ITEM 1.
Business
Overview
We are an oncology-focused biopharmaceutical company committed to delivering medicines that provide a better life for cancer patients. Our strategy is to focus our resources toward the development and commercialization of our product candidates in North America, while leveraging partnerships to support development and commercialization in other geographies. With the approval of our first commercial product, FOTIVDA® (tivozanib), in the United States, we have transitioned from a clinical development stage biopharmaceutical company to a commercial and clinical development stage biopharmaceutical company.
On March 10, 2021, the U.S. Food and Drug Administration, or FDA, approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced renal cell carcinoma following two or more prior systemic therapies. FOTIVDA is an oral, next-generation vascular endothelial growth factor receptor, or VEGFR, tyrosine kinase inhibitor, or TKI. The approval of FOTIVDA is based on our pivotal phase 3 randomized, controlled, multi-center, open-label clinical trial comparing tivozanib to an approved therapy, Nexavar® (sorafenib), in renal cell carcinoma, or RCC, patients whose disease had relapsed or become refractory to two or three prior systemic therapies, which we refer to as the TIVO-3 trial. The approval is also supported by three additional trials in RCC and includes safety data from over 1,000 clinical trial subjects.
We are actively preparing for the commercial launch of FOTIVDA in the United States. Our U.S. sales force, sales training, marketing, market access and medical affairs teams as well as distribution capabilities are in place and we expect to have full promotional capabilities and FOTIVDA available to patients by March 31, 2021.
FOTIVDA is also approved and commercialized through our development partner EUSA Pharma (UK) Limited, or EUSA, in the United Kingdom, Germany, Spain and certain other countries in their territory, for the treatment of adult patients with advanced RCC who are VEGFR pathway inhibitor-naïve and are either untreated or who have failed prior therapy with interferon-alpha (IFN-a) or interleukin-2 (IL-2).
Based on FOTIVDA’s demonstrated anti-tumor activity, tolerability profile and reduction of regulatory T-cell production, we are studying FOTIVDA in combination with immune checkpoint inhibitors for the treatment of RCC and hepatocellular carcinoma, or HCC, in phase 2 clinical trials and we recently announced our entry into a collaboration with Bristol Myers Squibb, or BMS, to conduct a phase 3 study of FOTIVDA in combination with OPDIVO® (nivolumab), BMS’s anti-PD-1 therapy, in patients with advanced relapsed or refractory RCC following prior immunotherapy exposure.
Our pipeline of product candidates includes ficlatuzumab, a potent humanized immunoglobulin G1, or IgG1, monoclonal antibody that targets hepatocyte growth factor, or HGF. We have previously reported promising early clinical data on ficlatuzumab in squamous cell carcinoma of the head and neck, or HNSCC, pancreatic cancer and acute myeloid leukemia, or AML. We are currently conducting a randomized phase 2 confirmatory study of ficlatuzumab for the potential treatment of HNSCC.
Our pipeline of product candidates also includes worldwide rights to AV-380, a potent humanized IgG1 monoclonal antibody that targets growth differentiation factor 15, or GDF15. In December 2020, the FDA accepted our investigational new drug application, or IND, for AV-380 for the potential treatment of cancer cachexia, and we have initiated a phase 1 clinical trial in healthy subjects.
Our earlier-stage pipeline under development includes AV-203 and AV-353, both as potential oncology treatments. AV-203 is a potent humanized IgG1 monoclonal antibody that targets ErbB3 (also known as HER3) to which we expect to regain worldwide rights in September 2021. AV-353 is a potent IgG1 monoclonal antibody that targets the Notch 3 pathway.
Commercial Launch
During 2020 and early 2021, in preparation for the commercial launch of FOTIVDA in the United States, we:
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expanded our organization with approximately 65 field-based employees, which includes approximately 50 oncology sales professionals;
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developed our commercial capabilities with implementation of systems and infrastructure to support our virtual and in person commercial sales organization, patient-focused programs and appropriate quality systems and compliance policies, systems and procedures; and
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established our distribution network in order to be prepared to have full promotional capabilities and product available for sale by March 31, 2021.
Business Update Regarding COVID-19
The pandemic caused by an outbreak of a new strain of coronavirus, or the COVID-19 pandemic, that is affecting the U.S. and global economy and financial markets is also impacting our employees, patients, communities and business operations to varying degrees. In the paragraphs that follow, we have described impacts of the COVID-19 pandemic on our commercialization plans and clinical development programs, as applicable. The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. Certain of our operations had been conducted remotely prior to the COVID-19 pandemic, and we have now transitioned essentially all of our business operations to be conducted remotely in response to COVID-19. If the COVID-19 pandemic continues or becomes more severe, it may further impact our ability to maintain that level of productivity, to grow the company as we have anticipated and to execute our commercialization and other long-term business strategies. Management is actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, industry and workforce. For additional information on risks posed by the COVID-19 pandemic, please see “Part I, Item 1A.
Item 1A.
Risk Factors
You should carefully consider the risks described below in addition to the other information set forth in this Annual Report on Form 10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and the consolidated financial statements and related notes. These risks, some of which have occurred and any of which may occur in the future, can have a material adverse effect on our business, financial condition, results of operations or the price of our publicly traded securities. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may occur or become material in the future and adversely affect our business, reputation, financial condition, results of operations or the price of our publicly traded securities. Therefore, historical operating results, financial and business performance, events and trends are often not a reliable indicator of future operating results, financial and business performance, events or trends. If any of the following risks occurs, our business, financial condition, and results of operations and future growth prospects could be materially and adversely affected.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant operating losses since inception and anticipate that we will continue to incur significant operating expenses for the foreseeable future. It is uncertain if we will ever achieve or sustain profitability.
We have a history of incurring operating losses and as of December 31, 2020, we had an accumulated deficit of $621.2 million. To date, we have not commercialized any products nor generated any revenues from the sale of products. Our operating losses have resulted principally from costs incurred in our discovery and development activities. On March 10, 2021, the FDA approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced RCC following two or more
prior systemic therapies. We anticipate that we will continue to incur significant operating expenses for the foreseeable future as we commercialize FOTIVDA in the United States and continue our planned development activities for our clinical stage assets. Our future product revenues will depend upon the size of markets in which FOTIVDA, and any future products, have received approval, and our ability to achieve sufficient market acceptance, reimbursement from third-party payers and adequate market share for FOTIVDA and any future products in those markets. The likelihood of our long-term success must be considered in light of the expenses, difficulties and potential delays to be encountered in the development and commercialization of new pharmaceutical products, competitive factors in the marketplace and the complex regulatory environment in which we operate.
If we do not effectively manufacture, market and sell FOTIVDA in the United States and if we do not successfully develop, obtain and maintain regulatory approval for our existing and future pipeline of product candidates and any product candidate for which we may obtain marketing approval in the future, we may never generate sufficient revenues from product sales to support our cost structure in order to attain or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.
We may require substantial additional funding to advance our pipeline of clinical stage assets, and a failure to obtain this necessary capital when needed would force us to delay, limit, reduce or terminate our research, product development or commercialization efforts.
We may require substantial additional funding to advance our pipeline of clinical stage assets, and the timing and nature of these activities will be conducted subject to the availability of sufficient financial resources.
We believe that our $61.8 million in cash and cash equivalents as of December 31, 2020, along with proceeds from the $20.0 million drawdown under the 2020 Loan Facility in March 2021 and from warrant exercises to date, together with anticipated partnership cost sharing reimbursements, royalties from EUSA’s FOTIVDA sales, product revenues upon the commercial launch of FOTIVDA in the United States and the potential additional $10.0 million in credit under the 2021 Loan Amendment as described below in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Hercules Loan Facility” would allow us to fund our planned operations into 2022.
Furthermore, there are numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products. Accordingly, our future capital requirements may vary from our current expectations and depend on many factors, including but not limited to:
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the cost of commercialization activities of FOTIVDA in the United States and any of our product candidates that may be approved for sale, including marketing, sales and distribution costs;
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the cost of manufacturing FOTIVDA in the United States, our product candidates and any additional products we may successfully commercialize;
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our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
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the number and characteristics of the product candidates we pursue;
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the scope, progress, results and costs of researching and developing our product candidates and of conducting preclinical and clinical trials;
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the timing of, and the costs involved in, completing our clinical trials and obtaining regulatory approvals for our product candidates;
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the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
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the absence of any breach, acceleration event or event of default under our Loan Agreement, or under any other agreements with third parties;
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the cost and outcome of any legal actions against us;
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the timing, receipt and amount of sales of, or royalties on, tivozanib and our future products, if any;
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general economic, industry and market conditions; and
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the impact of COVID-19 on our operations, business and prospects.
We may require substantial additional funding to advance our pipeline of clinical stage assets. We may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or the loans under credit facilities could provide for rights senior to those of our common stock and could contain covenants that would restrict our operations. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. For example, we may never achieve the milestones specified in the Loan Agreement that would allow us to access the remaining $10.0 million in available credit. We also expect to seek additional funds through arrangements with collaborators, licensees or other third parties. These arrangements would generally require us to relinquish or encumber rights to some of our technologies or product candidates, and we may not be able to enter into such arrangements on acceptable terms, if at all.
If we are unable to raise substantial additional funding to advance our pipeline of clinical stage assets, whether on terms that are acceptable to us, or at all, or we were to default under the Loan Agreement and Hercules accelerates the then remaining principal payments and fees due under the Loan Agreement, then we may be required to:
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delay, limit, reduce or terminate our clinical trials or other development activities for one or more of our product candidates; and/or
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delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates, if approved.
Failure to comply with the covenants or payment obligations under the Loan Agreement could result in an event of default, which could materially and adversely affect our business and our financial condition.
The Loan Agreement includes certain financial and operational covenants and provide for certain occurrences that constitute events of default. Certain of those covenants may be out of our control, such as failure to achieve net product revenue at a certain percentage of projected net product revenue. Potential events of default also include circumstances occurring that have a material adverse effect on our business, our insolvency or bankruptcy, or default on our other obligations or agreements. If we fail to make payments when due, breach any operational covenant or have any event of default, Hercules could require us to immediately repay all outstanding principal and accrued interest on the loan, plus a prepayment charge, which could have a material adverse effect on our business and financial condition.
We have only recently transitioned from a development stage biopharmaceutical company to a commercial and clinical development stage biopharmaceutical company, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Other than the marketing approvals for FOTIVDA received by our partner EUSA and the FDA marketing approval for FOTIVDA received in the United States in March 2021, all of our product candidates are in the development stage. We have not yet demonstrated our ability to manufacture a commercial scale medicine, or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had more experience commercializing our product candidates. In addition, as a newly commercial stage business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. To be profitable, we will need to successfully transition from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
Risks Related to Development and Commercialization of Our Product Candidates
In the near term, we are substantially dependent on the success of FOTIVDA (tivozanib). If we are unable to successfully commercialize FOTIVDA or maintain marketing approval for FOTIVDA in its approved indication, or if we are unable to complete the clinical development of tivozanib and obtain marketing approval for tivozanib in other indications, either alone or with our collaborators, or if we experience significant delays in doing so, our business could be substantially harmed.
Our prospects are substantially dependent on our ability to successfully commercialize FOTIVDA in the United States and maintain marketing approval for FOTIVDA in the United States, or, through EUSA, in those countries outside the United States where FOTIVDA is currently approved. We are also dependent on the success of tivozanib in clinical development and our ability to obtain marketing approval for tivozanib in one or more other indications.
The success of FOTIVDA (tivozanib) will depend on a number of factors, including the following:
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our ability to secure the substantial additional capital required to complete clinical trials of tivozanib, including the DEDUCTIVE trial and the TiNivo-2 trial;
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our ability to fund the activities necessary to successfully commercially launch FOTIVDA in the United States;
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commercial acceptance by patients, the medical community and third-party payors;
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successful design, enrollment and completion of clinical trials;
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a safety, tolerability and efficacy profile that is satisfactory to the FDA, EMA or any other comparable foreign regulatory authority for marketing approval;
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timely receipt of marketing approvals from applicable regulatory authorities such as the FDA;
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the performance of the contract research organizations, or CROs, we have hired to manage our clinical studies, as well as that of our collaborators and other third-party contractors;
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the extent of any required post-marketing approval commitments to applicable regulatory authorities;
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maintenance of existing or establishment of new supply arrangements with third-party raw materials suppliers and manufacturers including with respect to the supply of active pharmaceutical ingredient for tivozanib and finished drug product that is appropriately packaged for sale;
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adequate ongoing availability of raw materials and drug product for clinical development and any commercial sales;
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obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally, including our ability to maintain our license agreement with KKC;
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protection of our rights in our intellectual property portfolio, including our ability to maintain our license agreement with KKC;
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a continued acceptable safety profile following any marketing approval; and
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our ability to compete with other therapies.
Many of these factors are beyond our control. If we are unable to successfully commercialize FOTIVDA in the United States or to develop or receive marketing approval for tivozanib in other indications, on our own or with our collaborators, or experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.
FOTIVDA, or any one of our product candidates that may receive marketing approval in the future, may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for FOTIVDA or any one of our product candidates may be smaller than our estimates.
We have never commercialized a product. Despite the recent FDA marketing approval of FOTIVDA in the United States, FOTIVDA, or any one of our product candidates that may be approved in the future by the appropriate regulatory authorities for marketing and sale, may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. Physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. There are already a number of therapies on the market competitive to tivozanib, as well as our other product candidates, in indications we intend to target.
Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. In light of the COVID-19 pandemic, we designed our strategic commercial approach for FOTIVDA to be flexible by building remote as well as in-person customer engagement capabilities in preparation for commercialization. However, it is uncertain whether obstacles and changes to standard sales and marketing practices resulting from the COVID-19 pandemic, including the shift from in-person to telephonic and virtual interactions with healthcare professionals, could negatively impact our commercialization efforts.
If FOTIVDA, or any of our product candidates that may be approved for marketing and sale in the future, does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of FOTIVDA, or any of our product candidates that may be approved for marketing and sale in the future, will depend on a number of factors, including:
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the efficacy and safety of the product;
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the advantages of the product compared to competitive therapies;
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the number of competitors approved for similar uses;
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the relative promotional effort and success of us as compared with our competitors;
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the prevalence and severity of any side effects;
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how the product is positioned in physician treatment guidelines and pathways;
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our ability to offer the product for sale at competitive prices;
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the product’s convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try, and of physicians to prescribe, the product;
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limitations or warnings, including use restrictions, contained in the product’s approved labeling;
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the strength of sales, marketing and distribution support;
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the timing of market introduction of our approved products as well as competitive products;
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adverse publicity about the product or favorable publicity about competitive products;
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potential product liability claims;
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changes in the standard of care for the targeted indications for the product; and
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availability and amount of coverage and reimbursement from government payors, managed care plans and other third-party payors.
In addition, the potential market opportunities for FOTIVDA and our product candidates are difficult to estimate precisely. Our estimates of the potential market opportunities are predicated on many assumptions, including industry knowledge and publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidate could be smaller than our estimates of the potential market opportunities.
We depend heavily on the success of our product, FOTIVDA, and on our clinical stage assets, including tivozanib (in other indications), ficlatuzumab and AV-380. Preclinical studies and clinical trials of our product candidates may not be successful. If we are unable to complete the clinical development of, obtain marketing approval for or successfully commercialize our product candidates, either alone or with a collaborator, or if we experience significant delays in doing so, our business will be materially harmed.
We and any collaborators, including our partners and sublicensees, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Foreign regulatory authorities, such as the EMA, impose similar requirements. We and our collaborators must complete extensive preclinical development and clinical trials that demonstrate the safety and efficacy of our product candidates in humans before we can obtain these approvals.
Preclinical and clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all, particularly given that many of our clinical trial sites are research hospitals that have imposed restrictions on entry and other activity as a result of the COVID-19 pandemic. The preclinical and clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of product development. Moreover, we, or any collaborators, may experience any of a number of possible unforeseen adverse events in connection with clinical trials, many of which are beyond our control, including:
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we, or our collaborators, may fail to demonstrate efficacy in a clinical trial or across a broad population of patients;
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it is possible that even if one or more of our product candidates has a beneficial effect, that effect (x) will not be detected during preclinical or clinical evaluation or (y) may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials;
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we may fail to detect toxicity or intolerability of our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case;
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adverse events or undesirable side effects caused by, or other unexpected properties of, any product candidates that we may develop could cause us, any collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities;
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if any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective;
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regulators or institutional review boards may not authorize us, any collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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we, or any collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
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clinical trials of our product candidates may produce unfavorable or inconclusive results, including with respect to the safety, tolerability, efficacy or pharmacodynamic and pharmacokinetic profile of the product candidate;
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we, or any collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;
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the number of patients required for clinical trials of our product candidates may be larger than we, or any collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or any collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any collaborators, anticipate;
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our estimates of the patient populations available for study may be higher than actual patient numbers and result in our inability to sufficiently enroll our trials;
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the cost of planned clinical trials of our product candidates may be greater than we anticipate;
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our third-party contractors or those of any collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or any collaborators in a timely manner or at all;
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patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to increase the needed enrollment size for the clinical trial, extend the clinical trial’s duration, or drop the patients from the final efficacy analysis for the clinical trial, which can negatively affect the statistical power of the results;
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our decision, or a decision by regulators or institutional review boards, that may require us to suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar product or product candidate;
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the FDA or comparable foreign regulatory authorities may disagree with our, or any collaborators’, clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials;
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the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we, or any collaborators, enter into agreements for clinical and commercial supplies;
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the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;
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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval; and
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constraints on our, or any collaborators’, ability to conduct or complete clinical trials for our product candidates due to the COVID-19 pandemic, including slowdowns in patient enrollment, restrictions on patient monitoring at hospital clinical trial sites, closures of third-party facilities, and other disruptions to clinical trial activities.
Product development costs for us and our collaborators will increase if we experience delays in testing or pursuing marketing approvals, and we may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization. We do not know whether any trials will begin as planned, will need to be restructured or will be completed on schedule or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.
If we fail to develop and commercialize other product candidates, we may be unable to grow our business.
Although the continued development and commercialization of FOTIVDA (tivozanib) is our primary focus, as part of our growth strategy, we are developing a pipeline of product candidates. These other product candidates will require additional, time-consuming and costly development efforts, by us or by our collaborators, prior to commercial sale, including preclinical studies, clinical trials and approval by the FDA and/or applicable foreign regulatory authorities. All product candidates are prone to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace, or will be more effective than other commercially available alternatives.
We may not obtain marketing approval for tivozanib in other indications or our other product candidates.
We may not obtain marketing approval for our product candidates. It is possible that the FDA or comparable foreign regulatory agencies may refuse to accept for substantive review any future application that we or a collaborator may submit to market and sell our product candidates, or that any such agency may conclude after review of our or our collaborator’s data that such application is insufficient to obtain marketing approval of our product candidate.
If the FDA or other comparable foreign regulatory agency does not accept or approve any future application to market and sell any of our product candidates, such regulators may require that we conduct additional clinical trials, preclinical studies or manufacturing validation studies and submit that data before they will reconsider our application. Depending on the extent of these or any other required trials or studies, approval of any application that we submit may be delayed by several years, or may require us or our collaborator to expend more resources than we or they have available. It is also possible that additional trials or studies, if performed and completed, may not be considered sufficient by the FDA or other foreign regulatory agency to approve our applications for marketing and commercialization.
Any delay in obtaining, or an inability to obtain, marketing approvals would prevent us or our collaborators from commercializing tivozanib in other indications or our product candidates and generating revenues related thereto. If any of these outcomes occur, we would not be eligible for certain milestone and royalty revenue under our partnership agreements, our collaborators could terminate our partnership agreements and we may be forced to abandon our development efforts for our product candidates, any of which could significantly harm our business.
Results of early clinical trials may not be predictive of results of later clinical trials, and interim results of clinical trials may not be predictive of the final results or the success of clinical trials.
The outcome of early clinical trials, such as our DEDUCTIVE trial and our ficlatuzumab trials in HNSCC, pancreatic cancer and AML, may not be predictive of the success of later clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we have, and could in the future, face similar setbacks. In addition, interim results and analyses of clinical trials do not necessarily predict the final results or the success of a trial once it is complete.
While the design of a clinical trial may help to establish whether its results will support approval of a product, flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we, or any collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates. For example, in June 2013, we suffered such a setback when the FDA issued a complete response letter, or the 2013 CRL, informing us that it would not approve tivozanib for the first-line treatment of RCC based solely on the data from the TIVO-1 trial, and recommended that we perform an additional clinical trial adequately sized to assure the FDA that tivozanib did not adversely affect OS. We then designed and initiated our TIVO-3 trial to address the FDA’s concerns about the negative OS trend expressed in the 2013 CRL, which took time and resources and delayed our efforts to obtain marketing approval for tivozanib in the United States.
In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. If we fail to receive positive results in clinical trials of our product candidates, the development timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly, our business and financial prospects would be negatively impacted.
If we or our collaborators experience delays or difficulties in the enrollment of patients in clinical trials, receipt of necessary regulatory approvals could be delayed or prevented.
We or our collaborators may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:
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the impact of the COVID-19 pandemic;
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the size and nature of the patient population;
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the severity of the disease under investigation;
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the availability of approved therapeutics for the relevant disease;
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the proximity of patients to clinical sites;
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the eligibility criteria for the trial;
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the design of the clinical trial;
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efforts to facilitate timely enrollment; and
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competing clinical trials.
In addition, participation in our clinical trials will be affected by clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied and the drug being provided as a control in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. For example, at the request of the FDA, we have updated the forms used to obtain consent from patients in ongoing and future trials with tivozanib to include information about the OS results from the TIVO-3 trial as well as the other tivozanib clinical trial OS results to date. These results may impact the interest of clinicians and patients in participating in future clinical trials with tivozanib.
Our inability to enroll a sufficient number of patients for our clinical trials could result in significant delays or may require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline and limit our ability to obtain additional financing, if needed.
We are conducting, and intend in the future to conduct, clinical trials for certain of our product candidates at sites outside the United States. The FDA may not accept data from trials conducted in such locations and the conduct of trials outside the United States could subject us to additional delays and expense.
We are conducting, and intend in the future to conduct, one or more of our clinical trials with one or more trial sites that are located outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of these data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with good clinical practice. The FDA must be able to validate the data from the trial through an onsite inspection if necessary. The trial population must also have a similar profile to the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful, except to the extent the disease being studied does not typically occur in the United States. In addition, while these clinical trials are subject to the applicable local laws, the FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance that the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from any trial that we conduct outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of our product candidates.
In addition, the conduct of clinical trials outside the United States could have a significant adverse impact on us. Risks inherent in conducting international clinical trials include:
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clinical practice patterns and standards of care that vary widely among countries;
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non-U.S. regulatory authority requirements that could restrict or limit our ability to conduct our clinical trials;
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administrative burdens of conducting clinical trials under multiple non-U.S. regulatory authority schema;
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foreign exchange rate fluctuations; and
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diminished protection of intellectual property in some countries.
Even if a product candidate receives marketing approval, we or others may later discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, which could compromise our ability or that of any collaborators to market the product, and could cause regulatory authorities to take certain regulatory actions.
It is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. For example, despite the recent FDA marketing approval of FOTIVDA in the United States, we, or others, may discover that FOTIVDA is less effective or tolerable than previously believed. If, we, or others, discover that a product is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:
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regulatory authorities may withdraw their approval of the product or seize the product;
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we, or any of our collaborators, may be required to recall the product, change the way the product is administered or conduct additional clinical trials;
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additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular product;
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we, or any of our collaborators, may be subject to fines, injunctions or the imposition of civil or criminal penalties;
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regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
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we, or any of our collaborators, may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;
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we could be sued and held liable for harm caused to patients;
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physicians and patients may stop using our product; and
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our reputation may suffer.
Any of these events could harm our business and operations and could negatively impact our stock price.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify as most likely to succeed, in terms of their potential for marketing approval and commercialization, as well as those that are most aligned with our strategic goals. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to have greater commercial potential.
Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to the product candidate.
If the commercial launch of FOTIVDA for which we recruited a sales force and established marketing, market access and medical affairs teams and distribution capabilities is not successful for any reason, we could incur substantial costs and our investment would be lost if we cannot retain or reposition our sales, marketing, market access and medical affairs personnel.
To achieve commercial success for FOTIVDA, we have expended and anticipate that we will continue to expend significant resources to support our sales force, marketing, market access and medical affairs teams and distribution capabilities. There are risks involved with establishing our own sales, marketing, distribution, training and support capabilities. For example, recruiting and training sales and marketing personnel is expensive and time consuming and could delay our ability to focus on other priorities. If the commercial launch of FOTIVDA is not successful for any reason, this would be costly, and our investment would be lost if we cannot retain or reposition our sales, marketing, market access and medical affairs personnel or terminate on favorable terms any agreements entered into with third parties to support our commercialization efforts.
Factors that may inhibit our efforts to commercialize FOTIVDA on our own include:
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our inability to train and retain adequate numbers of effective sales, marketing, training and support personnel;
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the inability of sales personnel to obtain access to physicians, including key opinion leaders, or to persuade adequate numbers of physicians to use tivozanib;
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the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive or integrated product offerings; and
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unforeseen costs and expenses associated with establishing and maintaining an independent sales, marketing, training and support organization.
If our efforts to establish our own salesforce, marketing, market access and medical affairs teams and distribution capabilities are unsuccessful and instead we enter into arrangements with third parties to perform these services, our product revenues, gross margins and our profitability, if any, are likely to be lower than if we were to market, sell and distribute FOTIVDA ourselves. In addition, we may not be successful in entering into arrangements with third parties to market, sell and distribute FOTIVDA, or may be unable to do so on terms that are favorable to us. If we do not establish sales, marketing, distribution, training and support capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing FOTIVDA and achieving profitability, and our business would be harmed.
We face substantial competition from existing approved products. Our competitors may also discover, develop or commercialize new competing products before, or more successfully, than we do.
The biotechnology and pharmaceutical industries are highly competitive, and our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of product candidates. There are many companies focused on the development of small molecules and antibodies for cancer treatment. Our core competitors include pharmaceutical and biotech organizations, as well as academic research institutions, clinical research laboratories and government agencies that are pursuing research activities in the same therapeutic area. See “Part I, Item 1. Business-Competition.” Many of our competitors have greater financial, technical and human resources than we do. Further, mergers and
acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in favor of our competitors. Additionally, many competitors have greater experience in product discovery and development, obtaining FDA and other regulatory approvals and commercialization capabilities, which may provide them with a competitive advantage.
We believe that our ability to compete will depend on our ability to execute on the following objectives:
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design, develop and commercialize products that are superior to other products in the market in terms of, among other things, safety, efficacy, convenience or price;
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obtain patent and/or other proprietary protection for our processes and product candidates;
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obtain required regulatory approvals;
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obtain favorable reimbursement, formulary and guideline status; and
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collaborate with others in the design, development and commercialization of our products.
Established competitors may invest heavily to discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to obtain approval, to overcome price competition and to be commercially successful. If we are not able to compete effectively, our business will not grow and our financial condition and operations will suffer.
The competitive landscape and treatment regimens for RCC and HCC continue to rapidly evolve, particularly given the entrance of immune checkpoint inhibitor combination therapies and the entrance of immune checkpoint inhibitor and VEGFR TKI combination therapies into the RCC treatment landscape. The utilization of such regimens may affect sequencing of certain drugs and combinations across different lines of therapy. Additionally, there are several therapies in clinical development for RCC and HCC that may alter the competitive landscape for the treatment of these cancers. As such, it is difficult to predict how these changes will inform our perspective on the key competitors of tivozanib in RCC and HCC in the future.
For a description of the key competitors for tivozanib in relapsed or refractory RCC and in advanced HCC and the products that are considered competitive with ficlatuzumab and certain of our other product candidates, see “Part I, Item 1. Business - Competition”.
FOTIVDA, or any other product candidate that we or our collaborators are able to commercialize, may become subject to unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives, any of which could harm our business.
The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by third-party payors, including government health care programs and private health insurers. For example, our European licensee for FOTIVDA, EUSA, is currently in the process of seeking reimbursement approval for FOTIVDA in many of the countries in which FOTIVDA has been approved. If coverage is not available, or reimbursement is limited, we, or any collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us or our collaborators to establish or maintain pricing sufficient to realize a sufficient return on our investments. In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors, and coverage and reimbursement levels for products can differ significantly from payor to payor. As a result, the coverage determination process is often time consuming and costly and may require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained or applied consistently.
There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we or our collaborators might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval.
Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Therefore, our ability, and the ability of any collaborators, to successfully commercialize any of our product candidates will depend in part on the extent to which coverage and adequate reimbursement for these products and
related treatments will be available from third-party payors. Third-party payors decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability to sell our product candidates profitably. These payors may not view our products, even if approved, as cost-effective, and coverage and reimbursement may not be available to our customers or may not be sufficient to allow our products to be marketed on a competitive basis. Cost-control initiatives could cause us or our collaborators to decrease the price we might establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any, decrease or if governmental and other third-party payors do not provide coverage or adequate reimbursement, our prospects for revenue and profitability will suffer.
There may also be delays in obtaining coverage and reimbursement for newly approved drugs, such as FOTIVDA, and coverage may be more limited for FOTIVDA than the indication for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, for example, according to the use of the product and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. We cannot be sure that coverage will be available for any product candidate that we, or third-parties, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any of our product candidates for which we obtain regulatory approval could significantly harm our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
We face a risk of product liability as a result of the commercialization of FOTIVDA and the clinical testing of our product candidates. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even a successful defense could require significant financial and management resources. Regardless of the merits or eventual outcome, product liability claims may result in:
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decreased demand for FOTIVDA or our product candidates;
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withdrawal of clinical trial participants;
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delay or termination of our clinical trials;
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significant costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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product recalls, withdrawals or labeling, marketing or promotional restrictions;
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loss of revenue;
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the inability to commercialize our product candidates;
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injury to our reputation and negative media attention; and
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a decline in our stock price.
Although we maintain general liability insurance and clinical trial liability insurance, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. Insurance coverage is becoming increasingly expensive. We will need to increase our insurance coverage for the commercialization of FOTIVDA and if we commercialize any other product that receives marketing approval. If we are unable to maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could harm our business, financial condition, results of operations and prospects.
Our internal computer systems or other company technology to collect and store information, or those of any third parties with which we contract, may fail or suffer security breaches, which could result in a material disruption of our product development programs.
Despite the implementation of security measures, our internal computer systems and those of third parties with which we contract are vulnerable to damage from computer viruses, worms and other destructive or disruptive software, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such systems are also vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber incidents by malicious third parties. Sensitive commercial and personal information also may be subject to security breaches in other contexts, related to personal devices or other technology or systems where this information can be collected, stored and used. Cyber incidents are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber incidents could include the deployment of harmful malware, ransomware, denial-of-service attacks, unauthorized access to or deletion of files, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Cyber incidents also could include phishing attempts or e-mail fraud to cause payments or information to be transmitted to an unintended recipient. We could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in the information systems and networks of our company, including personal information of our employees. In addition, we face other kinds of risks related to our commercial and personal information, including lost or stolen devices or other systems (including paper records) that collect and store our personal and commercial information.
System failures, accidents, cyber incidents or security breaches could cause interruptions in our operations, and could result in a material disruption of our clinical and commercialization activities and business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions, in addition to possibly requiring substantial expenditures of resources to remedy. For example, the loss of clinical trial data from completed or future trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and our product research, development and commercialization efforts could be delayed. We may in certain instances be required to provide notification to individuals or others in connection with the loss of their personal or commercial information. In addition, we may not have adequate insurance coverage to provide compensation for any losses associated with such events.
If a material breach of our security or that of our vendors occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose business and our reputation and credibility could be damaged. We could be required to expend significant amounts of money and other resources to repair or replace information systems or networks. Although we develop and maintain systems and controls designed to prevent these events from occurring, and we have a process to identify and mitigate threats, the development and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of these events occurring cannot be eliminated entirely.
Risks Related to Our Dependence on Third Parties
We rely on third parties, such as CROs, to conduct clinical trials for our product candidates, and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.
We, in consultation with our collaborators, where applicable, design the clinical trials for our product candidates, but we rely on CROs and other third parties to perform many of the functions in managing, monitoring and otherwise carrying out many of these trials. We compete with larger companies for the resources of these third parties. In addition, these third parties may be adversely affected by the COVID-19 pandemic.
Although we plan to continue to rely on these third parties to conduct our ongoing and any future clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, including good clinical practices, for designing, conducting, monitoring, recording, analyzing and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. The third parties on whom we rely generally may terminate their engagements with us at any time. If we are required to enter into alternative arrangements because of any such termination, the introduction of our product candidates to market could be delayed.
If these third parties do not successfully carry out their duties under their agreements with us, if the quality or accuracy of the data they obtain, process and analyze is compromised for any reason or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, our clinical trials may experience delays or may fail to meet regulatory requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates and our reputation could be harmed.
We rely on third-party manufacturers and third-party suppliers to produce and supply our preclinical and clinical product candidate supplies, and we intend to rely on third parties to produce commercial supplies of FOTIVDA, and any approved product candidates. Any failure by a third-party manufacturer or a third-party supplier to produce or provide supplies for us may delay or impair our ability to complete our clinical trials or commercialize our product candidates.
We have relied upon third-party manufacturers for the manufacture of our product candidates for preclinical and clinical testing purposes and intend to continue to do so in the future. If we are unable to arrange for third-party manufacturing sources, or to do so on commercially reasonable terms, we may not be able to complete development of such product candidates or to market them.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance on the third-party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third-party because of factors beyond our control, failure of the third-party to accept orders for supply of drug substance or drug product and the possibility of termination or nonrenewal of the agreement by the third-party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our product candidates be manufactured according to cGMPs. Any failure by our third-party manufacturers to comply with cGMP or failure to scale-up manufacturing processes as needed, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates. In addition, such failure could be the basis for action by the FDA to withdraw approvals for product candidates previously granted to us and for other regulatory action, including recall or seizure, fines, imposition of operating restrictions, total or partial suspension of production or injunctions.
We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical studies and commercial manufacturing. There are a small number of suppliers of raw and starting materials that we use to manufacture our product candidates. Such suppliers may not sell these materials to our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers.
Any significant delay in the supply of a product candidate or the raw material components thereof for an ongoing clinical trial due to the COVID-19 pandemic, the need to replace a third-party supplier or other factors could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidates.
Because of the complex nature of many of our early stage compounds and product candidates, our manufacturers may not be able to manufacture such compounds and product candidates at a cost or quantity or in the timeframe necessary to develop and commercialize the related products. As our product development pipeline matures, we will have a greater need for commercial manufacturing capacity and we may be required to establish or access large-scale commercial manufacturing capabilities. In addition, we do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our product candidates and we currently have no plans to build our own clinical or commercial scale manufacturing capabilities. To meet our projected needs for commercial manufacturing, third parties with whom we currently work may need to increase their scale of production or we may need to secure alternate suppliers.
We rely on our licensee EUSA, over whom we have little control, for the sales, marketing and distribution efforts associated with the commercialization of FOTIVDA in certain European countries and any failure by EUSA to devote the necessary resources and attention to market and sell FOTIVDA effectively and successfully may materially impact our ability to generate revenue.
In December 2015, we entered into the EUSA Agreement, under which we granted to EUSA the exclusive, sublicensable right to develop, manufacture and commercialize tivozanib in the territories of Europe (excluding Russia, Ukraine and the Commonwealth of Independent States), Latin America (excluding Mexico), Africa and Australasia for all diseases and conditions in humans, excluding non-oncologic diseases or conditions of the eye. We have limited contractual rights to force EUSA to invest significantly in commercialization of tivozanib in jurisdictions covered by the EUSA Agreement. In the event that EUSA fails to adequately commercialize tivozanib because it lacks adequate financial or other resources, decides to focus on other initiatives or otherwise, our ability to successfully commercialize tivozanib in the applicable jurisdictions would be limited, which would adversely affect our business, financial condition, results of operations and prospects. In addition, the EUSA Agreement may be terminated by either party upon prior written notice. If EUSA terminated the EUSA Agreement, we may not be able to secure an alternative distributor in the
applicable territories on a timely basis or at all, in which case our ability to generate revenues from the sale of tivozanib, outside the United States would be materially harmed.
We may not be successful in establishing or maintaining strategic partnerships to further the development of our therapeutic programs. Additionally, if any of our current or future strategic partners fails to perform its obligations or terminates the partnership, the development and commercialization of the product candidates under such agreement could be delayed or terminated. Such failures could have a material adverse effect on our operations and business.
Our success will depend in significant part on our ability to attract and maintain strategic partners and strategic relationships with other biotechnology or pharmaceutical companies to support the development and commercialization of our product candidates. In these partnerships, we would expect our strategic partner to provide capabilities in research, development, marketing and sales, in addition to funding.
We face significant competition in seeking appropriate strategic partners, and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for any product candidates and programs because our product candidates may be deemed to be at too early of a stage of development for collaborative effort or third parties may not view our product candidates as having the requisite potential.
If we are not able to establish and maintain strategic partnerships:
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the development of certain of our product candidates may be delayed or terminated;
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the internal cash expenditures needed to develop such product candidates would increase significantly, and we may not have the cash resources to develop such product candidates on our own; and
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we may have fewer resources with which to continue to operate our business.
Even if we are successful in our efforts to establish new strategic partnerships, the terms that we agree upon may not be favorable to us. Furthermore, we may not be able to maintain such strategic partnerships. If any current or future strategic partners do not devote sufficient time and resources to their arrangements with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. For example, in March 2020, CANbridge advised us that it was evaluating alternative development plans for AV-203, which would delay the initiation of clinical trials of AV-203. Since then, in March 2021, CANbridge exercised its right to terminate the CANbridge Agreement for convenience. Under the terms of the CANbridge Agreement, we expect the transfer of the AV-203 program to be complete in September 2021, which will delay the initiation of clinical trials of AV-203 even further.
In addition, if any strategic partner were to breach or terminate its arrangements with us, the development and commercialization of the affected product candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue development and commercialization of the product candidate on our own. Our current partners and licensees can terminate their agreements with us under various conditions, including without cause, at which point they would no longer continue to develop our products. For example, in September 2020 Biodesix exercised its Opt-Out right under the Biodesix Agreement. As a result, Biodesix is not required to contribute to the future development costs of ficlatuzumab in exchange for a reduced economic interest in any future ficlatuzumab revenues.
Much of the potential revenue from any of our strategic partnerships will likely consist of contingent payments, such as development milestones and royalties payable on sales of any successfully developed drugs. Any such contingent revenue will depend upon our, and our strategic partners’, ability to successfully develop, introduce, market and sell new drugs. In some cases, we are not involved in these processes, and we depend entirely on our strategic partners. Any of our strategic partners may fail to develop or effectively commercialize these drugs because it:
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decides not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited cash resources or specialized equipment limitations, or the belief that other product candidates may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;
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does not have sufficient resources necessary to carry the product candidate through clinical development, regulatory approval and commercialization; or
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cannot obtain the necessary regulatory approvals.
If one or more of our strategic partners fails to develop or effectively commercialize product candidates for any reason, we may not be able to replace the strategic partner with another partner to develop and commercialize a product candidate under the terms of the strategic partnership. We may also be unable to obtain, on terms acceptable to us, a license from such strategic partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a product candidate. Any of these events could have a material adverse effect on our business, results of operations and our ability to achieve future profitability, and could cause our stock price to decline.
Risks Related to Our Intellectual Property Rights
We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our product candidates, or the scope of our patent protection could be insufficiently broad, which could result in competition and a decrease in the potential market share for our product candidates.
We cannot be certain that patents will be issued or granted with respect to applications that are currently pending, or that issued or granted patents will not later be found to be invalid and/or unenforceable. The patent position of biotechnology and pharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the United States Patent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology and pharmaceutical patents. Consequently, patents may not issue from our pending patent applications. As such, we do not know the degree of future protection that we will have on our proprietary products and technology. For example, we have filed a patent application directed to our clinical protocol for using tivozanib to treat refractory cancers, including, following therapy with checkpoint inhibitors. It is possible that we may not successfully obtain a granted patent based upon this patent application. The scope of patent protection that the USPTO will grant with respect to the antibodies in our antibody product pipeline is also uncertain. It is possible that the USPTO will not allow broad antibody claims that cover closely related antibodies as well as the specific antibody. Upon receipt of FDA approval, competitors would be free to market antibodies almost identical to ours, including biosimilar antibodies, thereby decreasing our market share.
If we do not obtain patent term extensions under the Hatch-Waxman Act and similar non-U.S. legislation to extend the term of patents covering each of our product candidates, our business may be materially harmed.
Patents have a limited duration. The term of a U.S. patent, if granted from an application filed on or after June 8, 1995, is generally 20 years from its earliest U.S. non-provisional filing date. Even if patents covering our product candidates are obtained, once the patents expire, we may be open to competition from competitive medications. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned or in-licensed patent rights may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Depending upon the circumstances, the term of our owned and in-licensed patent rights that cover our product candidates may be extended in the United States under the Hatch-Waxman Act, by SPCs, in certain European countries, and by similar legislation in other countries, for delays incurred when seeking marketing approval for a drug candidate. For example, the Hatch-Waxman Act permits a patent term extension of up to five years for a patent covering an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process. However, we may not receive an extension if we fail to apply within the applicable deadline, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. If we are unable to obtain a patent term extension or the term of any such extension is less than we request, the period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to market competing products sooner. As a result, our revenue from applicable products could be materially reduced. For example, we have exclusive license rights to a first U.S. patent covering the tivozanib molecule and its therapeutic use, which is scheduled to expire in 2022, and a second U.S. patent covering a crystalline form of tivozanib, which is scheduled to expire in 2023. In view of the length of time tivozanib has been under regulatory review at the FDA, a patent term extension of up to 5 years may be available. Although we plan to apply for patent term extensions on each U.S. patent, only one patent may be extended, and, when appropriate, we will have to elect which patent is to be extended. If a five-year extension were to be granted, if applied to the first patent, the term could be extended to April of 2027, and if applied to the second patent, the term could be extended to November of 2028. However, the length of the extension could be less than we request, or no extension may be granted at all.
In addition, SPCs have been granted for the patent covering the tivozanib molecule in Belgium, Finland, France, Germany, Italy, the Netherlands, Norway, Poland, Portugal, Spain and Sweden, extending the term of the patents in each of these countries up to April 2027. An SPC has been granted for the patent covering the crystalline form of tivozanib in Ireland extending the term of that patent to October 2028. The remaining pending applications for SPCs on the patent covering the tivozanib molecule in Denmark and Great Britain may not be similarly granted, or may be granted for a shorter period than requested. If we are unable to obtain a patent term extension or the term of any such extension is less than we request, the period of time during which the patent rights covering tivozanib or its use can be enforced will be shortened, and our competitors may obtain approval to market a competing product sooner. As a result, our potential revenue from tivozanib could be materially reduced, causing material harm to our business.
Issued patents covering one or more of our products could be found invalid or unenforceable if challenged in patent office proceedings, or in court.
If we or one of our strategic partners were to initiate legal proceedings against a third-party to enforce a patent covering one of our products, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. In addition, if we have a product approved by the FDA (for example, if the FDA approves our tivozanib product candidate), generic manufacturers could challenge the patents covering the approved product as part of the process of obtaining regulatory approval via an ANDA. (The process by which generic manufacturers may seek regulatory approval via an ANDA and challenge our patents is discussed above in the section entitled “Part I, Item 1. Business - Government Regulation and Product Approval-Generic Drugs.”) Grounds for a validity challenge could be an alleged failure to meet one or more statutory requirements for patentability, including, for example, lack of novelty, obviousness, lack of written description or non-enablement. In addition, patent validity challenges may, under certain circumstances, be based upon non-statutory obviousness-type double patenting, which, if successful, could result in a finding that the claims are invalid for obviousness-type double patenting or the loss of patent term, including a patent term adjustment granted by the USPTO, if a terminal disclaimer is filed to obviate a finding of obviousness-type double patenting. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Additionally, third parties are able to challenge the validity of issued patents through administrative proceedings in the patent offices of certain countries, including the USPTO and the European Patent Office. Although we have conducted due diligence on patents we have exclusively in-licensed, and we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one of our products. Such a loss of patent protection could have a material adverse impact on our business.
Claims that our platform technologies, our products or the sale or use of our products infringe the patent rights of third parties could result in costly litigation or could require substantial time and money to resolve, even if litigation is avoided.
We cannot guarantee that our platform technologies, our products or the use of our products, do not infringe third-party patents. Third parties might allege that we are infringing their patent rights or that we have misappropriated their trade secrets. Such third parties might resort to litigation against us. The basis of such litigation could be existing patents or patents that issue in the future.
It is also possible that we failed to identify relevant third-party patents or applications. For example, applications filed before November 29, 2000, and certain applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest filing, which is referred to as the priority date. Therefore, patent applications covering our products or platform technology could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our products or the use of our products.
With regard to ficlatuzumab, we are aware of one United States patent and its foreign counterparts that contain broad claims related to anti-HGF antibodies having certain binding properties and their use. In the event that the owner of these patents were to bring an infringement action against us, we may have to argue that our product, its manufacture or use does not infringe a valid claim of the patent in question. Furthermore, if we were to challenge the validity of any issued United States patent in court, we would need to overcome a statutory presumption of validity that attaches to every United States patent. This means that, in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. There is no assurance that a court would find in our favor on questions of infringement or validity.
In order to avoid or settle potential claims with respect to any of the patent rights described above or any other patent rights of third parties, we may choose or be required to seek a license from a third-party and be required to pay license fees or royalties or both. These licenses may not be available on commercially acceptable terms, or at all. Even if we or our strategic partners were able to obtain a license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual
property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.
Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business.
Unfavorable outcomes in an intellectual property litigation could limit our research and development activities and/or our ability to commercialize certain products.
If third parties successfully assert intellectual property rights against us, we might be barred from using aspects of our technology platform, or barred from developing and commercializing related products. Prohibitions against using specified technologies, or prohibitions against commercializing specified products, could be imposed by a court or by a settlement agreement between us and a plaintiff. In addition, if we are unsuccessful in defending against allegations of patent infringement or misappropriation of trade secrets, we may be forced to pay substantial damage awards to the plaintiff. There is inevitable uncertainty in any litigation, including intellectual property litigation. There can be no assurance that we would prevail in any intellectual property litigation, even if the case against us is weak or flawed. If litigation leads to an outcome unfavorable to us, we may be required to obtain a license from the patent owner in order to continue our research and development programs or our partnerships or to market our products. It is possible that the necessary license will not be available to us on commercially acceptable terms, or at all. This could limit our research and development activities, our ability to commercialize specified products, or both.
Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, in-license needed technology or enter into strategic partnerships that would help us bring our product candidates to market.
In addition, any future patent litigation, interference or other administrative proceedings will result in additional expense and distraction of our personnel. An adverse outcome in such litigation or proceedings may expose us or our strategic partners to loss of our proprietary position, expose us to significant liabilities or require us to seek licenses that may not be available on commercially acceptable terms, if at all.
An intellectual property litigation could lead to unfavorable publicity that could harm our reputation and cause the market price of our common stock to decline.
During the course of any patent litigation, there could be public announcements of the results of hearings, rulings on motions and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programs or intellectual property could be diminished. In such event, the market price of our common stock may decline.
Tivozanib and AV-380 are protected by patents exclusively licensed from other companies or institutions. If the licensors terminate the licenses or fail to maintain or enforce the underlying patents, our competitive position would be harmed and our partnerships could be terminated.
Certain of our product candidates and out-licensing arrangements depend on patents and/or patent applications owned by other companies or institutions with which we have entered into intellectual property licenses. In particular, we hold exclusive licenses from KKC for tivozanib and from St. Vincent’s for therapeutic applications that benefit from inhibition or decreased expression or activity of MIC-1, which we refer to as GDF15 and which we use in our AV-380 program. We may enter into additional license agreements as part of the development of our business in the future. Our licensors may not successfully prosecute certain patent applications which we have licensed and on which our business depends or may prosecute them in a manner not in the best interests of our business. Even if patents issue from these applications, our licensors may fail to maintain these patents, may decide not to pursue litigation against third-party infringers, may fail to prove infringement or may fail to defend against counterclaims of patent invalidity or unenforceability. In addition, in spite of our best efforts, a licensor could claim that we have materially breached a license agreement and terminate the license, thereby removing our or our licensees’ ability to obtain regulatory approval for and to market any product covered by such license. If these in-licenses are terminated, or if the underlying patents fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, identical products. In addition, the partners to which we have sublicensed certain rights under these licenses, such as EUSA, would likely have grounds for terminating our partnerships if these licenses are terminated or the underlying patents are not maintained or enforced. This could have a material adverse effect on our results of operations, our competitive business position and our business prospects.
Confidentiality agreements with employees, consultants and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information.
In addition to patents, we rely on trade secrets, technical know-how and proprietary information concerning our business strategy in order to protect our competitive position. In the course of our research, development and business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentiality agreements are used, for example, when we talk to potential strategic partners. In addition, each of our employees and consultants are required to sign a confidentiality agreement upon joining our company. We take steps to protect our proprietary information, and we seek to carefully draft our confidentiality agreements to protect our proprietary interests. Nevertheless, there can be no guarantee that an employee, consultant or an outside party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures.
Trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants or outside scientific collaborators might intentionally or inadvertently disclose our trade secret information to competitors. Enforcing a claim that a third-party illegally obtained and is using any of our trade secrets is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States sometimes are less willing than U.S. courts to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
Our research and development strategic partners may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities to conduct research relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our confidential information. If we do not apply for patent protection prior to such publication, or if we cannot otherwise maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information may be jeopardized.
We rely significantly upon information technology, and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our business effectively and result in a material disruption of our product development programs.
We could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in the information systems and networks of our company, including personal information of our employees. In addition, outside parties may attempt to penetrate our systems or those of our partners or fraudulently induce our employees or employees of our partners to disclose sensitive information to gain access to our data. Like other companies, we may experience threats to our data and systems, including malicious codes and computer viruses, cyber-attacks, or other system failures. Any system failure, accident or security breach that causes interruptions in our operations, for us or our partners, could result in a material disruption of our product development programs and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. For example, the loss of clinical trial data from completed clinical trials could result in delays in our regulatory approval efforts and we could incur significant increases in costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of, or damage to, our data or applications, or inappropriate public disclosure of confidential or proprietary information, we may incur liabilities and the further development of our product candidates may be delayed. In addition, we may not have adequate insurance coverage to provide compensation for any losses associated with such events.
The number and complexity of these threats continue to increase over time. If a material breach of our security or that of our partners occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose business and our reputation and credibility could be damaged. We could be required to expend significant amounts of money and other resources to repair or replace information systems or networks. Although we develop and maintain systems and controls designed to prevent these events from occurring, and we have a process to identify and mitigate threats, the development and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of these events occurring cannot be eliminated entirely.
Additionally, the collection, use, disclosure, transfer or other processing of personal data regarding individuals in the EU, including personal health data, is subject to the EU General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and
confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the United States, and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR is a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with any European activities.
Intellectual property rights may not address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
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Others may be able to make compounds or antibodies that are similar to our product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed.
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The term of patents that we own or have exclusively licensed may be insufficient to prevent competitors from introducing products that are competitive with our product candidates.
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If the licenses we have that relate to our product candidates are terminated by the licensors, we may be prevented from commercializing our product candidates.
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We or our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed.
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We or our licensors or strategic partners might not have been the first to file patent applications covering certain of our inventions.
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Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.
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Our pending patent applications might not lead to issued patents.
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Issued patents that we own or have exclusively licensed may not provide us with a competitive advantage; for example, our issued patents may not be broad enough to prevent the commercialization of products competitive with one or more of our product candidates, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.
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Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our or our strategic partners’ existing or potential commercial markets.
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We may not develop additional proprietary technologies that are patentable.
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The patents of others may have an adverse effect on our business.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological complexity and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time-consuming and inherently uncertain. In addition, several events in the last decade have increased uncertainty with regard to our ability to obtain patents in the future and the value of patents once obtained. Among these, in September 2011, patent reform legislation passed by Congress was signed into law in the United States. The patent law introduced changes including a first-to-file system for determining which inventors may be entitled to receive patents, and post-grant challenges, such as inter-partes review and post-grant review proceedings that allow third parties to challenge newly issued patents. The burden of proof required for challenging a patent in these proceedings is lower than in district court litigation, and patents in the biopharmaceutical industry have been successfully challenged using these new post-grant challenges. In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in specified circumstances or weakening the rights of patent owners in specified situations. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could further weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has adversely disrupted, and is expected to continue to adversely disrupt our operations, including our ability to complete our ongoing clinical trials and may have other adverse effects on our business and operations. In addition, this
pandemic has caused substantial disruption in the financial markets and has adversely impacted economies worldwide, both of which could result in adverse effects on our business, operations and ability to raise capital.
The COVID-19 pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak through quarantines, strict travel restrictions, heightened border scrutiny and other measures. The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, facilities and production have been suspended, and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. The future progression of the pandemic and its effects on our business and operations are uncertain.
We have enrolled and seek to enroll cancer patients in our ongoing clinical trials at sites located both in the United States and in Europe. The COVID-19 pandemic has delayed and may continue to delay or otherwise adversely affect these clinical development activities, including our ability to recruit and retain patients in our ongoing clinical trials, as a result of many factors, including:
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diversion of healthcare resources away from the conduct of our clinical trials in order to focus on pandemic concerns, including the availability of necessary materials, the attention of physicians serving as our clinical trial investigators, access to hospitals serving as our clinical trial sites, availability of hospital staff supporting the conduct of our clinical trials and the reluctance of patients enrolled in our clinical trials to visit clinical trial sites;
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potential interruptions in global shipping affecting the transport of clinical trial materials, such as investigational drug product, patient samples and other supplies used in our clinical trials;
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the impact of further limitations on travel that could interrupt key clinical trial activities, such as clinical trial site initiations and monitoring activities, travel by our employees, contractors or patients to clinical trial sites or the ability of employees at any of our CMOs or CROs to report to work, any of which could delay or adversely impact the conduct or progress of our clinical trials, and limit the amount of clinical data we will be able to report;
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any future interruption of, or delays in receiving, supplies of clinical trial material from our contract manufacturing organizations or, in the case of combination trials, our study collaborators, due to staffing shortages, production slowdowns or stoppages or disruptions in delivery systems; and
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availability of future capacity at CMOs to produce sufficient drug substance and drug product to meet forecasted clinical trial demand if any of these manufacturers elect or are required to divert attention or resources to the manufacture of other pharmaceutical products.
For example, some of the clinical trial sites for our DEDUCTIVE trial have suspended enrollment at times due to COVID-19 related hospital and governmental restrictions. Enrollment has occurred at a slower pace than initially forecasted prior to the onset of the pandemic, and we cannot guarantee the future pace of enrollment. In addition, in-person monitoring visits are currently on hold at certain of the clinical trial sites in our DEDUCTIVE trial and to the extent possible due to the COVID-19 pandemic, monitoring is being conducted remotely. We do not yet know whether remote management of this function will prove to be sufficient. The extent of any adverse impact on our clinical trials will depend on numerous evolving factors that cannot be predicted with any level of certainty. In addition, in March 2020 we decided to discontinue the CyFi-2 trial due to the urgent shift in priorities among clinical trial sites toward efforts to combat the COVID-19 pandemic, which had impacted the trial enrollment timeline and the feasibility of completing the study within the shelf-life of the ficlatuzumab clinical trial supply.
Any negative impact that the COVID-19 pandemic has on recruiting or retaining patients in our clinical trials, the ability of our suppliers to provide materials for our product candidates or the regulatory review process could cause additional delays with respect to product development activities, which could materially and adversely affect our ability to obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses, affect our ability to raise additional capital and have a material adverse effect on our financial results. In addition, our clinical trial patients who contract COVID-19 may have adverse health outcomes unrelated to their cancer that could impact the results of our clinical trials.
The COVID-19 pandemic continues to evolve and its ultimate scope, duration and effects are unknown. The extent of the impact of the disruptions to our business, preclinical studies, clinical trials and commercialization efforts as a result of the outbreak will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and actions to contain the outbreak or treat its impact, such as social distancing and quarantines or lock-downs in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
Risks Related to Regulatory Approval and Marketing of Our Product Candidates and Other Legal Compliance Matters
The regulatory approval process is expensive, time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of our product candidates. If we or our collaborators are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.
Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, export and import, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States, and by the EMA and comparable regulatory authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third-party CROs to assist us in this process.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive and may take many years, especially if additional clinical trials are required. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. It also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may delay or preclude our obtaining marketing approval or prevent or limit commercial use.
In addition, the FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. In addition, a regulatory agency’s varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. For example, in June 2013, the FDA issued the 2013 CRL informing us that it would not approve tivozanib for the first-line treatment of RCC based solely on the data from the TIVO-1 trial.
In addition, disruptions at the FDA and other agencies due to COVID-19 may prolong the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. The Trump Administration also took several executive actions that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities.
Accordingly, if we or our collaborators experience delays in obtaining approval or if we fail to obtain approval of our product candidates, or executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.
Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed abroad and may limit our ability to generate revenue from product sales.
In order to market and sell our medicines in the EU and many other jurisdictions, we or our collaborators must obtain marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, a product must be approved for reimbursement before the product can be approved for sale in that country. We or our collaborators may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any particular market.
In many countries outside the United States, a product candidate must also be approved for reimbursement before it can be sold in that country. In some cases, the price that we intend to charge for our products, if approved, is also subject to approval. Obtaining non-U.S. regulatory approvals and compliance with non-U.S. regulatory requirements could result in significant delays, difficulties and costs for us and any future collaborators and could delay or prevent the introduction of our product candidates in certain countries.
In addition, if we or any future collaborators fail to obtain the non-U.S. approvals required to market our product candidates outside the United States or if we or any future collaborators fail to comply with applicable non-U.S. regulatory requirements, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business, financial condition, results of operations and prospects may be adversely affected.
Additionally, we could face heightened risks with respect to seeking marketing approval in the United Kingdom as a result of the recent withdrawal of the United Kingdom from the EU, commonly referred to as Brexit. Pursuant to the formal withdrawal arrangements agreed between the United Kingdom and the EU, the United Kingdom withdrew from the EU, effective December 31, 2020. On December 24, 2020, the United Kingdom and the EU entered into a Trade and Cooperation Agreement. The agreement sets out certain procedures for approval and recognition of medical products in each jurisdiction. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of the Trade and Cooperation Agreement would prevent us from commercializing any product candidates in the United Kingdom and/or the EU and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or the EU for any product candidates, which could significantly and materially harm our business.
We may not be able to obtain orphan drug designation or orphan drug exclusivity for our product candidates, and, even if we do, that exclusivity may not prevent the FDA or the EMA from approving other competing products.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs and biologics for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States. Generally, a product with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first marketing approval for the indication for which it has such designation, in which case the FDA or the EMA will be precluded from approving another marketing application for the same product for that indication for the applicable exclusivity period. The applicable exclusivity period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified.
We or our collaborators may seek orphan drug designations for other product candidates and may be unable to obtain such designations. Moreover, even if we do secure such designations and orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products can be approved for the same condition. Further, even after an orphan drug is approved, the FDA can subsequently approve the same drug or biologic for the same condition if the FDA concludes that the later product is clinically superior in that it is shown to be safer, to be more effective or to make a major contribution to patient care. Finally, orphan drug exclusivity may be lost if the FDA or the EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.
Our recently approved product, FOTIVDA, and any product candidate for which we or our collaborators obtain marketing approval are subject to ongoing regulation and could be subject to restrictions or withdrawal from the market, and we may be subject to substantial penalties if we fail to comply with regulatory requirements.
Our recently approved product, FOTIVDA, and any product candidate for which we or our collaborators obtain marketing approval in the future will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control and manufacturing, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the medicine, including the requirement to implement a risk evaluation and mitigation strategy. For example, FDA approval of FOTIVDA is subject to limitations on the indicated uses for which FOTIVDA may be marketed, specifically the treatment of adults with relapsed or refractory advanced RCC who have progressed following two or more systemic therapies. Accordingly, we expect to continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control. If we fail to comply with these requirements, we could have the marketing approval for FOTIVDA withdrawn by regulatory authorities and our ability to market any products could be limited, which could adversely affect our ability to achieve or sustain profitability.
We and our collaborators must also comply with requirements concerning advertising and promotion for FOTIVDA or any of our product candidates for which we may obtain regulatory approval. Promotional communications with respect to prescription products are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we will not be able to promote any products we develop for indications or uses for which they are not approved. The FDA and other agencies, including the Department of Justice, or the DOJ, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. Violations of the FDCA and other statutes, including the FCA, relating to the promotion and advertising of prescription products may lead to investigations and enforcement actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.
Failure to comply with regulatory requirements, may yield various results, including:
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restrictions on such products, manufacturers or manufacturing processes;
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restrictions on the labeling or marketing of a product;
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restrictions on distribution or use of a product;
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requirements to conduct post-marketing studies or clinical trials;
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warning letters or untitled letters;
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withdrawal of the products from the market;
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refusal to approve pending applications or supplements to approved applications that we submit;
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recall of products;
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damage to relationships with collaborators;
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unfavorable press coverage and damage to our reputation;
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fines, restitution or disgorgement of profits or revenues;
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suspension or withdrawal of marketing approvals;
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refusal to permit the import or export of our products;
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product seizure;
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injunctions or the imposition of civil or criminal penalties; and
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litigation involving patients using our products.
Non-compliance with EU requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the EU’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
Our relationships with healthcare providers, physicians and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which, in the event of a violation, could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of FOTIVDA and any product candidate for which we may obtain marketing approval in the future. Our arrangements with healthcare providers, physicians and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute FOTIVDA and any products for which we may obtain marketing approval in the future. Restrictions under applicable federal and state healthcare laws and regulations include the federal Anti-Kickback Statute, FCA, Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Physician Payments Sunshine Act. There are also analogous state and foreign laws and regulations that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by third-party payors, including private insurers. Further, some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and may require manufacturers to report information related to payments and other transfers of value to other healthcare providers and healthcare entities, or marketing expenditures.
If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from funded healthcare programs and the curtailment or restructuring of our operations. Any such penalties could adversely affect our financial results. We are implementing a corporate compliance program designed to ensure that we will market and sell FOTIVDA and any future products that we successfully develop from our product candidates in compliance with all applicable laws and regulations, but we cannot guarantee that this program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, individual imprisonment, integrity obligations, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusion from government funded healthcare programs.
Current and future legislation may increase the difficulty and cost for us and any collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell FOTIVDA or any product candidates for which we may obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we or any collaborators may receive for FOTIVDA or any product candidate for which we may obtain marketing approval in the future.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the ACA. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2030 under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the ACA, there have been, and continue to be, numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with the enactment of the TCJA, which was signed by President Trump on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective in 2019. Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the TCJA, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Court of Appeals for the Fifth Circuit court affirmed the lower court’s ruling that the individual mandate portion of the ACA is unconstitutional and it remanded the case to the district court for reconsideration of the severability question and additional analysis of the provisions of the ACA. Thereafter, the U.S. Supreme Court agreed to hear this case. Oral argument in the case took place on November 10, 2020, and a ruling by the Court is expected sometime this year. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
The Trump Administration also took executive actions to undermine or delay implementation of the ACA, including directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers or manufacturers of pharmaceuticals or medical devices. On January 28, 2021, however, President Biden rescinded that Executive Order and issued a new Executive Order which directs federal agencies to reconsider rules and other policies that limit Americans’ access to health care, and consider actions that will protect and strengthen that access. Under this Executive Order, federal agencies are directed to re-examine:
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policies that undermine protections for people with pre-existing conditions, including complications related to COVID-19;
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demonstrations and waivers under Medicaid and the ACA that may reduce coverage or undermine the programs, including work requirements;
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policies that undermine the Health Insurance Marketplace or other markets for health insurance;
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policies that make it more difficult to enroll in Medicaid and the ACA; and
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policies that reduce affordability of coverage or financial assistance, including for dependents.
The costs of prescription pharmaceuticals have also been the subject of considerable discussion in the United States. To date, there have been several recent U.S. congressional inquiries, as well as proposed and enacted state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. To those ends, President Trump issued five Executive Orders intended to lower the costs of prescription drug products but it is unclear whether, and to what extent, these Executive Orders will remain in force under the Biden Administration. Further, on September 24, 2020, the Trump Administration finalized a rulemaking allowing states or certain other non-federal government entities to submit importation program proposals to the FDA for review and approval. Applicants are required to demonstrate that their importation plans pose no additional risk to public health and safety and will result in significant cost savings for consumers. The FDA has issued draft guidance that would allow manufacturers to import their own FDA-approved drugs that are authorized for sale in other countries (multi-market approved products).
At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for FOTIVDA or our product candidates or additional pricing pressures.
Finally, outside the United States, in some nations, including those of the EU, the pricing of prescription pharmaceuticals is subject to governmental control and access. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. If reimbursement of FOTIVDA is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.
Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our ability to collect and process data globally, and the failure to comply with such requirements could subject us to significant fines and penalties, which may have a material adverse effect on our business, financial condition or results of operations.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Globally, virtually every jurisdiction in which we operate has established its own data security and privacy frameworks with which we must comply, with additional laws and amendments being passed on a regular basis. As one example, the collection, use, disclosure, transfer or other processing of personal data regarding individuals in the EU, including personal health data, is subject to the EU General Data Protection Regulation, or the GDPR, which applies to all member states of the European Economic Area, or EEA. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data. The GDPR imposes significant obligations with respect to clinical trials conducted in the EEA. In addition, the GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the United States and, as a result, increases the scrutiny that clinical trial sites located in the EEA should apply to transfers of personal data from such sites to countries that are considered to lack an adequate level of data protection, such as the United States. The GDPR also permits data protection authorities to require destruction of improperly gathered or used personal information and/or impose substantial fines for violations of the GDPR and it also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the GDPR. In addition, the GDPR provides that EU member states may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data.
Given the breadth and depth of changes in data protection obligations, preparing for and complying with these requirements is rigorous and time intensive and requires significant resources and a review of our technologies, systems and practices, as well as those of any third-party collaborators, service providers, contractors or consultants that process or transfer personal data collected in the EU and otherwise across the world. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from our clinical trials, could require us to change our business practices and put in place additional compliance mechanisms, may interrupt or delay our development, regulatory and commercialization activities and increase our cost of doing business, and could lead to government enforcement actions, private litigation and significant fines and penalties against us and could have a material adverse effect on our business, financial condition or results of operations.
Similar actions are either in place or under way in the United States. There are a broad variety of data protection laws that are applicable to our activities, and a wide range of enforcement agencies at both the state and federal levels that can review companies for privacy and data security concerns based on general consumer protection laws. The Federal Trade Commission and state Attorneys General all are aggressive in reviewing privacy and data security protections for consumers. New laws also are being considered at both the state and federal levels. For example, the California Consumer Privacy Act-which went into effect on January 1, 2020-is creating similar risks and obligations as those created by GDPR, though the Act does exempt certain information collected as part of a clinical trial subject to the Federal Policy for the Protection of Human Subjects (the Common Rule). Many other states are considering similar legislation. A broad range of legislative measures also have been introduced at the federal level. Accordingly, failure to comply with federal and state laws (both those currently in effect and future legislation) regarding privacy and security of personal information could expose us to fines and penalties under such laws. There also is the threat of consumer class actions related to these laws and the overall protection of personal data. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our reputation and our business.
Laws and regulations governing any international operations we may have in the future may preclude us from developing, manufacturing and selling certain products outside of the United States and require us to develop and implement costly compliance programs.
If we expand our operations outside of the United States, we must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate. The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.
Various laws, regulations and Executive Orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, marketing or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.
The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.
We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities. However, we do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.
Risks Related to Employee Matters and Managing Potential Growth
If we fail to attract and keep senior management, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management personnel. We are highly dependent upon our senior management, as well as others on our management team. The loss of services of employees and, in particular, of a member of management could delay or prevent our ability to successfully commercialize FOTIVDA in the United States, to successfully maintain or enter into new licensing arrangements or collaborations, the successful development of our product candidates, the completion of our planned clinical trials or the commercialization of our product candidates. We do not carry “key person” insurance covering any members of our senior management. Our employment arrangements with all of these individuals are “at will,” meaning they or we can terminate their service at any time.
We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions, many of which have substantially greater resources with which to reward qualified individuals than we do. We may face challenges in retaining our existing senior management and key employees and recruiting new employees to join our company as our business needs change. In addition, the COVID-19 pandemic may negatively impact our ability to recruit and build out our organization as planned. We may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our future business plans.
Our employees or consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of employee or consultant fraud or other misconduct. Misconduct by employees or consultants could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state health-care fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, marketing, sales and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee or consultant misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation.
We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee or consultant misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
In addition, during the course of our operations, our directors, executives, employees and consultants may have access to material nonpublic information regarding our business, our results of operations or potential transactions we are considering. Despite the adoption of an insider trading policy, we may not be able to prevent a director, executive, employee or consultant from trading in our common stock on the basis of, or while having access to, material nonpublic information. If a director, executive or employee was to be investigated, or an action was to be brought against a director, executive, employee or consultant for insider trading, it could have a negative impact on our reputation and our stock price. Such a claim, with or without merit, could also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to the success of our business.
Risks Related to Ownership of Our Common Stock
If we fail to meet the requirements for continued listing on the Nasdaq Capital Market, our common stock could be delisted from trading, which would decrease the liquidity of our common stock and our ability to raise additional capital.
Our common stock is currently listed on the Nasdaq Capital Market. We are required to meet specified requirements to maintain our listing on the Nasdaq Capital Market, including a minimum market value of listed securities of $35.0 million, a minimum bid price of $1.00 per share for our common stock and other continued listing requirements.
In the past we have, from time to time, received deficiency letters from Nasdaq as a consequence of our failure to satisfy such requirements. Although we have been able to regain compliance with the listing requirements within the manner and time periods prescribed by Nasdaq in the past, there can be no assurance that we will be able to maintain compliance with the Nasdaq continued listing requirements in the future or regain compliance with respect to any future deficiencies. If we fail to satisfy the Nasdaq Capital Market’s continued listing requirements, we may transfer to the OTC Bulletin Board, which generally has lower financial requirements for initial listing, to avoid delisting. However, we may not be able to satisfy the initial listing requirements for the OTC Bulletin Board. Having our common stock trade on the OTC Bulletin Board could adversely affect the liquidity of our common stock. Any such event could make it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock, and there also would likely be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. We may also face other material adverse consequences in such event, such as negative publicity, a decreased ability to obtain additional financing, diminished investor and/or employee confidence and the loss of business development opportunities, some or all of which may contribute to a further decline in our stock price.
The market price of our common stock has been, and is likely to be, highly volatile, and could fall below the price you paid. A significant decline in the value of our stock price could also result in securities class-action litigation against us.
The market price of our common stock has been, and is likely to continue to be, highly volatile and subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:
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announcements relating to our product, FOTIVDA, including as it relates to commercial launch, sales and any future regulatory matters;
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new products, product candidates or new uses for existing products introduced or announced by our strategic partners, or our competitors, and the timing of these introductions or announcements;
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actual or anticipated results from and any delays in our clinical trials;
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the effect of the COVID-19 outbreak on the healthcare system and the economy generally and on our preclinical studies, clinical trials, commercial activities and other operations specifically;
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the results of regulatory reviews and other regulatory correspondence relating to our product, product candidates or our clinical trials;
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the results of our efforts to develop, acquire or in-license additional product candidates or products;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
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announcements by us of material developments in our business, financial condition and/or operations;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures and capital commitments;
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additions or departures of key scientific or management personnel;
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conditions or trends in the biotechnology and biopharmaceutical industries;
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actual or anticipated changes in revenue, expense or earnings estimates, development timelines or recommendations by securities analysts;
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general economic and market conditions on our industry and market conditions, and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies; and
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sales of common stock by us or our stockholders in the future, as well as the overall trading volume of our common stock.
In addition, the stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.
Periods of volatility in the market for a company’s stock are often followed by litigation against the company. For example, following our failure to obtain FDA approval for tivozanib in 2013, we and certain of our former officers and directors were involved in several legal proceedings. Following our January 2019 announcement that the FDA did not recommend we file an NDA for tivozanib at that time, several lawsuits were filed against us, our directors, and certain of our current and former officers. See Part II, Item 1 of this Annual Report on Form 10-K under the heading “Legal Proceedings.” While the 2019 Class Action was dismissed, any litigation instituted against us in the future could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business and financial condition.
We and our collaborators may not achieve development and commercialization goals in the estimated time frames that we publicly announce, which could have an adverse impact on our business and could cause our stock price to decline.
We set goals, and make public statements regarding our expected timing for certain accomplishments, such as statements we have made about the initiation and completion of clinical trials, filing and approval of regulatory applications, preparations for a commercial launch and other developments and milestones under our research and development programs and those of our partners and collaborators for tivozanib, ficlatuzumab, AV-380, AV-203 and AV-353. The actual timing of these events can vary significantly due to a number of factors, including those discussed in “Part I, Item 1A. Risk Factors.” As a result, there can be no assurance that our preclinical studies and clinical trials will advance or be completed in the time frames we expect or announce, that we will make regulatory submissions or receive regulatory approvals as planned, that we will be successful in our commercial launch or that we will be able to adhere to our currently anticipated schedule for the achievement of key milestones under any of our programs. If we fail to achieve one or more of the events described above as planned, our business could be materially adversely affected and the price of our common stock could decline.
Our management has broad discretion over our use of available cash and cash equivalents and might not spend our available cash and cash equivalents in ways that increase the value of your investment.
Our management has broad discretion on where and how to use our cash and cash equivalents and you will be relying on the judgment of our management regarding the application of our available cash and cash equivalents to fund our operations. Our management might not apply our cash and cash equivalents in ways that increase the value of your investment. We expect to use a substantial portion of our cash to fund existing and future research and development of our preclinical and clinical product candidates, with the balance, if any, to be used for working capital and other general corporate purposes, which may in the future include investments in, or acquisitions of, complementary businesses, joint ventures, partnerships, services or technologies. Our management might not be able to yield a significant return, if any, on any investment of this cash. You will not have the opportunity to influence our decisions on how to use our cash reserves.
Fluctuations in our quarterly operating results could adversely affect the price of our common stock.
Our quarterly operating results may fluctuate significantly. Some of the factors that may cause our operating results to fluctuate on a period-to-period basis include:
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the level of net product revenues from the sales of FOTIVDA;
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the level of expenses incurred to commercialize FOTIVDA;
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the level of expenses incurred in connection with our clinical development programs, including development and manufacturing costs relating to our clinical development candidates;
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the implementation of restructuring and cost-savings strategies;
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the implementation or termination of collaboration, licensing, manufacturing or other material agreements with third parties, and non-recurring revenue or expenses under any such agreement;
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costs associated with lawsuits against us or other litigation in which we may become involved, including the lawsuits described elsewhere in this Annual Report on Form 10-K under “Part II, Item 1. - Legal Proceedings”;
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changes in our Loan Agreement, including the existence of any event of default that may accelerate then remaining principal payments and fees due thereunder;
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non-cash changes in fair value related to re-valuations of our outstanding warrant liability as a result of fluctuations in our stock price; and
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compliance with regulatory requirements.
In addition, in March 2020, we decided to discontinue our CyFi-2 trial of ficlatuzumab due to the urgent shift in priorities among clinical trial sites towards efforts to combat the COVID-19 pandemic, which has impacted the trial enrollment timeline and the feasibility of completing the study within the shelf-life of the current ficlatuzumab clinical trial supply. While the COVID-19 pandemic has not had a material adverse impact on our operations to date, the future impact of COVID-19 is highly uncertain and cannot be predicted and there can be no assurance that the outbreak will not have a material adverse impact on our future operations. The extent of the impact, if any, will depend on future developments, including the extent of the pandemic and governmental actions taken to contain the COVID-19 pandemic.
Period-to-period comparisons of our historical and future financial results may not be meaningful, and investors should not rely on them as an indication of future performance. Our fluctuating results may fail to meet the expectations of securities analysts or investors. Our failure to meet these expectations may cause the price of our common stock to decline.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
Global credit and financial markets have been experiencing extreme volatility and disruptions in 2020 due to the COVID-19 pandemic and the government measures taken in response to the pandemic. We expect that rapid or extended periods of deterioration in credit and financial markets and confidence in economic conditions will continue. Our general business strategy may be adversely affected by external economic conditions and a volatile business environment or unpredictable and unstable market conditions. If the equity and credit markets are not favorable at any time we seek to raise capital, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers or other partners may not survive economically turbulent times, which could directly affect our ability to attain our operating goals on schedule and on budget.
As of December 31, 2020, we had approximately $61.8 million of cash, cash equivalents and marketable securities, consisting of cash on deposit with banks, a U.S. government money market fund and high-grade debt securities, including short-term commercial paper, corporate bonds and other U.S. government agency securities. As of the date of this report, we are not aware of any downgrades, material losses or other significant deterioration in the fair value of our cash equivalents or marketable securities. However, no assurance can be given that deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents and marketable securities or our ability to meet our financing objectives. Dislocations in the credit market may adversely impact the value and/or liquidity of cash equivalents and marketable securities owned by us.
Future sales of shares of our common stock, including shares issued upon the exercise of currently outstanding options and warrants, could negatively affect our stock price.
A substantial portion of our outstanding common stock can be traded without restriction at any time. Some of these shares are currently restricted as a result of securities laws, but will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales, in the near future. As such, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell such shares, could reduce the market price of our common stock. In addition, we have a significant number of shares that are subject to outstanding options and warrants. The exercise of these options or warrants and the subsequent sale of the underlying common stock could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our common stock may depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. A lack of research coverage may negatively impact the market price of our common stock. To the extent we do have analyst coverage, if one or more analysts downgrade our stock or change their opinion of our stock, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Provisions in our certificate of incorporation, our by-laws or Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Provisions of our certificate of incorporation, our by-laws or Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing a change in control of our company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest. These provisions include:
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advance notice requirements for stockholder proposals and nominations;
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the inability of stockholders to act by written consent or to call special meetings;
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the ability of our board of directors to make, alter or repeal our by-laws; and
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the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that a stockholder could receive a premium for shares of our common stock held by a stockholder in an acquisition.
Our business could be negatively affected as a result of the actions of activist stockholders.
Proxy contests have been waged against companies in the biopharmaceutical industry over the last few years. If faced with a proxy contest, we may not be able to successfully respond to the contest, which would be disruptive to our business. Even if we are successful, our business could be adversely affected by a proxy contest because:
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responding to proxy contests and other actions by activist stockholders may be costly and time-consuming, and may disrupt our operations and divert the attention of management and our employees;
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perceived uncertainties as to the potential outcome of any proxy contest may result in our inability to consummate potential acquisitions, collaborations or in-licensing opportunities and may make it more difficult to attract and retain qualified personnel and business partners; and
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if individuals that have a specific agenda different from that of our management or other members of our board of directors are elected to our board of directors as a result of any proxy contest, such an election may adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our stockholders.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us, on an annual basis, to review and evaluate our internal controls, and requires our independent registered public accounting firm to attest to the effectiveness of our internal controls. Despite our efforts, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions with respect to the effectiveness of our internal control over financial reporting under Section 404. There is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
If we are unable to successfully remediate any material weaknesses in our internal control, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We also could become subject to investigations by Nasdaq, the SEC or other regulatory authorities.
We do not expect to pay any cash dividends for the foreseeable future.
Our stockholders should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition, our ability to pay cash dividends is currently prohibited by the terms of our debt financing arrangements and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. In addition, the terms of the Loan Agreement preclude, and any future debt agreements may preclude us from, paying dividends. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.
Changes in tax laws or in their implementation or interpretation may adversely affect our business and financial condition.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. For example, the TCJA was enacted in 2017 and significantly reformed the Internal Revenue Code of 1986, as amended, or the Code. In addition, as part of Congress’ response to the COVID-19 pandemic, the Families First Coronavirus Response Act, or FFCR Act, was enacted on March 18, 2020, and the CARES Act was enacted on March 27, 2020. Both contain numerous tax provisions.
Regulatory guidance under the TCJA, the FFCR Act and the CARES Act is and continues to be forthcoming, and such guidance could ultimately increase or lessen impact of these laws on our business and financial condition. It is also possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on our company. In addition, it is uncertain if and to what extent various states will conform to the TCJA, the FFCR Act or the CARES Act. We urge investors to consult with their legal and tax advisers regarding the implications of the TCJA, the FFCR Act and the CARES Act and other changes in tax laws on an investment in our common stock. Recent changes in tax law may adversely affect our business or financial condition.
We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.
As of December 31, 2020, we had federal net operating loss carryforwards of $565.8 million, of which $502.6 million will, if not used, expire at various dates through 2037, and federal research and development tax credit carryforwards of $11.8 million, which will, if not used, expire at various dates through 2040. To the extent that they expire unused, these net operating loss and tax credit carryforwards will not be available to offset our future income tax liabilities. Federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such carryforwards is limited to 80% of our taxable income in the year in which such carryforwards are used.
In addition, under Section 382 of the Code and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss and credit carryforwards to reduce its tax liability for post-change periods may be limited. We have not determined if we have experienced Section 382 ownership changes in the past and if a portion of our net operating loss and tax credit carryforwards is subject to an annual limitation under Section 382. We also may experience ownership changes in the future as a result of shifts in our stock ownership, some of which may be outside of our control. In addition, we have not conducted a detailed study to document whether our historical activities qualify to support the research and development credits currently claimed as a carryforward. A detailed study could result in adjustment to our research and development credit carryforwards. If we determine that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is materially limited, or if our research and development carryforwards are adjusted, our use of those attributes to offset future income tax liabilities would be limited.
ITEM 1B.
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
ITEM 2.
Properties
We currently sublease our corporate headquarters, which consist of approximately 10,158 square feet of office space located at 30 Winter Street, Boston, Massachusetts. Our sublease agreement continues through November 29, 2022. We believe that our existing facilities are sufficient for our current needs.
ITEM 3.
ITEM 3.
Legal Proceedings
As of the date of filing this Annual Report on Form 10-K, there are no outstanding legal proceedings against us or our current officers or directors.
On July 24, 2020, the District Court for the District of Massachusetts dismissed a purported class action filed against us in 2019. This purported class action lawsuit, which we refer to as the 2019 Class Action, was filed against us and certain of our present and former officers, Michael Bailey, Matthew Dallas, and Keith Ehrlich, on February 25, 2019, in the Southern District of New York for the District of New York, captioned David Hackel v. AVEO Pharmaceuticals, Inc., et al, No. 1:19-cv-01722-AT. On April 12, 2019, the court granted the defendants’ motion to transfer the action to the District of Massachusetts (Case No. 1:19-cv-10783-JCB). On May 6, 2019, the court appointed Andrej Hornak as lead plaintiff and approved Pomerantz LLP as lead counsel and Andrews DeValerio LLP as liaison counsel. On July 24, 2019, the plaintiffs filed an amended complaint naming Michael Needle as an additional defendant. The amended complaint purported to be brought on behalf of shareholders who purchased our common stock between May 4, 2017 through January 31, 2019. It generally alleged that we and our officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by failing to disclose and/or making allegedly false and/or misleading statements about the estimated dates by which we would report the topline results from the TIVO-3 trial, the preliminary overall survival results from the TIVO-3 trial, the sufficiency of the overall survival data from the TIVO-3 trial, the timing of the NDA submission and the risk of FDA approval. The complaint sought unspecified damages, interest, attorneys’ fees, and other costs. On September 27, 2019, we filed a motion to dismiss the amended complaint. On July 24, 2020, the District Court granted our motion to dismiss. The time for appeal expired in August 2020 without appeal.
In connection with the filing of the 2019 Class Action, two derivative lawsuits were filed on July 8, 2019 and July 10, 2019 against us, certain of our present and former officers and our directors in the Suffolk Superior Court, Commonwealth of Massachusetts, captioned Stephen Favre v. Michael P. Bailey, et al. 19-2169-BLS2 and Jianbin Yu v. Michael P. Bailey, et al. 19-2188-BLS2, respectively. The complaints generally alleged breach of fiduciary duty, unjust enrichment, and waste of corporate assets due to the 2019 Class Action and the actions alleged therein. On July 26, 2019, the court granted the parties’ joint motion to consolidate the cases and stay the consolidated matter pending the dismissal of, or filing of an answer to, the complaint in the 2019 Class Action. After the 2019 Class Action was dismissed and the time for appeal had expired, the parties’ filed a joint stipulation to voluntarily dismiss the derivative lawsuit without prejudice. On December 8, 2020, the court entered an order dismissing the derivative action.
For a discussion of certain prior legal proceedings against us that are no longer pending, including two class action lawsuits filed against us and certain of our former officers and directors in 2013 and a lawsuit filed against us and our former officers by the SEC in 2016, each alleging that we violated federal securities laws by misleading investors about our efforts to obtain FDA approval for tivozanib, see Note 13 - “Legal Proceedings”, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K
ITEM 4.
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the Nasdaq Capital Market under the symbol “AVEO”.
Holders
As of March 5, 2021, there were approximately 24 holders of record of our common stock. We believe that the number of beneficial owners of our common stock at that date was substantially greater.
Dividends
We have never declared or paid any cash dividends on our common stock and our ability to pay cash dividends is currently prohibited by the terms of our debt financing arrangements. We currently intend to retain earnings, if any, for use in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, on our common stock will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, anticipated cash needs, and plans for expansion.
Purchase of Equity Securities
We did not purchase any of our equity securities during the period covered by this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
None.
ITEM 6.
ITEM 6.
Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The Balance Sheet Data at December 31, 2020 and 2019 and the Statement of Operations Data for each of the three years in the period ended December 31, 2020 have been derived from our audited Consolidated Financial Statements for such years, included elsewhere in this Annual Report on Form 10-K. The Balance Sheet Data at December 31, 2018, 2017 and 2016, and the Statement of Operations Data for each of the two years in the period ended December 31, 2017 have been derived from the audited Consolidated Financial Statements for such years not included in this Annual Report on Form 10-K.
Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
(1)
Partnership-related revenues in 2020, 2019 and 2018 were recognized in accordance with ASC 606, Revenue from Contracts with Customers, while prior periods were recognized in accordance with legacy GAAP.
(2)
On February 19, 2020, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-ten pursuant to a Certificate of Amendment to our Certificate of Incorporation filed with the Secretary of State of the State of Delaware. The reverse stock split was reflected on Nasdaq beginning with the opening of trading on February 20, 2020. As a result of the reverse stock split, every ten shares of our common stock issued and outstanding was converted into one share of common stock. All share amounts and per share amounts disclosed in this Annual Report on Form 10-K have been restated to reflect the reverse stock split on a retroactive basis.
ITEM 7.
ITEM 7.
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 consolidated financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section in Part 1, Item 1A of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are an oncology-focused biopharmaceutical company committed to delivering medicines that provide a better life for cancer patients. Our strategy is to focus our resources toward the development and commercialization of our product candidates in North America, while leveraging partnerships to support development and commercialization in other geographies. With the approval of our first commercial product, FOTIVDA® (tivozanib), in the United States, we have transitioned from a clinical development stage biopharmaceutical company to a commercial and clinical development stage biopharmaceutical company.
On March 10, 2021, the U.S. Food and Drug Administration, or FDA, approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced renal cell carcinoma, or RCC, following two or more prior systemic therapies. FOTIVDA is an oral, next-generation vascular endothelial growth factor receptor, or VEGFR, tyrosine kinase inhibitor, or TKI. The approval of FOTIVDA is based on our pivotal phase 3 randomized, controlled, multi-center, open-label clinical trial comparing tivozanib to an approved therapy, Nexavar® (sorafenib), in RCC patients whose disease had relapsed or become refractory to two or three prior systemic therapies, which we refer to as the TIVO-3 trial. The approval is also supported by three additional trials in RCC and includes safety data from over 1,000 clinical trial subjects.
We are actively preparing for the commercial launch of FOTIVDA in the United States. Our U.S. sales force, sales training, marketing, market access and medical affairs teams as well as distribution capabilities are in place and we expect to have full promotional capabilities and FOTIVDA available to patients by March 31, 2021.
FOTIVDA is also approved and commercialized through our development partner EUSA Pharma (UK) Limited, or EUSA, in the United Kingdom, Germany, Spain and certain other countries in their territory, for the treatment of adult patients with advanced RCC who are VEGFR pathway inhibitor-naïve and are either untreated or who have failed prior therapy with interferon-alpha (IFN-a) or interleukin-2 (IL-2).
Based on FOTIVDA’s demonstrated anti-tumor activity, tolerability profile and reduction of regulatory T-cell production, we are studying FOTIVDA in combination with immune checkpoint inhibitors for the treatment of RCC and hepatocellular carcinoma, or HCC, in phase 2 clinical trials and we recently announced our entry into a collaboration with Bristol Myers Squibb, or BMS, to conduct a phase 3 study of FOTIVDA in combination with OPDIVO® (nivolumab), BMS’s anti-PD-1 therapy, in patients with advanced relapsed or refractory RCC following prior immunotherapy exposure.
Our pipeline of product candidates includes ficlatuzumab, a potent humanized immunoglobulin G1, or IgG1, monoclonal antibody that targets hepatocyte growth factor, or HGF. We have previously reported promising early clinical data on ficlatuzumab in squamous cell carcinoma of the head and neck, or HNSCC, pancreatic cancer and acute myeloid leukemia, or AML. We are currently conducting a randomized phase 2 confirmatory study of ficlatuzumab for the potential treatment of HNSCC.
Our pipeline of product candidates also includes worldwide rights to AV-380, a potent humanized IgG1 monoclonal antibody that targets growth differentiation factor 15, or GDF15. In December 2020, the FDA accepted our investigational new drug application, or IND, for AV-380 for the potential treatment of cancer cachexia, and we have initiated a phase 1 clinical trial in healthy subjects.
Our earlier-stage pipeline under development includes AV-203 and AV-353, both as potential oncology treatments. AV-203 is a potent humanized IgG1 monoclonal antibody that targets ErbB3 (also known as HER3) to which we expect to regain worldwide rights in September 2021. AV-353 is a potent IgG1 monoclonal antibody that targets the Notch 3 pathway.
Commercial Launch
During 2020 and early 2021, in preparation for the commercial launch of FOTIVDA in the United States, we:
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expanded our organization with approximately 65 field-based employees, which includes approximately 50 oncology sales professionals;
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developed our commercial capabilities with implementation of systems and infrastructure to support our virtual and in person commercial sales organization, patient-focused programs and appropriate quality systems and compliance policies, systems and procedures; and
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established our distribution network in order to be prepared to have full promotional capabilities and product available for sale by March 31, 2021.
Other Recent Events
On December 28, 2017, we entered into the Amended and Restated Loan and Security Agreement, or the 2017 Loan Agreement, with Hercules Capital, Inc. and certain of its affiliates, or Hercules. On August 7, 2020, we entered into the first amendment to the 2017 Loan Agreement with Hercules, or the 2020 Loan Amendment, to provide us with additional term loans in an aggregate principal amount of up to $35.0 million, or the 2020 Loan Facility, in four tranches to be used to repay in full the outstanding loans under the 2017 Loan Agreement and for general working capital purposes through the commercial launch of FOTIVDA, subject to certain terms and conditions. On February 1, 2021, we entered into the second amendment to the 2017 Loan Agreement with Hercules, or the 2021 Loan Amendment, that increases the 2020 Loan Facility from up to $35.0 million to up to $45.0 million following FDA approval of FOTIVDA. On March 11, 2021, we completed a second drawdown, in the amount of $20.0 million, under the 2020 Loan Facility that was made available in connection with the FDA approval of FOTIVDA on March 10, 2021.
Financial Overview
We do not have a history of generating operating profits and, as of December 31, 2020, we had an accumulated deficit of $621.2 million. We anticipate that we will continue to incur significant operating expenses for the foreseeable future as we seek to commercialize FOTIVDA in the United States and continue our planned development activities for our clinical stage assets.
We may require substantial additional funding to advance our pipeline of clinical stage assets, and the timing and nature of these activities will be conducted subject to the availability of sufficient financial resources. Please see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -Liquidity and Going Concern” for a further discussion of our funding requirements.
Revenue
Our revenues have historically been generated primarily through collaborative research, development and commercialization agreements. Payments to us under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; milestone payments; and royalties on future product sales. In November 2017, we began earning sales royalties upon EUSA’s commencement of the first commercial launch of FOTIVDA (tivozanib).
In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research and development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under licenses of our intellectual property. On March 10, 2021, the FDA approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced RCC following two or more prior systemic therapies. We are actively preparing for the commercial launch of FOTIVDA in the United States and we expect to make FOTIVDA available to patients by March 31, 2021. We expect that any revenue we generate will fluctuate from quarter to quarter and year to year as a result of the timing and amount of license fees, research and development reimbursements, milestones, royalties and other payments received under our strategic partnerships, and the payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we or our strategic partners fail to complete the development of our product candidates in a timely manner or to obtain or maintain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Research and Development Expenses
Research and development expenses have historically consisted of expenses incurred in connection with the discovery and development of our product candidates. We recognize research and development expenses as they are incurred. These expenses consist primarily of:
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employee-related expenses, including salaries, bonuses, benefits, stock-based compensation and research-related overhead;
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external development-related expenses, including clinical trials, preclinical studies, consultants and other outsourced services;
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costs of acquiring and manufacturing drug development related materials and related distribution;
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costs associated with our regulatory and quality assurance operations and medical affairs;
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upfront license payments, milestones, sublicense fees and royalties related to in-licensed products and technology; and
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allocated expenses for facilities and information technology.
Research and development expenses are net of amounts reimbursed under our agreements with Biodesix and AstraZeneca for their respective shares of development costs incurred by us under our joint development plans with each respective partner.
We anticipate that research and development expenses will increase in 2021, principally related to increases for a full year of costs for the medical affairs function in support of the commercial launch of FOTIVDA, ficlatuzumab manufacturing of clinical supply for a potential phase 3 clinical trial in HNSCC and the conduct of the phase 1 clinical trial of AV-380 for the potential treatment of cancer cachexia. These increases will be partially offset by lower costs, principally related to the TIVO-3 trial as it nears completion and costs incurred in 2020 that will not be incurred in 2021 related to the submission of our tivozanib NDA in March 2020 and related FDA review support. The timing and nature of contemplated activities in 2021 will be conducted subject to the availability of sufficient financial resources.
Currently, we track direct external development expenses and direct salary on a program-by-program basis and allocate general-related expenses, such as indirect compensation, benefits and consulting fees, to each program based on the personnel resources allocated to such program. Facilities, IT costs and stock-based compensation are not allocated amongst programs and are considered overhead.
Uncertainties of Estimates Related to Research and Development Expenses
The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval for each of our product candidates is costly and time-consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, the risk benefit profile of the product candidates’ clinical activity, investment in the program, competition, manufacturing capabilities and commercial viability.
At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates, or the period, if any, in which material net cash inflows may commence from sales of any approved products. This uncertainty is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
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our ability to establish and maintain strategic partnerships, the terms of those strategic partnerships and the success of those strategic partnerships, if any, including the timing and amount of payments that we might receive from strategic partners;
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the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any product candidate;
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the progress and results of our clinical trials;
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the costs, timing and outcome of regulatory review of our product candidates;
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the emergence of competing technologies and products and other adverse market developments;
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the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and
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additional manufacturing requirements.
As a result of the uncertainties associated with developing drugs, including those discussed above, we are unable to determine the exact duration and completion costs of current or future clinical stages of our product candidates, or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates for which we may obtain regulatory approval. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success, if any, of each product candidate, as well as ongoing assessment of each product candidate’s commercial potential. We will need to raise substantial additional capital in the future in order to fund the development of our preclinical and clinical product candidates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of compensation, benefits and travel for employees in executive, finance, legal, human resource and commercial functions. Other selling, general and administrative expenses include professional fees for audit, tax, general legal, patent legal, investor relations, commercial, consulting services and directors’ fees, as well as facility and information technology-related costs not otherwise included in research and development expenses.
We anticipate that selling, general and administrative expenses will continue to increase significantly through the commercial launch of FOTIVDA and will remain consistent at that level in the second half of 2021, principally related to the addition of our salesforce, and continued expansion of our marketing, market access and commercial capabilities and general and administrative support. Accordingly, the timing and nature of contemplated activities in 2021 will be conducted subject to the availability of sufficient financial resources.
Interest Expense, Net
Interest expense consists of interest, amortization of debt discount, and amortization of deferred financing costs associated with our loans payable, and is shown net of interest income, which consists of interest earned on our cash, cash equivalents and marketable securities. The primary objective of our investment policy is capital preservation.
Income Taxes
We generated tax losses for the years ended December 31, 2020, 2019, and 2018, and since we maintain a full valuation allowance on all of our deferred tax assets, we have recorded no income tax provision or benefit during the years ended December 31, 2020, 2019, and 2018.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, the measurement of right-of-use assets and lease liabilities, the assessment of our ability to continue as a going concern, and the reported amounts of revenues and expenses during the reported periods. On an ongoing basis, we evaluate our estimates and judgments for changes in facts and circumstances, including those related to revenue recognition, contract research accruals, measurements of the PIPE Warrant liability, stock-based compensation, and estimates of our capital requirements over the next twelve months from the date of issuance of the annual consolidated financial statements. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Material changes in these estimates could occur in the future. Changes in estimates are recorded or reflected in our disclosures in the period in which they become known. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. Our significant accounting policies are described in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
As of December 31, 2020, our revenues have been generated primarily through collaborative research, development and commercialization agreements. The terms of these agreements generally contain multiple promised goods and services, which may include (i) licenses, or options to obtain licenses, to our technology, (ii) research and development activities to be performed on behalf of the collaborative partner, and (iii) in certain cases, services in connection with the manufacturing of preclinical and clinical material. Payments to us under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; milestone payments; and royalties on future product sales.
Collaboration Arrangements Within the Scope of ASC 808, Collaborative Arrangements
We analyze our collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and are therefore within the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.
For collaboration arrangements that are deemed to be within the scope of ASC 808, we first determine which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606, Revenue from Contracts with Customers, or ASC 606. Our policy is generally to recognize amounts received from collaborators in connection with joint operating activities that are within the scope of ASC 808 as a reduction in research and development expense.
Arrangements Within the Scope of ASC 606, Revenue from Contracts with Customers
Under ASC 606, we recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we determine we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy our performance obligation(s). As part of the accounting for these arrangements, we must make significant judgments, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation.
Once a contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes.
We assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.
The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices, or SSP, on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.
If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.
In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. We assess each of our revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of our arrangements.
We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time based on the use of an output or input method.
Licenses of Intellectual Property: The terms of our license agreements include the license of functional intellectual property, given the functionality of the intellectual property is not expected to change substantially as a result of our ongoing activities. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from the portion of the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises (that is, for licenses that are not distinct from other promised goods and services in an arrangement), we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Research and Development Funding: Arrangements that include payment for research and development services are generally considered to have variable consideration. If and when we assess the payment for these services is no longer subject to the constraint on variable consideration, the related revenue is included in the transaction price.
Milestone Payments: At the inception of each arrangement that includes non-refundable payments for contingent milestones, including preclinical research and development, clinical development and regulatory, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of us or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of the achievement of contingent milestones and the likelihood of a significant reversal of such milestone revenue, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and licensing revenue in the period of adjustment. This quarterly assessment may result in the recognition of revenue related to a contingent milestone payment before the milestone event has been achieved.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
The following table summarizes the total revenues earned in the years ended December 31, 2020, 2019 and 2018, respectively, by partner (in thousands). Refer to Note 4 “Collaborations and License Agreements” of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K regarding specific details of these collaboration and license arrangements.
Accrued Expenses and Accrued Clinical Trial Costs and Contract Research Liabilities
As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves identifying services which have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Given our current business, the primary area of uncertainty concerning accruals which could have a material effect on our operating results is with respect to service fees paid to
contract manufacturers in conjunction with the production of clinical drug supplies and to contract research organizations, or CROs, in connection with our clinical trials. In connection with all of the foregoing service fees, our estimates are most affected by our understanding of the status and timing of services provided. The majority of our service providers, including CROs, invoice us in arrears for services performed. In the event that we do not identify some costs which have begun to be incurred, or we under or overestimate the level of services performed or the costs of such services in a given period, our reported expenses for such period would be understated or overstated. We currently reflect the effects of any changes in estimates based on changes in facts and circumstances directly in our operations in the period such change becomes known.
Our arrangements with CROs in connection with clinical trials often provide for payment prior to commencing the project or based upon predetermined milestones throughout the period during which services are expected to be performed. We recognize expense relating to these arrangements based on the various services provided over the estimated time to completion. The date on which services commence, the level of services performed on or before a given date, and the cost of such services are often determined based on subjective judgments. We make these judgments based upon the facts and circumstances known to us based on the terms of the contract and our ongoing monitoring of service performance. During the years ended December 31, 2020, 2019 and 2018, we had arrangements with multiple CROs whereby these organizations commit to performing services for us over multiple reporting periods. We recognize the expenses associated with these arrangements based on our expectation of the timing of the performance of components under these arrangements by these organizations. Generally, these components consist of the costs of setting up the trial, monitoring the trial, closing the trial and preparing the resulting data. Costs related to patient enrollment in clinical trials are accrued as patients are enrolled in the trial.
With respect to financial reporting periods presented in this Annual Report on Form 10-K, the timing of our actual costs incurred have not differed materially from our estimated timing of such costs.
Results of Operations
Comparison of Years Ended December 31, 2020, 2019 and 2018
Revenues
Our total revenues decreased by $22.8 million, or 79%, to $6.0 million in 2020 from $28.8 million in 2019, principally due to payments we earned pursuant to the amendment to the KKC Agreement for KKC’s repurchase of the non-oncology rights to tivozanib in our territory, including the $25.0 million upfront payment we earned in 2019 offset by a $2.8 million development milestone we earned in 2020, as well as a $0.6 million decrease related to revenues from EUSA.
On August 1, 2019, we entered into an amendment to the KKC Agreement pursuant to which KKC repurchased the non-oncology rights to tivozanib in our territory, excluding the rights we have sublicensed to EUSA under the EUSA Agreement, and KKC made a $25.0 million non-refundable upfront payment to us that we received in September 2019. In the third quarter of 2019, we recognized this $25.0 million upfront payment as revenue in accordance with ASC 606. On August 2, 2020, we earned a $2.8 million development milestone payment from KKC for the acceptance of KKC’s IND for a non-oncology formulation of tivozanib by the Pharmaceuticals and Medical Devices Agency of Japan. In the third quarter of 2020, we recognized this $2.8 million development milestone as revenue in accordance with ASC 606. Prior to the amendment to the KKC Agreement, KKC did not have any payment obligations to us for non-oncology rights to tivozanib in our territory. Refer to Note 4 “Collaborations and License Agreements - In-License Agreements - Kyowa Kirin Co. (KKC)”, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K regarding the specific application of ASC 606 to our amendment to the KKC Agreement.
No milestone payments were earned under the CANbridge Agreement in 2020 or in 2019.
Revenues from EUSA decreased by $0.6 million, or 15%, in 2020 as compared to 2019. In February 2019, we earned a $2.0 million milestone payment under the EUSA Agreement for reimbursement approval for FOTIVDA (tivozanib) in the first-line treatment of RCC from the Ministry of Health, Consumer Affairs and Social Welfare in Spain. In accordance with ASC 606, we recognized $1.0 million in revenue in 2019 that was not recognized in 2020. No milestone payments were earned under the EUSA Agreement in 2020. The $1.0 million decrease in milestone revenue was partially offset by a $0.4 million increase in royalty revenue from sales of FOTIVDA to $1.2 million in 2020 from $0.8 million in 2019. Refer to Note 4 “Collaborations and License Agreements - Out-License Agreements - EUSA”, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K regarding the specific application of ASC 606 to our EUSA Agreement.
Our total revenues increased by $23.4 million, or 432%, to $28.8 million in 2019 from $5.4 million in 2018, principally due to the $25.0 million upfront payment we earned from KKC under the August 1, 2019 amendment to the KKC Agreement, pursuant to which KKC repurchased the non-oncology rights to tivozanib in our territory, excluding the rights we have sublicensed to EUSA under the EUSA Agreement, partially offset by a $2.0 million development and regulatory milestone earned under the CANbridge Agreement in 2018 that was not earned in 2019.
Revenues from KKC were $25.0 million in 2019, as discussed above, and none in 2018. No revenues were earned from KKC in 2018 as KKC did not have any payment obligations to us for non-oncology rights to tivozanib in our territory prior to the August 1, 2019 amendment to the KKC Agreement.
Revenues from EUSA increased by $0.4 million, or 11%, in 2019 as compared to 2018. The $0.4 million increase in 2019 as compared to 2018 was principally due to the increase in royalty revenue from the sales of FOTIVDA to $0.9 million in 2019 from $0.5 million in 2018.
Revenues from CANbridge decreased by $2.0 million, or 100%, in 2019 as compared to 2018. In the third quarter of 2018, we earned a $2.0 million development and regulatory milestone under the CANbridge Agreement for regulatory approval from the NMPA of an IND application for a clinical study of AV-203 in ESCC and recognized $2.0 million as revenue in accordance with ASC 606.
Research and Development Expenses
Our total research and development expenses increased by $4.7 million, or 26%, to $22.7 million in 2020 from $18.0 million in 2019, principally due to an increase of $5.3 million in tivozanib-related expenses, partially offset by a decrease of $0.8 million in AV-380 related expenses. Our total research and development expenses decreased by $2.7 million, or 13%, to $18.0 million in 2019 from $20.7 million in 2018, principally due to a decrease of $6.1 million in tivozanib-related expenses, partially offset by an increase of $3.4 million in AV-380 related expense.
Tivozanib expenses increased by $5.3 million, or 44%, in 2020 as compared to 2019. The $5.3 million increase was principally due to increases totaling $7.4 million, including: (i) $3.4 million related to the tivozanib NDA for RCC, including $0.5 million related to the completion of the NDA submission and ongoing support of the FDA’s review of the NDA and the $2.9 million application user fee pursuant to the PDUFA that was due upon the filing of the tivozanib NDA on March 31, 2020, (ii) $0.6 million related to the DEDUCTIVE trial that was initiated in September 2019, net of cost sharing with AstraZeneca, and (iii) $3.4 million in commercial launch-readiness initiatives incurred in 2020 that were not incurred in 2019, including $1.7 million related to the conduct of certain post-commercial launch drug supply manufacturing, $1.3 million related to the buildout of our medical affairs function and $0.4 million related to other commercial-launch readiness initiatives.
These increases were partially offset by decreases totaling $2.3 million, principally including: (i) $1.8 million related to lower expenses in connection with the TIVO-3 and TiNivo trials that are nearing completion and (ii) $0.5 million related to fluctuations in the year-to-year sublicense fees due to KKC in connection with a milestone we earned under our EUSA Agreement in 2019 that was not earned in 2020.
Tivozanib expenses decreased by $6.1 million, or 33%, in 2019 as compared to 2018. The $6.1 million decrease in 2019 as compared to 2018 was principally due to decreases of $4.2 million related to lower expenses in connection with the TIVO-3 and TiNivo trials as a result of a lower number of patients on treatment, $1.1 million related to commercial drug manufacturing conducted in 2018 that was not incurred in 2019, $0.6 million related to fluctuations in the year-to-year sublicense fees due to KKC in connection with milestones we earned under our EUSA Agreement and $0.7 million related to fluctuations in the year-to-year conduct of NDA submission preparation. These decreases were partially offset by an increase of $0.4 million related to the commencement of the DEDUCTIVE trial in HCC in 2019, net of cost sharing with AstraZeneca.
AV-380 expenses were $2.6 million, $3.4 million and $0 in 2020, 2019 and 2018, respectively. The $0.8 million decrease in 2020 as compared to 2019 was principally due to the $2.3 million time-based milestone obligation due to St. Vincent’s Hospital Sydney Limited, or St. Vincent’s, under our license agreement with St. Vincent’s, in the first quarter of 2019 that was not incurred in 2020, partially offset by an increase of $1.5 million related to pre-clinical development costs incurred in 2020 that were not incurred in 2019. In 2019, we incurred a total of $3.4 million in expenses, including the $2.3 million time-based milestone obligation due to St. Vincent’s in January 2019 and $1.1 million of expenses related to the initiation of pre-clinical development following the return of the AV-380 program to us by Novartis International Pharmaceutical, Ltd., or Novartis. In 2018, we did not incur any AV-380 related expenses.
Ficlatuzumab expenses were flat in 2020 as compared to 2019. Ficlatuzumab expenses increased by $0.6 million, or 95%, in 2019 as compared to 2018 principally due to the commencement of the CyFi-2 trial in AML in November 2019, net of cost sharing with Biodesix. In March 2020, we decided to discontinue the CyFi-2 trial due to the urgent shift in priorities among clinical trial sites towards efforts to combat the COVID-19 pandemic, which had impacted the trial enrollment timeline and the feasibility of completing the study within the shelf-life of the current ficlatuzumab clinical trial drug supply.
We did not incur any expenses related to AV-203 in 2020 or 2019. AV-203 expenses were $0.7 million in 2018 and comprised the $0.7 million sublicense fee due to Biogen in connection with the $2.0 million development and regulatory milestone we earned in the third quarter of 2018 under the CANbridge Agreement for regulatory approval from the NMPA of an IND application for a clinical study of AV-203 in ESCC. No milestones were earned nor sublicense fees incurred under the CANbridge Agreement in 2020 or 2019.
We anticipate that research and development expenses will increase in 2021, principally related to increases for a full year of costs for the medical affairs function in support of the commercial launch of FOTIVDA, ficlatuzumab manufacturing of the clinical supply for a potential phase 3 clinical trial in HNSCC and the conduct of the phase 1 clinical trial of AV-380 for the potential treatment of cancer cachexia. These increases will be partially offset by lower costs, principally related to the TIVO-3 trial as it nears completion and costs incurred in 2020 that will not be incurred in 2021 related to the submission of our tivozanib NDA on March 31, 2020 and related FDA review support. The timing and nature of contemplated activities in 2021 will be conducted subject to the availability of sufficient financial resources.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $11.0 million, or 98%, to $22.2 million in 2020 from $11.2 million in 2019. The $11.0 million increase was principally due to $11.2 million in total increases, including: (i) $8.5 million in commercial launch-readiness initiatives incurred in 2020 that were not incurred in 2019, including $3.1 million in compensation costs related to the growth in our commercial infrastructure and $5.4 million related to external commercial-launch readiness activities in marketing, market access and commercial operations, (ii) $2.3 million in other professional fees, and (iii) $0.4 million in other compensation-related costs. These increases were partially offset by $0.2 million in lower facility costs resulting from our corporate headquarters move in 2020 to 30 Winter Street in Boston, Massachusetts.
Selling, general and administrative expenses increased by $0.4 million, or 4%, to $11.2 million in 2019 from $10.8 million in 2018. The $0.4 million increase in 2019 as compared to 2018 was principally due to increases in compensation-related costs.
We anticipate that selling, general and administrative expenses will continue to increase significantly through the commercial launch of FOTIVDA and will remain consistent at that level in the second half of 2021, principally related to the addition of our salesforce, and continued expansion of our marketing, market access and commercial capabilities and general and administrative support. Accordingly, the timing and nature of contemplated activities in 2021 will be conducted subject to the availability of sufficient financial resources.
Settlement Costs
We did not incur any settlement costs in 2020 or 2019. Settlement costs were $(0.7) million in 2018. In December 2017, we entered into a binding memorandum of understanding related to a class action settlement that included the issuance of 200,000 warrants to purchase shares of our common stock, or the Settlement Warrants. The Settlement Warrants were revalued at each balance sheet date prior to their issuance on July 16, 2018. Refer to Note 3, “Significant Accounting Policies - Prior Class Action Settlement and Settlement Warrants” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Change in Fair Value of PIPE Warrant Liability
In May 2016, we issued PIPE Warrants, or the PIPE Warrants, in connection with a private placement financing and recorded the warrants as a liability. The PIPE Warrants are subject to revaluation at each balance sheet date and any changes in fair value are recorded as a non-cash gain or (loss) in our Statement of Operations as a component of other income (expense).
In 2020, we recorded an approximate non-cash gain of $4.9 million in our Statement of Operations attributable to the decrease in the fair value of the PIPE Warrant liability that resulted from a lower stock price of $5.77 on December 31, 2020 compared to the stock price of $6.20 on December 31, 2019, a decrease in our stock volatility rate and a shorter remaining term as the PIPE Warrants approach expiration in May 2021.
In 2019, we recorded an approximate non-cash gain of $11.6 million in our Statement of Operations attributable to the decrease in the fair value of the PIPE Warrant liability that principally resulted from a lower stock price of $6.20 on December 31, 2019 compared to the stock price of $16.00 on December 31, 2018.
In 2018, we recorded an approximate non-cash gain of $19.9 million in our Statement of Operations attributable to the decrease in the fair value of the PIPE Warrant liability that principally resulted from a lower stock price of $16.00 on December 31, 2018 compared to the stock price of $27.90 on December 31, 2017.
Other Income (Expense)
In 2020 and 2019, we did not recognize any other income or other expense. Other income (expense) was $2.3 million in 2018. In 2018, we recognized other income for the one-time payment by Novartis to us of $2.3 million in connection with the return of the AV-380 program to us. In August 2015, in connection with our AV-380 program, we entered into a license agreement with Novartis that was subsequently terminated by Novartis effective August 28, 2018. In December 2018, we entered into an agreement with
Novartis to further establish and clarify the terms on which the AV-380 program was to be returned to us, or the AV-380 Transfer Agreement. Pursuant to the AV-380 Transfer Agreement, Novartis was obligated to make a one-time payment to us of $2.3 million. The $2.3 million payment due from Novartis was not considered a revenue transaction due to the effective termination of the Novartis Agreement on August 28, 2018 and was instead considered other income. Refer to Note 4 “Collaborations and License Agreements - Novartis”, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Interest Expense, net
Interest expense, net decreased by $0.2 million, or 12%, in 2020 as compared to 2019. This decrease was principally due to the decrease in interest expense resulting from the paydown of principal under our 2017 Loan Agreement with Hercules and a lower interest rate that ranged from 9.45% to 9.65% in 2020 as compared to the interest rate that ranged from 9.70% to 10.2% in 2019. Principal payments to Hercules resumed during the period from August 1, 2019 through August 1, 2020.
In August 2020, we entered into the 2020 Loan Amendment with Hercules to provide us with the 2020 Loan Facility, an additional term loan in an aggregate principal amount of up to $35.0 million in four tranches to be used to refinance outstanding loans under the 2017 Loan Agreement and for general working capital purposes through the commercial launch of FOTIVDA, subject to certain terms and conditions. We received the initial $15.0 million of the 2020 Loan Facility upon the closing of the 2020 Loan Amendment, including approximately $9.7 million of which was used to retire the outstanding balance under the 2017 Loan Agreement and approximately $5.3 million of which is new loan funding. The 2020 Loan Amendment provides for an initial interest-only period effective for the period from September 1, 2020 through September 1, 2021. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Hercules Loan Facility” below for a description of the 2017 Loan Agreement, 2020 Loan Amendment and 2020 Loan Facility.
Interest expense, net decreased by $0.4 million, or 17%, in 2019 as compared to 2018 principally due to an increase in interest income from the investment of the higher balances of our cash equivalents and marketable securities.
We anticipate that interest expense, net will increase in 2021 due to the higher loan balance and interest-only period through September 1, 2021 pursuant to the 2020 Loan Amendment with Hercules, and lower investment income due to current market conditions.
Contractual Obligations and Commitments
Hercules Loan Facility
On August 7, 2020, we entered into the 2020 Loan Amendment with Hercules. The 2020 Loan Amendment provides us with the 2020 Loan Facility, an additional term loan of up to $35.0 million in four tranches to be used to refinance outstanding loans under the 2017 Loan Agreement and for general working capital purposes through the commercial launch of FOTIVDA, subject to certain terms and conditions. The 2020 Loan Facility includes (i) $15.0 million in initial funding upon execution of the 2020 Loan Amendment to retire the outstanding balance of approximately $9.7 million under the 2017 Loan Agreement and to provide approximately $5.3 million in new loan funding, and (ii) up to $20.0 million in additional loan funding following FDA approval of FOTIVDA and our net product revenues from sales of FOTIVDA, within certain time frames and subject to certain terms and conditions.
On February 1, 2021, we entered into the 2021 Loan Amendment with Hercules. The 2021 Loan Amendment increases the 2020 Loan Facility from up to $35.0 million to up to $45.0 million upon FDA approval of FOTIVDA. The 2021 Loan Amendment makes certain changes to the 2020 Loan Amendment, including, among other things, increasing the amount of Tranche Two funding for Performance Milestone I for FDA approval of FOTIVDA from $10.0 million to $20.0 million, thereby increasing the total amount of unfunded term loan commitments under the 2020 Loan Facility from $20.0 million to $30.0 million following FDA approval of FOTIVDA and our net product revenues from sales of FOTIVDA, within certain time frames and subject to certain terms and conditions. For more information, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -Hercules Loan Facility” below, as well as Note 6, “-Hercules Loan Facility” of the Notes to our consolidated financial statements, each included elsewhere in this Annual Report on Form 10-K.
Collaborations and License Agreements
Under our license agreement with KKC, we are required to pay tiered royalty payments on net sales we make of FOTIVDA in our North American territory, which range from the low to mid-teens as a percentage of net sales. We are also required to pay KKC 30% of certain amounts we receive from sublicensees, including upfront license fees, milestone payments and royalties, other than amounts we receive in respect of research and development funding or equity investments, subject to certain limitations. Also, under our license agreement with St. Vincent’s, we are required to make certain milestone payments upon the earlier of the achievement of specified development and regulatory milestones or a specified date for the first indication, and upon the achievement of specified development and regulatory milestones for the second and third indications. We are also obligated to pay Biogen a percentage of milestone payments received by us from future partnerships after March 28, 2016 and single digit royalty payments on net sales related to the sale of ErbB3 products, if any, up to a cumulative maximum amount of $50.0 million. In addition, we are obligated to pay Biodesix a low double digit royalty on future product sales and 25% of future licensing revenue (excluding contributions to research and development expenses), less approximately $2.5 million that Biodesix would be required to pay to us pursuant to the October 2016 amendment to the Biodesix Agreement. At this time, we cannot reasonably estimate when or if we may be required to make other additional payments to KKC, St. Vincent’s, Biogen or Biodesix. For example, we are required to make future milestone payments to St. Vincent’s, up to an aggregate total of $14.4 million, upon the earlier of the achievement of specified development and regulatory milestones or a specified date for the first indication and second indication, and upon the achievement of specified development and regulatory milestones for the third indication, for licensed therapeutic products, some of which payments may be increased by a mid to high double digit percentage rate for milestone payments made after we grant any sublicense under the license agreement, depending on the sublicensed territory. For more information, see Note 6, “-Collaborations and License Agreements” of the Notes to our consolidated financial statements, included elsewhere in this Annual Report on Form 10-K.
Winter Street Lease
On March 5, 2020, we entered into a sublease agreement for office space located at 30 Winter Street in Boston, Massachusetts (the “Winter Street Sublease”) to relocate our corporate headquarters located at One Broadway in Cambridge, Massachusetts. Under the terms of the Winter Street Sublease, we lease 10,158 square feet of office space for $47.00 per square foot, or approximately $0.5 million per year in base rent subject to certain operating expenses, taxes and annual base rent increases of approximately 3%. The sublease term will continue through November 29, 2022.
Other Funding Commitments
We enter into contracts in the normal course of business with CROs for preclinical research studies and clinical trials. We have contracts with CROs for our TIVO-3, DEDUCTIVE and TiNivo trials, as well as our Phase 1 trial in AV-380. These contracts generally provide for termination on notice with no early termination fees. We have also entered into a contract with a third-party contract manufacturer for the manufacture of clinical drug supply for tivozanib and commercial drug supply for FOTIVDA in the United States, which includes minimum annual purchase requirements, in the approximate amount of $1.4 million for the next few years. In addition, we have entered into contracts with another contract manufacturer for the manufacture of clinical drug supply for ficlatuzumab and AV-380, for which we have manufacturing commitments in 2021, in the aggregate amount of approximately $10.3 million.
Liquidity and Capital Resources
We have financed our operations to date primarily through private placements and public offerings of our common stock and preferred stock, license fees, milestone payments and research and development funding from strategic partners, and loan proceeds. As of December 31, 2020, we had cash and cash equivalents of approximately $61.8 million. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -Liquidity and Going Concern” below and Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a further discussion of our liquidity. Currently, our funds are invested in a United States government money market fund. The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):
Our operating activities used cash of $38.0 million, $2.9 million and $25.0 million in 2020, 2019 and 2018, respectively. Cash used in operations was principally due to our net income (loss) adjusted for non-cash items and changes in working capital.
Our investing activities provided cash of $17.7 million and $18.6 million in 2020 and 2018, respectively, and used cash of $17.9 million in 2019, principally due to net changes in the maturities and purchases of marketable securities.
Our financing activities provided cash of $52.3 million, $26.2 million and $15.9 million in 2020, 2019 and 2018, respectively.
In 2020, we raised approximately $52.2 million in funding, including approximately $47.7 million in net proceeds from the sale of approximately 9.7 million shares of our common stock in an underwritten public offering in June 2020, approximately $5.1 million in new loan funding pursuant to the 2020 Loan Amendment with Hercules, net of transaction costs, and approximately $5.9 million in net proceeds from the sale of approximately 1.1 million shares of our common stock in November 2020 pursuant to our “at-the-market” sales agreement with SVB Leerink LLC, or SVB Leerink, which we refer to as the SVB Leerink Sales Agreement, partially offset by approximately $6.5 million in total principal payments pursuant to a prior loan facility with Hercules from May 2010, or the 2010 Loan Agreement, during the period from January 2020 through August 2020.
In 2019, we raised approximately $30.3 million in net proceeds from the issuance of our common stock, including $7.5 million in net proceeds from the sale of approximately 1.3 million shares of our common stock pursuant to the SVB Leerink Sales Agreement in February 2019 and approximately $22.8 million in net proceeds from the sale of approximately 2.2 million shares of our common stock and warrants to purchase an aggregate of 2.5 million shares of our common stock in an underwritten public offering in April 2019, offset in part by approximately $4.1 million in debt-related payments pursuant to our 2010 Loan Agreement, including approximately $3.8 million in total principal payments during the period from August 2019 through December 2019 and a $0.3 million end-of-term fee in December 2019.
In 2018, we raised approximately $16.4 million in net proceeds from the issuance of our common stock, including approximately $5.1 million in net proceeds from an underwritten public offering of approximately 0.3 million shares of our common stock in August 2018, $10.3 million in net proceeds from the sale of approximately 0.5 million shares of our common stock pursuant to the SVB Leerink Sales Agreement in the fourth quarter of 2018 and approximately $1.0 million from the exercise of PIPE Warrants and stock options, offset in part by a $0.5 million end-of-term debt payment in January 2018 pursuant to our 2010 Loan Agreement.
Public Offering - June 2020
On June 19, 2020, we completed an underwritten public offering of 9,725,000 shares of our common stock, including the partial exercise by the underwriters of their option to purchase an additional 1,225,000 shares, at the public offering price of $5.25 per share for gross proceeds of approximately $51.1 million. Three stockholders each beneficially holding more than 5% of our voting securities, including an entity affiliated with New Enterprise Associates and two other stockholders purchased an aggregate of 4,503,571 shares in this offering at the same public offering price per share as the other investors. At such time, entities affiliated with New Enterprise Associates (collectively) beneficially held more than 5% of our voting securities. The net offering proceeds to us were approximately $47.7 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
Hercules Loan Facility
On December 28, 2017, we entered into the 2017 Loan Agreement to refinance in full the 2010 Loan Agreement. The 2017 Loan Agreement provided for a term loan, or the 2017 Loan, subject to certain terms and conditions, in the aggregate principal amount of $20.0 million. The 2017 Loan: (i) was scheduled to mature on July 1, 2021, (ii) accrued interest at the greater of 9.45% and an amount equal to 9.45% plus the prime rate minus 4.75% (subject to a 15.0% cap), and (iii) had an interest-only period that began on the closing date of the 2017 Loan Agreement and ended on August 1, 2019, with equal installments of principal due thereafter until the maturity date.
On August 7, 2020, we entered into the 2020 Loan Amendment, to provide us, subject to certain terms and conditions, with additional term loans in an aggregate principal amount of up to $35.0 million, or the 2020 Loan Facility, to be used to repay in full the 2017 Loan and for general working capital purposes. The 2020 Loan Facility was made available to us in four tranches, the first of which, in the amount of $15.0 million, was made available to us immediately upon the closing of the 2020 Loan Amendment. We used the $15.0 million in proceeds of the first tranche as follows: approximately $9.7 million was used to repay the outstanding balance of the 2017 Loan in full, and approximately $5.3 million was used for general working capital purposes. In connection with the 2020 Loan Amendment, we incurred approximately $0.3 million in loan issuance costs paid directly to Hercules, which are accounted for as a loan discount. The 2020 Loan Amendment was accounted for as a loan modification in accordance with ASC 470-50.
The remaining $20.0 million of term loans available to us under the 2020 Loan Facility subject to, among other terms and conditions, the achievement of the following milestones: (i) Tranche Two in the amount of $10.0 million, would be available through June 30, 2021 upon achieving Performance Milestone I for FDA approval of FOTIVDA, (ii) the third tranche, or Tranche Three, in the amount of $5.0 million, would be available from July 1, 2021 through January 31, 2022 if we achieve $20.0 million in net product revenues from sales of FOTIVDA, following FDA approval, by no later than December 31, 2021, or Performance Milestone II, and (iii) the fourth tranche, or Tranche Four, in the amount of $5.0 million, would be available through June 30, 2022 if we achieve both Performance Milestone I and Performance Milestone II, and if Hercules consents to the advancement of Tranche Four.
The 2020 Loan Amendment also amended the 2017 Loan Agreement by: (i) extending maturity of the loans from July 1, 2021 until September 1, 2023, which is extendable to September 1, 2024 upon our option if the Tranche Three funding has occurred, (ii) providing for an interest-only period beginning on the closing date of 2020 Loan Amendment and ending September 30, 2021, which period may be extended through September 30, 2022 provided we achieved Performance Milestone I, and further extendable through March 31, 2023 if the Tranche Three funding has occurred, and (iii) revising the interest rate to the greater of 9.65% and an amount equal to 9.65% plus the prime rate minus 3.25% (subject to a 15% cap). Principal payments are scheduled to commence on October 1, 2021, at the earliest, as described above. The interest rate as of December 31, 2020 was 9.65%.
Pursuant to the terms of the Loan Agreement, principal will be repaid in equal monthly installments following the conclusion of the interest-only period. We may prepay all of the outstanding principal and accrued interest under the Loan Agreement, subject to a prepayment charge up to 3.0% in the first year following the closing of the 2020 Loan Amendment, decreasing to 2.0% in year two and 1.0% in year three. We are obligated to make an end-of-term payment of (i) 6.95% of the aggregate amount of loan funding received under the Loan Agreement on the earlier of the maturity of the loans or the date on which we prepay the outstanding loan balance in full, and (ii) an approximate $0.8 million payment due on the earlier of July 1, 2021 or the date on which we prepay the outstanding loan balance in full.
The Loan Agreement includes (i) a financial covenant that we maintain minimum unrestricted cash positions of $10.0 million through the date the Second Tranche funding is received, $15.0 million through the date the Third Tranche funding is received and $10.0 million thereafter through the maturity of the Loan Agreement, and (ii) an operating covenant that we achieve greater than or equal to 75% of our forecasted net product revenues from our sales of tivozanib over a 6-month trailing period, as defined and measured on a monthly basis, commencing upon the earlier to occur of (x) the Third Tranche funding and (y) the month of April 2022. The Loan Agreement also includes various other affirmative and negative covenants, including covenants to deliver certain financial reports; to maintain insurance coverage; and to refrain from transferring assets, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, and suffering a change in control, in each case subject to certain exceptions.
On February 1, 2021, we entered into the 2021 Loan Amendment. The 2021 Loan Amendment increased the aggregate principal amount of loans available under the 2020 Loan Facility from up to $35.0 million to up to $45.0 million following FDA approval of FOTIVDA. The 2021 Loan Amendment also (i) increased Tranche Two funding upon achieving Performance Milestone I from $10.0 million to $20.0 million, (ii) increased the amount of net product revenues from sales of FOTIVDA required for us to achieve Performance Milestone II from $20.0 million to $35.0 million, and changed the deadline for achieving Performance Milestone II from December 31, 2021 to April 1, 2022, and (iii) increased the amount of unrestricted cash required for us to satisfy the minimum financial covenant during the period between receiving Tranche Two funding and Tranche Three funding from $10.0 million to $15.0 million.
On March 11, 2021, we completed the $20.0 million drawdown of Tranche Two funding under the 2021 Loan Amendment that was made available in connection with the achievement of Performance Milestone I upon FDA approval of FOTIVDA on March 10, 2021. The achievement of Performance Milestone I extended the interest-only period by twelve months from September 30, 2021 to September 30, 2022 and increased the amount of unrestricted cash required for us to satisfy the minimum financial covenant during the period between receiving Tranche Two funding and Tranche Three funding from $10.0 million to $15.0 million.
Obligations under the Loan Agreement are secured by substantially all of our assets, excluding intellectual property. The Loan Agreement provides that certain events shall constitute a default by us, including failure by us to pay amounts under the Loan Agreement when due; breach or default in the performance of any covenant under the Loan Agreement by us, subject to certain cure periods; our insolvency and certain other bankruptcy proceedings involving us; our default of obligations involving indebtedness in excess of $500,000; and the occurrence of an event or circumstance that would have a material adverse effect upon our business.
We have determined that the risk of subjective acceleration under the material adverse events clause included in the Loan Agreement is remote and, therefore, have classified the outstanding principal amount in current and long-term liabilities based on the timing of scheduled principal payments. As of December 31, 2020, we are in compliance with all of the loan covenants and, through the date of this filing, the lenders have not asserted any events of default under the Loan Agreement. We do not believe that there has been a material adverse change as defined in the Loan Agreement.
Universal Shelf Registration Statement
On November 9, 2020, we filed a shelf registration statement on Form S-3 with the SEC, which covers the offering, issuance and sale of up to $300.0 million of our common stock, preferred stock, debt securities, warrants and/or units, or the 2020 Shelf. The 2020 Shelf (File No. 333-249982) was declared effective by the SEC on November 18, 2020 and was filed to replace our then existing shelf registration statement, which was terminated. As of December 31, 2020, there was approximately $268.2 million available for future issuance of our common stock, preferred stock, debt securities, warrants and/or units.
Public Offering - April 2019
In April 2019, we completed an underwritten public offering of 2,173,913 shares of our common stock and warrants to purchase an aggregate of 2,500,000 shares of our common stock, which we refer to herein as the Offering Warrants, including warrants to purchase an aggregate of 326,086 shares of our common stock sold pursuant to the underwriter’s partial exercise of its overallotment option, at the public offering price of $11.40 per share and $0.10 per warrant for gross proceeds of approximately $25.0 million. The Offering Warrants were immediately exercisable upon issuance at an exercise price of $12.50 per share, subject to adjustment in certain circumstances, and will expire two years from the date of issuance. Any Offering Warrants that have not been exercised for cash prior to their expiration shall be automatically exercised via cashless exercise on the expiration date. The shares and warrants were issued separately and are separately transferable. An entity affiliated with New Enterprise Associates purchased 434,782 shares and warrants to purchase an aggregate of 434,782 shares in this offering at the same public offering price per share as the other investors. At such time, entities affiliated with New Enterprise Associates (collectively) beneficially held more than 5% of our voting securities. The net offering proceeds to us were approximately $22.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. As of December 31, 2020, Offering Warrants to purchase 2,500,000 shares of our common stock were outstanding, at an exercise price of $12.50 per share, with an expiration date of April 8, 2021.
In March 2021, Offering Warrants exercisable for 247,391 shares of common stock had been exercised, for approximately $3.1 million in cash proceeds, and Offering Warrants exercisable for 2,252,609 shares of common stock were outstanding.
Sales Agreement with SVB Leerink
In February 2018, we entered into the SVB Leerink Sales Agreement with SVB Leerink pursuant to which we may issue and sell shares of our common stock from time to time up to an aggregate amount of $50 million, at our option, through SVB Leerink as our sales agent, with any sales of common stock through SVB Leerink being made by any method that is deemed an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, or in other transactions. Any such shares of common stock will be sold pursuant to a prospectus supplement filed under the 2017 Shelf, as defined below. We agreed to pay SVB Leerink a commission of up to 3% of the gross proceeds of any sales of common stock pursuant to the SVB Leerink Sales Agreement. In the fourth quarter of 2018, we sold approximately 0.5 million shares pursuant to the SVB Leerink Sales Agreement, resulting in approximately $10.3 million in proceeds, net of commissions. In February 2019, we sold approximately 1.3 million shares pursuant to the SVB Leerink Sales Agreement, resulting in proceeds of approximately $7.5 million, net of commissions. In the fourth quarter of 2020, we sold approximately 1.1 million shares as a block pursuant to the SVB Leerink Sales Agreement, resulting in proceeds of approximately $5.9 million, net of commissions. As of December 31, 2020, approximately $25.7 million was available for future issuance pursuant to the SVB Leerink Sales Agreement.
Public Offering - August 2018
On August 21, 2018, we closed an underwritten public offering of approximately 0.3 million shares of our common stock at the public offering price of $22.60 per share for gross proceeds of approximately $5.7 million. Two greater than 5% stockholders, including an entity affiliated with New Enterprise Associates and another stockholder purchased approximately 0.2 million shares in this offering at the same public offering price per share as the other investors. The net offering proceeds to us were approximately $5.1 million after deducting underwriting discounts and estimated offering expenses payable by us.
Private Placement / PIPE Warrants
In May 2016, we entered into a securities purchase agreement with a select group of qualified institutional buyers, institutional accredited investors and accredited investors pursuant to which we sold 1,764,242 units, at a price of $9.65 per unit, for gross proceeds of approximately $17.0 million. Each unit consisted of one share of our common stock and a PIPE Warrant to purchase one share of our common stock. The PIPE Warrants have an exercise price of $10.00 per share and are exercisable in any manner at any time for a period of five years from the date of issuance. Certain of our directors and executive officers purchased an aggregate of 54,402 units in this offering at the same price as the other investors. The net offering proceeds to us were approximately $15.4 million after deducting placement agent fees and other offering expenses payable by us. As of December 31, 2020, PIPE Warrants exercisable for 1,683,933 shares of common stock were outstanding, at an exercise price of $10.00 per share, with an expiration date of May 16, 2021.
Liquidity and Going Concern
We have devoted substantially all of our resources to our drug development efforts, comprised of research and development, manufacturing, conducting clinical trials for our product candidates, protecting our intellectual property and general and administrative functions relating to these operations. Our future success is dependent on our ability to commercialize FOTIVDA in the United States and develop our clinical stage assets and, ultimately, upon our ability to create shareholder value.
On March 10, 2021, the FDA approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced RCC following two or more prior systemic therapies. We anticipate that we will continue to incur significant operating expenses for the foreseeable future as we commercialize FOTIVDA in the United States and continue our planned development activities for our clinical stage assets. Our future product revenues will depend upon the size of markets in which FOTIVDA, and any future products, have received approval, and our ability to achieve sufficient market acceptance, reimbursement from third-party payers and adequate market share for FOTIVDA and any future products in those markets. The likelihood of our long-term success must be considered in light of the expenses, difficulties and potential delays that may be encountered in the development and commercialization of new pharmaceutical products, competitive factors in the marketplace and the complex regulatory environment in which we operate. Absent the realization of sufficient revenues from product sales to support our cost structure, we may never attain or sustain profitability. We may require substantial additional funding to advance our pipeline of clinical stage assets, and the timing and nature of these activities will be conducted subject to the availability of sufficient financial resources.
During the year ended December 31, 2020, we received approximately $65.3 million in funding, including approximately $53.6 million in equity funding, approximately $5.1 million in new loan funding pursuant to the August 2020 Loan Amendment with Hercules, net of transaction costs, and approximately $6.6 million in partnership funding for cost sharing obligations, royalties from the sales of FOTIVDA by EUSA and a development milestone payment by KKC. The $53.6 million in equity finding included approximately $47.7 million in net proceeds from the sale of approximately 9.7 million shares of our common stock in an underwritten public offering in June 2020 and approximately $5.9 million in net proceeds from the sale of approximately 1.1 million shares of our common stock pursuant to the SVB Leerink Sales Agreement.
We believe that our $61.8 million in cash and cash equivalents as of December 31, 2020, along with proceeds from the $20.0 million drawdown under the 2020 Loan Facility in March 2021 and from warrant exercises to date, together with anticipated partnership cost sharing reimbursements, royalties from EUSA’s FOTIVDA sales, product revenues upon the commercial launch of FOTIVDA in the United States and the potential additional $10.0 million in credit under the Loan Agreement, as described above in “Liquidity and Capital Resources-Hercules Loan Facility”, would allow us to fund our planned operations into 2022.
There are numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products. Accordingly, our future funding requirements may vary from our current expectations and will depend on many factors, including, but not limited to:
•
the cost of commercialization activities of FOTIVDA in the United States and any of our product candidates that may be approved for sale, including marketing, sales and distribution costs;
•
the cost of manufacturing FOTIVDA in the United States, our product candidates and any additional products we may successfully commercialize;
•
our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
•
the number and characteristics of the product candidates we pursue;
•
the scope, progress, results and costs of researching and developing our product candidates, and of conducting preclinical and clinical trials;
•
the timing of, and the costs involved in, completing our clinical trials and obtaining regulatory approvals for our product candidates;
•
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
•
the absence of any breach, acceleration event or event of default under our Loan Agreement, or under any other agreements with third parties;
•
the cost and outcome of any legal actions against us;
•
the timing, receipt and amount of sales of, or royalties on, tivozanib and our future products, if any;
•
general economic, industry and market conditions; and
•
the impact of COVID-19 on our operations, business and prospects.
We may require substantial additional funding to advance our pipeline of clinical stage assets. We may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or the loans under credit facilities could provide for rights senior to those of our common stock and could contain covenants that would restrict our operations. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. We also expect to seek additional funds through arrangements with collaborators, licensees or other third parties. These arrangements would generally require us to relinquish or encumber rights to some of our technologies or product candidates, and we may not be able to enter into such arrangements on acceptable terms, if at all. If we are unable to raise substantial additional funding to advance our pipeline of clinical stage assets, whether on terms that are acceptable to us, or at all or if we were to default under the Loan Agreement, and Hercules accelerated the then remaining principal payments and fees due under the loan, then we may be required to:
•
delay, limit, reduce or terminate our clinical trials or other development activities for one or more of our product candidates; and/or
•
delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates, if approved.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.
ITEM 7A.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to changes in interest rates. As of December 31, 2020, we had cash and cash equivalents of approximately $61.8 million, consisting of cash on deposit with banks and a U.S. government money market fund. We do not hold any of these instruments for trading or speculative purposes. Our funds are invested in accordance with investment guidelines as approved by our board of directors.
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term cash equivalents. Our cash equivalents and marketable securities are subject to interest rate risk and could fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our cash equivalents until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. We do not currently have any auction rate securities.
Our loans payable are subject to interest rate risk. As of December 31, 2020, our aggregate principal balance outstanding on our 2017 Loan Agreement as amended by the 2020 Loan Amendment was approximately $15 million. Per annum interest is payable on the principal balance of the loan each month it remains outstanding at the greater of 9.65% or an amount equal to 9.65% plus the prime rate minus 3.25% as determined daily, provided however, that the per annum interest rate shall not exceed 15.0%. As of December 31, 2020, the interest rate was 9.65%. For every 1% increase in the prime rate over 3.25%, given the amount of debt outstanding under the 2017 Loan Agreement as amended by the 2020 Loan Amendment as of December 31, 2020, we would have an increase in future annual cash outflows of approximately $0.2 million over the next twelve-month period as a result of such 1% increase.
We are also exposed to market risk related to change in foreign currency exchange rates. We contract with CROs and investigational sites that are located around the world. We are subject to fluctuations in foreign currency rates in connection with these agreements. We do not currently hedge our foreign currency exchange rate risk.
ITEM 8.
ITEM 8.
Financial Statements and Supplementary Data
AVEO PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of AVEO Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AVEO Pharmaceuticals, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholder’s equity (deficit) and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated” financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgements. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Clinical Trial Costs and Contract Research
Description of the Matter
As discussed in Note 3 to the consolidated financial statements, the Company records costs for clinical trial activities based upon estimates of costs incurred through the balance sheet date that have yet to be invoiced by contract research organizations, clinical study sites and other vendors. The Company’s accruals for clinical trial costs and contract research totaled $4.6 million at December 31, 2020.
Auditing the Company’s accrued clinical trial costs and contract research was especially challenging due to the significant judgment required to determine the nature and level of services that have been received, including determining the progress to completion of specific tasks and activities conducted under the Company’s clinical trials and contract research arrangements and the costs of those tasks that will be invoiced in the future by the contract research organizations, clinical study sites and other vendors.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that addressed the identified risks related to the Company’s process for recording accrued clinical trial costs and contract research. For example, we tested controls over management’s review of the clinical trial and contract research expense calculations, the significant assumptions about the status of research and development services incurred, and the completeness and accuracy of the data used to calculate the estimates.
To test the accrued clinical trial costs and contract research, our procedures included, among others, testing the completeness and accuracy of the underlying data used in the estimates and evaluating significant assumptions, including, but not limited to, estimated costs per patient and project duration, that are used by management to estimate the recorded accruals. To assess the reasonableness of the significant assumptions, we corroborated the progress of the clinical trials and contract research with the
Company’s operations personnel and to information obtained by the Company directly from third parties (e.g., number of patients on treatment, imaging received) and to information in contracts related to patient treatment activities, including costs for those activities, and project duration. We examined subsequent invoicing received from such third parties, inspected the Company’s contracts with these third parties and any pending change orders and subsequent reporting received from the third-parties for evidence of the accuracy and completeness of the accruals at the balance sheet date.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Boston, Massachusetts
March 16, 2021
AVEO PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(In thousands, except par value amounts)
See accompanying notes.
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
See accompanying notes.
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
See accompanying notes.
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands)
See accompanying notes.
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(In thousands)
See accompanying notes.
AVEO Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
December 31, 2020
(1) Organization
AVEO Pharmaceuticals, Inc. (the “Company”) is an oncology-focused biopharmaceutical company committed to delivering medicines that provide a better life for cancer patients. The Company’s strategy is to focus its resources toward the development and commercialization of its product candidates in North America, while leveraging partnerships to support development and commercialization in other geographies. With the approval of its first commercial product, FOTIVDA® (tivozanib), in the United States, the Company has transitioned from a clinical development stage company to a commercial and clinical development stage biopharmaceutical company.
On March 10, 2021, the U.S. Food and Drug Administration (the “FDA”), approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced renal cell carcinoma (“RCC”) following two or more prior systemic therapies. FOTIVDA is an oral, next-generation vascular endothelial growth factor receptor (“VEGFR”) tyrosine kinase inhibitor (“TKI”). The approval of FOTIVDA is based on the Company’s pivotal phase 3 randomized, controlled, multi-center, open-label clinical trial comparing tivozanib to an approved therapy, Nexavar® (sorafenib), in RCC patients whose disease had relapsed or become refractory to two or three prior systemic therapies (the “TIVO-3 trial”). The approval is also supported by three additional trials in RCC and includes safety data from over 1,000 clinical trial subjects.
The Company is actively preparing for the commercial launch of FOTIVDA in the United States. The Company’s U.S. sales force, sales training, marketing, market access and medical affairs teams as well as distribution capabilities are in place and the Company expects to have full promotional capabilities and FOTIVDA available to patients by March 31, 2021.
FOTIVDA is also approved and commercialized through the Company’s development partner EUSA Pharma (UK) Limited (“EUSA”) in the United Kingdom, Germany, Spain and certain other countries in their territory, for the treatment of adult patients with advanced RCC who are VEGFR pathway inhibitor-naïve and are either untreated or who have failed prior therapy with interferon-alpha (IFN-a) or interleukin-2 (IL-2).
Based on FOTIVDA’s demonstrated anti-tumor activity, tolerability profile and reduction of regulatory T-cell production, the Company is studying FOTIVDA in combination with immune checkpoint inhibitors for the treatment of RCC and hepatocellular carcinoma (“HCC”) in phase 2 clinical trials. The Company recently announced its entry into a collaboration with Bristol Myers Squibb (“BMS”) to conduct a phase 3 study of FOTIVDA in combination with OPDIVO® (nivolumab), BMS’s anti-PD-1 therapy, in patients with advanced relapsed or refractory RCC following prior immunotherapy exposure.
The Company’s pipeline of product candidates includes ficlatuzumab, a potent humanized immunoglobulin G1, or IgG1, monoclonal antibody that targets hepatocyte growth factor (“HGF”). The Company has previously reported promising early clinical data on ficlatuzumab in squamous cell carcinoma of the head and neck (“HNSCC”), pancreatic cancer and acute myeloid leukemia (“AML”). The Company is currently conducting a randomized phase 2 confirmatory study of ficlatuzumab for the potential treatment of HNSCC.
The Company’s pipeline of product candidates also includes worldwide rights to AV-380, a potent humanized IgG1 monoclonal antibody that targets growth differentiation factor 15 (“GDF15”). In December 2020, the FDA accepted the Company’s investigational new drug application (“IND”) for AV-380 for the potential treatment of cancer cachexia, and the Company has initiated a phase 1 clinical trial in healthy subjects.
The Company’s earlier-stage pipeline includes AV-203 and AV-353, both as potential oncology treatments. AV-203 is a potent humanized IgG1 monoclonal antibody that targets ErbB3 (also known as HER3) to which the Company expects to regain worldwide rights in September 2021. AV-353 is the Company’s a potent IgG1 monoclonal antibody that targets the Notch 3 pathway.
The Company is subject to a number of risks, including the need for substantial additional capital to continue its development programs and to fulfill its planned operating goals. In particular, the Company’s currently planned operating and capital requirements include the need for substantial working capital to support the development and commercialization activities for its lead product, FOTIVDA.
As used throughout these consolidated financial statements, the terms “AVEO,” and the “Company” refer to the business of AVEO Pharmaceuticals, Inc. and its three wholly-owned subsidiaries, AVEO Pharma Limited, AVEO Pharma (Ireland) Limited and AVEO Securities Corporation.
Liquidity and Going Concern
In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date
that the consolidated financial statements are issued. The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Through December 31, 2020, the Company has financed its operations primarily through private placements and public offerings of its common stock and preferred stock, license fees, milestone payments and research and development funding from strategic partners, and loan proceeds. The Company has devoted substantially all of its resources to its drug development efforts, comprising research and development, manufacturing, conducting clinical trials for its product candidates, protecting its intellectual property and general and administrative functions relating to these operations.
The future success of the Company is dependent on its ability to commercialize FOTIVDA in the United States and to develop its clinical stage assets and, ultimately, upon the Company’s ability to create shareholder value. On March 10, 2021, the FDA approved FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced RCC following two or more prior systemic therapies. The Company’s future product revenues will depend upon the size of markets in which FOTIVDA, and any future products, have received approval, and its ability to achieve sufficient market acceptance, reimbursement from third-party payers and adequate market share for FOTIVDA and any future products in those markets. The likelihood of the Company’s long-term success must be considered in light of the expenses, difficulties and potential delays that may be encountered in the development and commercialization of new pharmaceutical products, competitive factors in the marketplace and the complex regulatory environment in which the Company operates. Absent the realization of sufficient revenues from product sales to support the Company’s cost structure, the Company may never attain or sustain profitability.
The Company has incurred recurring losses and cash outflows from operations since its inception, including an accumulated deficit of $621.2 million as of December 31, 2020. The Company anticipates that it will continue to incur significant operating expenses for the foreseeable future as it commercializes FOTIVDA in the United States and continues its planned development activities for its clinical stage assets. The Company may require substantial additional funding to advance its pipeline of clinical stage assets, and the timing and nature of these activities will be conducted subject to the availability of sufficient financial resources.
As of March 16, 2021, the date of issuance of these consolidated financial statements, the Company expects that its cash and cash equivalents of $61.8 million as of December 31, 2020, along with proceeds from the $20.0 million drawdown under the 2020 Loan Facility with Hercules Capital, Inc. and certain of its affiliates (collectively “Hercules”) in March 2021 and from warrant exercises to date, and product revenues upon the commercial launch of FOTIVDA in the United States, will be sufficient to fund its current operations for more than twelve months from the date of filing this Annual Report on Form 10-K.
Management’s expectations with respect to its ability to fund current planned operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional strategic or financing opportunities sooner than would otherwise be expected. However, there is no guarantee that any of these strategic or financing opportunities would be executed or executed on favorable terms, and some could be dilutive to existing stockholders. If the Company is unable to obtain additional funding on a timely basis, it may be forced to significantly curtail, delay or discontinue one or more of its planned research or development programs or be unable to expand its operations or otherwise capitalize on its commercialization of its product and product candidates.
(2) Basis of Presentation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AVEO Pharma Limited, AVEO Pharma (Ireland) Limited and AVEO Securities Corporation. The Company has eliminated all significant intercompany accounts and transactions in consolidation.
Effective as of 5:00 p.m. Eastern Time on February 19, 2020, the Company effected a 1-for-10 reverse stock split of its common stock. All references to shares of common stock outstanding and per share amounts in these consolidated financial statements and the notes to the consolidated financial statements have been restated to reflect the reverse stock split on a retroactive basis. Refer to Note 7, “Common Stock-Reverse Stock Split - February 2020” for further details.
(3) Significant Accounting Policies
Revenue Recognition
As of December 31, 2020, the Company’s revenues have been generated primarily through collaborative research, development and commercialization agreements. The terms of these agreements generally contain multiple promised goods and services, which may include (i) licenses, or options to obtain licenses, to the Company’s technology, (ii) research and development activities to be performed on behalf of the collaborative partner, and (iii) in certain cases, services in connection with the manufacturing of preclinical and clinical material. Payments to the Company under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; milestone payments; and royalties on future product sales.
Collaboration Arrangements Within the Scope of ASC 808, Collaborative Arrangements
The Company analyzes its collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and are therefore within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements that are deemed to be within the scope of ASC 808, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company’s policy is generally to recognize amounts received from collaborators in connection with joint operating activities that are within the scope of ASC 808 as a reduction in research and development expense.
Arrangements Within the Scope of ASC 606, Revenue from Contracts with Customers
Under ASC 606, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company determines it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation(s). As part of the accounting for these arrangements, the Company must make significant judgments, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation.
Once a contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and determines those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes.
The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The Company also considers the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.
The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (“SSP”) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.
If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company determines the amount of variable consideration by using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.
In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the Company with a significant benefit of financing. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. The Company assessed each of its revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of its arrangements.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time based on the use of an output or input method.
Licenses of Intellectual Property: The terms of the Company’s license agreements include the license of functional intellectual property, given the functionality of the intellectual property is not expected to change substantially as a result of the Company’s ongoing activities. If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from the portion of the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises (that is, for licenses that are not distinct from other promised goods and services in an arrangement), the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Research and Development Funding: Arrangements that include payment for research and development services are generally considered to have variable consideration. If and when the Company assesses the payment for these services is no longer subject to the constraint on variable consideration, the related revenue is included in the transaction price.
Milestone payments: At the inception of each arrangement that includes non-refundable payments for contingent milestones, including preclinical research and development, clinical development and regulatory, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of the achievement of contingent milestones and the likelihood of a significant reversal of such milestone revenue, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and licensing revenue in the period of adjustment. This quarterly assessment may result in the recognition of revenue related to a contingent milestone payment before the milestone event has been achieved.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
The following table summarizes the total revenues earned in the years ended December 31, 2020, 2019 and 2018, respectively, by partner (in thousands). Refer to Note 4, “Collaborations and License Agreements” regarding specific details.
Leases
The Company adopted ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), effective January 1, 2019 using the required modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases. In connection with the adoption of ASU 2016-02, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which does not require the reassessment of the following: (i) whether existing or expired arrangements are or contain a lease, (ii) the lease classification of existing or expired leases, and (iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company made an accounting policy election not to recognize right-of-use assets or related lease liabilities with a lease term of twelve months or less in its Consolidated Balance Sheet. Such short-term lease payments are recorded in its Consolidated Statements of Operations in the period in which the obligation for those payments was incurred.
As of the date of initial application of ASU 2016-02, the Company’s lease arrangement for its former corporate headquarters at One Broadway, Cambridge, Massachusetts was cancellable within 30 days’ notice to its landlord and excluded any extension incentives or disincentives to renew for an extended period of time. In addition, the Company has drug storage arrangements with multiple storage providers that are cancellable at any time without penalty to the Company. The Company recognized short-term operating lease expense in its Consolidated Statements of Operations of approximately $0.5 million, $1.0 million and $0.7 million in the years ended December 31, 2020, 2019 and 2018, respectively.
Application of ASC 842 policy elections to leases post adoption
The Company has made certain accounting policy elections to apply to its leases executed post adoption of ASU 2016-02 , or subsequent to January 1, 2019, as further described below.
In accordance with ASC 842, components of a lease should be split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components. The Company made an accounting policy election to combine lease and non-lease components as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable.
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating.
ASC 842 allows for the use of judgment in determining whether the assumed lease term is for a major part of the remaining economic life of the underlying asset and whether the present value of lease payments represents substantially all of the fair value of the underlying asset. The Company applies the bright line thresholds referenced in ASC 842-10-55-2 to assist in evaluating leases for appropriate classification.
30 Winter Street Lease
On March 5, 2020, the Company entered into a sublease agreement for office space located at 30 Winter Street in Boston, Massachusetts (the “Winter Street Sublease”) to relocate the Company’s corporate headquarters previously located at One Broadway in Cambridge, Massachusetts. Under the terms of the Winter Street Sublease, the Company leases 10,158 square feet of office space for $47.00 per square foot, or approximately $0.5 million per year in base rent subject to certain operating expenses, taxes and annual base rent increases of approximately 3%. The Winter Street Sublease commenced when the space became available for use by the Company on March 24, 2020 and will continue until its expiration on November 30, 2022. Upon commencement of the Winter Street Sublease, the Company paid a security deposit, in the amount of $0.3 million, which is subject to certain reductions to be applied to future base rent payments provided that no event of default has occurred in the preceding twelve months.
The Company is accounting for the Winter Street Sublease under ASC 842 using its initial 2.7-year term through November 30, 2022. In applying ASC 842, the Company classified the Winter Street Sublease as an operating lease and recorded a right-of-use asset of approximately $1.2 million and a lease liability of approximately $1.0 million upon the effective lease commencement date. In calculating the lease liability, the Company used the present value of all future lease payments using an incremental borrowing rate of 7.58%. The Company is recognizing rent expense on a straight-line basis throughout the remaining term of the lease. In the year ended December 31, 2020, the Company recognized $0.4 million in rent expense.
In connection with the execution of the Winter Street Sublease, the Company also entered into a Purchase Agreement for furniture (the “Furniture Purchase Agreement”) located on the premises upon the lease commencement. Upon execution of the Furniture Purchase Agreement, the Company paid the $0.1 million purchase price and recorded the furniture acquisition as property and equipment, net. The Company is recognizing depreciation using the straight-line method over the estimated useful life of 7 years.
As of December 31, 2020, future minimum lease payments under the Company’s Winter Street Sublease are as follows (amounts in thousands):
Short-term arrangements
As of the date of initial application of ASU 2016-02, the Company’s lease arrangement for its former corporate headquarters at One Broadway, Cambridge, Massachusetts was cancellable within 30 days’ notice to its landlord and excluded any extension incentives or disincentives to renew for an extended period of time. In addition, the Company has drug storage arrangements with multiple storage providers that are cancellable at any time without penalty to the Company. The Company recognized short-term operating lease expense in its Consolidated Statements of Operations of approximately $0.5 million, $1.0 million and $0.7 million in the years ended December 31, 2020, 2019 and 2018, respectively.
Research and Development Expenses
Research and development expenses are charged to expense as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including (i) internal costs for salaries, bonuses, benefits, stock-based compensation, research-related overhead, and allocated expenses for facilities and information technology, and (ii) external costs for
clinical trials, drug manufacturing and distribution, preclinical studies, upfront license payments, milestones and sublicense fees related to in-licensed products and technology, consultants and other contracted services.
Warrants Issued in Connection with Private Placement
In May 2016, the Company issued warrants to purchase an aggregate of 1,764,242 shares of common stock in connection with a private placement financing and recorded the warrants as a liability (the “PIPE Warrants”). The Company accounts for warrant instruments that either conditionally or unconditionally obligate the issuer to transfer assets as liabilities regardless of the timing of the redemption feature or price, even though the underlying shares may be classified as permanent or temporary equity. As of December 31, 2020, PIPE Warrants exercisable for 80,309 shares of common stock had been exercised, for approximately $0.8 million in cash proceeds, and PIPE Warrants exercisable for 1,683,933 shares of common stock were outstanding. Refer to Note 7, “Common Stock-Private Placement - May 2016” for further discussion of the private placement financing.
The PIPE Warrants contain a provision giving the warrant holder the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480, Distinguishing Liabilities from Equity requires that these warrants be classified as a liability and not as equity. Accordingly, the Company recorded a warrant liability in the amount of approximately $9.3 million upon issuance of the PIPE Warrants. The fair value of these warrants has been determined using the Black-Scholes pricing model. These warrants are subject to revaluation at each balance sheet date and any changes in fair value are recorded as a non-cash gain or (loss) in the Statement of Operations as a component of other income (expense), net until the earlier of their exercise or expiration or upon the completion of a liquidation event. Upon exercise, the PIPE Warrants are subject to revaluation just prior to the date of the warrant exercise and any changes in fair value are recorded as a non-cash gain or (loss) in the Statement of Operations as a component of other income (expense), net and the corresponding reduction in the PIPE Warrant liability is recorded as additional paid-in capital in the Balance Sheet as a component of stockholder’s equity.
The Company recorded a non-cash gain of approximately $4.9 million in the year ended December 31, 2020 in its Statement of Operations principally attributable to the decreases in the fair value of the warrant liability that resulted from lower stock prices as of December 31, 2020 relative to prior periods, a decrease in the Company’s stock volatility rate and a shorter remaining term as the PIPE Warrants approach their expiration in May 2021. The Company recorded non-cash gains of approximately $11.6 million and $19.9 million in the years ended December 31, 2019 and 2018, respectively, in its Statement of Operations principally attributable to the decreases in the fair value of the warrant liability that resulted from lower stock prices as of December 31, 2019 and 2018, relative to prior periods. The Company recorded a reduction in the warrant liability attributable to warrant exercises, with a corresponding increase to additional paid-in capital, of $0 in each of the years ended December 31, 2020 and 2019, respectively, and approximately $1.2 million in the year ended December 31, 2018.
The following table rolls forward the fair value of the Company’s PIPE Warrant liability, the fair value of which is determined by Level 3 inputs for the years ended December 31, 2020, 2019 and 2018, respectively (in thousands):
The key assumptions used to value the PIPE Warrants were as follows:
Prior Class Action Settlement and Settlement Warrants
In December 2017, the Company entered into a binding memorandum of understanding (the “MOU”) with class representatives Bob Levine and William Windham (the “Plaintiffs”), regarding the settlement of a securities class action lawsuit (the “2013 Class Action”) that had been filed in 2013 and was pending in the United States District Court for the District of Massachusetts (the “District Court”) against the Company and certain of the Company’s former officers (Tuan Ha-Ngoc, David Johnston, and William Slichenmyer, together, the “Individual Defendants”), In re AVEO Pharmaceuticals, Inc. Securities Litigation et al., No. 1:13-cv-11157-DJC. As previously disclosed, the 2013 Class Action was purportedly brought on behalf of stockholders who purchased the Company’s common stock between May 16, 2012 and May 1, 2013 (the “Class”).
In December 2017, upon entering into the MOU, the Company’s liability related to this settlement became estimable and probable. Accordingly, the Company recorded an estimated $17.1 million contingent liability, including $15.0 million for the cash portion of the settlement with a corresponding insurance recovery for the 100% portion to be paid directly by certain of the Company’s insurance carriers, and an approximate $2.1 million estimate for the fair value on December 31, 2017 of 200,000 warrants to purchase shares of its common stock that the Company agreed to issue the Class (the “Settlement Warrants”), with a corresponding non-cash charge to the Statement of Operations as a component of operating expense. The Settlement Warrants were exercisable for a one-year period from their date of issue at an exercise price equal to the closing price on December 22, 2017, the trading day prior to the execution of the MOU, which was $30.00 per share.
In February 2018, the District Court preliminarily approved a definitive stipulation of settlement agreement (the “Stipulation”), following which the insurance carriers funded the settlement escrow account related to the $15.0 million cash portion of the settlement. On May 30, 2018, the District Court approved the Stipulation in its order of final approval and final judgment (the “Final Judgment”), which became effective on June 29, 2018 (the “Effective Date”). Pursuant to the Final Judgment, all claims against the Company were released upon the Effective Date. In addition, pursuant to the Stipulation, the Company had no interest in the settlement escrow account subsequent to the Effective Date. Accordingly, the $15 million contingent liability associated with the cash portion of the settlement and the corresponding insurance recovery was eliminated on the Effective Date. On July 16, 2018, the Company issued and delivered the Settlement Warrants in accordance with the Stipulation and filed a corresponding shelf registration statement, File No. (333-226190) to register the shares of common stock underlying the Settlement Warrants which was declared effective by the SEC on July 25, 2018. All 200,000 Settlement Warrants expired on July 15, 2019 as none of the warrants had been exercised during the one-year exercise period.
Refer to Note 13, “Legal Proceedings” for further discussion of the 2013 Class Action settlement.
The estimated fair value of the Settlement Warrants was determined using the Black-Scholes pricing model. The estimated fair value of the Settlement Warrants was subject to revaluation at each balance sheet date and any changes in fair value were recorded as a non-cash gain or (loss) in the Statement of Operations as a component of operating expenses until the Settlement Warrants were issued. The fair value of the Settlement Warrants on June 30, 2018 was determined based on the estimated fair value of the Settlement Warrants at the time of issuance. The Company recorded a non-cash gain of approximately $0.7 million in the year ended December 31, 2018 in its Statement of Operations attributable to the decrease in the fair value of the Settlement Warrants that principally resulted from a lower volatility rate relative to prior periods.
In July 2018, upon the issuance of the Settlement Warrants, the Company reclassified the approximate $1.4 million value of the Settlement Warrants from a liability to stockholders equity as a component of additional paid-in-capital based upon the terms of the warrant agreement and, accordingly, the approximate $1.4 million contingent liability on the Company’s balance sheet associated with the warrant portion of the settlement was eliminated.
The key assumptions used to estimate the fair value the Settlement Warrants were as follows:
Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase and an investment in a U.S. government money market fund to be cash equivalents. Changes in the balance of cash and cash equivalents may be affected by changes in investment portfolio maturities, as well as actual cash disbursements to fund operations.
The Company’s cash is deposited in highly-rated financial institutions in the United States. The Company invests in United States government money market funds, high-grade, short-term commercial paper, corporate bonds and other United States government agency securities, which management believes are subject to minimal credit and market risk. The carrying values of the Company’s cash and cash equivalents approximate fair value due to their short-term maturities.
The Company does not have any restricted cash balances.
Marketable Securities
Marketable securities consist primarily of investments which have expected average maturity dates in excess of three months. The Company invests in high-grade corporate obligations, including commercial paper, and U.S. government and government agency obligations that are classified as available-for-sale. Since these securities are available to fund current operations they are classified as current assets on the consolidated balance sheets.
Marketable securities are stated at fair value, including accrued interest, with their unrealized gains and losses included as a component of accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity. The fair value of these securities is based on quoted prices and observable inputs on a recurring basis. The cost of marketable securities is adjusted for amortization of premiums and accretion of discounts, with such amortization and accretion recorded as a component of interest expense, net. Realized gains and losses are determined on the specific identification method. Unrealized gains and losses are included in other comprehensive loss until realized, at which point they would be recorded as a component of interest expense, net.
Below is a summary of cash, cash equivalents and marketable securities at December 31, 2020 and December 31, 2019:
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivable. The Company maintains deposits in highly-rated, federally-insured financial institutions in excess of federally insured limits. The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the high credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument.
The Company’s accounts receivable primarily consists of amounts due to the Company from licensees and collaborators. The Company has not experienced any material losses related to accounts receivable from individual licensees or collaborators.
Fair Value Measurements
The fair value of the Company’s financial assets and liabilities reflects the Company’s estimate of amounts that it would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company’s assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1:
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company measures the fair value of its marketable securities by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
As of December 31, 2020, the Company had financial assets valued based on Level 1 inputs consisting of cash and cash equivalents in a United States government money market fund. During the year ended December 31, 2020, the Company did not have any transfers of financial assets between Levels 1 and 2.
As of December 31, 2020, the Company’s financial liability that was recorded at fair value consisted of the PIPE Warrant liability.
The fair value of the Company’s loans payable at December 31, 2020 and December 31, 2019 approximates its carrying value, computed pursuant to a discounted cash flow technique using a market interest rate and is considered a Level 3 fair value measurement. The effective interest rate, which reflects the current market rate, considers the loan issuance costs and the deferred financing charge.
The following table summarizes the assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and December 31, 2019:
Basic and Diluted Net Loss per Common Share
Basic net income (loss) per share attributable to the Company’s common stockholders is based on the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to the Company’s common stockholders is based on the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.
For the year ended December 31, 2020, diluted net loss per share is the same as basic net loss per share as the inclusion of common stock issuable upon the exercise of warrants and stock options would be anti-dilutive under the treasury stock method. In the year ended December 31, 2020, the average market prices of the Company’s common stock were below the exercise prices of $10.00 and $12.50 per share for the PIPE Warrants and Offering Warrants. Refer to Note 7, “Common Stock-Private Placement - May 2016, - Public Offering - April 2019 and - Settlement Warrants” for further discussion of these warrants.
For the year ended December 31, 2019, diluted net income per share (i) includes common equivalent shares issuable upon the exercise of in-the-money stock options, as determined using the treasury stock method, as the average market prices of the Company’s common stock during the respective period exceeded the exercise prices of certain stock options, and (ii) excludes the incremental common shares issuable upon the exercise of the PIPE Warrants, Offering Warrants and out-of-the money stock options as their effect would be anti-dilutive. In the year ended December 31, 2019, the average market prices of the Company’s common stock were below the exercise prices of $10.00 and $12.50 per share for the PIPE Warrants and Offering Warrants, respectively.
For the year ended December 31, 2018, diluted net income per share (i) includes common equivalent shares issuable upon the exercise of the PIPE Warrants, as determined using the treasury stock method, as the average market prices of the Company’s common stock during the respective period exceeded the exercise price of $10.00 per share for the PIPE Warrants, and (ii) excludes the incremental common shares issuable upon the exercise of the Settlement Warrants (as defined in Note 7, “- Common Stock - Settlement Warrants” below) and stock options as their effect would be anti-dilutive. In the year ended December 31, 2018, the average market prices of the Company’s common stock were below the exercise price of $30.00 per share for Settlement Warrants.
The following tables summarizes the computation of basic and diluted net loss per share for the years ended December 31, 2020, 2019 and 2018, respectively (in thousands except per share amounts):
The following table summarizes outstanding securities not included in the computation of diluted net loss per common share as their inclusion would be anti-dilutive for the years ended December 31, 2020, 2019 and 2018, respectively:
Stock-Based Compensation
Under the Company’s stock-based compensation programs, the Company periodically grants stock options and restricted stock to employees, directors and nonemployee consultants. The Company also issues shares under an employee stock purchase plan. The fair value of each award is recognized in the Company’s statements of operations over the requisite service period for such award.
Awards that vest as the recipient provides service are expensed on a straight-line basis over the requisite service period. The Company uses the Black-Scholes option pricing model to value its stock option awards without market conditions, which requires the Company to make certain assumptions regarding the expected volatility of its common stock price, the expected term of the option grants, the risk-free interest rate and the dividend yield with respect to its common stock. The Company calculates volatility using its historical stock price data. Due to the lack of the Company’s own historical data, the Company elected to use the “simplified” method for “plain vanilla” options to estimate the expected term of the Company’s stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate used for each grant is based on the United States Treasury yield curve in effect at the time of grant for instruments with a similar expected life. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.
The fair value of equity-classified awards to employees and directors are measured at fair value on the date the awards are granted. During the years ended December 31, 2020, 2019 and 2018, the Company recorded the following stock-based compensation expense (in thousands):
Stock-based compensation expense is allocated to research and development and selling, general and administrative expense based upon the department of the employee to whom each award was granted. No related tax benefits of the stock-based compensation expense have been recognized.
Income Taxes
The Company provides for income taxes using the asset-liability method. Under this method, deferred tax assets and liabilities are recognized based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company calculates its provision for income taxes on ordinary income based on its projected annual tax rate for the year. Uncertain tax positions are recognized if the position is more-likely-than-not to be sustained upon examination by a tax authority. Unrecognized tax benefits represent tax positions for which reserves have been established. The Company maintains a full valuation allowance on all deferred tax assets.
Segment and Geographic Information
Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment principally in the United States. As of December 31, 2020, 2019 and 2018, the Company has no net assets located outside of the United States.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, the assessment of the Company’s ability to continue as a going concern, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include revenue recognition, clinical trial costs and contract research accruals, measurement of the PIPE Warrant liability, measurement of stock-based compensation, measurement of right-of-use assets and lease liabilities, and estimates of the Company’s capital requirements over the next twelve months from the date of issuance of the consolidated financial statements. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Material changes in these estimates could occur in the future. Changes in estimates are recorded or reflected in the Company’s disclosures in the period in which they become known. Actual results could differ from those estimates if past experience or other assumptions do not turn out to be substantially accurate.
Accrued Clinical Trial Costs and Contract Research Liabilities
During the years ended December 31, 2020, 2019 and 2018, the Company had arrangements with multiple CROs whereby these organizations commit to performing services for the Company over multiple reporting periods. The Company recognizes the expenses associated with these arrangements based on its expectation of the timing of the performance of components under these arrangements by these organizations. Generally, these components consist of the costs of setting up the trial, monitoring the trial, closing the trial and preparing the resulting data. Costs related to patient enrollment in clinical trials are accrued as patients are enrolled in the trial.
In addition to fees earned by the clinical research organizations to manage the Company’s clinical trials, the clinical research organizations are also responsible for managing payments to the clinical trial sites on the Company’s behalf. There can be significant lag time in clinical trial sites invoicing the clinical research organizations. The date on which services are performed, the level of services performed and the cost of such services are often determined based on subjective judgments. The Company makes these judgments based upon the facts and circumstances known to it, such as the terms of the contract and its knowledge of activity that has been incurred, including the number of active clinical sites, the number of patients enrolled, the activities to be performed for each patient, including patient treatment and any imaging, if applicable, the activities to be performed for each patient, and the duration for
which the patients will be enrolled in the trial. In the event that the Company does not identify some costs which have begun to be incurred, or the Company under or overestimates the level of services performed or the costs of such services in a given period, its reported expenses for such period would be understated or overstated. The Company currently reflects the effects of any changes in estimates based on changes in facts and circumstances directly in its operations in the period such change becomes known.
With respect to financial reporting periods presented in this Annual Report on Form 10-K, the timing of the Company’s actual costs incurred have not differed materially from its estimated timing of such costs.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”). This standard requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. Expanded disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required. The targeted transition relief standard allows filers an option to irrevocably elect the fair value option of ASC 825-10, Financial Instruments-Overall, applied on an instrument-by-instrument basis for eligible instruments. The Company adopted ASU 2016-13 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective beginning January 1, 2021. The Company is assessing the impact ASU 2019-12 will have on its consolidated financial statements.
(4) Collaborations and License Agreements
Collaboration Agreement
AstraZeneca
In December 2018, the Company entered into a clinical supply agreement (the “AstraZeneca Agreement”) with a wholly-owned subsidiary of AstraZeneca PLC (“AstraZeneca”) to evaluate the safety and efficacy of AstraZeneca’s IMFINZI (durvalumab), a human monoclonal antibody directed against programmed death-ligand 1 (PD-L1), in combination with tivozanib as a first-line treatment for patients with advanced, unresectable HCC in an open-label, multi-center, randomized phase 1b/2 clinical trial (the “DEDUCTIVE trial”). The Company serves as the study sponsor; each party contributes the clinical supply of its study drug; key decisions are made by both parties by consensus; and external study costs are otherwise shared equally.
The Company is accounting for the joint development activities under the AstraZeneca Agreement as a joint risk-sharing collaboration in accordance with ASC 808 because both the Company and AstraZeneca are active participants in the oversight of the DEDUCTIVE trial via their participation on a joint steering committee and are exposed to significant risk and rewards in connection with the activity based on their obligation to share in the costs. AstraZeneca does not meet the definition of a customer, thus the joint development activities under the AstraZeneca Agreement are not accounted for under ASC 606.
Payments from AstraZeneca with respect to its share of the external costs for the DEDUCTIVE trial incurred by the Company pursuant to a joint development plan are recorded as a reduction in research and development expenses due to the joint risk-sharing nature of the activities that is not representative of a vendor-customer relationship.
The Company records reimbursements from AstraZeneca for external study costs as a reduction in research and development expense during the period that reimbursable expenses are incurred. As a result of the cost sharing provisions in the AstraZeneca Agreement, the Company’s research and development expenses were reduced by approximately $1.1 million, $0.5 million and $0 in the years ended December 31, 2020, 2019 and 2018, respectively. The amount due to the Company from AstraZeneca pursuant to the cost-sharing provision was approximately $0.4 million as of December 31, 2020.
Out-License Agreements
CANbridge
In March 2016, the Company entered into a collaboration and license agreement (the “CANbridge Agreement”) with CANbridge Life Sciences, Ltd. (“CANbridge”). Under the terms of the CANbridge Agreement, the Company granted CANbridge the exclusive right to develop, manufacture and commercialize AV-203, the Company’s is a potent humanized IgG1 monoclonal antibody that targets ErbB3 (also known as HER3), for the diagnosis, treatment and prevention of disease in all countries outside of North America.
Pursuant to the CANbridge Agreement, CANbridge made an upfront payment to the Company of $1.0 million in April 2016, net of $0.1 million of foreign withholding taxes. CANbridge also reimbursed the Company for $1.0 million of certain AV-203 manufacturing costs incurred by the Company prior to entering into the CANbridge Agreement. CANbridge paid this manufacturing reimbursement in two installments of $0.5 million each, one in March 2017 and one in September 2017, net of foreign withholding taxes, following CANbridge’s validation of the manufacturing process for AV-203 drug substance. In December 2017, CANbridge filed an investigative new drug (“IND”) application with the National Medical Products Administration (formerly, the China Food and Drug Administration) (the “NMPA”) for a clinical study of AV-203, which CANbridge refers to as CAN017, in esophageal squamous cell carcinoma (“ESCC”). In August 2018, CANbridge obtained regulatory approval of this IND application from the NMPA and, accordingly, the Company earned a $2.0 million development and regulatory milestone payment that was received from CANbridge in August 2018. No milestones had been achieved by CANbridge in the years ended December 31, 2020 and 2019, respectively.
A percentage of any milestone and royalty payments received by the Company pursuant to the CANbridge Agreement, excluding upfront and reimbursement payments, or under future partnership agreements related to the AV-203 program, are due to Biogen Idec International GmbH (“Biogen”) as a sublicensing fee under the option and license agreement between the Company and Biogen dated March 18, 2009, as amended. The $2.0 million development and regulatory milestone the Company earned in August 2018 for regulatory approval from the NMPA of an IND application for a clinical study of AV-203 in ESCC was subject to this sublicense fee, or $0.7 million, which was paid to Biogen in October 2018.
In March 2021, CANbridge exercised its right to terminate for convenience the CANbridge Agreement. Under the terms of the CANbridge Agreement, the Company expects the transfer of the AV-203 program to be complete in September 2021 and, at that time, the Company will regain worldwide rights to the AV-203 program.
Accounting Analysis Under ASC 606
The Company evaluated the CANbridge Agreement under ASC 606 and determined the CANbridge Agreement contained a single performance obligation related to the exclusive license to develop and commercialize AV-203 that was satisfied at the inception of the arrangement. The Company determined that the $1.0 million in upfront consideration received upon the execution of the CANbridge Agreement in March 2016 and the $1.0 million reimbursement received in the year ended December 31, 2017 for certain manufacturing costs incurred by the Company prior to the effective date constituted the amount of the consideration to be included in the transaction price upon the adoption of ASC 606 on January 1, 2018 and attributed these amounts to the Company’s single performance obligation.
Because the Company satisfied the single performance obligation at the inception of the contract and had no remaining performance obligations, each of these amounts were recognized upon receipt. Upon adoption of ASC 606 on January 1, 2018, none of the development and regulatory milestones were included in the transaction price, as these milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered multiple factors: (i) regulatory approvals are outside of the control of CANbridge, (ii) certain development and regulatory milestones are contingent upon the success of future clinical trials, if any, which is out of the control of CANbridge, and (iii) efforts by CANbridge.
Under the CANbridge Agreement, the Company had been eligible to receive milestone payments and royalties tied to the commencement of clinical trials, to regulatory approvals and to sales of such products upon commercialization. In the third quarter of 2018, the Company increased the transaction price to $4.0 million to include the $2.0 million development and regulatory milestone that was earned in August 2018 for regulatory approval from the NMPA of an IND application for a clinical study of AV-203 in ESCC. Accordingly, the Company recognized the full $2.0 million amount as collaboration and licensing revenue in the year ended December 31, 2018, as the Company did not have any ongoing performance obligations under the CANbridge Agreement. No additional milestones set forth in the CANbridge Agreement had been achieved prior to the termination of the CANbridge Agreement.
EUSA
In December 2015, the Company entered into the EUSA Agreement, under which the Company granted to EUSA the exclusive, sublicensable right to develop, manufacture and commercialize tivozanib in the territories of Europe (excluding Russia, Ukraine and the Commonwealth of Independent States), Latin America (excluding Mexico), Africa and Australasia (collectively, the “EUSA Licensed Territories”) for all diseases and conditions in humans, excluding non-oncologic diseases or conditions of the eye.
EUSA made research and development reimbursement payments to the Company of $2.5 million upon the execution of the EUSA Agreement during the year ended December 31, 2015 and $4.0 million in September 2017 upon its receipt of marketing approval from the European Commission in August 2017 for FOTIVDA (tivozanib) for the treatment of RCC. In September 2017, EUSA elected to opt-in to co-develop the phase 2 clinical trial of tivozanib in combination with OPDIVO (nivolumab), a PD-1 inhibitor, in the first-line and the second-line treatment of RCC (the “TiNivo trial”). As a result of exercising its opt-in right, EUSA made an additional research and development reimbursement payment to the Company of $2.0 million. This $2.0 million payment was received in October 2017, in advance of the completion of the TiNivo trial, and represents EUSA’s approximate 50% share of the total estimated costs of the TiNivo trial. The Company is also eligible to receive an additional research and development reimbursement payment from EUSA of 50% of the total costs for the Company’s phase 3 randomized, controlled, multi-center, open-label clinical trial comparing tivozanib to an approved therapy, sorafenib (Nexavar®), in 350 subjects in RCC patients whose disease had relapsed or become refractory to two or three prior systemic therapies, including subjects with prior checkpoint inhibitor therapy (the“TIVO-3 trial”), up to $20.0 million, if EUSA elects to opt-in to that study.
The Company is entitled to receive milestone payments of $2.0 million per country upon reimbursement approval for RCC, if any, in each of France, Germany, Italy, Spain and the United Kingdom (collectively, the “EU5”). The Company is also entitled to receive an additional $2.0 million for the grant of marketing approval for RCC, if any, in three of the licensed countries outside of the EU, as mutually agreed by the parties, of which approvals have been obtained in New Zealand in July 2019 and in South Africa in September 2020. In February 2018, November 2018 and February 2019, EUSA obtained reimbursement approval from the National Institute for Health and Care Excellence (“NICE”) in the United Kingdom, the German Federal Association of the Statutory Health Insurances (“GKV-SV”) in Germany and the Ministry of Health, Consumer Affairs and Social Welfare (“MSCBS”) in Spain, respectively, for the first-line treatment of RCC. Accordingly, the Company earned a $2.0 million milestone payment with respect to reimbursement approval in the United Kingdom that was received in March 2018, a $2.0 million milestone payment with respect to reimbursement approval in Germany that was received in December 2018 and a $2.0 million milestone payment with respect to reimbursement approval in Spain that was received in May 2019. The Company is also eligible to receive a payment of $2.0 million per indication in connection with a filing by EUSA with the EMA for marketing approval, if any, for tivozanib for the treatment of each of up to three additional indications and $5.0 million per indication in connection with the EMA’s grant of marketing approval for each of up to three additional indications, as well as potentially up to $335.0 million upon EUSA’s achievement of certain sales thresholds. The Company is also eligible to receive tiered double digit royalties on net sales, if any, of licensed products in the EUSA Licensed Territories ranging from a low double digit up to mid-twenty percent depending on the level of annual net sales. No milestone payments nor research and development reimbursement payments were earned in the year ended December 31, 2020.
The research and development reimbursement payments under the EUSA Agreement are not subject to the 30% sublicensing payment payable to KKC, subject to certain limitations. The Company, however, would owe KKC 30% of other, non-research and development payments it may receive from EUSA pursuant to the EUSA Agreement, including reimbursement approvals for RCC in the EU5, marketing approvals for RCC in three specified non-EU licensed territories, EU marketing approval filings and corresponding marketing approvals by the EMA for up to three additional indications beyond RCC, and sales-based milestones and royalties, as set forth above. The $2.0 million milestone payments the Company earned in each of February 2018, November 2018 and February 2019 upon EUSA’s reimbursement approval for FOTIVDA from the NICE in the United Kingdom, the GKV-SV in Germany and the MSCBS in Spain, respectively, for the first-line treatment of RCC were subject to the 30% KKC sublicense fee, or $0.6 million, each. The sublicense fees for EUSA’s reimbursement approvals in the United Kingdom, Germany and Spain were paid in April 2018, January 2019 and June 2019, respectively.
EUSA is obligated to use commercially reasonable efforts to seek regulatory approval for and commercialize tivozanib throughout the EUSA Licensed Territories in RCC. EUSA has responsibility for all activities and costs associated with the further development, manufacture, regulatory filings and commercialization of tivozanib in the EUSA Licensed Territories.
Accounting Analysis Under ASC 606
Pursuant to ASC 606, the Company identified the following promised goods and services at the inception of the EUSA Agreement: (i) the Company’s grant of an exclusive license to develop and commercialize tivozanib in the EUSA Licensed Territories, including the Company’s obligation to transfer all technical knowledge and data useful in the development and manufacture of tivozanib; (ii) the Company’s obligation to cooperate with EUSA and support its efforts to file for marketing approval in the EUSA Licensed Territories and in its commercialization efforts; (iii) the Company’s obligation to provide access to certain regulatory information resulting from the Company’s ongoing development activities outside of the EUSA Licensed Territories; and (iv) the Company’s participation in a joint steering committee. The Company determined that the license to develop and commercialize tivozanib in the EUSA Licensed Territories was not distinct from the other promised goods and services and has accordingly accounted for these items as a single performance obligation. In reaching this conclusion, the Company concluded the remaining promises were essential to EUSA’s use of the license.
The Company concluded at contract inception that EUSA’s opt-in rights with respect to the TiNivo trial and the TIVO-3 trial did not represent material rights because at contract inception the Company had not yet initiated either trial and the option price (representing approximately 50% of the costs of the respective trial) was proportional to the value attributed to the EUSA Licensed Territories relative to the territorial rights retained by the Company. Accordingly, the Company accounts for each opt-in as a separate arrangement when such opt-ins occur.
The Company evaluated the promised goods and services at the inception of the EUSA Agreement under ASC 606. Based on this evaluation, the Company determined that $6.5 million in research and development payments by EUSA, including the $2.5 million upfront consideration received upon the execution of the EUSA Agreement in December 2015 and the $4.0 million payment upon the receipt of marketing approval from the EMA for FOTIVDA (tivozanib) for the treatment of RCC in August 2017, constituted the amount of the consideration that was included in the transaction price upon the adoption of ASC 606 on January 1, 2018 and attributed this amount to the Company’s single performance obligation. Upon adoption of ASC 606 on January 1, 2018, none of the remaining regulatory-related milestones were included in the transaction price as these milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered multiple factors: (i) the remaining reimbursement and marketing approvals in RCC are outside of the control of EUSA and vary on a country-by-country basis, (ii) milestones related to the submission filings for EMA approval of tivozanib in up to three additional indications are contingent upon the success of future clinical trials in additional indications, if any, and are outside of the control of EUSA, (iii) milestones related to the marketing approval by the EMA for tivozanib in up to three additional indications are contingent upon the success of the corresponding future clinical trials, if any, and are outside of the control of EUSA, and (iv) efforts by EUSA. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license granted to EUSA and therefore are recognized at the later of when the performance obligation is satisfied (or partially satisfied) or the related sales occur. The Company will re-evaluate the transaction price, including its estimated variable consideration for milestones included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
Under ASC 606, the upfront consideration and regulatory milestones included in the transaction price are being recognized as collaboration and licensing revenue over the Company’s performance period from contract execution in December 2015 through the remaining patent life of tivozanib in April 2022. Under ASC 606, upon the achievement of a regulatory milestone, the amount that represents the cumulative catch-up for the period from contract execution in December 2015 through the date of the milestone achievement is recognized as collaboration and licensing revenue, with the balance classified as deferred revenue and recognized as collaboration and licensing revenue over the remainder of the performance period, currently estimated through April 2022.
In November 2017, the Company began earning sales royalties upon EUSA’s commencement of the first commercial launch of FOTIVDA (tivozanib) with the initiation of product sales in Germany. EUSA has received reimbursement approval for and commercially launched FOTIVDA in Germany, the United Kingdom, and Spain as well as in some additional non-EU5 countries. EUSA is working to secure reimbursement approval in Italy and France and commercially launch FOTIVDA in additional European countries. The Company recognized royalty revenue of approximately $1.2 million, $0.9 million and $0.5 million in the years ended December 31, 2020, 2019 and 2018, respectively.
In the first quarter of 2018, the Company increased the transaction price to $8.5 million to include the $2.0 million milestone for reimbursement approval from the NICE in the United Kingdom in first-line RCC that was achieved in February 2018. Accordingly, the Company recognized approximately $0.7 million in collaboration and licensing revenue for the cumulative catch-up for the period from contract execution in December 2015 through the milestone achievement in February 2018, with the approximate $1.3 million balance classified as deferred revenue that is being recognized as collaboration and licensing revenue over the remainder of the performance period through April 2022.
In the fourth quarter of 2018, the Company increased the transaction price to $10.5 million to include the $2.0 million milestone for reimbursement approval from the GKV-SV in Germany in first-line RCC that was achieved in November 2018. Accordingly, the Company recognized approximately $0.9 million in collaboration and licensing revenue for the cumulative catch-up for the period from contract execution in December 2015 through the milestone achievement in November 2018, with the approximate $1.1 million balance classified as deferred revenue that is being recognized as collaboration and licensing revenue over the remainder of the performance period through April 2022.
In the first quarter of 2019, the Company increased the transaction price to $12.5 million to include the $2.0 million milestone for reimbursement approval from the MSCBS in Spain in first-line RCC that was achieved in February 2019. Accordingly, the Company recognized approximately $1.0 million in collaboration and licensing revenue for the cumulative catch-up for the period from contract execution in December 2015 through the milestone achievement in February 2019, with the approximate $1.0 million balance classified as deferred revenue that is being recognized as collaboration and licensing revenue over the remainder of the performance period through April 2022.
The Company recognized total revenues under the EUSA Agreement of approximately $3.2 million, $3.8 million and $3.4 million in the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, there was approximately $2.6 million in total deferred revenue that is expected to continue to be recognized as collaboration and licensing revenue, in the approximate amount of $0.5 million per quarter, over the duration of the Company’s performance period through April 2022.
The following table summarizes the revenues earned in connection with the EUSA Agreement under ASC 606 for the year ended December 31, 2020, 2019 and 2018 (in thousands):
The following table summarizes changes in the Company’s accounts receivable and contract liabilities (deferred revenue) in connection with the EUSA Agreement for the year ended December 31, 2020 (in thousands):
Opt-In to the TiNivo Trial
In September 2017, EUSA elected to opt-in to co-develop the TiNivo trial. As previously described, the Company accounts for each opt-in as a separate arrangement. As a result of EUSA’s exercise of its opt-in right, it became an active participant in the ongoing conduct of the TiNivo trial and is able to utilize the resulting data from the TiNivo trial for regulatory and commercial purposes in the EUSA Licensed Territories. Upon the exercise of its opt-in right, EUSA became responsible for funding 50% of the total estimated costs of the TiNivo trial, up to $2.0 million. The Company is accounting for the joint development activities relative to the TiNivo trial as a joint risk-sharing collaboration in accordance with ASC 808 because EUSA is an active participant in the ongoing TiNivo trial and is exposed to significant risk and rewards in connection with the activity. Payments from EUSA with respect to its share of TiNivo trial development costs incurred by the Company pursuant to a joint development plan are recorded as a reduction in research and development expenses due to the joint risk-sharing nature of the activities that is not representative of a vendor-customer relationship.
The Company recognized reductions in research and development expenses of approximately $0.1 million, $0.4 million and $0.5 million in the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, the Company had recognized $2.0 million in cumulative total reductions in research and development expenses related to EUSA’s approximate 50% share of the cumulative study-to-date costs. EUSA paid the $2.0 million maximum amount of cost sharing per the EUSA Agreement in advance of the completion of the trial.
Novartis
In August 2015, the Company entered into a license agreement (the “Novartis Agreement”) with Novartis International Pharmaceutical, Ltd. (“Novartis”), under which the Company granted Novartis the exclusive right to develop and commercialize AV-380 and the Company’s related antibodies worldwide. On June 29, 2018, Novartis notified the Company that it would be terminating the Novartis Agreement without cause, following a change in strategic direction at Novartis. Effective August 28, 2018 the Company regained the rights to AV-380, and on December 19, 2018, the Company entered into a new agreement with Novartis (the “AV-380 Transfer Agreement”) to further establish and clarify the terms on which Novartis would return the AV-380 program to the Company and to support the Company’s continuing development of the AV-380 program. Pursuant to the AV-380 Transfer Agreement, Novartis made a one-time payment to the Company of $2.3 million in January 2019, which the Company used to cover the $2.3 million time-based milestone obligation due to St. Vincent’s Hospital Sydney Limited (“St. Vincent’s”) in January 2019 under its license agreement as further described below under the heading “-In-License Agreements - St. Vincent’s.”
In connection with the AV-380 Transfer Agreement, the $2.3 million payment due from Novartis was not considered a revenue transaction due to the effective termination of the Novartis Agreement on August 28, 2018 and was instead considered other income. The Company evaluated the return of the AV-380 drug supply and determined that the inventory was not capitalizable as future economic benefit was not probable due to the AV-380 product candidate being in the pre-clinical development stage.
Biodesix
In April 2014, the Company entered into a worldwide co-development and collaboration agreement (the “Biodesix Agreement”) with Biodesix, Inc. (“Biodesix”) to develop and commercialize ficlatuzumab, the Company’s potent humanized IgG1 monoclonal antibody that targets HGF. In September 2020, the Company regained full global rights to ficlatuzumab, effective December 2, 2020, when Biodesix exercised its “Opt-Out” rights (as defined below) under the Biodesix Agreement.
Under the Biodesix Agreement, the Company granted Biodesix perpetual, non-exclusive rights to certain intellectual property, including all clinical and biomarker data related to ficlatuzumab, to develop and commercialize VeriStrat®, Biodesix’s proprietary companion diagnostic test. Biodesix granted the Company perpetual, non-exclusive rights to certain intellectual property, including diagnostic data related to VeriStrat, with respect to the development and commercialization of ficlatuzumab. Each license included the right to sublicense, subject to certain exceptions. The Company was designated to lead the clinical development of ficlatuzumab following approval of a development plan by a joint steering committee. The Company and Biodesix are currently funding an investigator-sponsored clinical trial for ficlatuzumab in combination with ERBITUX® (cetuximab) in HNSCC. The Biodesix Agreement generally provided for each party to contribute 50% of all clinical, regulatory, manufacturing and other costs to develop ficlatuzumab and to share equally in any future revenue from development or commercialization.
Under the Biodesix Agreement, prior to the first commercial sale of ficlatuzumab, each party had the right to elect to discontinue its funding obligation for further development or commercialization efforts with respect to ficlatuzumab in exchange for reduced economics in the program, which is referred to as an “Opt-Out.” Pursuant to the terms of the Biodesix Agreement, as a result of Biodesix’s election to Opt-Out, Biodesix will (i) continue to be responsible for reimbursement of development costs with respect to the ongoing open label Phase 2 investigator-sponsored clinical trial of ficlatuzumab in combination with ERBITUX® (cetuximab) in HNSCC (the “Phase 2 HNSCC Trial”), (ii) cease to be entitled to 50% sharing of profits resulting from commercialization of ficlatuzumab, (iii) be entitled to a low double digit royalty on future product sales and 25% of future licensing revenue (excluding contributions to research and development expenses) less approximately $2.5 million that Biodesix would be required to pay to the Company pursuant to the October 2016 amendment to the Biodesix Agreement and (iv) remain responsible for development obligations under the Biodesix Agreement with respect to VeriStrat. Biodesix and the Company also remain obligated to negotiate a commercialization agreement to delineate their rights and obligations in the event of any commercialization of VeriStrat with ficlatuzumab. As a result of Biodesix’s decision to Opt-Out, the Company now has worldwide licensing rights and sole decision-making authority with respect to further development and commercialization of ficlatuzumab. The payment obligations between the parties under the Biodesix Agreement are in effect until completion of the Phase 2 HNSCC Trial.
The Company is accounting for the joint development activities under the Biodesix Agreement as a joint risk-sharing collaboration in accordance with ASC 808 because both the Company and Biodesix have been active participants in the ongoing development of ficlatuzumab via their participation on a joint steering committee that oversaw the development plans for ficlatuzumab and have been exposed to significant risk and rewards in connection with their activity based on their obligations to share in the costs, as defined above. Payments from Biodesix with respect to its share of ficlatuzumab development costs incurred by the Company pursuant to a joint development plan are recorded as a reduction in research and development expenses due to the joint risk-sharing nature of the activities that is not representative of a vendor-customer relationship.
The Company records reimbursements from Biodesix for expenses related to these trials and drug manufacturing as a reduction in research and development expense during the period that reimbursable expenses are incurred. As a result of the cost sharing provisions in the Biodesix Agreement, the Company reduced research and development expenses by approximately $0.8 million, $0.9 million and $0.3 million in the years ended December 31, 2020, 2019 and 2018, respectively. The amount due to the Company from Biodesix pursuant to the cost-sharing provision was approximately $0.1 million as of December 31, 2020.
Biogen Idec International GmbH
In March 2009, the Company entered into an exclusive option and license agreement with Biogen regarding the development and commercialization of the Company’s discovery-stage ErbB3-targeted antibodies, including AV-203, for the potential treatment and diagnosis of cancer and other diseases outside of North America (the “Biogen Agreement”). Under the Biogen Agreement, the Company was responsible for developing ErbB3 antibodies through completion of the first phase 2 clinical trial designed in a manner that, if successful, would generate data sufficient to support advancement to a phase 3 clinical trial.
In March 2014, the Company and Biogen amended the Biogen Agreement (the “Biogen Amendment”). Pursuant to the Biogen Amendment, Biogen agreed to the termination of its rights and obligations under the Biogen Agreement, including Biogen’s option to (i) obtain a co-exclusive (with the Company) worldwide license to develop and manufacture ErbB3 targeted antibodies and (ii) obtain exclusive commercialization rights to ErbB3 products in countries in the world other than North America. As a result, the Company has worldwide rights to AV-203. Pursuant to the Biogen Amendment, the Company was obligated to use reasonable efforts to seek a collaboration partner for the purpose of funding further development and commercialization of ErbB3 targeted antibodies. The Company is also obligated to pay Biogen a percentage of milestone payments received by the Company from future partnerships after March 28, 2016 and single digit royalty payments on net sales related to the sale of ErbB3 products, if any, up to a cumulative maximum amount of $50.0 million.
In March 2016, the Company entered into a collaboration and license agreement for AV-203 with CANbridge, which satisfied its obligation to seek a collaboration partner for the purpose of funding further development and commercialization of ErbB3 targeted antibodies. The $2.0 million development and regulatory milestone the Company earned in August 2018 in connection with CANbridge’s regulatory approval from the NMPA of an IND application for a clinical study of AV-203 in ESCC was subject to this sublicense fee, or $0.7 million, which was paid to Biogen in October 2018. See “-CANbridge” within this Note 4 for a further description of that arrangement.
In-License Agreements
St. Vincent’s
In July 2012, the Company entered into a license agreement with St. Vincent’s, under which the Company obtained an exclusive, worldwide sublicensable right to research, develop, manufacture and commercialize products for human therapeutic, preventative and palliative applications that benefit from inhibition or decreased expression or activity of GDF15, which is also referred to as MIC-1 (the “St. Vincent’s Agreement”). Under the St. Vincent’s Agreement, St. Vincent’s also granted the Company non-exclusive rights for certain related diagnostic products and research tools.
In order to sublicense certain necessary intellectual property rights to Novartis in August 2015, the Company amended and restated the St. Vincent’s Agreement and made an additional upfront payment to St. Vincent’s of $1.5 million. As of December 31, 2020, the Company is required to make future milestone payments, up to an aggregate total of $14.4 million, upon the earlier of the achievement of specified development and regulatory milestones or a specified date for the first indication, and upon the achievement of specified development and regulatory milestones for the second and third indications, for licensed therapeutic products, some of which payments may be increased by a mid to high double digit percentage rate for milestone payments made after the Company grants any sublicense, depending on the sublicensed territory. In February 2017, Novartis agreed to pay $1.8 million out of its then future payment obligations to the Company under the Novartis Agreement. These funds were used to satisfy a $1.8 million time-based milestone obligation that the Company owed to St. Vincent’s in March 2017. The Company used the $2.3 million payment received from Novartis in January 2019, pursuant to the AV-380 Transfer Agreement, to cover a $2.3 million time-based milestone obligation that became due to St. Vincent’s in January 2019. The Company will also be required to pay St. Vincent’s tiered royalty payments equal to a low-single-digit percentage of any net sales it or its sublicensees make from licensed therapeutic products. The royalty rate escalates within the low-single-digit range during each calendar year based on increasing licensed therapeutic product sales during such calendar year.
Kyowa Kirin Co. (KKC)
In December 2006, the Company entered into the KKC Agreement with KKC, under which it obtained an exclusive, sublicensable license to develop, manufacture and commercialize tivozanib in all territories in the world except for Asia and the Middle East, where KKC retained the rights to tivozanib. Under the KKC Agreement, the Company obtained exclusive rights to tivozanib in its territory under certain KKC patents, patent applications and know-how for the diagnosis, prevention and treatment of all human diseases and conditions (the “Field”). On August 1, 2019, the Company entered into an amendment to the KKC Agreement pursuant to which KKC repurchased the non-oncology rights to tivozanib in the Company’s territory, excluding the rights the Company has sublicensed to EUSA under the EUSA Agreement. The Company has upfront, milestone and royalty payment obligations to KKC under the KKC Agreement related to the amended Field for oncology development by the Company, and following the amendment, KKC also has upfront, milestone and royalty payment obligations to the Company related to non-oncology development by KKC in the Company’s territory. Pursuant to the amendment to the KKC Agreement, KKC was required to make a non-refundable upfront payment to the Company in the amount of $25.0 million that was received in September 2019 and KKC waived a one-time milestone payment of $18.0 million otherwise payable by the Company upon obtaining marketing approval for tivozanib in the United States.
KKC Agreement
Upon entering into the KKC Agreement, the Company made an upfront payment in the amount of $5.0 million. In March 2010, the Company made a milestone payment to KKC in the amount of $10.0 million in connection with the dosing of the first patient in the Company’s TIVO-1 trial. In December 2012, the Company made a $12.0 million milestone payment to KKC in connection with the acceptance by the FDA of the Company’s 2012 NDA filing for tivozanib. Each milestone under the KKC Agreement is a one-time only payment obligation, accordingly, the Company did not owe KKC another milestone payment in connection with the dosing of the first patient in the Company’s TIVO-3 trial, and would not owe a milestone payment to KKC when the Company filed its then anticipated NDA with the FDA, which was subsequently filed on March 31, 2020. The Company has no remaining development and commercialization milestone payments due to KKC under the KKC Agreement.
If the Company sublicenses any of its rights to tivozanib to a third-party, as it has done with EUSA, the sublicense defines the payment obligations of the sublicensee, which may vary from the milestone and royalty payment obligations under the KKC Agreement relating to rights the Company retains. The Company is required to pay KKC a fixed 30% of amounts the Company receives from its sublicensees, including upfront license fees, milestone payments and royalties, but excluding amounts the Company receives in respect of research and development reimbursement payments or equity investments, subject to certain limitations. Certain research and development reimbursement payments by EUSA, including the $2.5 million upfront payment in December 2015, the $4.0 million payment in September 2017 upon the receipt of marketing authorization from the European Commission for FOTIVDA (tivozanib) and the $2.0 million payment upon EUSA’s election in September 2017 to opt-in to co-develop the TiNivo trial, were not subject to sublicense revenue payments to KKC. In addition, if EUSA elects to opt-in to the TIVO-3 trial, the additional research and development reimbursement payment from EUSA of 50% of the total trial costs, up to $20.0 million, would also not be subject to a sublicense revenue payment to KKC, subject to certain limitations. The Company would, however, owe KKC 30% of other, non-research and development payments the Company may receive from EUSA pursuant to the EUSA Agreement, including reimbursement approvals for RCC in up to five specified EU countries, marketing approvals for RCC in three specified non-EU licensed territories, EU marketing approval filings and corresponding marketing approvals by the EMA for up to three additional indications beyond RCC, and sales-based milestones and royalties. The $2.0 million milestone payments the Company earned in each of February 2018, November 2018 and February 2019 upon EUSA’s reimbursement approvals for FOTIVDA as a first-line treatment for RCC in the United Kingdom, Germany and Spain, respectively, were subject to the 30% KKC sublicense fee, or $0.6 million each. The sublicense fees for EUSA’s reimbursement approvals in the United Kingdom, Germany and Spain were paid in April 2018, January 2019 and June 2019, respectively.
The Company is also required to pay tiered royalty payments on net sales it makes of tivozanib in its North American territory, which range from the low to mid-teens as a percentage of net sales. The royalty rate escalates within this range based on increasing tivozanib sales. The Company’s royalty payment obligations in a particular country in its territory begin on the date of the first commercial sale of tivozanib in that country, and end on the later of 12 years after the date of first commercial sale of tivozanib in that country or the date of the last to expire of the patents covering tivozanib that have been issued in that country.
The Company and KKC each have access to and can benefit from the other party’s clinical data and regulatory filings with respect to tivozanib and biomarkers identified in the conduct of activities under the KKC Agreement, as related to the amended Field for oncology development. Under the KKC Agreement, the Company is obligated to use commercially reasonable efforts to develop and commercialize tivozanib in its territory.
The KKC Agreement will remain in effect until the expiration of all of the Company’s royalty and sublicense revenue obligations, determined on a product-by-product and country-by-country basis, unless terminated earlier. If the Company fails to meet its obligations under the KKC Agreement and is unable to cure such failure within specified time periods, KKC can terminate the KKC Agreement, resulting in a loss of our rights to tivozanib and an obligation to assign or license to KKC any intellectual property or other rights the Company may have in tivozanib, including its regulatory filings, regulatory approvals, patents and trademarks for tivozanib.
August 1, 2019 Amendment to the KKC Agreement
In addition to the non-refundable upfront payment to the Company pursuant to the amendment to the KKC Agreement in the amount of $25.0 million, KKC is also required to make milestone payments to the Company of up to an aggregate of $390.7 million upon the successful achievement of certain development and sales milestones of tivozanib in non-oncology indications. On August 2, 2020, KKC’s IND application for a non-oncology formulation of tivozanib was accepted by the Pharmaceuticals and Medical Devices Agency of Japan. Accordingly, the Company earned a $2.8 million development milestone payment upon acceptance of the IND pursuant to the KKC Agreement that was received in August 2020. In addition, KKC is required to make tiered royalty payments to the Company on net sales of tivozanib in non-oncology indications in the Company’s territory, which range from high single digit to low double digits as a percentage of net sales. The royalty rate escalates within this range based on increasing tivozanib sales, subject to certain adjustments. KKC’s royalty payment obligations in a particular country in the Company’s territory begin on the date of the first commercial sale of tivozanib in that country, and end on the later of the expiration date of the last valid claim of a patent application or patent owned by KKC covering tivozanib or 10 years after the date of first commercial sale of tivozanib in non-oncology indications in that country.
If KKC sublicenses any of its rights to tivozanib to a third-party, KKC is required to pay the Company a percentage of amounts received from the respective sublicensees related to the Company’s territory, including upfront license fees, milestone payments and royalties, but excluding amounts received in respect of research and development reimbursement payments or equity investments, subject to certain limitations.
Accounting Analysis Under the August 1, 2019 Amendment to the KKC Agreement
Following the repurchase of non-oncology rights by KKC, the amended KKC Agreement is accounted for as two distinct agreements: (i) the KKC Agreement by which the Company has upfront, milestone and royalty payment obligations to KKC related to the Company’s oncology development of tivozanib in the amended Field for the Company’s territory that continues to be accounted for under ASC 730, Research and Development, and (ii) the amended KKC Agreement by which KKC has upfront, milestone and royalty payment obligations to the Company related to its non-oncology development of tivozanib for the Company’s territory that will be accounted for under ASC 606.
The Company evaluated the amendment to the KKC Agreement under ASC 606 and determined that KKC met the definition of a customer as the Company considers the licensing or sale of intellectual property rights to be an output of the Company’s ordinary activities and is central to the operations of the Company. The Company determined that the amendment to the KKC Agreement contained a single performance obligation related to the Company’s transfer of rights to non-oncology intellectual property and know-how to KKC, excluding the rights the Company has sublicensed to EUSA under the EUSA Agreement. In addition, the Company determined that the $25.0 million non-refundable upfront payment received from KKC in September 2019 constituted the amount of the consideration to be included in the transaction price and attributed this amount to the Company’s single performance obligation. The Company satisfied this performance obligation during the third quarter of 2019. Accordingly, the Company recognized the $25.0 million in consideration as revenue in the third quarter of 2019. The Company concluded the performance obligation was satisfied at a point in time because any know-how or clinical data generated from the Company’s ongoing oncology development of tivozanib would not benefit KKC’s non-oncology development of tivozanib.
In the third quarter of 2020, the Company increased the transaction price to $27.8 million to include the $2.8 million development milestone that was earned in August 2020 upon the acceptance of KKC’s IND application for a non-oncology formulation of tivozanib by the Pharmaceuticals and Medical Devices Agency of Japan. Accordingly, the Company recognized the $2.8 million in consideration as revenue in the third quarter of 2020 as the Company did not have any ongoing performance obligations under the amendment to the KKC Agreement.
None of KKC’s remaining development and regulatory milestones to the Company related to its non-oncology development of tivozanib for the Company’s territory were included in the transaction price, as these milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered multiple factors: (i) regulatory approvals are outside of the control of KKC, (ii) certain development and regulatory milestones are contingent upon the success of future clinical trials, if any, which is out of the control of KKC, and (iii) efforts by KKC. Any consideration related to development and regulatory milestones owed by KKC to the Company will be recognized when the corresponding milestones are no longer constrained as the Company does not have any ongoing performance obligations. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the intellectual property transferred to KKC and therefore are recognized at the later of when the performance obligation is satisfied or the related sales occur.
(5) Other Accrued Liabilities
Other accrued expenses consisted of the following:
(6) Hercules Loan Facility
On May 28, 2010, the Company entered into a loan and security agreement with Hercules Capital Inc. and certain of its affiliates (the “First Loan Agreement”). The First Loan Agreement was subsequently amended in March 2012, September 2014 and May 2016 (the “2016 Amendment”). Amounts borrowed under the amendment in 2012 were repaid in full in 2015.
In December 2017, the Company entered into an amended and restated loan and security agreement (the “2017 Loan Agreement”) to refinance the Company’s prior loan facility with Hercules and to retire the $20.0 million in secured debt then-outstanding under the First Loan Agreement. Per the terms of the 2017 Loan Agreement, the $20.0 million loan facility had a 42-month maturity from closing, no financial covenants, a lower interest rate and an interest-only period of no less than 12 months, which could be extended up to a maximum of 24 months, assuming the achievement of specified milestones relating to the development of tivozanib.
Per the 2017 Loan Agreement, the loan maturity date was revised from December 2019 to July 2021. The Company was not required to make principal payments until February 1, 2019, at which time the Company would have been required to make 29 equal monthly payments of principal and interest, in the approximate amount of $0.8 million, through July 2021. An additional end-of-term payment of approximately $0.8 million is due on July 1, 2021. The financial covenant per the 2016 Amendment to maintain an unrestricted cash position greater than or equal to $10.0 million through the date of completion of the Company’s TIVO-3 trial with results that are satisfactory to Hercules was removed. Per the 2017 Loan Agreement, the interest rate decreased from 11.9% to 9.45%. The Company incurred approximately $0.1 million in loan issuance costs paid directly to Hercules, which was accounted for as a loan discount. The 2017 Loan Agreement was accounted for as a loan modification in accordance with ASC 470-50, Modifications and extinguishments (“ASC 470-50”).
The Company must make interest payments on the principal balance of the loan each month it remains outstanding. Per annum interest was payable on the loan balance at the greater of 9.45% and an amount equal to 9.45% plus the prime rate minus 4.75%, as determined daily, provided however, that the per annum interest rate shall not exceed 15.0%. In 2018, the interest rate increased to 9.70%, 9.95% and 10.20% in June 2018, September 2018 and December 2018, respectively, due to corresponding increases in the prime rate. In 2019, the interest rate decreased to 9.95%, 9.70% and 9.45% in August 2019, September 2019 and October 2019, respectively, due to corresponding decreases in the prime rate. The interest rate as of August 1, 2020 was 9.45%.
The interest-only period could be extended by two 6-month deferrals of principal payments upon the achievement of specified milestones relating to the development of tivozanib, subject to confirmation by Hercules at its reasonable discretion.
In November 2018, Hercules granted the first 6-month extension of the interest-only period. Accordingly, this resulted in the deferment of principal payments until August 1, 2019, at which time the Company resumed making 24 equal monthly payments of principal and interest, in the approximate amount of $0.9 million through July 2021. The outstanding principal balance as of August 1, 2020 was approximately $9.7 million.
On August 7, 2020, the Company entered into a first amendment to the 2017 Loan Agreement (the “2020 Loan Amendment”) to provide the Company, subject to certain terms and conditions, with an additional term loan in an aggregate principal amount of up to $35.0 million (the “2020 Loan Facility”) in up to four tranches to be used to refinance outstanding loans under the 2017 Loan Agreement, and for general working capital purposes.
The Company received the initial $15.0 million of the 2020 Loan Facility upon the closing of the 2020 Loan Amendment, of which approximately $9.7 million was used to retire the then outstanding balance under the 2017 Loan Agreement and of which approximately $5.3 million was new loan funding which was used for general working capital purposes.
The remainder of the loan amount will be available to the Company, at its option, subject to certain terms and conditions, including upon the achievement of the following milestones: (i) the second tranche of $10.0 million (“Tranche Two”) would be available through June 30, 2021 upon achieving FDA approval of FOTIVDA (“Performance Milestone I”), (ii) the third tranche of $5.0 million (“Tranche Three”) would be available from July 1, 2021 through January 31, 2022 assuming the Company achieves $20.0 million in net product revenues from sales of FOTIVDA, by no later than December 31, 2021 (“Performance Milestone II”), and (iii) the fourth tranche of $5.0 million would be available through June 30, 2022 contingent upon the achievement of both Performance Milestone I and Performance Milestone II, and subject to the consent of Hercules.
The 2020 Loan Amendment also amends the 2017 Loan Agreement by: (i) extending maturity until September 1, 2023, which is extendable to September 1, 2024 at the Company’s option assuming the Tranche Three funding has occurred, (ii) providing for an interest-only period beginning on the closing date of 2020 Loan Amendment and ending on September 30, 2021, which period may be extended through September 30, 2022 provided the Company achieved Performance Milestone I and further extendable through March 31, 2023 after the Tranche Three funding has occurred, if at all, and (iii) revising the per annum interest rate to the greater of (x) 9.65% and (y) an amount equal to 9.65% plus the prime rate as reported in the Wall Street Journal minus 3.25% as determined daily, provided however, that the per annum interest rate shall not exceed 15%. Principal payments are scheduled to commence on October 1, 2021, at the earliest, as described above. The interest rate as of December 31, 2020 was 9.65%.
Per the terms of the 2020 Loan Facility, principal will be repaid in equal monthly installments following the conclusion of the interest-only period. The Company may prepay all of the outstanding principal and accrued interest under the 2020 Loan Facility, subject to a prepayment charge up to 3.0% in the first year following the closing of the 2020 Loan Amendment, decreasing to 2.0% in year two and 1.0% in year three. The Company is obligated to make an end-of-term payment of 6.95% of the aggregate amount of loan funding received under the 2020 Loan Facility on the earlier of the maturity of the loan or the date on which the Company prepays any outstanding loan balance. The approximate $0.8 million end-of-term payment under the 2017 Loan Agreement continues to be due on July 1, 2021. In connection with the 2020 Loan Amendment, the Company incurred approximately $0.3 million in loan issuance costs paid directly to Hercules, which are accounted for as a loan discount. The 2020 Loan Amendment was accounted for as a loan modification in accordance with ASC 470-50.
The unamortized discount to be recognized over the remainder of the loan period was approximately $1.2 million and $0.4 million as of December 31, 2020 and December 31, 2019, respectively.
The 2020 Loan Facility includes various financial and operating covenants, including that the Company maintain an unrestricted cash position of at least $10.0 million through the date the Third Tranche funding is received and at least $5.0 million thereafter through the maturity of the loan. The Company is also required to achieve greater than or equal to 75% of its forecasted net product revenues from its sales of tivozanib over a 6-month trailing period, as defined and measured on a monthly basis, effective upon the Third Tranche funding and continuing through the maturity of the loan. The net product revenue covenant will not apply at any time the Third Tranche funding has not been provided nor such advance has been prepaid in full.
On February 1, 2021, the Company entered into the second amendment to the 2017 Loan Agreement (the “2021 Loan Amendment”), which increases the 2020 Loan Facility from up to $35.0 million to up to $45.0 million following FDA approval of FOTIVDA. The 2021 Loan Amendment makes certain changes to the 2020 Loan Amendment, including, among other things, (i) increasing Tranche Two funding upon achieving Performance Milestone I from $10.0 million to $20.0 million, thereby increasing the total amount of unfunded term loan commitments under the 2020 Loan Facility from $20.0 million to $30.0 million, (ii) increasing the amount of net product revenues from sales of FOTIVDA required to achieve Performance Milestone II from $20.0 million to $35.0 million and changing the deadline for achieving Performance Milestone II from December 31, 2021 to April 1, 2022 and (iii) increasing the amount of the financial covenant for the maintenance of an unrestricted cash position from at least $10.0 million to at least $15.0 million from the date the Tranche Two funding is received until the date the Tranche Three funding is received and at least $10.0 million thereafter through the maturity of the Loan Agreement.
On March 11, 2021, the Company completed the $20.0 million drawdown of Tranche Two funding under the 2021 Loan Amendment that was made available in connection with the achievement of Performance Milestone I upon FDA approval of FOTIVDA on March 10, 2021. The achievement of Performance Milestone I extended the interest-only period by twelve months from September 30, 2021 to September 30, 2022 and increased the amount of unrestricted cash required for the Company to satisfy the minimum financial covenant during the period between receiving Tranche Two funding and Tranche Three funding from $10.0 million to $15.0 million.
The 2020 Loan Facility is secured by substantially all of the Company’s assets, excluding intellectual property. The 2020 Loan Facility provides that certain events shall constitute a default by the Company, including failure by the Company to pay amounts under the 2020 Loan Amendment when due; breach or default in the performance of any covenant under the 2020 Loan Amendment by the Company, subject to certain cure periods; insolvency of the Company and certain other bankruptcy proceedings involving the Company; default by the Company of obligations involving indebtedness in excess of $500,000; and the occurrence of an event or circumstance that would have a material adverse effect upon the business of the Company. As of December 31, 2020, the Company was in compliance with all loan covenants, Hercules has not asserted any events of default and the Company does not believe that there has been a material adverse effect as defined in the 2020 Loan Amendment.
The Company has determined that the risk of subjective acceleration under the material adverse events clause is remote and therefore has classified the outstanding principal as a long-term liability based on the timing of scheduled principal payments.
Future minimum payments under the loans payable outstanding as of December 31, 2020 are as follows (amounts in thousands):
(7) Common Stock
As of December 31, 2020, the Company had 50,000,000 authorized shares of common stock, $0.001 par value, of which 26,882,696 shares were issued and outstanding.
Reverse Stock Split - February 2020
On February 13, 2020, the holders of a majority of the Company’s outstanding shares of common stock approved the reverse stock split and gave the Company’s board of directors discretionary authority to select a ratio for the split ranging from 1-for-5 to 1-for-15. The Company’s board of directors approved the reverse stock split at a ratio of 1-for-10 on February 13, 2020. On February 19, 2020, the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-ten pursuant to a Certificate of Amendment to its Certificate of Incorporation filed with the Secretary of State of the State of Delaware. The reverse stock split was reflected on Nasdaq beginning with the opening of trading on February 20, 2020. The primary purpose of the reverse stock split was to enable the Company to regain compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq.
The reverse stock split affected all issued and outstanding shares of the Company’s common stock, as well as the number of authorized shares of the Company’s common stock and the number of shares of common stock available for issuance under the Company’s equity incentive plans. The reverse stock split reduced the number of shares of the Company’s issued and outstanding common stock from approximately 160.8 million to approximately 16.1 million. In addition, the reverse stock split effected a reduction in the number of shares of the Company’s common stock issuable upon the exercise of stock options and warrants outstanding immediately prior to the reverse stock split, with a proportional increase in the respective exercise prices. The reverse stock split proportionately reduced the number of authorized shares of the Company’s common stock from 500.0 million shares to 50.0 million shares. The reverse stock split did not change the par value of the Company’s common stock or the authorized number of shares of the Company’s preferred stock. All share and per share amounts give effect to the reverse stock split on a retroactive basis.
Public Offering - June 2020
On June 19, 2020, the Company completed an underwritten public offering of 9,725,000 shares of its common stock, including the partial exercise by the underwriters of their option to purchase an additional 1,225,000 shares, at the public offering price of $5.25 per share for gross proceeds of approximately $51.1 million. Three stockholders beneficially holding more than 5% of the Company’s voting securities, including an entity affiliated with New Enterprise Associates and two other stockholders, purchased an aggregate of 4,503,571 shares in this offering at the same public offering price per share as the other investors. At such time, entities affiliated with New Enterprise Associates (collectively) beneficially held more than 5% of the Company’s voting securities. The net offering proceeds to the Company were approximately $47.7 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.
Universal Shelf Registration Statement
On November 9, 2020, the Company filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission, which covers the offering, issuance and sale of up to $300.0 million of its common stock, preferred stock, debt securities, warrants and/or units (the “2020 Shelf”). The 2020 Shelf (File No. 333-249982) was declared effective by the SEC on November 18, 2020 and was filed to replace the Company’s then existing shelf registration statement, which was terminated. As of December 31, 2020, there was approximately $268.2 million available for future issuance of common stock, preferred stock, debt securities, warrants and/or units.
Public Offering - April 2019
In April 2019, the Company completed an underwritten public offering of 2,173,913 shares of its common stock and warrants to purchase an aggregate of 2,500,000 shares of its common stock (“the Offering Warrants”), including warrants to purchase an aggregate of 326,086 shares of its common stock sold pursuant to the underwriter’s partial exercise of its overallotment option, at the public offering price of $11.40 per share and $0.10 per warrant for gross proceeds of approximately $25.0 million. The Offering Warrants were immediately exercisable upon issuance at an exercise price of $12.50 per share, subject to adjustment in certain circumstances, and will expire two years from the date of issuance upon their scheduled expiration on April 8, 2021. Any Offering Warrants that have not been exercised for cash prior to their expiration shall be automatically exercised via cashless exercise on the expiration date. The shares and warrants were issued separately and are separately transferable. An entity affiliated with New Enterprise Associates purchased 434,782 shares and warrants to purchase an aggregate of 434,782 shares in this offering at the same public offering price per share as the other investors. At such time, entities affiliated with New Enterprise Associates (collectively) beneficially held more than 5% of the Company’s voting securities. The net offering proceeds to the Company were approximately
$22.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. As of December 31, 2020, Offering Warrants to purchase 2,500,000 shares of the Company’s common stock were outstanding. The Company determined the shares of common stock and the Offering Warrants represented freestanding financial instruments. In addition, the Company conducted an assessment of the classification of the Offering Warrants and, based on their terms, concluded the Offering Warrants are equity-classified. Accordingly, the net offering proceeds of $22.8 million have been recorded within stockholders’ equity (deficit).
In March 2021, Offering Warrants exercisable for 247,391 shares of common stock had been exercised, for approximately $3.1 million in cash proceeds, and Offering Warrants exercisable for 2,252,609 shares of common stock were outstanding.
Sales Agreement with SVB Leerink
In February 2018, the Company entered into a sales agreement with SVB Leerink (the “SVB Leerink Sales Agreement”) pursuant to which the Company may issue and sell shares of its common stock from time to time up to an aggregate amount of $50.0 million, at its option, through SVB Leerink as its sales agent, with any sales of common stock through SVB Leerink being made by any method that is deemed an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), or in other transactions pursuant to an effective shelf registration statement on Form S-3. The Company agreed to pay SVB Leerink a commission of up to 3% of the gross proceeds of any sales of common stock pursuant to the SVB Leerink Sales Agreement. In the fourth quarter of 2018, the Company sold 470,777 shares pursuant to the SVB Leerink Sales Agreement, resulting in approximately $10.3 million in proceeds, net of commissions. In February 2019, the Company sold 1,251,555 shares pursuant to the SVB Leerink Sales Agreement, resulting in proceeds of approximately $7.5 million, net of commissions. In November 2020, the Company sold 1,070,175 shares pursuant to the SVB Leerink Sales Agreement, resulting in proceeds of approximately $5.9 million, As of December 31, 2020, approximately $25.7 million was available for issuance in connection with future stock sales pursuant to the SVB Leerink Sales Agreement.
Public Offering - August 2018
On August 21, 2018, the Company completed an underwritten public offering of 250,000 shares of its common stock at the public offering price of $22.60 per share for gross proceeds of approximately $5.7 million. Two greater than 5% stockholders, including an entity affiliated with New Enterprise Associates and another stockholder purchased approximately 200,000 shares in this offering at the same public offering price per share as the other investors. The net offering proceeds to the Company were approximately $5.1 million after deducting underwriting discounts and estimated offering expenses payable by the Company.
Settlement Warrants
On July 16, 2018, the Company issued and delivered 200,000 warrants to purchase shares of its common stock that the Company agreed to issue in connection with the settlement of the former 2013 class action lawsuit (the “Settlement Warrants”). The Settlement Warrants were exercisable for a one-year period after the date of issuance at an exercise price equal to $30.00 per share. All 200,000 Settlement Warrants expired on July 15, 2019 as none of the warrants had been exercised during the one-year exercise period.
Private Placement - May 2016
In May 2016, the Company entered into a securities purchase agreement with a select group of qualified institutional buyers, institutional accredited investors and accredited investors pursuant to which the Company sold 1,764,242 units, at a price of $9.65 per unit, for gross proceeds of approximately $17.0 million. Each unit consisted of one share of the Company’s common stock and a warrant to purchase one share of the Company’s common stock (the “PIPE Warrants”). The PIPE Warrants have an exercise price of $10.00 per share and are exercisable for a period of five years from the date of issuance until their scheduled expiration on May 16, 2021. Certain of the Company’s directors and executive officers purchased an aggregate of 54,402 units in this offering at the same price as the other investors. The net offering proceeds to the Company were approximately $15.4 million after deducting placement agent fees and other offering expenses payable by the Company. As of December 31, 2020, PIPE Warrants exercisable for 80,309 shares of common stock had been exercised, for approximately $0.8 million in cash proceeds, and PIPE Warrants exercisable for 1,683,933 shares of common stock were outstanding.
(8) Stock-based Compensation
Stock Incentive Plan
The Company previously maintained the 2010 Stock Incentive Plan (the “2010 Plan”) for employees, consultants, advisors, and directors, as amended in March 2013, June 2014 and June 2017.
In April 2019, the Company’s board of directors adopted the 2019 Equity Incentive Plan (the “2019 Plan”) and on June 12, 2019 the stockholders approved the 2019 Plan at the Annual Meeting of Stockholders. The 2019 Plan provides similar terms as the 2010 Plan, including: (i) a provision for the grant of equity awards such as stock options and restricted stock, (ii) that the exercise price of incentive stock options cannot be less than 100% of the fair market value of the common stock on the date of the grant for participants who own less than 10% of the total combined voting power of stock of the Company and not less than 110% for participants who own more than 10% of the total combined voting power of the stock of the Company, (iii) that options and restricted stock granted under the 2019 Plan vest over periods as determined by the board of directors, which generally are equal to four years, and (iv) that options granted under the 2019 Plan expire over periods as determined by the board of directors, which generally are ten years from the date of grant. In April 2020, the board of directors adopted an amendment to the 2019 Plan to increase the total number of shares reserved under the Plan by 1,300,000 shares, among other things. The amendment was approved by stockholders at the Annual Meeting of Stockholders held on June 10, 2020.
Awards may be made under the 2019 Plan for up to the sum of (i) 2,300,000 shares of common stock and (ii) such additional number of shares of common stock (up to 1,068,901 shares) as is equal to (x) the number of shares of common stock reserved for issuance under the 2010 Plan that were available for grant under the 2010 Plan immediately prior to the date the 2019 Plan was approved by the Company’s stockholders and (y) the number of shares of common stock subject to awards outstanding under the 2010 Plan, which awards expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company pursuant to a contractual repurchase right. As of December 31, 2020, there were 1,563,282 shares of common stock available for future issuance under the 2019 Plan and no shares of common stock available for future issuance under the 2010 Plan.
The following table summarizes stock option activity during the year ended December 31, 2020:
The aggregate intrinsic value is based upon the Company’s closing stock price of $5.77 on December 31, 2020.
The fair value of stock options subject only to service or performance conditions that are granted to employees is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions noted in the following table:
The risk-free interest rate is determined based upon the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the options being valued. The Company does not expect to pay dividends in the foreseeable future.
Based upon these assumptions, the weighted-average grant date fair value of stock options granted was $4.54, $5.70 and $21.40 during the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, there was $4.9 million of total unrecognized stock-based compensation expense related to stock options granted to employees under the Plan. The expense is expected to be recognized over a weighted-average period of 2.8 years. The intrinsic value of options exercised was $1,000, $7,000 and $0.4 million in the years ended December 31, 2020, 2019 and 2018, respectively.
Employee Stock Purchase Plan
In February 2010, the board of directors adopted the 2010 Employee Stock Purchase Plan (the “ESPP”) pursuant to which the Company may sell up to an aggregate of 25,000 shares of Common Stock, as amended in March 2013. The ESPP allows eligible employees to purchase common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six-month period during the term of the ESPP. The Company has reserved 76,400 shares of common stock under the ESPP. As of December 31, 2020, there were 23,859 shares available for future issuance under the ESPP.
Pursuant to the ESPP, the Company sold a total of 5,971 shares of common stock during the year ended December 31, 2020 at purchases prices of $6.46 and $4.57, which represents 85% of the closing price of the Company’s common stock on December 1, 2019 and November 30, 2020, respectively. Pursuant to the ESPP, the Company sold a total of 897 shares of common stock during the year ended December 31, 2018 at purchases prices of $18.80 and $17.60, which represents 85% of the closing price of the Company’s common stock on May 31, 2018 and November 30, 2018, respectively. The Company did not sell any shares of common stock during the year ended December 31, 2019. The total stock-based compensation expense recorded as a result of the ESPP was approximately $25,000, $2,000 and $8,000 during the years ended December 31, 2020, 2019 and 2018, respectively.
(9) Commitments and Contingencies
Operating Leases
On March 5, 2020, the Company entered into the Winter Street Sublease to relocate the Company’s corporate headquarters previously located at One Broadway in Cambridge, Massachusetts. Under the terms of the Winter Street Sublease, the Company leases 10,158 square feet of office space for $47.00 per square foot, or approximately $0.5 million per year in base rent subject to certain operating expenses, taxes and annual base rent increases of approximately 3%. Previously, the Company leased office space under a month-to-month lease. Rent expense under the operating leases amounted to $0.6 million, $0.8 million and $0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Manufacturing Commitments
The Company has entered into a contract with a clinical manufacturing organization for the manufacture of clinical drug supply for tivozanib and commercial drug supply for FOTIVDA in the United States, which includes minimum annual purchase requirements, in the approximate amount of $1.4 million for the next few years. In addition, the Company has entered into contracts with another clinical manufacturing organization for the manufacture of clinical drug supply for ficlatuzumab and AV-380, for which we have manufacturing commitments in 2021, in the aggregate amount of approximately $10.3 million.
Employment Agreements
Certain key executives are covered by severance and change in control agreements. Under these agreements, if the executive’s employment is terminated without cause or if the executive terminates his employment for good reason, such executive will be entitled to receive severance equal to his base salary, benefits and prorated bonuses for a period of time equal to either 12 months or 18 months, depending on the terms of such executive’s individual agreement. In addition, in December 2007, the Company approved a key employee change in control severance benefits plan, which was amended in November 2009, and which provides for severance and other benefits under certain qualifying termination events upon a change in control for a period of time ranging from 6 months to 18 months, depending upon the position of the key employee.
(10) Income Taxes
The Company accounts for income taxes under the provisions of ASC 740. The Company recorded no tax provision for each of the years ended December 31, 2020 and 2019. For the year ended December 31, 2020, the Company did not have any federal, state, or foreign income tax expense as it generated taxable losses in all filing jurisdictions.
A reconciliation of the expected income tax benefit computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2020, 2019 and 2018:
With limited exceptions, the Company has incurred net operating losses from inception. At December 31, 2020, the Company had domestic federal, state, and United Kingdom (UK) net operating loss carryforwards of approximately $565.8 million, $420.9 million, and $6.0 million respectively, available to reduce future taxable income. The federal net operating loss carryforwards expire beginning in 2022 and continue through 2037 and the state loss carryforwards begin to expire in 2030 and continue through 2040. The Company’s federal net operating losses include $63.2 million, which do not expire. The foreign net operating loss carryforwards in the UK do not expire. The Company also had federal and state research and development tax credit carryforwards of approximately $11.8 million and $4.3 million, respectively, available to reduce future tax liabilities and which expire at various dates. The federal credits expire beginning in 2023 through 2040 and the state credits expire beginning in 2021 through 2035. The net operating loss and research and development carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.
The Company’s net deferred tax assets as of December 31, 2020 and 2019 are as follows (in thousands):
A full valuation allowance has been recorded in the accompanying consolidated financial statements to offset these deferred tax assets because the future realizability of such assets is uncertain. This determination is based primarily on the Company’s historical and expected future losses. The valuation allowance increased by $10.9 million and $27 thousand during the years ended December 31, 2020 and 2019, respectively, which was primarily due to the generation of net operating losses and tax credits.
The Company applies the provisions of ASC 740, Income Taxes, for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Unrecognized tax benefits represent tax positions for which reserves have been established. A full valuation allowance has been provided against the Company’s deferred tax assets, so that the effect of the unrecognized tax benefits is to reduce the gross amount of the deferred tax asset and the corresponding valuation allowance. Since the Company has incurred net operating losses since inception, it has never been subject to a revenue agent review. The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years ended 2017 through 2020. Carryforward tax attributes generated in years past may still be adjusted upon future examination if they have or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years.
Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public
groups in the stock of a corporation by more than 50% over a three-year period. The Company has not recently conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the last study was completed due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since the last study was completed, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties have been recognized by the Company to date.
The Company anticipates that the amount of unrecognized tax benefits recorded will not change in the next twelve months.
The following is a reconciliation of the Company’s gross uncertain tax positions at December 31, 2020, 2019 and 2018:
(11) Employee Benefit Plan
In 2002, the Company established the AVEO Pharmaceuticals, Inc. 401(k) Plan (the “401(k) Plan”) for its employees, which is designed to be qualified under Section 401(k) of the Code. Eligible employees are permitted to contribute to the 401(k) Plan within statutory and 401(k) Plan limits. The Company makes matching contributions of 50% of the first 5% of employee contributions. The Company made matching contributions of $0.1 million for each of the years ended December 31, 2020, 2019 and 2018.
(12) Quarterly Results (Unaudited)
(13) Legal Proceedings
As of the date of filing this Annual Report on Form 10-K, there are no outstanding legal proceedings against the Company or its current officers or directors.
On July 24, 2020, the District Court for the District of Massachusetts dismissed a purported class action filed against the Company in 2019. This purported class action lawsuit (the “2019 Class Action”) was filed against the Company and certain of its present and former officers, Michael Bailey, Matthew Dallas, and Keith Ehrlich, in the Southern District of New York for the District of New York, captioned David Hackel v. AVEO Pharmaceuticals, Inc., et al, No. 1:19-cv-01722-AT. On April 12, 2019, the court granted the defendants’ motion to transfer the action to the District of Massachusetts (Case No. 1:19-cv-10783-JCB). On May 6, 2019, the court appointed Andrej Hornak as lead plaintiff and approved Pomerantz LLP as lead counsel and Andrews DeValerio LLP as liaison counsel. On July 24, 2019, the plaintiffs filed an amended complaint naming Michael Needle as an additional defendant. The amended complaint purported to be brought on behalf of shareholders who purchased the Company’s common stock between May 4, 2017 through January 31, 2019. It generally alleged that the Company and its officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by failing to disclose and/or making allegedly false and/or misleading statements about the estimated dates by which the Company would report the topline results from the TIVO-3 trial, the preliminary overall survival results from the TIVO-3 trial, the sufficiency of the overall survival data from the TIVO-3 trial, the timing of the NDA submission, and the risk of FDA approval. The complaint sought unspecified damages, interest, attorneys’ fees, and other costs. On September 27, 2019, the defendants filed a motion to dismiss the amended complaint. On July 24, 2020, the District Court granted the Company’s motion to dismiss. The time for appeal expired in August 2020 without appeal
In connection with the filing of the 2019 Class Action, two derivative lawsuits were filed on July 8, 2019 and July 10, 2019 against the Company, certain of its present and former officers and its directors in the Suffolk Superior Court, Commonwealth of Massachusetts, captioned Stephen Favre v. Michael P. Bailey, et al. 19-2169-BLS2 and Jianbin Yu v. Michael P. Bailey, et al. 19-2188-BLS2, respectively. The complaints generally alleged breach of fiduciary duty, unjust enrichment, and waste of corporate assets due to the 2019 Class Action and the actions alleged therein. On July 26, 2019, the court granted the parties’ joint motion to consolidate the cases and stay the consolidated matter pending the dismissal of, or filing of an answer to, the complaint in the 2019 Class Action. After the 2019 Class Action was dismissed and the time for appeal had expired, the parties’ filed a joint stipulation to voluntarily dismiss the derivative lawsuit without prejudice. On December 8, 2021, the court entered an order dismissing the derivative action.
In June 2018, the Company settled a consolidated class action lawsuit (the “2013 Class Action”), In re AVEO Pharmaceuticals, Inc. Securities Litigation et al., No. 1:13-cv-11157-DJC, that had been filed in 2013 against the Company and certain of its former officers (Tuan Ha-Ngoc, David N. Johnston, William Slichenmyer, and Ronald DePinho) in the United States District Court for the District of Massachusetts (the “District Court”). The 2013 Class Action had been dismissed without prejudice in March 2015, and the lead plaintiffs then filed a second amended complaint bringing similar allegations, but which no longer named Mr. DePinho as a defendant. The Company moved to dismiss again, and the District Court ruled in the Company’s favor and dismissed the second amended complaint with prejudice in November 2015. The lead plaintiffs appealed the District Court’s decision and also filed a motion to vacate and reconsider the District Court’s judgment. In January 2017, the District Court granted the plaintiffs’ motion to vacate the dismissal and judgment. In February 2017, the plaintiffs filed a third amended complaint, on behalf of stockholders who purchased common stock between May 16, 2012 and May 1, 2013 (the “2013 Class”) alleging claims similar to those alleged in the prior complaints, namely that the Company and certain of the Company’s former officers and directors violated Sections 10(b) and/or 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the phase 3 trial design and results for the Company’s TIVO-1 clinical trial in an effort to lead investors to believe that the drug would receive approval from the FDA. In July 2017, the District Court entered an order referring the case to alternative dispute resolution. The parties mediated during the fall of 2017.
On December 26, 2017, the parties entered into a binding memorandum of understanding (the “MOU”) to settle the 2013 Class Action. Under the terms of the MOU, the Company agreed to cause certain of the Company’s and the individual defendants’ insurance carriers to provide the 2013 Class with a cash payment of $15.0 million, which included the cash amount of any attorneys’ fees or litigation expenses that the District Court may award. Additionally, the Company agreed to issue to the 2013 Class the Settlement Warrants, for the purchase of 0.2 million shares of the Company’s common stock, which, subject to certain conditions, are exercisable from the date of issue until the expiration of a one-year period after the date of issue at an exercise price of $3.00 per share, equal to the closing price on December 22, 2017, the trading day prior to the execution of the MOU. On January 29, 2018, the parties entered into a definitive Stipulation of Settlement (the “Stipulation”), which was filed with the District Court on February 2, 2018. On February 8, 2018, the District Court issued an order preliminarily approving the terms of the Stipulation. In February 2018, the insurance carriers funded the settlement escrow account for the $15.0 million cash settlement. On May 30, 2018, the District Court held the final approval hearing and approved the settlement and the plaintiffs’ request for attorneys’ fees and expenses, subject to the final judgment. Upon the conclusion of a standard 30-day appeal period, the effective date was deemed to be June 29, 2018. On July 16, 2018, the Company issued and delivered the Settlement Warrants in accordance with the Stipulation and filed a corresponding shelf registration statement to register the shares of common stock underlying the Settlement Warrants which was declared effective by the SEC on July 25, 2018. All 0.2 million Settlement Warrants expired on July 15, 2019 as none of the warrants had been exercised during the one-year exercise period.
The Company evaluates developments in legal proceedings on a quarterly basis. The Company records an accrual for loss contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. In December 2017, upon entering into the MOU, the Company’s liability related to this settlement became estimable and probable. Accordingly, the Company recorded an estimated $17.1 million contingent liability, including $15.0 million for the cash portion of the settlement with a corresponding insurance recovery for the 100% portion to be paid directly by certain of the Company’s insurance carriers, and an approximate $2.1 million estimate for the warrant portion of the settlement with a corresponding non-cash charge to the Statement of Operations as a component of operating expenses. Pursuant to the Final Judgment, all claims against the Company were released upon the Effective Date. In addition, pursuant to the Stipulation, the Company has no interest in the settlement escrow account subsequent to the Effective Date. Accordingly, the Company reversed the $15.0 million cash portion of the settlement from both the contingent liability and the corresponding insurance recovery as of the Effective Date.
ITEM 9.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of December 31, 2020. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were (1) designed to ensure that material information relating to us is made known to our management including our principal executive officer and principal financial officer by others, particularly during the period in which this report was prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports the Company files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s report on the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) appears below.
Internal Control Over Financial Reporting
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on its assessment, management believes that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm has issued an attestation report of our internal control over financial reporting. This report appears below.
(b) Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of AVEO Pharmaceuticals, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited AVEO Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AVEO Pharmaceuticals, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated March 16, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 16, 2021
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, during the fourth quarter of 2020 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
Other Information
Bristol-Myers Squibb Company Clinical Trial Collaboration and Supply Agreement
On January 26, 2021, or the Effective Date, we entered into a Clinical Trial Collaboration and Supply Agreement, or the Agreement, with Bristol-Myers Squibb Company, or BMS. Under the terms of the Agreement, BMS agreed to supply OPDIVO® (nivolumab), its anti-PD-1 therapy, for a combined therapy clinical trial, which we refer to as the TiNivo-2 Trial, with FOTIVDA® (tivozanib) in patients with advanced relapsed or refractory renal cell carcinoma following prior immunotherapy exposure, which we agreed to conduct in accordance with a specified protocol. In connection with the TiNivo-2 Trial, BMS granted us a non-exclusive,
worldwide (other than within certain territories specified therein), non-transferable, royalty-free license under certain BMS patent rights, technology and regulatory documentation to use OPDIVO in research and development, solely to the extent necessary to conduct the TiNivo-2 Trial. Additionally, BMS granted us a non-exclusive, worldwide (other than within certain territories specified therein), non-transferable, irrevocable, royalty-free license under certain patent rights, technology and regulatory documentation, to seek regulatory approval of FOTIVDA for use in a combined therapy in the field, and, upon any such regulatory approval, to market and promote FOTIVDA solely for use in a combined therapy in the field in any manner that is consistent with the regulatory approval for FOTIVDA. Finally, BMS granted us a non-exclusive, worldwide (other than within certain territories specified therein), non-transferable, irrevocable, royalty-free license in the field under certain inventions and patent rights relating to OPDIVO for all purposes in the field except to research, develop, make, have made, use, sell offer for sale, export or import OPDIVO or any biosimilar version. We and BMS shall jointly own all inventions, or the Combined Therapy Inventions, and patent rights, or the Combined Therapy Patent Rights, relating to the combined therapy used in the TiNivo-2 Trial. We and BMS each may freely exploit the Combined Therapy Inventions and Combined Therapy Patent Rights, and the parties will share equally in costs relating to maintaining and prosecuting the Combined Therapy Patent Rights.
Each party will be responsible for expenses relating to the manufacturing and supply of its respective products. For expenses related to conduct of the TiNivo-2 Trial: (i) we will be responsible for all out-of-pocket costs associated with the performance of the TiNivo-2 Trial, and (ii) each party will be responsible for its own internal costs associated with the TiNivo-2 Trial. If the conduct of the TiNivo-2 Trial requires a third-party license payment, then the party required to make such payment shall be determined in accordance with the prior sentence.
The parties’ obligations under the Agreement are conditioned upon our execution of an agreement with a clinical research organization to conduct the TiNivo-2 Trial.
The term of the Agreement commenced on the Effective Date and will continue, unless earlier terminated in accordance with the Agreement, until completion of the TiNivo-2 Trial by all centers participating in the TiNivo-2 Trial, delivery of all study data, including all completed case report forms, all final analyses and all final clinical study reports contemplated by the TiNivo-2 Trial to both parties, and the completion of any statistical analyses and bioanalyses contemplated by the protocol or otherwise agreed to by the Parties to be conducted under the Agreement.
Either party may terminate the Agreement in the event of a material breach of the Agreement by the other party or in the event of a material safety issue present in the TiNivo-2 Trial.
This agreement became material to us on March 10, 2021 upon approval by the FDA of FOTIVDA in the United States for the treatment of adult patients with relapsed or refractory advanced RCC following two or more prior systemic therapies.
Drawdown of Tranche Two funding under the 2021 Loan Amendment
On February 1, 2021, the Company entered into the 2021 Loan Amendment, which increases the 2020 Loan Facility from up to $35.0 million to up to $45.0 million following FDA approval of FOTIVDA. The 2021 Loan Amendment makes certain changes to the 2020 Loan Amendment, including, among other things, increasing Tranche Two funding upon achieving Performance Milestone I from $10.0 million to $20.0 million and increasing the amount of the financial covenant for the maintenance of an unrestricted cash position from at least $10.0 million to at least $15.0 million from the date the Tranche Two funding is received until the date the Tranche Three funding is received and at least $10.0 million thereafter through the maturity of the Loan Agreement.
On March 11, 2021, we completed the $20.0 million drawdown of Tranche Two funding under the 2021 Loan Amendment that was made available in connection with the achievement of Performance Milestone I upon FDA approval of FOTIVDA on March 10, 2021. The achievement of Performance Milestone I increased the amount of unrestricted cash required for us to satisfy the minimum financial covenant during the period between receiving Tranche Two funding and Tranche Three funding from $10.0 million to $15.0 million and extended the interest-only period by twelve months from September 30, 2021 to September 30, 2022.
PART III
ITEM 10.
ITEM 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item 10 will be contained in the sections entitled “Election of Directors,” “Corporate Governance” and “Delinquent Section 16(a) Reports,” if applicable, appearing in the definitive proxy statement we will file in connection with our 2021 Annual Meeting of Stockholders and is incorporated by reference herein. The information required by this item relating to executive officers may be found in Part I, Item 1 of this Annual Report on Form 10-K under the heading “Business-Information about our Executive Officers” and is incorporated herein by reference.
We post our Code of Business Conduct and Ethics, which applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, in the “Corporate Governance” sub-section of the “Investors” section of our website at www.aveooncology.com. We intend to disclose on our website any amendments to, or waivers from, the Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.
ITEM 11.
ITEM 11.
Executive Compensation
The information required by this Item 11 will be contained in the sections entitled “Executive and Director Compensation,” “Executive and Director Compensation-Compensation Committee Interlocks and Insider Participation” and “Executive and Director Compensation-Compensation Committee Report” appearing in the definitive proxy statement we will file in connection with our 2021 Annual Meeting of Stockholders and is incorporated by reference herein.
ITEM 12.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be contained in the sections entitled “Ownership of Our Common Stock” and “Executive and Director Compensation-Equity Compensation Plan Information” appearing in the definitive proxy statement we will file in connection with our 2021 Annual Meeting of Stockholders and is incorporated by reference herein.
ITEM 13.
ITEM 13.
Certain Relationships and Related Person Transactions, and Director Independence
The information required by this Item 13 will be contained in the sections entitled “Certain Relationships and Related Person Transactions” appearing in the definitive proxy statement we will file in connection with our 2021 Annual Meeting of Stockholders and is incorporated by reference herein.
ITEM 14.
ITEM 14.
Principal Accountant Fees and Services
The information required by this Item 14 will be contained in the section entitled “Corporate Governance-Principal Accountant Fees and Services” appearing in the definitive proxy statement we will file in connection with our 2021 Annual Meeting of Stockholders and is incorporated by reference herein.
PART IV
ITEM 15.
ITEM 15.
Exhibits, Financial Statement Schedules
(a)
Documents filed as part of Form 10-K.
(1)
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
Schedules
Schedules have been omitted as all required information has been disclosed in the financial statements and related footnotes.
(3)
Exhibits
The Exhibits listed in the Exhibit Index are filed as a part of this Form 10-K.
ITEM 16.
Form 10-K Summary
None.
EXHIBIT INDEX
†
Confidential treatment has been granted as to certain portions, which portions have been omitted and separately filed with the U.S. Securities and Exchange Commission.
††
Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Michael Bailey
President, Chief Executive Officer and Director
March 16, 2021
Michael Bailey
Principal Executive Officer
/s/ ERICK LUCERA
Chief Financial Officer
March 16, 2021
Erick Lucera
Principal Financial and Accounting Officer
/s/ Kenneth M. Bate
Director
March 16, 2021
Kenneth M. Bate
/s/ CORINNE EPPERLY
Director
March 16, 2021
Corinne Epperly
/s/ ANTHONY B. EVNIN
Director
March 16, 2021
Anthony B. Evnin
/s/ GREGORY T. MAYES
Director
March 16, 2021
Gregory T. Mayes
/s/ SCARLETT SPRING
Director
March 16, 2021
Scarlett Spring
/s/ ROBERT C. YOUNG
Director
March 16, 2021
Robert C. Young