MORPHIC HOLDING, INC. You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations, intentions and belief. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" under Part I, Item 1A. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, the impact of the COVID-19 pandemic, business strategy, market size, potential growth opportunities, preclinical and clinical development activities, efficacy and safety profile of our product candidates, use of net proceeds from our offerings, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of preclinical studies and clinical trials, commercial collaborations with third parties and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "predict," "target," "intend," "could," "would," "should," "project," "plan," "expect," and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
Overview
We are a biopharmaceutical company applying our proprietary insights into integrins to discover and develop a pipeline of potentially first-in-class oral small molecule integrin therapeutics. Integrins are a target class with multiple approved injectable blockbuster drugs for the treatment of serious chronic diseases, including autoimmune, cardiovascular and metabolic diseases, fibrosis and cancer. To date, no oral small molecule integrin therapies have been approved by theU.S. Food and Drug Administration , or FDA. Despite this, we believe our unique platform can unlock the potential to reliably generate high-quality oral molecules against specific integrin targets. TheMorphic integrin technology platform, or MInT Platform, was created leveraging our unique understanding of integrin structure and function to develop novel product candidates designed to achieve the potency, high selectivity, and pharmaceutical properties required for oral administration. We are advancing our pipeline, including our lead product candidate, MORF-057, an ?4?7-specific integrin inhibitor affecting inflammation, into clinical development for the treatment of inflammatory bowel disease, or IBD. We submitted an investigational new drug application, or IND, for MORF-057 inJuly 2020 , and the FDA permitted the study submitted under the IND to proceed inAugust 2020 . InSeptember 2020 , we initiated a Phase 1 clinical trial of MORF-057 in healthy volunteers to establish our clinical program and select doses for our Phase 2 program in IBD with an initial focus on ulcerative colitis, or UC. The MORF-057 Phase 1 study included SAD, MAD, and FE, cohorts evaluating MORF-057 safety, pharmacokinetics, or PK, and pharmacodynamics, or PD. Healthy subjects were randomized 3:1 to receive a single dose of MORF-057 at 25, 50, 100, 150 and 400 mg or matching placebo in the SAD cohorts; or twice daily, or BID, doses of 25, 50 and 100 mg MORF-057 or matching placebo for a total of 14 days in the MAD cohorts. A total of 67 eligible healthy subjects were enrolled into the studies, with 36 in the SAD, nine in the FE and 22 in the MAD cohorts. 66 subjects completed study treatment and one from the 50 mg BID MAD cohort withdrew consent for personal reasons MORF-057 was well tolerated in all cohorts and no safety signals were identified. MORF-057 demonstrated a favorable PK profile, where target engagement was confirmed, and a clear PK and PD relationship was established. MORF-057 was rapidly absorbed and systemic exposure was confirmed to increase approximately dose proportionally. A slight reduction in exposure without effect on trough concentrations was observed upon administration with a high fat meal in the FE study. The results suggest food intake has no impact on trough MORF-057 levels and that MORF-057 can be administered without regard to food in planned studies in patients. ?4?7 RO increased with dose and study day, achieving saturation (>99% RO) in individual patients from all cohorts above 25 mg by day 14. In the 100 mg BID cohort, MORF-057 saturated the ?4?7 receptor (mean RO >99%). Dose-and time-dependent changes in biomarkers including specific ?4?7 high expressing immune cell populations were observed, adding to evidence of proof of biology for MORF-057. These changes were consistent with those reported with other integrin inhibitors including the antibody drug vedolizumab which is approved for the treatment of IBD. In an additional MORF-057 Phase 1 study, subjects were dosed up to 200 mg twice daily (BID) and those receiving MORF-057 at 100 BID or 200 mg BID demonstrated ?4?7 receptor saturation and statistically significant increases in circulating central memory, effector memory T lymphocyte and switched memory B lymphocyte populations compared with placebo. At the 25 78
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mg and 50 mg BID exploratory doses, directionally increasing trends were also observed in key PD measures. All doses were well tolerated, no safety signals were identified, and a favorable PK profile was observed. In both single doses of 200 mg MORF-057 and 200 mg BID over the 14 days, MORF-057 demonstrated ?4?7 receptor saturation at Ctrough. Statistically significant changes in lymphocyte subset populations and CCR9 mRNA were observed, consistent with previous studies. Based on the results from the Phase 1 studies, we initiated a Phase 2 clinical trial of MORF-057 inMarch 2022 . EMERALD-1 (MORF-057-201), which is an open-label multi-center Phase 2a trial designed to evaluate the efficacy, safety and tolerability of MORF-057 in adults with moderate to severe UC, completed targeted enrollment inOctober 2022 , with 30 patients enrolled in the study. Additionally, patients that were undergoing screening at the time the study completed targeted enrollment were enrolled in the study for a total of 35 patients enrolled in the main cohort. Enrollment of an exploratory cohort of up to ten patients who have previously failed treatment with vedolizumab is ongoing. Patients enrolled in the EMERALD-1 study are being treated with 100 mg BID at sites inthe United States andPoland . The primary endpoint of the trial is the change in RHI, a validated instrument that measures histological disease activity in ulcerative colitis at 12 weeks compared to baseline. Patients will then continue for an additional 40 weeks of maintenance therapy followed by a 52-week assessment. Secondary and additional outcome measures in the EMERALD-1 study include change in the modified Mayo clinic score, safety, PK parameters and key PD measures including ?4?7 receptor occupancy and lymphocyte subset trafficking. We expect that primary endpoint data from the main cohort of the EMERALD-1 Phase 2a trial of MORF-057 in patients with moderate to severe UC will report in the second quarter of 2023. EMERALD-2 (MORF-057-202) which is a global Phase 2b randomized controlled trial of MORF-057 began dosing patients inNovember 2022 . Patients enrolled in the EMERALD-2 study are randomized to receive one of three active arms or a placebo arm: 100 mg BID, 200 mg BID, and a QD (once daily) arm, or a placebo arm which will cross over to MORF-057 after the 12-week induction phase. The primary endpoint of the trial is the clinical remission rate as measured by the modified Mayo score at 12 weeks. The secondary endpoints will include the change in RHI, PK and PD measures, as well as safety parameters. Following the 12-week induction phase, patients will move to a 40-week maintenance phase. We believe that we will achieve completion of the primary endpoint from the EMERALD-2 Phase 2b trial of MORF-057 in patients with moderate to severe UC in the first half of 2025. Given the progress achieved with MORF-057, we paused a second-generation development candidate at the pre-IND stage during 2022, focusing on the advancement of MORF-057 through Phase 2 clinical programs. We continue to expand our ?4?7 portfolio and have positioned next-generation ?4?7 small molecule development candidates for clinical studies in the future. InJune 2022 we have reported that our collaboration withAbbVie Biotechnology, Ltd. , or AbbVie, which was entered into inOctober 2018 , or the AbbVie Agreement, had been terminated for convenience. The subject of this collaboration was selective oral ?v?6-specific integrin inhibitors we had developed for the treatment of fibrotic diseases including idiopathic pulmonary fibrosis, or IPF, and additional indications under our collaboration with AbbVie. InAugust 2020 , AbbVie exercised an option to license our ?v?6-specific integrin inhibitor program and made a one-time$20.0 million payment to us. AbbVie informed us that it did not intend to advance any of our selective oral ?v?6-specific integrin inhibitors due to a suspected on-target ?v?6-mediated safety signal that has been observed in pre-clinical testing, the details of which were published in theSociety for Toxicology journal inDecember 2022 . The AbbVie Agreement terminated effectiveDecember 2022 , and as a result we will not receive any additional payments thereunder. InFebruary 2019 , we entered into an agreement withJanssen Pharmaceuticals, Inc. , or Janssen, to develop novel integrin therapeutics, or the Janssen Agreement. InFebruary 2021 Janssen paid us$5.0 million to commence work on a third research program to discover antibody activators against a specific integrin target. InDecember 2021 , Janssen informed us that they had decided not to exercise the options on the first two integrin targets and focused efforts on the third integrin research program which includes the potential development of integrin antibody activators. The first two integrin targets were returned to us due to a lack of target validation in the specific disease of Janssen's interest. InJanuary 2023 , we received notice from Janssen that they had elected to terminate the agreement. The termination will be effective within 60 days ofJanuary 13, 2023 , and as a result we do not expect to receive any additional payments under the Janssen Agreement except for potential nominal amounts related to research services completed in 2023 prior to termination. Beyond our lead target, MORF-057, we are using our MInT Platform to advance a broad pipeline of preclinical programs across a variety of therapeutic areas, all of which aim to harness the potential of inhibition or activation of an integrin receptor. Additional wholly-owned programs have advanced near to or into the lead optimization phase of discovery. We presented positive preclinical data from our ?v?8 program at theAmerican Association for Cancer Research Annual Meeting inApril 2021 , demonstrating anti-tumor activity in checkpoint refractory cancer models and we are continuing our focus on advancing our ?v?8 program. We also have additional research stage programs ongoing against fibronectin integrin targets in pulmonary hypertensive diseases including pulmonary arterial hypertension (PAH) and other therapeutic areas. Integrins are known to promote cell proliferation, survival, hypertrophic growth and fibrosis, which are key elements in the progression of PAH.
In
InJuly 2020 , we entered into an Open Market Sale Agreement, or the Original Agreement, withJefferies LLC , or Jefferies, with respect to an at-the-market offering program, or the Previous ATM, under which we could offer and sell, from time to time at our sole discretion, shares of our common stock, having an aggregate offering amount of up to$75,000,000 , referred to as Placement Shares, through Jefferies as sales agent. InAugust 2021 , we entered into Amendment No. 1 to the Original 79
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Agreement with Jefferies, or the New ATM, to increase the total value of Placement Shares subject to offer and sale to up to an aggregate offering amount of up to$150,000,000 . We refer to the Previous ATM and the New ATM, collectively, as the ATM. During the year endedDecember 31, 2022 , 1,000,000 shares were issued under the New ATM for net proceeds of$39.2 million , after deducting offering commissions and expenses. As ofDecember 31, 2022 , we had approximately$97.2 million of common stock remaining available for sale under the New ATM. We may not sell any Placement Shares under the Previous ATM. Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, and performing research to discover and develop oral small-molecule integrin therapeutics. Revenue generation activities to date have been limited to payments received from our collaboration agreements with AbbVie and Janssen, discussed further in Note 12 of the accompanying consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We do not have any products approved for sale and have not generated any revenue from product sales to date. From inception throughDecember 31, 2022 , we raised an aggregate of approximately$743.0 million of gross proceeds primarily through the issuance of equity, including our convertible preferred equity securities, our initial public offering, our underwritten public offering inMarch 2021 , and sales of shares of our common stock pursuant to the ATM, along with payments received under our collaboration agreements. Since inception, we have incurred significant operating losses. As ofDecember 31, 2022 , we had an accumulated deficit of$297.1 million . We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we advance our current and future product candidates through preclinical and clinical development, seek regulatory approval for them, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel, and operate as a public company. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing, and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as additional collaboration agreements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when, needed, could have a material adverse effect on our business, results of operations, and financial condition. As ofDecember 31, 2022 , we had cash, cash equivalents, and marketable securities of$348.2 million . We believe that our existing cash, cash equivalents and marketable securities, along with the$100.0 million raised in our private issuance of common stock and pre-funded warrants inFebruary 2023 , will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2026.
Impact of the COVID-19 Pandemic
The ongoing COVID-19 pandemic continues to present public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as theU.S. economy and financial markets. The extent of the ongoing impact of COVID-19 including supply chain disruptions, as well as other economic conditions and trends including increases in consumer prices, inflation, the rise in interest rates and ongoing labor shortage, on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the rise of variants that may be less responsive to existing vaccines, the impact on our clinical and preclinical studies, employee or industry events, and the effect on our suppliers and manufacturers, all of which are uncertain and cannot be predicted. Although we currently have not experienced much of an impact on our business, excluding minor changes to our development timelines, if there are closures or other restrictions in places where we or our vendors work or transport supply that may result in constrained supply of our product candidates or delays in our clinical and preclinical studies or planned clinical trials, our business, results of operations and overall financial performance in future periods could be materially adversely impacted. In addition, we have experienced impacts from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, delays in future site activations and future enrollment of clinical trials, prioritization of hospital resources toward the COVID-19 pandemic effort, and delays in review by the FDA and comparable foreign regulatory agencies. As of the filing date of this Form 10-K, the extent to which COVID-19 and other economic conditions and trends or geo-political actions, including the current armed conflict inUkraine , may impact our financial condition, results of operations or guidance is uncertain and the effects thereof may not be fully reflected in our results of operations and overall financial performance until future periods. See "Risk Factors" included elsewhere in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic, general economic conditions and geo-political actions on our business. 80
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Table of Contents Financial Operations Overview Collaboration Revenue
We do not have any products approved for sale, and as a result, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future.
To date, all of our collaboration revenue has been derived from collaboration agreements with AbbVie and Janssen. Our collaborations with AbbVie and Janssen are now concluded, and prospectively we remain open to opportunistically evaluating and entering into strategic partnerships around certain therapeutic candidates, geographic markets or disease areas. We expect that our revenue, until we have a marketed product, will be derived primarily from payments under collaboration and license agreements that we may enter into in the future, if any.
Collaboration Revenue - AbbVie
InOctober 2018 , we entered into a collaboration with AbbVie, an investor that held approximately 5% of our common stock at the time of the agreement, designed to advance a number of our oral integrin therapeutics for fibrosis-related indications. Under the terms of the AbbVie Agreement, AbbVie paid us an upfront payment of$100.0 million for research and development activities, and we provided to AbbVie exclusive license options on product candidates directed at multiple targets. InAugust 2020 , AbbVie exercised its option to license the selective ?v?6-specific integrin inhibitors program and paid us a one-time payment of$20.0 million .
In
Collaboration Revenue - Janssen
InFebruary 2019 , we entered into the Janssen Agreement to discover and develop novel integrin therapeutics for patients with conditions not adequately addressed by current therapies. The Janssen Agreement focused on three integrin targets, each target the subject of a research program, with the ability to substitute up to two integrin targets not explored by us. In consideration for certain rights granted under the Janssen Agreement, during 2019 Janssen paid us an upfront commencement fee of$10.0 million for each of the first two research programs, and inFebruary 2021 Janssen paid us an upfront commencement fee of$5.0 million for the third research program. InDecember 2021 , Janssen informed us that it had decided not to exercise the options on the first two integrin targets which resulted in a reduction in scope of our responsibilities under the Janssen Agreement. InJanuary 2023 , Janssen informed us that it had decided to exercise its right to terminate the Janssen Agreement for convenience, subject to a 60 day notification period. The Janssen Agreement will terminate effectiveMarch 2023 or earlier if agreed to by us and Janssen.
Expenses
Research and Development
Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts and preclinical studies under our research programs, which include:
•employee-related expenses, including salaries, benefits, and equity-based compensation expense for our research and development personnel;
•costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;
•costs of manufacturing clinical supply related to any of our current or future product candidates;
•expenses incurred under agreements with contract research organizations, or CROs and investigative sites that conduct our clinical trials;
•costs of conducting preclinical studies of any of our current or future product candidates;
•consulting and professional fees related to research and development activities, including equity-based compensation to non-employees;
•costs of purchasing laboratory supplies and non-capital equipment used in our preclinical studies;
•costs related to compliance with clinical regulatory requirements;
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•facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies; and
•fees for maintaining licenses and other amounts due under our third-party licensing agreements.
Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our preclinical studies or other services performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period. Non-refundable advance payments for research and development goods or services to be received in the future from third parties are capitalized and expensed as the related goods are delivered or the services are performed. The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete our future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
•the scope, rate of progress, and expenses of our ongoing research activities as well as any additional preclinical studies and clinical trials and other research and development activities;
•establishing an appropriate safety profile;
•successful enrollment in and completion of clinical trials;
•whether our product candidates show safety and efficacy in our clinical trials;
•receipt of marketing approvals from applicable regulatory authorities, if any;
•establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
•obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
•commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and
•continued acceptable safety profile of the products following any regulatory approval.
A change in the outcome of any of these variables with respect to the development of our current and future product candidates would significantly change the costs and timing associated with the development of those product candidates. Research and development activities are central to our business model. Product candidates in later stages of clinical development 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. We expect research and development costs to increase significantly for the foreseeable future as we continue the development of our product candidates. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
General and Administrative
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, and equity-based compensation expenses for personnel in executive, finance, accounting, business development, legal, and human resources functions. Other significant general and administrative expenses include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services. We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in research and development activities, including our future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, among other expenses. We also incur expenses associated with being a public company, including costs for audit, legal, regulatory, and tax-related services related to compliance with the rules and regulations of theSEC , and listing standards applicable to companies listed on Nasdaq, director and officer compensation and insurance premiums, and investor relations costs. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant general and administrative expenses related to supporting product sales, marketing and distribution activities. 82
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Interest Income, Net
Interest income, net consists primarily of interest income earned on our cash, cash equivalents and marketable securities.
(Provision for) Benefit from Income Tax Expense
We record a provision or benefit for income taxes on pre-tax income or loss based on our effective tax rate for the year. For additional details about the current year tax provision, refer to the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
Results of Operations
Comparison of the years ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Collaboration revenue$ 70,808 $ 19,794 $ 51,014 258 % Operating expenses: Research and development 102,062 87,789 14,273 16 % General and administrative 32,142 27,811 4,331 16 % Total operating expenses 134,204 115,600 18,604 16 % Loss from operations (63,396) (95,806) 32,410 (34) % Other income: Interest income, net 4,567 272 4,295 1,579 % Other expense (145) (8) (137) 1,713 % Total other income, net 4,422 264 4,158 1,575 % Loss before benefit from income taxes$ (58,974) $ (95,542) $ 36,568 (38) % Provision for income taxes (67) - (67) - Net loss$ (59,041) $ (95,542) $ 36,501 (38) % Collaboration Revenue The increase in collaboration revenue of$51.0 million is attributable the conclusion of the AbbVie Agreement and reduction in the scope of the Janssen Agreement. In Q2 2022, we decreased our estimates to complete the remaining performance obligations under the AbbVie Agreement and recorded a cumulative catch-up to revenue based on AbbVie's notification of exercise of their option to terminate the AbbVie Agreement effective December 2022. In Q4 2022, we decreased our estimates to complete the remaining performance obligations under the Janssen Agreement based on changes in expected effort and the timing of the research services for the third integrin research program. 83
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Research and Development Expenses
Research and development expense increased by$14.3 million , or 16% from$87.8 million for the year endedDecember 31, 2021 to$102.1 million for the year endedDecember 31, 2022 . A significant portion of our research and development costs have been external clinical and preclinical CRO costs, which we track on a program-by-program basis related to a clinical product candidate, once the candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation, and other indirect costs. The following table summarizes our research and development expense for years endedDecember 31, 2022 and 2021: Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) External costs by program: MORF-057$ 37,826 $ 31,467 $ 6,359 20 % AbbVie Agreement programs 155 2,759 (2,604) (94) % Janssen Agreement programs 1,263 1,751 (488) (28) % ?v?8 Program 11,899 8,924 2,975 33 % Other early development candidates and unallocated costs 10,149 6,516 3,633 56 % Total external costs 61,292 51,417 9,875 19 % Internal costs: Employee compensation and benefits 36,673 32,150 4,523 14 % Facility and other 4,097 4,222 (125) (3) % Total internal costs 40,770 36,372 4,398 12 % Total research and development expense$ 102,062 $ 87,789 $ 14,273 16 %
The changes in research and development expense were primarily attributable to the following:
•The$9.9 million increase in external costs from the year endedDecember 31, 2021 to the year endedDecember 31, 2022 primarily related to costs associated with the ongoing Phase 2 clinical studies and other development activities for MORF-057 and development milestone fees due to our collaborators as well as other external research costs to support our early development candidates, including ?v?8. These increases were partially offset by decreases in activity under the AbbVie Agreement and the Janssen Agreement. ?The$4.4 million increase in internal costs from the year endedDecember 31, 2021 to the year endedDecember 31, 2022 was primarily driven by an increase in non-cash equity-based compensation expense, subscriptions and executive searches to support the ongoing clinical activity for MORF-057 as well as our early-stage pipeline candidates.
General and Administrative Expenses
General and administrative expense increased by$4.3 million , or 16%, from$27.8 million for the year endedDecember 31, 2021 to$32.1 million for the year endedDecember 31, 2022 . The increase in general and administrative expense was primarily attributable to a$4.2 million increase in non-cash equity-based compensation expense and a$0.8 million increase in legal and patent costs, partially offset by$0.5 million and$0.2 million decreases in consulting expenses and audit and tax fees, respectively.
Interest Income, Net
Interest income increased by$4.3 million due to an increase in yields earned on cash equivalents and marketable securities and an increase in invested marketable securities during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . 84
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Comparison of the years ended
The following table summarizes our results of operations for the years endedDecember 31, 2021 and 2020: Year Ended December 31, Change 2021 2020 $ % (in thousands, except percentages) Collaboration revenue$ 19,794 $ 44,945 $ (25,151) (56) % Operating expenses: Research and development 87,789 73,630 14,159 19 % General and administrative 27,811 18,495 9,316 50 % Total operating expenses 115,600 92,125 23,475 25 % Loss from operations (95,806) (47,180) (48,626) 103 % Other income: Interest income, net 272 1,630 (1,358) (83) % Other expense (8) (19) 11 (58) % Total other income, net 264 1,611 (1,347) (84) % Loss before benefit from income taxes$ (95,542) $ (45,569) $ (49,973) 110 % Benefit from income taxes - 570 (570) (100) % Net loss$ (95,542) $ (44,999) $ (50,543) 112 % Collaboration Revenue The increase in collaboration revenue of$25.2 million is primarily attributable to a decrease in activity under the AbbVie Agreement. In the prior year period, AbbVie exercised its option for the selective ?v?6 -specific integrin inhibitors program resulting in the payment of a$20.0 million option exercise payment from AbbVie, which was recognized during the year endedDecember 31, 2020 . Further, upon the AbbVie option exercise, we revised our estimates to complete the remaining performance obligations under the ?v?6 -specific integrin inhibitors program, which resulted in an increase in revenue during the prior year period. Offsetting the decrease in collaboration revenue from the prior year, based on recent scientific results, we decreased our estimates to complete the remaining performance obligations under the AbbVie Agreement based on changes in expected effort and the timing of the research services, which resulted in us recognizing$6.2 million in revenue in Q4 2021. The revenue for our collaborations fluctuates based on the timing and magnitude of costs incurred under the collaboration programs, as well as changes to our estimates to complete the remaining performance obligations. The contract modification for the Janssen Agreement did not have a material effect on the collaboration revenue. 85
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Research and Development Expenses
Research and development expense increased by$14.2 million , or 19% from$73.6 million for the year endedDecember 31, 2020 to$87.8 million for the year endedDecember 31, 2021 . A significant portion of our research and development costs have been external clinical and preclinical contract research organization ("CRO") costs, which we track on a program-by-program basis related to a clinical product candidate, once the candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation, and other indirect costs. The following table summarizes our research and development expense for years endedDecember 31, 2021 and 2020: Year Ended December 31, Change 2021 2020 $ % (in thousands, except percentages) External costs by program: MORF-057$ 31,467 $ 24,122 $ 7,345 30 % AbbVie Agreement programs 2,759 8,679 (5,920) (68) % Janssen Agreement programs 1,751 2,680 (929) (35) % ?v?8 Program 8,924 4,489 4,435 99 % Other early development candidates and unallocated costs 6,516 4,566 1,950 43 % Total external costs 51,417 44,536 6,881 15 % Internal costs: Employee compensation and benefits 32,150 25,158 6,992 28 % Facility and other 4,222 3,936 286 7 % Total internal costs 36,372 29,094 7,278 25 %
Total research and development expense
$ 14,159 19 %
The changes in research and development expense were primarily attributable to the following:
•The$6.9 million increase in external costs from the year endedDecember 31, 2020 to the year endedDecember 31, 2021 primarily related to manufacturing costs and other development activities to support Phase 2 clinical studies for MORF-057, as well as other external research costs to support our early development candidates, including ?v?8. These increases were partially offset by a decrease in expenditures associated with the ?v?6 program as a result of the option exercise by AbbVie inAugust 2020 and decreases in activity regarding other programs with AbbVie and Janssen. ?The$7.3 million increase in internal costs from the year endedDecember 31, 2020 to the year endedDecember 31, 2021 was primarily driven by an increase in headcount to support the ongoing clinical activity for MORF-057 as well as our early-stage pipeline candidates.
General and Administrative Expenses
General and administrative expense increased by$9.3 million , or 50%, from$18.5 million for the year endedDecember 31, 2020 to$27.8 million for the year endedDecember 31, 2021 . The increase in general and administrative expense was primarily attributable to a$6.4 million increase in non-cash stock-based compensation expense, a$1.2 million increase in personnel costs, a$0.8 million increase in consulting fees, a$0.6 million increase in professional fees primarily due to increases in legal and accounting expenses related to public company administrative costs and a$0.4 million increase in D&O insurance premiums.
Interest Income, Net
Interest income decreased by
Benefit from Income Tax
OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act included several income tax changes, including allowing for the carryback of net operating losses, expanding interest deductibility, and allowing for accelerated expensing of 86
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certain capital improvements. Based on the anticipated recovery of the federal income tax paid for theDecember 31, 2019 tax period, we recognized an income tax benefit of$0.6 million for the year endedDecember 31, 2020 .
Liquidity and Capital Resources
Sources of Liquidity
From inception throughDecember 31, 2022 , we raised an aggregate of approximately$743.0 million of gross proceeds primarily through the issuance of equity, including our convertible preferred equity securities, our IPO and follow-on equity offering, and sales of shares of our common stock under the ATM, as well as through payments received under collaboration agreements.
The following table provides information regarding our total cash, cash
equivalents, and marketable securities, each of which are stated at their
respective fair values as of
December 31,
2022 2021
(in thousands)
Cash $ 458 $ 292
Cash equivalents 58,814 171,142
Marketable securities 288,976 236,701
Total cash, cash equivalents and marketable securities
Cash Flows
The following table provides information regarding our cash flows for the years
ended
Year Ended December 31,
2022 2021 2020
(in thousands)
Net cash used in operating activities $ (100,977) $
(83,461)
8,181
Net cash provided by financing activities 45,266 266,313 38,297
Net (decrease) increase in cash, cash equivalents and restricted cash
$ (112,162) $
69,672
The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was$101.0 million for the year endedDecember 31, 2022 , compared to$83.5 million in cash used in operating activities for the year endedDecember 31, 2021 . The increase in cash used in operating activities was primarily driven by a$61.8 million decrease in operating assets and liabilities, principally due a$52.8 million decrease in in deferred revenue, a$3.2 million increase in accounts receivable and a$2.5 million decrease in accounts payable, partially offset by a$36.5 million decrease in net loss and a$7.9 million increase in equity-based compensation. Net cash used in operating activities was$46.0 million for the year endedDecember 31, 2020 . The increase in cash used in operating activities between the year endedDecember 31, 2021 and the year endedDecember 31, 2020 was primarily driven by a$50.5 million increase in net loss in the year endedDecember 31, 2021 , partially offset by changes in operating assets and liabilities, and a$10.1 million increase equity-based compensation. The increase in net loss was primarily attributable to the$20.0 million option exercise payment from AbbVie in 2020 as well as a$23.5 million increase in operating expenses in 2021.
Net cash used in investing activities was$56.5 million for the year endedDecember 31, 2022 compared to$113.2 million used in investing activities for the year endedDecember 31, 2021 . The change in cash used in investing activities is primarily based on the timing of purchases or maturities in marketable securities in the period. During the year endedDecember 31, 2022 , cash used in investing activities primarily resulted from purchases of marketable securities exceeding maturities and sales of marketable securities. During the year endedDecember 31, 2021 , the increase in cash used in investing activities was due to an 87
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increase in investments in marketable securities in the form of proceeds from
the underwritten public offering completed in
Cash provided by investing activities during the year ended
Net Cash Provided by Financing Activities
Net cash provided by financing activities of$45.3 million for the year endedDecember 31, 2022 resulted from$39.2 million in net proceeds received from sales of shares of common stock under the ATM and$6.1 million in proceeds received from issuance of common shares under 2019 Employee Stock Purchase Plan, or ESPP and stock option exercises. Net cash provided by financing activities of$266.3 million for the year endedDecember 31, 2021 primarily resulted from the$230.0 million in net proceeds received from the underwritten public offering completed inMarch 2021 ,$25.7 million in net proceeds received from sales of shares of common stock under the ATM, and$10.6 million in proceeds received from issuance of common shares under ESPP and stock option exercises. Net cash provided by financing activities of$38.3 million for the year endedDecember 31, 2020 resulted from$33.7 million in net proceeds received from sales of shares of common stock under the ATM and$4.6 million from the issuance of common shares under ESPP and stock option exercises.
Funding Requirements
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue research and development, conduct clinical trials, and seek marketing approval for our current and any of our future product candidates. In addition, if we obtain marketing approval for any of our current or our future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution, which costs we might offset through entry into collaboration agreements with third parties. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed on acceptable terms, or at all, including, but not limited to, as a result macroeconomic factors relating to COVID-19, the ongoing conflict in theUkraine , inflation, or rising interest rates, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts. We expect our existing cash, cash equivalents and marketable securities, along with the$100.0 million raised in our private issuance of common stock and pre-funded warrants inFebruary 2023 , will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2026. OnFebruary 13, 2023 , we entered into a securities purchase agreement pursuant with existing investors for a private placement where we agreed to sell and issue 848,655 shares of our common stock at a price of$35.35 per share and pre-funded warrants to purchase 1,980,198 shares of common stock at a purchase price of$35.3499 where each pre-funded warrant has an exercise price of$0.0001 per share (the "Pre-Funded Warrants"). We received aggregate net proceeds of approximately$100.0 million before deducting costs and offering expenses payable by us. The Pre-Funded Warrants are exercisable at any time after their original issuance and will not expire. Per their terms, the outstanding Pre-Funded Warrants to purchase shares of the Company's common stock generally may not be exercised if the holder's aggregate beneficial ownership would be more than 9.99% of the total issued and outstanding shares of our common stock following such exercise. The exercise price per share and number of shares of common stock issuable upon the exercise of the Pre-Funded Warrant shares are subject to adjustment in the event of any stock dividends and splits, recapitalization, reorganization or similar transaction, as described in the Pre-Funded Warrant agreement. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
•the costs of conducting additional clinical and preclinical studies and future clinical trials;
•the costs of future manufacturing;
•the scope, progress, results and costs of discovery, preclinical development, laboratory testing, and clinical trials for other potential product candidates we may develop, if any;
•the costs, timing, and outcome of regulatory review of our product candidates;
•our ability to establish and maintain collaborations on favorable terms, if at all;
•the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time;
•the costs and timing of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
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•the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
•the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims; •our ability to file and prosecute patent applications, obtain, maintain, and enforce our intellectual property rights, and defend intellectual property-related claims in certain countries that are subject to economic sanctions and/or hostile toU.S. and international companies; •our headcount growth and associated costs as we expand our business operations and research and development activities; •the potential delays in our preclinical studies, our development programs and our current and planned clinical trials due to the effects of the COVID-19 pandemic (including supply chain interruptions) or geo-political actions, including war (such as the current armed conflict inUkraine );
•general economic conditions and trends, including inflation, rising interest rates, and the ongoing labor shortage; and
•the cost of operating as a public company.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.
Critical Accounting Policies and Significant Estimates
This management's discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.
Revenue from Contracts with Customers
ThroughDecember 31, 2022 , all of our revenue to date has been generated from the AbbVie Agreement and Janssen Agreement. We account for revenue pursuant to ASC 606, Revenue from Contracts with Customers, or ASC 606, which is a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. For additional details regarding our associated accounting policies of ASC 606, refer to Notes 2 and 12 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. As part of the process of preparing our consolidated financial statements, we are required to make estimates to determine amounts to be recognized in collaboration revenue. In particular, for our collaborations with AbbVie and Janssen, revenue attributable to research services is recognized as those services are provided, based on the costs incurred to date in proportion to total costs expected to satisfy those performance obligations. The estimated costs associated with the remaining effort requires judgment and impacts revenue recognition. The uncertainties in the estimated costs associated with the remaining effort is principally a result of those cost estimates being based on expected effort for novel research and is partially reliant on scientific results. The research and scientific results impact the timing and the magnitude of costs to complete the remaining performance obligations. Accordingly, revenue may fluctuate from period to period due to significant revisions to estimated costs, resulting in a change in the measure of progress for a performance obligation. The services provided by us under the AbbVie Agreement were completed inDecember 2022 . We do not expect to recognize any further revenue related to the AbbVie Agreement. InJanuary 2023 , Janssen informed us that it had decided to exercise its right to terminate the Janssen Agreement for convenience, subject to a 60 day notification period. The Janssen Agreement will terminate effectiveMarch 2023 or earlier if agreed to by us and Janssen.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued expenses as of each balance sheet date.
This process involves reviewing open contracts and purchase orders,
communicating with our
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personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and adjust, if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. In certain instances, we prepay for services to be provided in the future. These amounts are expensed as the services are performed. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred.
Equity-Based Compensation
We measure employee and nonemployee equity-based compensation based on the grant date fair value of the equity-based awards and recognize equity-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period of the respective award. We recognize forfeitures as they occur. We estimate the fair value of stock option awards granted using the Black-Scholes option-pricing model, which uses as inputs, the fair value of our common stock and subjective assumptions we make, including the expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. Due to insufficient company-specific historical data, we base the estimate of expected volatility on the historical volatility of a representative group of publicly traded companies for which historical information is available in addition to our own historical volatility. The historical volatility is generally calculated based on a period of time commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For options granted to non-employees, we utilize the contractual term. The risk-free interest rate is based on aU.S. Treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero, as we have never paid dividends and do not have current plans to pay any dividends on our common stock.
Contractual Obligations
InAugust 2021 , we exercised our one-time extension right for its existing lease for 32,405 square feet of office and laboratory space throughMay 2025 , as provided for under the terms of the lease, and with future rent payments of$4.2 million as reflected in Note 6, "Leases", to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, with additional other rent payments of$0.3 million to be paid in 2023. As ofDecember 31, 2022 , our contractual obligations for our primary office and laboratory space remain consistent with those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We entered into contracts with a number of third parties, including external CROs, that require us to make upfront payments, some of which may be non-refundable. Under various licensing and related agreements with third parties, we have agreed to make milestone payments and pay royalties to third parties. Pursuant to an exclusive license agreement withChildren's Medical Center Corporation , as amended in 2018, we are required to pay$80,000 per year until the agreement is terminated. We will also be responsible for up to$1.3 million of development milestone payments through the first regulatory approval of a licensed product, tiered royalty payments of low single-digit percentages on net sales of licensed products in the event that we realize sales from products covered by the license agreement, and between 10% and 20% of non-royalty income attributable to a sublicense of the CMCC rights. Amounts paid to CMCC are recorded as research and development expense in the statements of operations. 90
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Pursuant to a collaboration agreement with Schrödinger, we may be required to pay Schrödinger certain development milestones, not to exceed in the aggregate, on a target-by-target basis, a low six-figure payment upon initiation of lead optimization and$3.1 million on a compound-by-compound basis, as well as royalties in the low single digits on sales of products containing such compounds. In addition, we have agreed to pay Schrödinger a percentage, in the mid-single digits, of certain payments we receive from third parties in connection with the licensing or transfer of the rights to exploit such compounds to such third parties, including a one-time fee of$1.0 million paid in 2019. We enter into agreements in the normal course of business with vendors for preclinical studies, preclinical and clinical supply and manufacturing services, professional consultants for expert advice, and other vendors for other services for operating purposes. We have not included these payments in the table of contractual obligations above since the contracts do not contain any minimum purchase commitments and are cancelable at any time by us, generally upon 30 days prior written notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that such
standards will not have a material impact on our financial statements or do not
otherwise apply to our operations.
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