CENTESSA PHARMACEUTICALS PLC The following discussion and analysis should be read in conjunction with the consolidated and combined financial statements and related notes thereto of theCentessa Predecessor Group ("Predecessor") andCentessa Pharmaceuticals, plc ("Successor"), included elsewhere herein.
Overview
Centessa Pharmaceuticals plc ("Centessa" or "the Company") is clinical-stage pharmaceutical company with a R&D innovation engine that aims to discover, develop and ultimately deliver impactful medicines to patients. We seek to pursue the best assets in a capital efficient manner with objective and strategic decision-making to rapidly progress our programs through development. Through our approach, we strive to deliver medicines that can lead to significant impact for patients who are desperately in need of new treatments. Centessa was incorporated onOctober 26, 2020 as a limited liability company under the laws ofEngland andWales . In connection with the IPO, we re-registeredCentessa Pharmaceuticals Limited as an English public limited company and renamed it asCentessa Pharmaceuticals plc . InJanuary 2021 , we implemented our reimagined approach to research and development by completing the acquisition of eleven asset-centric private biotech companies (the Centessa Subsidiaries). Simultaneous with our acquisition of the Centessa Subsidiaries, we completed a$250.0 million Series A convertible preferred share financing that was comprised of$245.0 million in proceeds and the conversion of$5.0 million in convertible debt. InJune 2021 , we completed an initial public offering ("IPO") of our ordinary shares through the sale and issuance of 16,500,000 American Depositary Shares, ("ADSs"), at an initial price of$20.00 per ADS. Each ADS represents one ordinary share with a nominal value of £0.002 per ordinary share. Following the close of the IPO, the underwriters fully exercised their option to purchase an additional 2,475,000 ADSs at the initial public offering price of$20.00 per ADS. We received aggregate net proceeds of$344.1 million in connection with the IPO and subsequent exercise of the underwriters' options after deducting underwriting discounts, commissions and other offering expenses paid or to be paid. InOctober 2021 , we entered into a financing agreement with funds managed byOberland Capital and drew down an initial tranche of funding in the amount of$75.0 million . Since inception, Centessa has devoted substantially all of its resources to acquiring and developing product and technology rights, conducting research and development in its discovery and enabling stages, in its clinical and preclinical trials and raising capital. The Company has incurred recurring losses and negative cash flows from operations since inception and has funded operations primarily through the sale and issuance of its common stock and convertible preferred stock. The ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of current or future product candidates. The Company expects to continue to incur significant expenses and increasing operating losses for the foreseeable future in connection with ongoing development activities related to the portfolio of programs as Centessa Subsidiaries advance the preclinical and clinical development of product candidates; perform research activities as Centessa seeks to discover and develop additional programs and product candidates; carry out maintenance, expansion enforcement, defense, and protection of its intellectual property portfolio; and hires additional research and development, clinical and commercial personnel. Based on the current operating plan, the Company expects the cash and cash equivalents as ofDecember 31, 2021 of$595.1 million , to fund its operations into early 2024 without drawing on the remaining available tranches under theOberland Capital financing agreement. Covid-19 Update The Company is continuing to proactively monitor the ongoing COVID-19 global pandemic, to assess the potential impact on our business, and to seek to avoid any unnecessary potential delays to our programs. At this time, the clinical programs and research activities remain largely on track, with some modest delays in clinical trial enrollment rates and supply chain activities. While we are unable to fully quantify the potential effects of this pandemic on our future operations, including any further delays to our preclinical and clinical programs, management continues to evaluate and to seek to mitigate risks. The safety and well-being of employees, patients and partners remains our highest priority.
Components of Results of Operations
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Subsequent to the contribution of the Centessa Subsidiaries to Centessa, the financial activities of Centessa and all Centessa Subsidiaries are being presented on a consolidated basis and are denoted as "Successor" within management's discussion and analysis of the financial statements. The historical financial condition and results of operations for the periods presented may not be comparable due to the difference in basis of accounting for theCentessa Predecessor Group andCentessa Pharmaceuticals plc (previouslyCentessa Pharmaceuticals Limited ). Prior to the acquisition of the Centessa Subsidiaries onJanuary 29, 2021 , theCentessa Predecessor Group consisted of three of the acquired companies (Z Factor Limited ,LockBody Therapeutics Ltd andMorphogen-IX Limited ). Following the acquisition of the Centessa Subsidiaries,Centessa Pharmaceuticals plc consisted of 20 legal entities, inclusive of the parent company and all indirect subsidiaries.
Revenues
The Company has not generated any revenue. The ability to generate product revenue and to become profitable will depend upon the ability to successfully develop, obtain regulatory approval and commercialize any current and future product candidates. Because of the numerous risks and uncertainties associated with product development and regulatory approval, the Company (Successor) is unable to predict the amount or timing of product revenue.
Research and Development Expense
Research and development expenses consist primarily of costs incurred in connection with the discovery and development of the Company's clinical and preclinical programs, net of reimbursements. Research and development costs are expensed as incurred. These expenses include:
•expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;
•milestone payments pursuant to the license agreements;
•personnel expenses, including salaries, benefits and share-based compensation expense for employees engaged in research and development functions;
•costs of funding research performed by third parties, including pursuant to agreements with contract research organizations ("CROs"), as well as investigative sites and consultants that conduct preclinical studies and clinical trials;
•expenses incurred under agreements with CMOs, including manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical study and clinical trial materials;
•fees paid to consultants who assist with research and development activities;
•expenses related to regulatory activities, including filing fees paid to regulatory agencies; and
•allocated expenses for facility costs, including rent, utilities, depreciation and maintenance.
Research and development activities are central to the Company's business model. Product candidates in later stages of clinical development will generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. The Company expects research and development expenses to increase significantly over the next several years due to increases in personnel costs, including share-based compensation, increases in costs to conduct clinical trials for current product candidates and other clinical trials for future product candidates and prepare regulatory filings for any product candidates. The successful development of the Company's current or future product candidates is highly uncertain. At this time, the Company cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of current or future product candidates, or when, if ever, material net cash inflows may commence from product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including: •delays in regulators or institutional review boards authorizing the Company or its investigators to commence our clinical trials, or in the Company's ability to negotiate agreements with clinical trial sites or CROs;
•the ability to secure adequate supply of product candidates for trials;
•the number of clinical sites included in the trials;
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•the ability and the length of time required to enroll suitable patients;
•the number of patients that ultimately participate in the trials;
•the number of doses patients receive;
•any side effects associated with product candidates;
•the duration of patient follow-up;
•the results of clinical trials;
•significant and changing government regulations; and
•launching commercial sales of product candidates, if and when approved, whether alone or in collaboration with others.
The Company's expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals. The Company may never succeed in achieving regulatory approval for their product candidates. The Company (Successor) may obtain unexpected results from clinical trials and may elect to discontinue, delay or modify clinical trials of product candidates. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if theEuropean Medicines Agency ("EMA"), FDA or other comparable regulatory authorities were to require the Company to conduct clinical trials beyond those that are currently anticipated, or if the Company experiences significant delays in enrollment in any clinical trials, the Company could be required to expend significant additional financial resources and time on the completion of clinical development. Product commercialization will take several years, and the Company expects to spend a significant amount in development costs.
Research and Development Tax Incentives
The Company participates in research tax incentive programs that are granted to companies by theUnited Kingdom and certain European tax authorities in order to encourage them to conduct technical and scientific research. Expenditures that meet the required criteria are eligible to receive a tax credit that is reimbursed in cash. Estimates of the amount of the cash refund expected to be received are determined at each reporting period and recorded as reductions to research and development expenses. We may not be able to continue to claim the most beneficial payable research and development tax credits in the future if we cease to qualify as a small or medium enterprise, based on size criteria concerning employee headcount, turnover and gross assets.
General and Administrative Expense
General and administrative expense consists primarily of personnel expenses, including salaries and benefits for employees in certain executive functions and share-based compensation. General and administrative expense also includes facility costs, including rent, utilities, depreciation and maintenance, not otherwise included in research and development expense, as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services.
Change in Fair Value of Contingent Value Rights
Change in fair value of contingent value rights reflects the fair market value
adjustment to the contingent value rights ("CVR") liability related to the
achievement of a specified development milestone for Palladio's product
candidate. In connection with the acquisition of the Centessa Subsidiaries, the
Company (Successor) issued CVR to former shareholders and option holders of
Palladio. The CVR represents the contractual rights to receive shares valued, in
aggregate, at $39.7 million upon the first patient dosed in a Phase 3 pivotal
study of lixivaptan for the treatment of ADPKD in any of the United States ,
France , Germany , Italy , Spain , the United Kingdom and Japan (designated the
ACTION Study). The contingent CVR milestone will be settled through the issuance
of Centessa ordinary shares equal to the amount of the total CVR payable based
on the per share value of ordinary shares at the milestone date. The Company
(Successor) determined that the CVR should be accounted for as a liability in
accordance with ASC 480, Distinguishing Liabilities from Equity. Accordingly,
the fair value of the contingent consideration is assessed quarterly until
settlement.
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Change in Fair Value of Derivative Liability
Change in fair value of derivative liability reflects the change in the fair value of the embedded redemption feature contained in the Centessa Predecessor's convertible term notes. As a result of the convertible notes being convertible into a variable number of shares of the Centessa Predecessor's preferred stock, this embedded redemption feature was bifurcated from the convertible debt at each issuance date and recorded at fair value. The derivative has been remeasured at each reporting period until settled. In connection with Centessa's acquisition of the Predecessor and concurrent Series A financing event inJanuary 2021 , the outstanding principal, interest and derivative liability were settled in their entirety and are no longer subject to remeasurement.
Amortization of Debt Discount
Amortization of debt discount primarily consists of the bifurcation of the embedded redemption feature associated with the Centessa Predecessor's convertible term notes. The debt discount was amortized over the life of the loans until they were settled inJanuary 2021 and theCentessa Predecessor Group recognized all unamortized debt discount.
Interest (Expense) Income, net
Interest (expense) income primarily consists of interest costs related to the Note Purchase Agreement and interest costs related to Centessa Predecessor's convertible term notes, partially offset by interest income earned from the Company (Successor)'s and Predecessor's cash and cash equivalents.
Other (Expense) Income, net
Other (expense) income, net consists primarily of foreign currency transaction gains and losses, franchise tax expense as well as the change in fair value of the Note Purchase Agreement. Foreign Currency Translation The Company's financial statements are presented inU.S. dollars ("USD"), the reporting currency of the Company. The functional currency ofCentessa Pharmaceuticals plc is USD and the functional currency of the Centessa Subsidiaries is their respective local currency. Income and expenses have been translated into USD at average monthly exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheets dates and equity accounts at their respective historical rates. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders' equity as other comprehensive income (loss). Transactions denominated in a currency other than the functional currency are remeasured based upon the exchange rate at the date of remeasurement with the resulting gain or loss included in the accompanying consolidated and combined statements of operations and comprehensive loss within Other (expense) income, net. The functional currency ofCentessa Pharmaceuticals plc had previously been British pounds (GBP), asCentessa Pharmaceutical plc's primary activities during formation were mostly denominated in GBP, including related transaction costs, the acquisition of Centessa subsidiaries predominantly with operations in GBP and the issuance of shares with a GBP nominal value as consideration in the acquisition. Beginning in the second quarter of 2021, the functional currency ofCentessa Pharmaceuticals plc changed from GBP to USD. The change in functional currency was the result of many factors including the completion of an IPO and receipt of proceeds in USD which resulted in USD denominated assets exceeding GBP denominated assets, the increase in the number ofU.S. -based employees, and the increase in costs denominated in USD, following completion of the Company's IPO on aU.S. stock exchange (Nasdaq). Given these significant changes, the Company considered the economic factors outlined in ASC 830, Foreign Currency Matters and concluded that the majority of the factors supported the use of the USD as the functional currency forCentessa Pharmaceutical plc . The change in functional currency forCentessa Pharmaceuticals plc was applied on a prospective basis beginning as of the second quarter of 2021 and translation adjustments for prior periods will continue to remain as a component of accumulated other comprehensive loss. The Company reclassified the presentation of foreign currency gains and losses recognized first quarter of 2021 from General & administration expense to Other income (expense), net to conform to the current period financial statement presentation. 161
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Results of Operations
The following table sets forth the Company (Successor)'s results of operations for the period fromJanuary 30, 2021 throughDecember 31, 2021 and theCentessa Predecessor Group's results of operations for the period fromJanuary 1, 2021 throughJanuary 29, 2021 and for the twelve month periods endedDecember 31, 2020 andDecember 31, 2019 (amounts in thousands): Successor Predecessor Period from Period from January 30, January 1, 2021 2021 through through Twelve months Twelve months December 31, January 29, ended December ended December 2021 2021 31, 2020 31, 2019 Operating expenses: Research and development$ 95,660 $ 662 $ 9,301 $ 4,263 General and administrative 42,888 121 1,139 790 Change in fair value of contingent value rights 15,082 - - - Acquired in-process research and development 220,454 - - - Loss from operations (374,084) (783) (10,440) (5,053) Interest (expense) income, net (1,172) (9) (68) 5 Amortization of debt discount - (37) (310) (118) Debt issuance costs (1,331) - - - Other (expense) income, net (4,370) - 155 105 Loss before income taxes (380,957) (829) (10,663) (5,061) Income tax expense 114 - - - Net loss$ (381,071) $ (829) $ (10,663) $ (5,061) 162
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Research and Development Expenses
The following table summarizes research and development expenses by program incurred for the following periods (amounts in thousands):
Successor Predecessor
Period from
January 30, 2021 Period from
through January 1, 2021 Twelve months Twelve months
December 31, through ended December ended December
2021 January 29, 2021 31, 2020 31, 2019
Registrational
Lixivaptan (Palladio) $ 17,365 $ - $ - $ -
SerpinPC (ApcinteX) 2,926 - - -
Emerging
OX2R (Orexia) 19,411 - - -
ZF874 (Z Factor) 8,577 323 3,121 1,294
LB101/LB201 (LockBody) 5,397 241 2,549 1,270
MGX292 (Morphogen-IX) 5,127 187 3,566 1,688
Exploratory
CBS001/CBS004 (Capella) 6,275 - - -
Other deprioritized programs
Imgatuzumab (Pega-One) 12,870 - - -
Dual-STAT3/5 (Janpix) 5,962 - - -
EGFR Exon20/C797S (PearlRiver) 2,857 - - -
Non-program specific costs:
Personnel expenses 21,239 98 1,691 999
Research tax incentives (13,839) (222) (2,199) (1,287)
Other preclinical and clinical development
expenses 1,493 35 573 299
$ 95,660 $ 662 $ 9,301 $ 4,263
We categorize our current programs as registrational, emerging, or exploratory.
Our R&D spend is commensurate with these three stages, with the highest spend on
the programs that have already established clinical proof of concept. For
programs in the earlier stages, we aim to implement capital-efficient plans to
reach the next set of catalysts, gating more significant spending until after we
obtain clinical proof of concept.
As part of ongoing portfolio management, we continuously review all of our
programs with the goal of assembling a pipeline of product candidates with the
potential to be first in class / best in class assets. We are not dependent on
any one program or therapeutic area within our product portfolio. Our portfolio
decisions reflect the responsibility of the management team to expeditiously
evaluate and potentially increase resources or suspend development based on
whether the product profile or data meet our criteria for further investment. In
particular, we apply our criteria to each program individually and evaluate the
merits of each program individually and not in comparison to other programs in
our pipeline. As a result, we have recently determined to: (1) discontinue the
small molecule epidermal growth factor receptor (EGFR) Exon20 insertion mutation
inhibitor program and C797S mutation inhibitor program for the treatment of
Non-Small Cell Lung Cancer (NSCLC); (2) evaluate strategic options including
potential divestment for imgatuzumab, an anti-EGFR mAb; and (3) discontinue
internal funding for the lead dual-STAT3/5 degrader program in Acute Myeloid
Leukemia (AML).
Research and development expenses for the Company (Successor) for the period
from January 30, 2021 through December 31, 2021 was $95.7 million and for the
Centessa Predecessor Group during the period from January 1, 2021 through
January 29, 2021 was $0.7 million , compared to the Centessa Predecessor Group
for the twelve months ended December 31, 2020 of $9.3 million . The increase in
2021 is primarily attributable to the growth in the portfolio of product
candidates under development following the acquisition of the Centessa
Subsidiaries in January 2021 as well as increased spending in the Centessa
Predecessor Group . Personnel expenses represent staffing costs, including
share-based
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compensation, for centralized as well as subsidiary-level teams that support program development efforts. The increase in personnel related expenses includes an increase in headcount and an increase in share-based compensation expense of$5.6 million , which is primarily attributable to the equity awards issued at the time of the acquisition and the subsequent issuances of awards throughDecember 31, 2021 . These increases were partially offset by an increase in research tax incentives earned as a result of the increase in qualified research and development expenses in 2021 when compared to 2020. Research and development expenses for the year endedDecember 31, 2020 were$9.3 million , compared to$4.3 million for the year endedDecember 31, 2019 . The increase of$5.0 million was primarily due to the increase in clinical development of activities and expenses for the product candidates. Costs associated with Z Factor's lead candidate, ZF874, increased$1.8 million from$1.3 million in 2019 to$3.1 million in 2020 as Z Factor initiated its Phase 1 clinical trial and dosed its first human patient inAugust 2020 . Costs associated with LockBody's lead candidates, LB101 and LB201, increased$1.2 million in the aggregate from$1.3 million in 2019 to$2.5 million in 2020 as LockBody initiated its preclinical evaluation and cell line development for LB101 and lead optimization for LB201. Costs associated withMorphogen-IX's lead candidate, MGX292, increased$1.9 million from$1.7 million in 2019 to$3.6 million in 2020 and primarily attributable to ongoing preclinical development in preparation for submitting an investigational new drug application. Other research and development expenses increased$0.3 million from$0.3 million in 2019 to$0.6 million 2020 in connection with preclinical activities and discovery efforts for other programs. Personnel related expenses increased$0.7 million from$1.0 million in 2019 to$1.7 million in 2020 and was attributable to the increase in research and development employee headcount. These increases were partially offset by an increase in research tax incentives of$0.9 million earned as a result of the increase in qualified research and development expenses in 2020 when compared to 2019.
General and Administrative Expense
The following table summarizes the general and administrative expenses for the following periods (amounts in thousands):
Successor Predecessor
Period from Period from
January 30, 2021 January 1,
through 2021 through Twelve months Twelve months
December 31, January 29, ended December ended December
2021 2021 31, 2020 31, 2019
Personnel expenses $ 17,858 $ - $ 62 $ 46
Legal and professional fees 14,831 117 1,031 612
Other expenses 9,570 4 40 118
Facilities and supplies 629 - 6 14
$ 42,888 $ 121 $ 1,139 $ 790
General and administrative expenses for the Company (Successor) for the period
from January 30, 2021 through December 31, 2021 was $42.9 million and for the
Centessa Predecessor Group during the period from January 1, 2021 through
January 29, 2021 was $0.1 million , compared to the Centessa Predecessor Group
for the twelve months ended December 31, 2020 of $1.1 million . The increase is
primarily attributable to public company costs, the operating costs of Centessa
Pharmaceuticals plc and Centessa Pharmaceutical Inc. including professional fees
and personnel costs, and the increase in operating costs resulting from the
acquired Centessa Subsidiaries. In addition, the increase in personnel related
expenses includes an increase in headcount and an increase in share-based
compensation expense of $9.0 million , which is primarily attributable to the
immediate recognition of the certain replacement awards issued to the Centessa
Subsidiaries' employees and consultants and the options granted through December
2021 by the Company (Successor).
General and administrative expenses for the year ended December 31, 2020 were
$1.1 million , compared to $0.8 million for the year ended December 31, 2019 . The
increase of $0.3 million was primarily attributable to an increase in legal and
professional fees of $0.4 million that were partially offset by a $78,000
decrease in other administrative expenses.
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Acquired In-Process Research and Development
During the period from January 30, 2021 through December 31, 2021 , the Company
(Successor) recognized $220.5 million of expense associated with research and
development projects of the Centessa Subsidiaries which were in-process with no
alternative future use.
Change in Fair Value of CVR
The Company (Successor) recognized $15.1 million for the change in fair value of
the contingent value right for the period from January 30, 2021 through
December 31, 2021 . The change was attributable to a fair market value adjustment
from the initial fair value of $22.6 million at the date of acquisition of the
Centessa subsidiaries in January 2021 to the fair value at December 31, 2021 of
$37.7 million . On February 18, 2022 , the milestone which triggers the CVR
entitlement was achieved. See Note 13 - "Subsequent Events" .
Interest (Expense) Income, net and Debt Issuance Costs
Interest (expense) income, net for the Company (Successor) for the period fromJanuary 30, 2021 throughDecember 31, 2021 was$(1.2) million , driven by interest expense from the issuance of the Note Purchase Agreement inOctober 2021 , partially offset by interest earned on larger cash balances due to the Series A financing inJanuary 2021 and the IPO inJune 2021 . Additionally, as the Company has elected to account for the Note Purchase Agreement under the fair value option, debt issuance costs of$1.3 million were immediately expensed.
Amortization of Debt Discount
Amortization of debt discount for theCentessa Predecessor Group was$37 thousand and$0.3 million during the period fromJanuary 1, 2021 throughJanuary 29, 2021 and for the twelve months endedDecember 31, 2020 , respectively and was attributable to the convertible term loans. The loans were settled inJanuary 2021 at which point all unamortized debt discounts were immediately recognized by theCentessa Predecessor Group .The Predecessor Group recognized$0.1 million of amortization of debt discount for the year endedDecember 31, 2019 compared to$0.3 million for the year endedDecember 31, 2020 . The$0.2 million increase is attributable to the additional principal borrowings in 2020 and related bifurcated redemption feature that was recorded as a debt discount and subsequently amortized.
Other (Expense) Income, net
Other (expense) income, net for the Company (Successor) for the period fromJanuary 30, 2021 throughDecember 31, 2021 was$(4.4) million and was primarily attributable to foreign currency losses of$3.6 million resulting from in part to remeasuring the Company's USD cash and cash equivalents ofCentessa Pharmaceutical plc to GBP in the first quarter of 2021. Additionally, other (expense) income included a$0.7 million loss related to remeasuring the Note Purchase agreement at fair value atDecember 31, 2021 . Other (expense) income, net for theCentessa Predecessor Group for the period fromJanuary 1, 2021 throughJanuary 29, 2021 and for the twelve months endedDecember 31, 2020 was insignificant to the Group's results of operations.
Liquidity and Capital Resources
Sources of Liquidity
As ofDecember 31, 2021 , the Company had cash and cash equivalents of$595.1 million . Concurrent with the acquisition of the Centessa Subsidiaries by the Company (Successor) inJanuary 2021 , the Company (Successor) completed a$250.0 million Series A convertible preferred financing that was comprised of$245.0 million in proceeds and the$5.0 million conversion of a convertible debt instrument. InJune 2021 , the Company (Successor) completed its IPO and shortly after the close of the IPO, the underwriters exercised their option in full to purchase an additional 2,475,000 ADSs at the initial public offering price of$20.00 per ADS. The Company (Successor) received aggregate net proceeds of$344.1 million which includes the full exercise of the underwriters' option. InOctober 2021 , the Company entered into a financing agreement with funds managed byOberland Capital , which provides the Company additional funds to further scale up our development activities and to enhance balance sheet flexibility for potential pipeline extension. Under the terms of the agreement,Oberland Capital will purchase up to$300.0 million of 6-year, interest-only (initial interest rate is 8.0% per annum), senior secured notes from the Company including 165
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$75.0 million , funded onOctober 4, 2021 ,$125.0 million available in tranches of$75 million and$50 million within 24 months at the Company's option, and$100.0 million available to fund M&A, in-licensing, or other strategic transactions, at the option of the Company andOberland Capital . OnFebruary 11, 2022 ,Centessa Pharmaceuticals plc , as issuer, and certain of the Company's wholly owned subsidiaries, as guarantors (the "Guarantors"), entered into an Amendment to Note Purchase Agreement (the "Amendment") withThree Peaks Capital Solutions Aggregator Fund (the "Purchaser"), andCocoon SA LLC (the "Purchaser Agent"), an affiliate ofOberland Capital Management LLC , as agent for the Purchaser to modify the Note Purchase Agreement (the "Note Purchase Agreement"), dated as ofOctober 1, 2021 by and among the Company, the Guarantors, the Purchaser and the Purchaser Agent. Under the terms of the Amendment, the Company acknowledged the existence of certain Events of Default, including the delivery by the Company of a landlord consent after the required delivery date ofOctober 31, 2021 and the entry by a subsidiary of the Company into a Research Collaboration and License Agreement without the prior consent of Purchaser Agent; as well as other non-financial, administrative-related defaults. Under the Note Purchase Agreement, Events of Default may entitle the lenders to default interest, penalties and the ability to terminate the facility and to accelerate repayment of any outstanding loans in full. Pursuant to the Amendment, the lenders agreed to waive such Events of Default. Pursuant to the Amendment, the Purchaser and the Purchaser Agent have also agreed to waive the requirement to obtain the consent of a certain licensee and waive certain of the insurance requirements contained in the Note Purchase Agreement. The Amendment also provides that the Company is required to maintain a cash balance in an amount equal to 75% of the aggregate outstanding principal amount of all issued Notes, as defined in the Note Purchase Agreement, that have been issued on and fromFebruary 11, 2022 . Also pursuant to the Amendment, the date for the Third Purchase Date, as defined in the Note Purchase Agreement, and the Commitment Termination Date were extended toDecember 31, 2023 . The Amendment also provides that upon the sale of any of the Company's or any of its subsidiary's assets, if the Purchaser Agent elects to have the Company repurchase the notes, such repurchase amounts will be subject to a$100 million deductible such that the Purchaser Agent will not collect any repurchase amounts until$100 million has been received by the Company from such sale event. In addition, the reduced payment cap that is triggered by the Purchaser Agent opting into a repayment in the event of an asset sale, extends to the second loan tranche, if drawn. The effectiveness of the Amendment is subject to certain conditions precedent and conditions subsequent. The Company (Successor) has no other ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect liquidity over the next five years. The maturity date of the Oberland Capital Notes isOctober 4, 2027 . Cash Flow
The following table shows a summary of cash flows for the periods indicated (in
thousands):
Successor Predecessor
Period from Period from
January 30, January 1,
2021 through 2021 through Twelve months Twelve months
December 31, January 29, ended December ended December
2021 2021 31, 2020 31, 2019
Net cash (used in) provided by:
Operating activities $ (135,109) $
(1,049)
63,256 - - -
Financing activities 660,147 - 1,362 9,005
Exchange rate effect on cash and cash
equivalents 1,822 80 (75) 520
Net increase (decrease) in cash and cash
equivalents $ 590,116 $ (969) $ (9,343) $ 3,700
Operating Activities
During the period from January 30, 2021 through December 31, 2021 , the Company
(Successor) used $135.1 million of cash in operating activities. Cash used in
operating activities reflected a net loss of $381.1 million , offset by a
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$220.5 million non-cash charge for acquired in-process research and development in connection with the acquisition of the Centessa Subsidiaries,$15.8 million in a non-cash change in fair value of contingent value rights and debt,$14.9 million in non-cash share-based compensation expense, and a$(5.8) million net change in operating assets and liabilities. During the period fromJanuary 1, 2021 throughJanuary 29, 2021 , theCentessa Predecessor Group used$1.0 million of net cash in operating activities. Cash used in operating activities reflected the net loss of$0.8 million and$(0.2) million net change in operating assets and liabilities. During the year endedDecember 31, 2020 , theCentessa Predecessor Group used$10.6 million of net cash in operating activities. Cash used in operating activities reflected a net loss of$10.7 million and$0.3 million non-cash gains in connection with the extinguishment of debt and the change in fair value of the derivative liability.The Centessa Predecessor Group also used cash of$0.5 million related to the change in operating assets. These uses were offset by$0.9 million in non-cash charges associated with non-cash interest and share-based compensation expense. During the year endedDecember 31, 2019 , theCentessa Predecessor Group used$5.8 million of net cash in operating activities. Cash used in operating activities reflected the net loss of$5.1 million and$0.1 million non-cash gains in connection with the extinguishment of debt.The Centessa Predecessor Group also used cash of$1.1 million related to the change in operating assets that were offset by$0.4 million in non-cash charges for non-cash interest expense, depreciation expense and share-based compensation expense.
Investing Activities
During the period fromJanuary 30, 2021 throughDecember 31, 2021 , net cash provided by investing activities for the Company (Successor) was$63.3 million and is primarily attributable to$68.0 million of cash acquired in connection with the acquisition of the Centessa Subsidiaries, which was partially offset by the related$4.6 million of transaction costs paid during the period and$0.2 million in purchases of property and equipment.
Financing Activities
During the period fromJanuary 30, 2021 throughDecember 31, 2021 financing activities for the Company (Successor) provided$660.1 million in net cash proceeds and is primarily attributable to the sale of the Company (Successor)'s Series A preferred shares inJanuary 2021 , the IPO inJune 2021 , and the issuance of debt inOctober 2021 , net of issuance costs. The Company (Successor) also received$0.8 million in proceeds upon the exercise of stock options. During the year endedDecember 31, 2020 , financing activities for theCentessa Predecessor Group provided$1.4 million in net cash proceeds, primarily attributable to proceeds from convertible debt issuances. During the year endedDecember 31, 2019 , financing activities provided$9.0 million in net cash proceeds and attributable to$3.8 million upon the issuance of convertible debt and$5.2 million upon the sale and issuance of Series A convertible preferred shares. Funding Requirements Following the acquisition of the Centessa Subsidiaries inJanuary 2021 , the Company expects expenses to increase in connection with ongoing activities, particularly as the Company continues the research and development of, continues or initiates clinical trials of, and seeks marketing approval for any current and future product candidates. In addition, if marketing approval is obtained for any product candidates, the Company expects to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, following the completion of our IPO, additional costs associated with operating as a public company are expected. Accordingly, there will be a need to obtain substantial additional funding in connection with the continuing operations. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce or eliminate research and development programs or future commercialization efforts.
The Company anticipates that its expenses will increase substantially as it:
•seeks to discover and develop current and future clinical and preclinical product candidates;
•scales up clinical and regulatory capabilities;
•adapts regulatory compliance efforts to incorporate requirements applicable to marketed products;
•establishes a sales, marketing and distribution infrastructure and scale up
external manufacturing capabilities to commercialize any product candidates for
which regulatory approval may be obtained;
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•maintains, expands and protects the intellectual property portfolio;
•hires additional internal or external clinical, manufacturing and scientific personnel or consultants;
•adds operational, financial and management information systems and personnel, including personnel to support product development efforts; and
•incurs additional legal, accounting and other expenses in operating as a public company.
Because of the numerous risks and uncertainties associated research, development and commercialization of product candidates, the Company is unable to estimate the exact amount of its working capital requirements. Future funding requirements will depend on and could increase significantly as a result of many factors, including:
•the scope, progress, results and costs of preclinical studies and clinical trials;
•the scope, prioritization and number of research and development programs;
•the costs, timing and outcome of regulatory review of product candidates;
•the ability to establish and maintain collaborations on favorable terms, if at all;
•the extent to which obligations to reimburse exist, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;
•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing intellectual property rights and defending intellectual property-related claims;
•the costs of securing manufacturing arrangements for commercial production; and
•the costs of establishing or contracting for sales and marketing capabilities if regulatory approvals are obtained to market product candidates.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time- consuming, expensive and uncertain process that takes many years to complete, and may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, product candidates, if approved, may not achieve commercial success. Commercial revenues, if any, will be derived from sales of product candidates that do not expect to be commercially available for the next couple of years, if at all. Accordingly, the need to continue to rely on additional financing to achieve our business objectives will exist. Adequate additional financing may not be available on acceptable terms, or at all.
Contractual Obligations and Other Commitments
As of
"Commitment and contingencies" and Note 6 - "Debt" , we had no material contractual obligations and other commitments associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. OnFebruary 7, 2022 , the Company entered into a 10-year office lease for its new corporate headquarters inBoston, Massachusetts . The fixed annual rent will be approximately$1.6 million in 2023 and will escalate to approximately$1.9 million in Year 10. The Company has entered into collaborative arrangements to develop and commercialize intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due to collaborative partners related to development activities are generally reflected as research and development expenses. See Note 10 - "Licensing Arrangements" as well as "Intellectual Property and License Agreements" in Item 1. Business of this Form 10-K for additional information on these arrangements. The contractual obligations we have disclosed do not include any potential development, regulatory and commercial milestone payments and potential royalty payments that we may be required to make under the various license agreements entered into by the Centessa Subsidiaries and collaboration agreement. We excluded these payments given that the timing of any such payments cannot be reasonably estimated at this time. 168
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In connection with our acquisition of the Centessa Subsidiaries inJanuary 2021 , we issued contingent value rights, or CVR, to former shareholders and option holders of Palladio. In total, the CVR represent the contractual rights to receive shares valued, in aggregate, at$39.7 million upon the dosing of the first patient in commencement of the ACTION study, a pivotal Phase 3 clinical trial of lixivaptan for the treatment of Polycystic Kidney Disease in any ofthe United States ,France ,Germany ,Italy ,Spain , theUnited Kingdom andJapan . OnFebruary 18, 2022 , the Company commenced dosing in its pivotal Phase 3 clinical trial evaluating lixivaptan as a potential treatment for ADPKD. Such event was the milestone trigger for payment of contingent value rights originally issued to the former shareholders and option holders of the Company's subsidiary,Palladio Biosciences, Inc. , in connection with its acquisition by Centessa inJanuary 2021 . The contingent value rights entitled such holders to a number of ordinary shares of the Company (including in the form of ADSs) in an aggregate amount of approximately$39.7 million based on the Volume Weighted Average Price of the Company's ADSs over the five day trading period ending on the date of the milestone trigger. OnMarch 8, 2022 , the Company and the representative of the contingent value rights holders agreed that 3,938,423 represents the aggregate number of ordinary shares, issued as ADSs, to be issued in satisfaction of such contingent value rights, to the former shareholders and option holders ofPalladio Biosciences, Inc. The number of ADSs issued to employee recipients reflected in this figure is net of tax withholding, which the Company satisfied with cash payments to tax authorities. The ADSs were issued in exchange for the previously-issued contingent value rights of the Company. The Company will recognize a remaining adjustment of fair value (approximately a$2 million charge) in its consolidated statement of operations and comprehensive loss in its first quarter of 2022.
Incentivization Agreements
InJanuary 2021 , we established incentivization arrangements pursuant to which certain members of the senior management teams of each predecessor entity are eligible to earn certain payments based on the attainment of corresponding milestone performance by and/or an exit event of such predecessor entity, as applicable to each executive. As defined in the incentivization agreements, an "exit event" includes the sale or disposition of all or substantially all of the applicable subsidiary's commercially valuable assets or any sale or disposition of the applicable subsidiary's equity which results in the purchaser of the equity acquiring a controlling interest in the applicable subsidiary. Milestones may include the designation of a product candidate or the attainment of approvals, licenses, permits, certifications registrations or authorizations necessary for the sale of a particular product candidate or related molecules inthe United States ,France ,Germany ,Italy ,Spain or theUnited Kingdom . The milestone payment amount for each subsidiary is in the low eight figure range to be divided among the members of the respective subsidiary's senior management team and employees according to the terms of its respective incentivization agreement. Any milestone payment earned will be payable in a lump sum within twenty (20) days after attainment of the milestone. In addition, if a sale of a controlling interest in a subsidiary or sale (or grant of an exclusive license) of its respective product candidate occurs prior to attainment of the milestone or within the three (3) year period following attainment of the milestone, an exit payment equal in the range of single digit to low teens percentage of the sales proceeds less any amounts previously paid as a milestone payment (if any) and any fees, costs and expenses of the sale (excluding any earn out, milestone, royalty payment or other contingent payments but including any escrow, holdback or similar amount) will become due and payable to certain employees and members of the subsidiary's senior management team. To the extent an exit event occurs following the occurrence of an adverse event (which includes the failure to achieve milestones within the specified time period), no exit payment will become due unless sale proceeds are in excess of an amount in the eight-figure range. The incentivization agreements contain standard termination provisions providing that the agreements shall terminate upon the occurrence of certain events, or automatically onDecember 31, 2035 . Other events that may trigger termination include: •an exit event;
•the occurrence of certain asset sales in conjunction with certain milestones; and
•the date that is three years following achievement of certain milestones.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of operations is based on the consolidated and combined financial statements of theCompany (Successor) and Centessa Predecessor Group which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires estimates and judgments be made that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the combined financial statements. On an ongoing basis, an evaluation of estimates and judgments are required, including those related to accrued expenses, contingent consideration 169
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and share-based compensation. Estimates are based on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While the significant accounting policies are described in more detail in Note 2 to the Company (Successor)'s consolidated and the Group's combined financial statements, the following accounting policies are the most critical to the judgments and estimates used in the preparation of the financial statements.
Research and Development Accruals
Research and development expenses consist primarily of costs incurred in connection with the development of product candidates. Research and development costs are expensed as incurred.
Expenses for preclinical studies and clinical trial activities performed by third parties are accrued based upon estimates of the proportion of work completed over the term of the individual trial and patient enrollment rates in accordance with agreements with CROs and clinical trial sites. Estimates are determined by reviewing external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including the clinical development plan. Estimates of accrued expenses are made as of each balance sheet date in the financial statements based on facts and circumstances known at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, an adjustment to the accrual will be made accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are recognized as expense in the period that the related goods are consumed or services are performed. Milestone payments within the Company (Successor)'s licensing arrangements are recognized when achievement of the milestone is deemed probable to occur. To the extent products are commercialized and future economic benefit has been established, commercial milestones that become probable are capitalized and amortized over the estimated remaining useful life of the intellectual property. In addition, royalty expenses would be accrued and sublicense non-royalty payments, as applicable, for the amount it is obligated to pay, with adjustments as sales are made. Contingent Value Rights In connection with the acquisition of Palladio, the Company (Successor) issued contingent value rights, or CVR, to former shareholders and option holders of Palladio. In total, the CVR represent the contractual rights to receive shares valued, in aggregate, at$39.7 million upon the first patient dosed in a Phase 3 pivotal study of lixivaptan for the treatment of ADPKD in any ofthe United States ,France ,Germany ,Italy ,Spain , theUnited Kingdom andJapan (designated the ACTION Study). This contingent milestone was triggered inFebruary 2022 and will be settled in 2022 through the issuance of the Company (Successor)'s ordinary shares equal to the amount of the total CVR payable based on the per share value of ordinary shares at the milestone date. The Company (Successor) determined that the contingent value rights should be accounted for as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity. Accordingly, fair value of the contingent consideration is assessed quarterly until settlement. To estimate the fair value of the CVR, the Company (Successor) applies a cumulative probability of achieving the clinical milestone and applied it to the potential payout.
Note Purchase Agreement
As described in further detail in Note 6 - "Debt," in October 2021, the Company entered into a Note Purchase Agreement (the "Notes") withOberland Capital Management LLC (Oberland Capital ). Under the terms of the agreement, amended,Oberland Capital will purchase up to$300.0 million of 6-year, interest-only (initial interest rate is 8.0% per annum), senior secured notes (the Notes) from the Company including$75.0 million , funded onOctober 4, 2021 ,$125.0 million available within 24 months at the Company's option, and$100.0 million available to fund Mergers and Acquisitions ("M&A"), in-licensing, or other strategic transactions, at the option of the Company andOberland Capital . In addition to interest payments on the principal, the Company is obligated to pay certain Revenue Participation payments, starting on the date of the first commercial sale of lixivaptan, currently a product candidate under development by the Company, and ending on the tenth anniversary of the First Purchase Date; as well as obligated to pay a Milestone payment 170
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equal to 30% of the aggregate principal amount issued under the Notes by the Company upon regulatory approval of any drug candidate.
The Company evaluated the notes and determined that the notes include embedded derivatives that would otherwise require bifurcation as derivative liabilities. Neither the debt instrument nor any embedded features are required to be classified as equity. Therefore, the hybrid financial instrument comprised of the debt host and the embedded derivative liability may be accounted for under the fair value option. The Company elected to carry the Notes at fair value, and the debt instrument is outside the scope of ASC 480, Distinguishing Liabilities from Equity, and thus will be classified as a liability under ASC 470, Debt, in the Company's financial statements. As the Company has elected to account for the Notes under the fair value option, debt issuance costs were immediately expensed. The fair value of the Note Purchase Agreement represents the present value of estimated future payments, including interest, principal as well as estimated payments that are contingent upon the achievement of specified milestones. The fair value of the notes is based on the cumulative probability of the various estimated payments. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving the milestones, anticipated timelines, probability and timing of an early redemption of all obligations under the agreement and discount rate. Any changes in the fair value of the liability are recognized in the consolidated statement of operations and comprehensive loss until it is settled.
Share-Based Compensation
The Company (Successor) and the Predecessor measure share-based awards at their grant-date fair value and record compensation expense on a straight-line basis over the vesting period of the awards. Following the completion of our IPO, the fair value of our ordinary shares was determined based on the quoted market price of our ADSs representing our ordinary shares. The Company (Successor) and thePredecessor Group account for forfeitures of stock option awards as they occur. The Company uses the Black-Scholes option pricing model to value its stock option awards. The expected life of the stock options is estimated using the "simplified method," as the Company has limited historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For share price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The risk-free rate is based on theU.S. Treasury yield curve commensurate with the expected life of the option. Forfeitures of stock options are recognized in the period the forfeiture occurs. As there was no public market for our ordinary shares prior to the IPO, the estimated fair value of our ordinary shares has been determined by our board of directors as of the date of each option grant, with input from management, considering third-party valuations of our ordinary shares, which were performed contemporaneously with events which management believed would have an impact on the valuation of our ordinary shares. Our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our ordinary shares, including:
•our nascent stage of development and business strategy, including the status of research and development efforts of its product candidates and the material risks related to its business and industry;
•our results of operations and financial position, including our levels of available capital resources;
•the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;
•the lack of marketability of our ordinary shares as a private company;
•the most recent price of our convertible preferred shares sold to investors in arm's length transactions and the rights, preferences and privileges of our convertible preferred shares relative to those of our ordinary shares;
•the likelihood of achieving a liquidity event for the holders of our ordinary shares, such as an initial public offering or a sale of our, given prevailing market conditions;
•trends and developments in our industry; and
•external market conditions affecting the life sciences and biotechnology industry sectors.
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The third-party valuations of our ordinary shares that our board of directors considered in making its determinations were performed in accordance with the guidance outlined in the "Practice Guide", which prescribes several valuation approaches for determining the value of an enterprise, such as cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its capital structure and specifically the ordinary shares.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, " Summary of Significant Accounting Policies " in our consolidated financial statements included elsewhere in this Annual Report.
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