Our management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted inthe United States , or GAAP, and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Note on the COVID-19 Pandemic
While the COVID-19 pandemic has had an impact on our business, operations, and financial performance, our management team and our employees have and will continue to take steps to evaluate, monitor, manage, and respond to the challenges that have arisen from the COVID-19 pandemic and to new challenges that may arise. We continue to operate under a previously established remote operating model for all employees other than certain members of our laboratory and facilities staff. As part of this remote operating model, our laboratory staff who have engaged in research and development activities continue to have restricted access to laboratories. Accordingly, our laboratory staff are not yet back to their full daily output as existed prior to the onset of the COVID-19 pandemic. We continue to evaluate our remote operating model for our offices based on guidance from federal, state and local government authorities. In addition, although we continue to remain on track for our ongoing and planned clinical trials for 2020, we are aware of the impact that COVID-19 continues to have on other clinical trials in our industry and there is a risk of material impact on the conduct of our clinical trials as well. We are continuing to work with our clinical trial sites to ensure study continuity, enable medical monitoring, facilitate study procedures and maintain clinical data and records, including the use of local laboratories for testing, home delivery of study drug and remote data and records monitoring. To date, the COVID-19 pandemic has not had a material impact on our supply chain, and we currently have a consistent supply of TAZVERIK that we believe will cover the ongoing launches for epithelioid sarcoma, or ES, and follicular lymphoma, or FL. As a proactive measure, we have taken certain steps to try and reduce the risk to our supply chain, such as advancing orders for long-lead items in anticipation of potential future delays or shortages. Because the COVID-19 pandemic could materially adversely impact our suppliers and result in delays or disruptions in our current or future supply chain, we are continuing to monitor and manage our supply chain accordingly. For our launch activities for TAZVERIK, our commercial and medical affairs field teams are using virtual formats where possible in order to allow us to serve the needs of healthcare providers, patients and other stakeholders during this critical time. During the third quarter of 2020, the COVID-19 pandemic continued to negatively impact FL patient visits to physicians, new patient starts across all lines of treatment as well as the ability of our field-based teams to fully access FL prescribers. Notwithstanding these challenges, new prescriptions for TAZVERIK in FL have increased month over month and are being written for both EZH2 mutation and wild-type patients; in the academic and community settings; and across multiple treatment lines in relapsed or refractory patients. In addition, payor coverage for ES and FL has been in-line with the TAZVERIK label. We continue to adapt our commercial strategy to the COVID-19 pandemic to support increased adoption of TAZVERIK in appropriate patients. We continue to assess the duration, scope and severity of the COVID-19 pandemic and its potential impacts on our business, operations and financial performance, and continue to work closely with our third-party vendors, collaborators and other parties in order to seek to continue to advance our commercialization efforts with TAZVERIK as well as our pipeline as quickly as possible, while making the health and safety of our employees and their families, healthcare providers, patients and communities a top priority. Due to the evolving and uncertain global impacts of the COVID-19 pandemic, however, we cannot precisely determine or quantify the impact that this pandemic has had or will have on our business, operations and financial performance for the remainder of our fiscal year endingDecember 31, 2020 and beyond.
Please refer to our Risk Factors in Part II, Item 1A. of this Quarterly Report on Form 10-Q for further discussion of risks related to the COVID-19 pandemic.
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Overview
We are a commercial-stage biopharmaceutical company that is committed to rewriting treatment for people with cancer and other serious diseases through the discovery, development, and commercialization of novel epigenetic medicines. By focusing on the genetic drivers of disease, our science seeks to match targeted medicines with the patients who need them. InJanuary 2020 , theU.S. Food and Drug Administration , or FDA, granted accelerated approval of TAZVERIK (tazemetostat) for the treatment of adult and pediatric patients aged 16 years and older with metastatic or locally advanced epithelioid sarcoma, or ES, not eligible for complete resection. This approval was based on overall response rate and duration of response shown in the ES cohort of our Phase 2 trial in patients with INI1-negative tumors. We have made TAZVERIK available to eligible patients and their physicians inthe United States . As part of the accelerated approval for ES, continued approval for this indication is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide this confirmatory evidence to support a full approval of TAZVERIK for this indication, we are conducting a global, randomized, controlled Phase 1b/3 confirmatory trial assessing TAZVERIK in combination with doxorubicin compared with doxorubicin plus placebo as a front-line treatment for epithelioid sarcoma. The trial is expected to enroll approximately 152 patients. We expect to complete the safety run-in portion of the trial in 2020, and to commence the efficacy portion of the trial in early 2021. InJune 2020 , the FDA approved a supplemental New Drug Application, or sNDA, for TAZVERIK for the following FL indications: (1) adult patients with relapsed or refractory FL whose tumors are positive for an EZH2 mutation as detected by an FDA-approved test and who have received at least two prior systemic therapies, and (2) adult patients with relapsed or refractory FL who have no satisfactory alternative treatment options. These indications were approved under accelerated approval with a priority review, based on overall response rate and duration of response shown in the FL cohort of our Phase 2 clinical trial in patients with EZH2 mutations and wild-type EZH2. We have made TAZVERIK available to eligible patients and their physicians inthe United States . As part of the accelerated approval for FL, continued approval for these indications is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide this confirmatory evidence to support a full approval of TAZVERIK for these indications, we are conducting a single global, randomized, adaptive Phase 1b/3 confirmatory trial to evaluate the combination of TAZVERIK with "R2" (Revlimid® plus rituximab), an approved chemotherapy-free treatment regimen, for FL patients in the second-line or later treatment setting. The trial is expected to enroll approximately 500 FL patients, stratified based on their EZH2 mutation status. We expect to complete the safety run-in portion of the trial in 2020 and to commence the efficacy portion of the trial in early 2021. In addition, we plan to conduct post-marketing commitments, including expanding our ongoing Phase 2 clinical trial with a cohort of FL patients with wild-type EZH2 to evaluate tazemetostat as a monotherapy in patients who have been treated with at least one prior systemic treatment, in order to inform the label and potentially expand in the relapsed and refractory setting in the future. Through our planned development efforts, our intention is to eventually make TAZVERIK available in all lines of treatment for patients with FL. We plan to leverage the confirmatory trial and post-marketing commitments to expand TAZVERIK into the second-line treatment setting. In collaboration withThe Lymphoma Study Association , or LYSA, and based on clinical activity observed with tazemetostat in combination with R-CHOP as a front-line treatment for patients with high risk diffuse large B-cell lymphoma, or DLBCL, we commenced a Phase 2 clinical trial that is being conducted by LYSA evaluating this combination as a front-line treatment for high-risk patients with FL. In addition, we are finalizing plans for investigator-sponsored studies to evaluate tazemetostat in combination with rituximab, venetoclax or BTK inhibitors for the treatment of patients with FL in the third-line or later treatment settings. Tazemetostat is an oral, first in class, selective small molecule inhibitor of the EZH2 histone methyltransferase, or HMT, that we are developing for the treatment of a broad range of cancer types in multiple treatment settings. Tazemetostat has shown meaningful clinical activity as an investigational monotherapy in multiple cancer indications and has been generally well-tolerated across clinical trials to date. We believe tazemetostat is a "pipeline in a product" opportunity and plan to explore its utility as a monotherapy and in combinations through both company and investigator-sponsored studies in additional indications, including:
• Lymphomas and B-cell malignancies, such as DLBCL, mantle cell lymphoma, or
MCL, chronic lymphocytic leukemia, or CLL, chronic myeloid leukaemia, or
CML, and others; • Mutationally defined solid tumors, such as chordoma, melanoma, mesothelioma, and tumors harboring an EZH2 or SWI/SNF alteration;
• Chemotherapy or treatment-resistant tumors, such as triple-negative breast
cancer, small cell lung cancer, ovarian cancer, and metastatic castration-resistant prostate cancer, or mCRPC; and,
• Immuno-oncology-sensitive tumors, such as colorectal cancer, bladder
cancer, soft tissue sarcomas and non-small cell lung cancer. 30
-------------------------------------------------------------------------------- In connection with these efforts, we completed enrollment in the safety run-in portion of our combination study in mCRPC and initiation of the efficacy expansion stage is planned for early 2021. We anticipate reporting safety and efficacy data from the safety run-in portion of the study at a medical meeting in 2021.
We own the global development and commercialization rights to tazemetostat
outside of
TAZVERIK is available to eligible patients inthe United States via a specialty distribution network. To commercialize TAZVERIK for the ES and FL indications inthe United States , we have built a focused field presence and marketing capabilities. This includes an efficiently sized field-based organization of 76 individuals.
For geographies outside
Tazemetostat is covered by claims ofU.S. and European composition of matter patents, which are expected to expire in 2032, exclusive of any patent term or other extensions. Tazemetostat has been granted Fast Track designation by the FDA in patients with relapsed or refractory FL, relapsed or refractory DLBCL with EZH2 activating mutations and metastatic or locally advanced ES who have progressed on or following an anthracycline-based treatment regimen. The FDA has also granted orphan drug designation to tazemetostat for the treatment of patients with FL, malignant rhabdoid tumors, or MRT, soft tissue sarcoma, or STS, and mesothelioma. With the approval of TAZVERIK for the treatment of patients with FL, orphan drug designation provides us with a seven-year market exclusivity. Beyond tazemetostat, we are progressing preclinical efforts to pursue additional development candidates for our pipeline and to further support our leadership position in epigenetics. We have collaborations withBoehringer Ingelheim International GmbH , or Boehringer Ingelheim, focused on the research, development and commercialization of novel small molecule inhibitors, discovered by us, directed toward previously unaddressed epigenetic targets as potential therapies for people with cancer, and withGlaxo Group Limited (an affiliate of GlaxoSmithKline plc), or GSK, focused on the development of PRMT inhibitors discovered by us. InMarch 2020 , we and Boehringer Ingelheim amended our agreement to extend the research period for the shared program targeting enzymes within helicase families with Boehringer Ingelheim providing research funding of approximately$0.4 million . Additionally, Boehringer Ingelheim terminated the program targeting enzymes with HAT families inJune 2020 . InSeptember 2020 , we and Boehringer Ingelheim further amended the agreement to extend the research period for the shared program targeting enzymes within helicase families, with Boehringer Ingelheim to provide research funding of approximately$0.1 million . ThroughSeptember 30, 2020 , in addition to revenues from product sales, we have raised an aggregate of$1,377.3 million to fund our operations. This includes$243.7 million of non-equity funding through our collaboration agreements,$218.1 million of funding, consisting of$150.0 million in equity funding received through agreements withRPI Finance Trust , or RPI, and$68.1 million in debt financing received through a loan agreement withBioPharma Credit Investments V (Master) LP andBPCR Limited Partnership (as transferee ofBioPharma Credit Investments V (Master) LP's interest as a lender), or the Lenders,$839.5 million from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 .
As of
We commenced active operations in early 2008, and since inception, have incurred significant operating losses. Our net loss was$56.1 million and$165.5 million , respectively, for the three and nine months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , our accumulated deficit totaled$922.5 million . Notwithstanding our sales of TAZVERIK, we expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses to increase in connection with our ongoing activities, particularly as we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we expect our expenses to increase as we fund our tazemetostat development program; continue our collaboration with Boehringer Ingelheim; and continue research and development and initiate clinical trials of, and seek regulatory approval for, any future product candidates 31 --------------------------------------------------------------------------------
Funding Agreements with
We executed a purchase agreement with RPI onNovember 4, 2019 , or the RPI Purchase Agreement. Pursuant to the RPI Purchase Agreement, we sold to RPI 6,666,667 shares of our common stock and a warrant to purchase up to 2,500,000 shares of our common stock at an exercise price of$20.00 per share, or the Warrant. We also sold our rights to receive royalties from Eisai with respect to net sales by Eisai of tazemetostat products inJapan , or the Japan Royalty, pursuant to the amended and restated collaboration and license agreement between us and Eisai, dated as ofMarch 12, 2015 , or the Eisai License Agreement. In consideration for the sale of shares of our common stock, the Warrant and the Japan Royalty, RPI paid us$100.0 million upon the closing of the RPI Purchase Agreement inNovember 2019 . In addition, RPI agreed, in connection with RPI's acquisition from Eisai of the right to receive royalties from us under the Eisai License Agreement, to reduce our royalty obligation by low single digits upon the achievement of specified annual net sales levels. We also had the option to sell to RPI$50.0 million of shares of common stock for an 18-month period beginningNovember 4, 2019 , or the Put Option. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnNovember 4, 2019 , we also entered into a Loan Agreement with BioPharma Credit PLC, or the Collateral Agent, and the Lenders, providing for up to$70.0 million in secured term loans to be advanced in up to three tranches, or the Loan Agreement. We borrowed$70.0 million in the aggregate under the three tranches pursuant to the Loan Agreement. OnNovember 3, 2020 , we, the Collateral Agent and the Lenders entered into an Amended and Restated Agreement, amending and restating the Loan Agreement, or, as amended and restated, the Amended and Restated Loan Agreement. The Amended and Restated Loan Agreement provides for, among other things, an additional secured term loan facility of$150.0 million , or the Tranche D Loan. OnNovember 3, 2020 , we also delivered written notice to the Lenders to draw down the Tranche D Loan, which we expect will be funded onNovember 18, 2020 . Our right to borrow, and the Lenders' obligation to lend, the Tranche D Loan is subject to the satisfaction of customary closing conditions and ongoing effectiveness of FDA approval of TAZVERIK for the treatment of FL. Under the Amended and Restated Loan Agreement, we have the right to request from the Lenders, subject to the Lenders' agreement to lend additional amounts to us, up to an additional$150.0 million , provided that we have not prepaid any outstanding term loans at the time of our request and such request is made beforeNovember 18, 2021 . The obligations under the Amended and Restated Loan Agreement remain secured by a first priority security interest that was granted at the time of the Loan Agreement in and a lien on substantially all of our assets, subject to certain exceptions. The Amended and Restated Loan Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default applicable to us and our subsidiaries. If an event of default occurs and is continuing, the Collateral Agent under the Amended and Restated Loan Agreement may, among other things, accelerate the loans and foreclose on the collateral. See Note 18, Subsequent Events, of the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the key terms of the Amended and Restated Loan Agreement.
Collaborations
See Note 12, Collaborations, of the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the key terms of our arrangements with Boehringer Ingelheim, GSK, Eisai andRoche Sequencing Solutions, Inc. , or Roche Sequencing. OnNovember 3, 2020 , we received a notice of termination of our collaboration and license agreement with Celgene (See Note 18, Subsequent Events, of the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). 32
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Results of Operations Revenues
The following is a comparison of total revenues for the three and nine months
ended
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change (In millions) (In millions) Product revenues, net$ 3.4 $ -$ 3.4 $ 7.0 $ -$ 7.0 Collaboration revenue 0.1 5.7 (5.6 ) 0.4 19.5 (19.1 ) Total revenues$ 3.5 $ 5.7 $ (2.2 ) $ 7.4 $ 19.5 $ (12.1 ) Product Revenues, net Net product revenues representU.S. sales from our sole commercial product, TAZVERIK, which was first approved by the FDA onJanuary 23, 2020 . During the three and nine months endedSeptember 30, 2020 , net product revenues were$3.4 million and$7.0 million , respectively. Sales allowances and accruals consisted of patient financial assistance, distribution fees, discounts, and chargebacks. We did not have product revenues in 2019.
Collaboration Revenue
Our revenue during the periods consisted of collaboration revenue, including amounts recognized from deferred revenue related to upfront payments for licenses or options to obtain licenses in the future, research and development services revenue earned and milestone payments earned under collaboration and license agreements with our collaboration partners. Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change (In millions) (In millions) Collaboration Partner Boehringer Ingelheim:$ 0.1 $ 5.7 $ (5.6 ) $ 0.4 $ 19.5 $ (19.1 ) $ 0.1 $ 5.7 $ (5.6 ) $ 0.4 $ 19.5 $ (19.1 ) In the three and nine months endedSeptember 30, 2020 , we recognized$0.1 million and$0.4 million , respectively, in collaboration revenue. This collaboration revenue was earned as part of our Boehringer Ingelheim collaboration. The revenue recognized during the three and nine months endedSeptember 30, 2020 was related to an amendment to extend the research period under the collaboration agreement under which Boehringer Ingelheim agreed to fund up to$0.4 million of additional research activities. ThroughSeptember 30, 2020 , we have recognized$25.9 million in total collaboration revenue under our agreement with Boehringer Ingelheim. In three and nine months endedSeptember 30, 2019 , we recognized$5.7 million and$19.5 million , respectively, in collaboration revenue as part of our Boehringer Ingelheim collaboration. We recognized revenue as our research services were performed. Under the agreement we received$15.0 million in an upfront payment from Boehringer Ingelheim for our license to inhibitor technology of two undisclosed targets,$5.5 million for a development milestone for selection of a lead optimization candidate for the shared program targeting enzymes within helicase families and a total of$5.0 million in fixed quarterly payments for services throughDecember 31, 2019 . Cost of Product Revenue
The following is a comparison of cost of product revenue for the three and nine
months ended
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change (In millions) (In millions) Cost of product revenue$ 1.6 $ -$ 1.6 $ 3.2 $ -$ 3.2 33
-------------------------------------------------------------------------------- The cost of product revenue consists of costs related to the sales of TAZVERIK. These costs include materials, labor, manufacturing overhead, amortization of milestone payments, and royalties payable on net sales of TAZVERIK. During the three months endedSeptember 30, 2020 , the cost of product revenue was$1.6 million and consisted of$0.1 million in costs associated with manufacturing TAZVERIK,$1.0 million in amortization expense related to the two$25.0 million milestone payments under our agreement with Eisai upon regulatory approval of tazemetostat for ES and upon regulatory approval of tazemetostat for follicular lymphoma, and$0.5 million in worldwide royalties owed to Royalty Pharma on net sales of TAZVERIK in the three months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2020 , the cost of product revenue was$3.2 million and consisted of$0.2 million in costs associated with manufacturing TAZVERIK,$2.0 million in amortization expense related to the two$25.0 million milestone payments under our agreement with Eisai upon regulatory approval of tazemetostat for epithelioid sarcoma and upon regulatory approval of tazemetostat for follicular lymphoma, and$1.0 million in worldwide royalties owed to Royalty Pharma on net sales of TAZVERIK in the three months endedSeptember 30, 2020 . All product costs incurred prior to FDA approval of TAZVERIK inJanuary 2020 were expensed as R&D expenses. We expect our cost of product revenues (excluding amortization of intangible assets) to continue to be positively impacted during 2020 and 2021, as we sell through certain inventory that was expensed prior to FDA approval of TAZVERIK inJanuary 2020 . We did not have cost of product revenues in 2019.
Research and Development
The following is a comparison of research and development expenses for the three
and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change (In millions) (In millions)
Research and development
During the three and nine months endedSeptember 30, 2020 , total research and development expenses decreased by$0.9 million and$17.1 million compared to the three and nine months endedSeptember 30, 2019 , respectively. The decrease in the three months endedSeptember 30, 2020 relates to decreases in tazemetostat manufacturing costs, which were offset by increases in clinical trial expenses, discovery research activities, and costs associated with the buildout of our regulatory and late-stage development groups. The decrease in the nine months endedSeptember 30, 2020 primarily relates to the payment of a$10.0 million clinical development milestone to Eisai in 2019, and decreases in tazemetostat manufacturing costs and discovery research activities related to tazemetostat in other indications, which were offset by increases in clinical trial expenses and costs associated with the buildout of our regulatory and late-stage development groups. The following table illustrates the components of our research and development expenses: Three Months Ended Nine Months Ended September 30, September 30, Product Program 2020 2019 2020 2019 (In millions) (In millions) External research and development expenses: Tazemetostat and related EZH2 programs$ 8.0 $ 11.2 $ 26.7 $ 48.1 Pinometostat and related DOT1L programs 0.0 0.2 0.0 0.3 Discovery and preclinical stage product programs, collectively 5.8 4.7 12.6 14.0 Unallocated personnel and other expenses 11.9 10.5 38.0 32.0
Total research and development expenses
34
-------------------------------------------------------------------------------- External research and development expenses for tazemetostat and related EZH2 programs decreased$3.2 million and$21.4 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to the three and nine months endedSeptember 30, 2019 . The decrease for the three and nine months endedSeptember 30, 2020 relates to a decrease in tazemetostat manufacturing costs, as we began to capitalize the cost of manufacturing following the approval of TAZVERIK inJanuary 2020 , and decreased discovery research activities related to tazemetostat in other indications, which were offset by increases in clinical trial expenses and increased costs associated with the buildout of our regulatory and late stage development groups. There were no costs incurred related to pinometostat for the three and nine months endedSeptember 30, 2020 . For the three and nine months endedSeptember 30, 2019 , external research and development expenses for pinometostat and related DOT1L programs were$0.2 million and$0.3 million , respectively. In general, costs related to pinometostat are primarily associated with costs attributed to theCooperative Research and Development Agreement, or CRADA, with theNational Cancer Institute , or NCI. External research and development expenses for discovery and preclinical stage product programs increased$1.1 million and decreased$1.4 million during the three and nine months endedSeptember 30, 2020 , respectively, compared to the three and nine months endedSeptember 30, 2019 . The increase for the three months endedSeptember 30, 2020 relates to increased spending for high priority discovery research programs and development activities related to our G9a preclinical program. The decrease for the nine months endedSeptember 30, 2020 is primarily related to reduced spending for discovery research activities and decreased development activities related to our G9a preclinical program. Unallocated personnel and other expenses are comprised of compensation expenses for our full-time research and development employees and other general research and development expenses. Unallocated personnel and other expenses increased by$1.4 million and$6.0 million during the three and nine months endedSeptember 30, 2020 , respectively, compared to the three and nine months endedSeptember 30, 2019 . The increase for the three and nine months endedSeptember 30, 2020 is a result of increases in facilities and equipment related expenses and in unallocated personnel costs, offset by an increase in the allocation of expenses to projects.
We expect that research and development expenses will increase during the remainder of 2020, as we increase our clinical trial activity for tazemetostat and utilize our drug discovery platform to progress preclinical efforts and pursue additional development candidates to expand our pipeline.
Selling, General and Administrative
The following is a comparison of selling, general and administrative expenses
for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change (In millions)
(In millions)
Selling, general and administrative
For the three months endedSeptember 30, 2020 , our selling, general and administrative expenses increased$13.5 million compared to the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , our selling, general and administrative expenses increased$45.4 million compared to the nine months endedSeptember 30, 2019 . The increases in expenses for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 are due to increased commercialization activities, including the build out of our sales force and commercial infrastructure to support the ongoing launch of TAZVERIK in the ES indication, and an expansion of our infrastructure to support the ongoing commercial launch in FL, and increased personnel related expenses. We expect that selling, general and administrative expenses will increase during the remainder of 2020, as we continue to increase our commercial activities for tazemetostat. 35
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Other (Expense) Income, Net
The following is a comparison of other (expense) income, net for the three and
nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change (In thousands) (In thousands) Other income, net Interest income$ 473 $ 1,879 $ (1,406 ) $ 2,720 $ 5,790 $ (3,070 ) Interest expense (1,837 ) - (1,837 ) (3,897 ) - (3,897 ) Other expense, net (42 ) (15 ) (27 ) (105 ) (34 ) (71 ) Non-cash interest expense related to sale of future royalties (312 ) - (312 )
(908 ) - (908 )
Other (expense) income, net
Other (expense) income, net consists of interest income earned on our cash equivalents and marketable securities, net of imputed interest expense paid under our capital lease obligation. The decrease in other income for the three months endedSeptember 30, 2020 is principally due to an increase in interest expense of$1.8 million incurred in connection with our long-term debt obligations, non-cash interest expense related to the sale of future royalties of$0.3 million , and a decrease in net interest income of$1.4 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . The decrease in other income for the nine months endedSeptember 30, 2020 is principally due to an increase in interest expense of$3.9 million incurred in connection with our long-term debt obligations, non-cash interest expense related to the sale of future royalties of$0.9 million , and a decrease in net interest income of$3.1 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 .
Income Tax Expense
We did not record a federal or state income tax provision or benefit for the three and nine months endedSeptember 30, 2020 and 2019 due to the expected and known loss before income taxes to be incurred, or incurred, as applicable, for the years endedDecember 31, 2020 and 2019, as well as our continued maintenance of a full valuation allowance against our net deferred tax assets, with the exception of the deferred tax asset related to alternative minimum tax credit.
Liquidity and Capital Resources
ThroughSeptember 30, 2020 , in addition to revenues from product sales, we have raised an aggregate of$1,377.3 million to fund our operations. This includes$243.7 million of non-equity funding through our collaboration agreements,$218.1 million of funding, consisting of$150.0 million in equity funding received through an agreement withRPI Finance Trust , or RPI, and$68.1 million in debt financing received through a loan agreement withBioPharma Credit Investments V (Master) LP andBPCR Limited Partnership (as transferee ofBioPharma Credit Investments V (Master) LP's interest as a lender), or the Lenders,$839.5 million was from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million was from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 . As ofSeptember 30, 2020 , we had$279.9 million in cash, cash equivalents and marketable securities. InNovember 2019 , we raised approximately$123.1 million in net proceeds from the sale to RPI of 6,666,667 shares of our common stock, the Warrant and the Japan Royalty for, as well as from proceeds of the Tranche A Loan borrowings under the Loan Agreement. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnMarch 27, 2020 , we received proceeds of the Tranche B Loan borrowings of$25.0 million under the Loan Agreement. OnJune 30, 2020 , we received proceeds of the Tranche C Loan borrowings of$20.0 million under the Loan Agreement. InMarch 2019 , we raised approximately$122.7 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 11,500,000 shares of our common stock in a public offering at a price of$11.50 per share. We also raised approximately$37.4 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 350,000 shares of series A convertible preferred stock in a public offering at a price of$115 per share. The series A convertible preferred stock is convertible into 3,500,000 shares of our common stock. 36
-------------------------------------------------------------------------------- InOctober 2018 , we raised approximately$81.6 million in net proceeds (after deducting underwriting discounts and commissions and offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 9,583,334 shares of our common stock in a public offering at a price of$9.00 per share. In addition to our existing cash, cash equivalents and marketable securities, we may receive research and development co-funding and are eligible to earn a significant amount of option exercise and milestone payments under our collaboration agreements. Our ability to earn these payments and the timing of earning these payments is dependent upon the outcome of our research and development activities and is uncertain at this time.
Funding Requirements
Our primary uses of capital are clinical trial costs, third-party research and development services, expenses related to commercialization, compensation and related expenses, laboratory and related supplies, our potential future milestone payment obligations to Roche Sequencing under the amended Roche Sequencing companion diagnostics agreement, legal and other regulatory expenses and general overhead costs. Because the continued approval of TAZVERIK both in the ES indication and in the FL indications is contingent upon verification and description of clinical benefit in confirmatory trials and, because we are developing tazemetostat for other indications and because our product candidates are in various stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of TAZVERIK, for all indications we are exploring or plan to explore, or our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. Except for any obligations of our collaborators to make license, milestone or royalty payments under our agreements with them, and remaining amounts available to us under the Loan Agreement with the Lenders, which are subject to certain conditions, we do not have any committed external sources of liquidity. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise any additional funds that may be needed through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Outlook
Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities as ofSeptember 30, 2020 , together with the cash we expect to generate from product sales and the anticipated$150.0 million of proceeds from our borrowing of the Tranche D Loan, will be sufficient to fund our planned operating expenses and capital expenditure requirements and pay our debt service obligations as they become due into 2023, without giving effect to any potential option exercise fees or milestone payments we may receive under our collaboration agreements. We have based this estimate on assumptions that may prove to be wrong, such as the revenue that we expect to generate from the sale of our products, and particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain. As a result, we could use our capital resources sooner than we expect. Cash Flows The following is a summary of cash flows for the nine months endedSeptember 30, 2020 and 2019: Nine Months Ended September 30, 2020 2019 Change (In millions) Net cash (used in) operating activities$ (153.2 ) $ (111.7 ) $ (41.5 ) Net cash provided by (used in) investing activities 4.9 (43.3 ) 48.2 Net cash provided by financing activities 102.3 162.8 (60.5 ) 37
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Net cash used in operating activities during the nine months endedSeptember 30, 2020 primarily relates to our net loss of$165.5 million and changes in working capital of$12.5 million , partially offset by net depreciation and amortization of$2.7 million , non-cash stock-based compensation of$21.2 million , and non-cash interest expense associated with the sale of future royalties of$0.9 million . Net cash used in operating activities for the nine months endedSeptember 30, 2019 primarily relates to our net loss of$113.9 million , changes in working capital of$7.3 million and net depreciation and amortization of$2.1 million , partially offset by non-cash stock-based compensation of$11.6 million .
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities during the nine months ended
Net cash used in investing activities during the nine months endedSeptember 30, 2019 reflects$343.2 million of purchases of available-for-sale securities and$0.4 million of purchases of property and equipment, offset by maturities of available-for-sale securities of$300.3 million .
Net Cash Provided by Financing Activities
Net cash provided by financing activities of$102.3 million during the nine months endedSeptember 30, 2020 primarily reflects cash received from the sale of common stock of$50.0 million in connection with our exercise of our Put Option to sell shares of our common stock to Royalty Pharma, net cash received during the period from Tranche B Loan borrowings of$25.0 million under the Loan Agreement, net cash received during the period from Tranche C Loan borrowings of$20.0 million under the Loan Agreement, stock option exercises of$6.3 million , and the purchases of shares under our employee stock purchase plan of$1.2 million , partially offset by payments of debt issuance costs of$0.1 million and offering costs of$0.1 million . Net cash provided by financing activities of$162.8 million during the nine months endedSeptember 30, 2019 primarily reflects cash received from the sale of common and preferred stock of$160.4 million , stock option exercises of$1.9 million , and the purchases of shares under our employee stock purchase plan of$0.8 million , partially offset by payments of public offering costs of$0.3 million . Contractual Obligations There were no material changes to our contractual obligations and commitments described under "Management's Discussion and Analysis and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration revenue, inventories and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the condensed consolidated financial statements prospectively from the date of the change in estimate. 38
-------------------------------------------------------------------------------- We define our critical accounting policies as those accounting principles generally accepted inthe United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. Management has determined that our most critical accounting policies are those relating to revenue recognition, inventories, stock-based compensation and research and development expenses, including our accounting for clinical trial expense and accruals. As our clinical development plan for tazemetostat progresses, we expect research and development expenses and, in particular, our accounting for clinical trial accruals to be an increasingly important critical accounting policy. Except as described below with respect to revenue recognition for product revenue, during the nine months endedSeptember 30, 2020 , there have been no material changes with respect to our critical accounting policies disclosed in our Annual Report on Form 10-K for our fiscal year endedDecember 31, 2019 . Revenue Recognition We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. We sell TAZVERIK inthe United States principally to a limited number of specialty pharmacies, which dispense the product directly to patients, and specialty distributors, which in turn sell the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of patients. The specialty pharmacies and specialty distributors are referred to as our customers. Revenue is recognized by us when the customer obtains control of the product, which occurs at a point in time, typically when the product is received by our customers. We provide a right of return to our customers for unopened product for a limited time before and after its expiration date, which lapses upon shipment to a patient. Healthcare providers to whom specialty distributors sell TAZVERIK hold limited inventory that is designated for patients, and we are able to monitor inventory levels in the distribution channel, thereby limiting the risk of return.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to our product sales. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. Trade Discounts and Allowances: We generally provide customers with discounts that include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from certain customers. To the extent the services received are distinct from our sale of products to the customer, these payments are classified in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss. 39 -------------------------------------------------------------------------------- Product Returns: Consistent with industry practice, we generally offer customers a limited right of return based on the product's expiration date for product that has been purchased from us, which lapses upon shipment to a patient. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using available industry data and our own historical sales information, including our visibility into the inventory remaining in the distribution channel. Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and we generally issue credits for such amounts within a few weeks of the customer's notification to us of the resale. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed but for which we have not yet issued a credit. Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at period end. Payor Rebates: We may contract with various private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. Other Incentives: Other incentives that we offer include voluntary patient assistance programs such as co-pay assistance. Co-pay assistance programs are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in in the distribution channel inventories at period end.
Recently Adopted Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our condensed consolidated financial statements, see Note 2, Summary of Significant Accounting Policies-Recently Adopted Accounting Pronouncements, in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
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