You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and related notes thereto for the year ended
December 31, 2020included in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 11, 2021, or the Annual Report. Overview We are a clinical-stage biotechnology company discovering and developing breakthrough treatments in immune-mediated and oncologic disorders. We believe therapies that inhibit multiple drivers of disease by targeting fundamental upstream control processes within the cell have the potential for profound therapeutic benefit in a number of difficult-to-treat diseases. To that end, we are advancing two drug development programs that harness different master regulators of cellular function: the first targets the immunoproteasome which is responsible for protein degradation in cells of the immune system and drives many key aspects of immune cell function, and the second targets the Sec61 translocon, which is located on the endoplasmic reticulum and represents the beginning of the protein secretion pathway. Targeting these fundamental regulators of cellular function offers an attractive approach to treating many diseases. Our lead product candidate, KZR-616, is a first-in-class selective immunoproteasome inhibitor that has completed Phase 1a testing in healthy volunteers and a Phase 1b trial in patients with systemic lupus erythematosus, or SLE. We are now leveraging its broad therapeutic potential in two Phase 2 clinical trials, MISSION and PRESIDIO, treating patients with severe autoimmune diseases characterized by high levels of unmet need. The Phase 2 portion of our MISSION clinical trial is evaluating KZR-616 in patients with lupus nephritis, or LN. The PRESIDIO Phase 2 clinical trial is evaluating KZR-616 in dermatomyositis, or DM, and polymyositis, or PM, indications for which we have been granted orphan drug designation, or ODD, by the U.S. Food and Drug Administration, or FDA. Based on Phase 1 clinical data generated to date with KZR-616, as well as preclinical data with selective immunoproteasome inhibitors, we believe that KZR-616 has the potential to address multiple chronic immune-mediated disorders. We believe that the immunoproteasome is a validated target for the treatment of a wide variety of immune-mediated disorders given its ability to regulate multiple drivers of the inflammatory disease process. Many inflammatory disorders are currently treated one cytokine or cell type at a time, but the immunoproteasome affects a broad spectrum of immune regulators. The compelling published activity seen with non-selective proteasome inhibitors administered to patients with severe autoimmune diseases provides proof of principle that inhibiting the immunoproteasome results in broad immunomodulatory benefit. Based on the results from our Phase 1a studies in healthy volunteers and the Phase 1b portion of our MISSION clinical trial, KZR-616 has largely avoided the adverse effects associated with currently marketed non-selective proteasome inhibitors, as exhibited in clinical studies conducted by third parties, including side effects which we believe prevent them from being utilized as a chronic treatment in autoimmune disorders. We have seen encouraging clinical activity and biomarker data in the SLE and LN patients who received KZR-616 in the Phase 1b portion of the MISSION trial. We acquired exclusive worldwide rights to KZR-616 pursuant to a license agreement with Onyx Therapeutics, Inc., a wholly owned subsidiary of Amgen, Inc., in June 2015. Additionally, we are advancing our novel research platform targeting the Sec61 translocon and the protein secretion pathway to discover and develop small molecule therapeutics for oncology and autoimmune indications. Our first clinical candidate in this program, KZR-261, has demonstrated broad anti-tumor activity in preclinical models of both solid and hematologic malignancies. We recently initiated our Phase 1 clinical trial of KZR-261, assessing safety, tolerability and preliminary tumor activity of KZR-261 in solid tumors. We believe this discovery platform has the potential to yield additional small molecule product candidates that offer the potential of combination therapy in a single agent. If successfully developed and approved, these small molecules could serve as alternatives to currently marketed biologic therapeutics to act as cytotoxic anti-cancer agents or to block the secretion of novel targets of interest in immuno-oncology or inflammation. Since the commencement of our operations, we have devoted substantially all of our resources to performing research and development activities in support of our product development efforts, hiring personnel, raising capital to support and expand such activities and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date primarily from the issuance and sale of equity securities. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates and programs. We have incurred significant operating losses since our inception. Our net losses were $41.7 millionand $40.4 millionfor the year ended December 31, 2020and the nine months ended September 30, 2021, respectively, and we expect to continue to incur significant losses for the foreseeable future. As of September 30, 2021, we had an accumulated deficit of $166.4 million. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on discovering new potential therapeutics, 16 --------------------------------------------------------------------------------
complete the necessary development, obtain regulatory approval and prepare for the potential commercialization of our product candidates.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on other research and development activities. We expect our expenses will increase substantially over time as we:
• continue the ongoing and planned development of the KZR-616 and KZR-261;
• seek to discover and develop other product candidates, including
preclinical studies and clinical trials for these product candidates;
• maintain, protect and expand our intellectual property portfolio
rights, including patents, trade secrets and know-how
• request marketing authorizations for KZR-616, KZR-261 and any future product
candidates that successfully complete clinical trials; • establish a sales, marketing, manufacturing and distribution
infrastructure to commercialize any product candidate for which we may obtain marketing approval; • continue to build a portfolio of product candidates through the
the acquisition or licensing of drugs, product candidates or technologies;
• set up operational, financial, management and compliance systems; and
• attract, hire and retain additional administrative, clinical and regulatory resources
and scientific staff.
Third Quarter Highlights and Recent Developments
August 2021, we completed target enrollment of 24 subjects in our PRESIDIO Phase 2 clinical trial evaluating the safety and efficacy of KZR-616 for the treatment of DM and PM. We expect top-line data for PRESIDIO to be available in the second quarter of 2022. In October 2021, the first patient was dosed in our Phase 1 clinical trial of KZR-261. The study will be conducted in two parts: dose escalation in subjects with locally advanced or metastatic solid malignancies, and dose expansion in subjects with selected tumor types. The Phase 1 trial will assess safety and tolerability, including determination of a recommended Phase 2 dose, evaluate pharmacokinetics and pharmacodynamics, and explore preliminary anti-tumor activity. In November 2021, we reached target enrollment of 20 subjects in the Phase 2 portion of our MISSION clinical trial, an open-label study evaluating the safety and efficacy of KZR-616 for the treatment of LN. We expect top-line data for the Phase 2 portion of MISSION to be available in the second quarter of 2022. In November 2021, we entered into a loan and security agreement, or the Loan Agreement, with Oxford Finance LLC, or Oxford Finance, which provides up to $50.0 millionin borrowing capacity across five potential tranches. The initial tranche of $10.0 millionwas funded at the closing of the Loan Agreement, and an additional $10.0 millionwill be available at our election from July 1, 2022to December 30, 2022. Subsequent tranches of $20.0 millioneach would become available upon achieving milestones related to our MISSION Phase 2 clinical trial, our PRESIDIO Phase 2 clinical trial and our KZR-261 Phase 1 clinical trial, up to the aggregate maximum amount of $50.0 million. The Loan Agreement bears interest at a floating per annum rate (based on the actual number of days elapsed divided by a year of 360 days) equal to the sum of (a) the greater of (i) the 30-day U.S.LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue and (ii) 0.08%, plus (b) 7.87%. We are required to make monthly interest-only payments prior to the amortization date of January 1, 2025, subject to a potential one-year extension upon satisfaction of certain conditions. The loan facility is secured by all assets except intellectual property and will mature on November 1, 2026. There are no warrants or financial covenants associated with the Loan Agreement. 17
The following table shows the status and initial direction of our product candidates and our protein secretion program:
Compound therapeutic indication development stage discovery preclinical phase 1 phase 2 phase 3 KZR-616 lupus nephritis (LN) mission Dematomyositis (DM) / Polymyositis presidio Protein secretion inhibition KZR-261 oncology IND-enabling activities KZR-TBD oncology & autoimmunity
Overview of financial transactions
Research and development costs
Research and development costs consist primarily of costs incurred for the development of our product candidates, which include:
• employee-related expenses, which include salaries, benefits and stock-based compensation;
• fees paid to consultants for services directly related to our product
development and regulatory effort; • expenses incurred under agreements with third-party contract
organizations, investigative clinical trial sites and consultants who
conduct research and development activities on our behalf; • costs associated with preclinical studies and clinical trials; • costs associated with technology and intellectual property licenses; • the costs related to production of clinical supplies; and
• facilities and other assigned expenses, which include rental expenses
and other costs related to facilities and other supplies.
We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators and third-party service providers. We are eligible under the
AusIndustry Researchand Tax Development Tax Incentive Program to obtain a cash amount from the Australian Taxation Office. The tax incentive is available to us on the basis of specific criteria with which we must comply related to research and development expenditures in Australia. These research and development tax incentives are recognized as contra research and development expenses when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred by our Australian subsidiary, Kezar Life Sciences Australia Pty Ltd, a proprietary company limited by shares, and the amount 18
-------------------------------------------------------------------------------- of the consideration can be reliably measured. The amounts are determined based on a cost-reimbursement basis, and the incentive is related to our research and development expenditures and is due to us regardless of whether any Australian tax is owed.
The following table summarizes our research and development expenses incurred during the respective periods (in millions):
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (unaudited) (unaudited) Research and development expenses by program: KZR-616 $ 6.8 $ 5.2 $ 18.7 $ 14.1 Protein Secretion 3.7 3.1 10.5 8.8 Total research and development expenses $ 10.5 $ 8.3 $ 29.2 $ 22.9 We expect our research and development expenses to increase substantially for the foreseeable future as our product candidates advance into later stages of development. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and administrative expenses
Our general and administrative expenses consist primarily of personnel costs, allocated facilities costs and expenses for outside professional services, including legal, human resource, information technology and audit services. Personnel costs consist of salaries, benefits and stock-based compensation. We will incur additional expenses as we increase the size of our administrative function to support the growth of our business.
Our interest income is made up of interest income earned on our cash, cash equivalents and marketable securities.
Comparison of the three completed months
Three Months Ended September 30, (dollars in millions) 2021 2020 $ Change Operating expenses: Research and development $ 10.5 $ 8.3
$ 2.2General and administrative 4.0 3.3 0.7 Total operating expenses 14.5 11.6 2.9 Loss from operations (14.5 ) (11.6 ) (2.9 ) Interest income - 0.3 (0.3 ) Net loss $ (14.5 ) $ (11.3 ) $ (3.2 )
Research and development costs
Research and development expenses increased by
$2.2 millionfor the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The increase was primarily due to an increase of $1.0 millionin clinical trial related costs for KZR-616 and $0.7 millionin clinical start-up costs for KZR-261, an increase of $0.7 millionin personnel expenses due to an increase in headcount and salaries, an increase of $0.1 millionin stock-based compensation, an increase of $0.3 millionin consulting expenses and an increase of $0.2 millionin manufacturing and research expenses driven by increased drug substance and drug product manufacturing, offset by a decrease of $0.7 millionin preclinical expenses related to the Protein Secretion program. 19 --------------------------------------------------------------------------------
General and administrative expenses
General and administrative expenses increased by
Interest income decreased by
$0.3 millionfor the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The decrease was due to lower interest rates and the lower balances in cash equivalents and marketable securities.
Comparison of the completed nine months
Nine Months Ended September 30, (dollars in millions) 2021 2020 $ Change Operating expenses: Research and development $ 29.2 $ 22.9
$ 6.3General and administrative 11.4 9.0 2.4 Total operating expenses 40.6 31.9 8.7 Loss from operations (40.6 ) (31.9 ) (8.7 ) Interest income 0.2 1.1 (0.9 ) Net loss $ (40.4 ) $ (30.8 ) $ (9.6 )
Research and development costs
Research and development expenses increased by
$6.3 millionfor the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase was primarily due to an increase of $2.1 millionin research and manufacturing expenses driven by increased drug product manufacturing, an increase of $1.3 millionin clinical trial related costs for KZR-616 and $1.2 millionin clinical start-up costs for KZR-261, an increase of $1.8 millionin personnel expenses due to an increase in headcount and salaries, an increase of $0.7 millionin stock-based compensation, an increase of $0.7 millionin consulting expenses, and an increase of $0.3 millionin facility-related expenses, offset by a decrease of $1.8 millionin preclinical expenses related to the Protein Secretion program.
General and administrative expenses
General and administrative expenses increased by
$2.4 millionfor the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase was primarily due to an increase of $1.3 millionin stock-based compensation and an increase of $0.7 millionin personnel and recruiting expenses due to an increase in headcount and salaries, an increase of $0.2 millionin directors and officers liability insurance, and an increase of $0.2 millionin facilities related expenses.
Interest income decreased by
$0.9 millionfor the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The decrease was due to lower interest rates.
Liquidity and capital resources
September 30, 2021, we had $57.1 millionin cash and cash equivalents and $63.7 millionof marketable securities invested in a U.S. Treasurymoney market fund, U.S. Treasurysecurities, commercial paper and corporate debt securities. As of September 30, 2021, our cash equivalents and marketable securities had an average maturity of approximately three months and the longest maturity was nine months. We have incurred operating losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the foreseeable future. Our net loss was $40.4 millionfor the nine months ended September 30, 2021, and we had an accumulated deficit of $166.4 millionas of September 30, 2021.
We believe that our cash, cash equivalents and marketable securities in the
estimate based on assumptions that could prove to be incorrect, and we could use our available capital resources sooner than expected.
Market Offer Program
September 2020, we entered into a Sales Agreement, or the ATM Agreement, with Cowen and Company, LLC, or Cowen, pursuant to which we can offer and sell, from time to time at our sole discretion through Cowen, as our sales agent, shares of our common stock having an aggregate offering price of up to $50.0 million. Any shares of our common stock sold will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-248752). We will pay Cowen a commission equal to 3.0% of the gross sales proceeds of any shares of our common stock sold through Cowen under the ATM Agreement and also have provided Cowen with indemnification and contribution rights. During the nine months ended September 30, 2021, we sold an aggregate of 1,823,984 shares of our common stock for gross proceeds of approximately $12.1 millionat a weighted average purchase price of $6.63per share pursuant to the ATM Agreement. In October 2021, we sold an additional 525,037 shares of our common stock pursuant to the ATM Agreement for gross proceeds of approximately $4.6 millionat a weighted average purchase price of $8.67per share. Approximately $183.4 millionremains available under the shelf registration statement.
Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. We will require additional financing to fund working capital and pay our obligations. We may pursue financing opportunities through the issuance of debt or equity. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us or at all. Our future funding requirements will depend on many factors, including the following:
• the progress, timing, scope, results and costs of our clinical trials and
preclinical studies for our product candidates, including the ability to
register patients in a timely manner for our clinical trials;
• costs of obtaining clinical and commercial supplies for the KZR-616,
KZR-261 and any other product candidates that we may identify and develop;
• the cost, timing and outcomes of regulatory approvals;
• the extent to which we may acquire or license other product candidates
and technologies; • the cost of attracting, hiring and retaining qualified personnel;
• our ability to successfully market all product candidates for which
we get regulatory approval; and
• the costs of preparing, filing, prosecuting, defending and executing any
patents and other intellectual property rights.
Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. The COVID-19 pandemic continues to rapidly evolve and could result in significant disruption of global financial markets. If such a disruption occurs, we could experience an inability to access additional capital, which could in the future negatively affect our operations. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our preclinical studies, clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations and other licensing arrangements. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. 21 --------------------------------------------------------------------------------
Here is a summary of our cash flows for the periods indicated:
Nine Months Ended September 30, 2021 2020 (dollars in millions) (unaudited) Net cash used in operating activities $ (31.4 ) $ (27.6 ) Net cash provided by (used in) investing activities $ 54.0 $ (73.8 ) Net cash provided by financing activities $ 13.2 $ 99.3
Cash flow from operating activities
During the nine months ended
September 30, 2021, cash used in operating activities was $31.4 million, which consisted of a net loss of $40.4 millionand a net change of $0.7 millionin our net operating assets and liabilities, adjusted by non-cash charges of $8.3 million. The non-cash charges consisted of $5.7 millionfor stock-based compensation expense, $1.5 millionof amortization of premium and discounts on marketable securities and $1.1 millionfor depreciation and amortization. The change in our net operating assets and liabilities was primarily due to an increase of $1.2 millionin accounts payable and accrued liabilities, a decrease of $0.4 millionin prepaid and other current assets and a decrease of $0.8 millionin operating lease liabilities. During the nine months ended September 30, 2020, cash used in operating activities was $27.6 million, which consisted of a net loss of $30.8 millionand a net change of $1.6 millionin our net operating assets and liabilities, adjusted by non-cash charges of $4.7 million. The non-cash charges consisted of $1.2 millionfor depreciation and amortization and $3.7 millionfor stock-based compensation expense, offset by $0.1 millionof amortization of premium and discounts on marketable securities. The change in our net operating assets and liabilities was primarily due to an increase of $0.9 millionin prepaid expenses and other current assets and a decrease of $0.7 millionin operating lease liabilities.
Cash flow from investing activities
Net cash provided by investing activities was
$54.0 millionfor the nine months ended September 30, 2021, primarily relating to the maturities of marketable securities exceeding purchases of such marketable securities. Payments for the purchases of property and equipment were $50,000during the nine months ended September 30, 2021. Net cash used in investing activities was $73.8 millionfor the nine months ended September 30, 2020, primarily relating to the purchases of marketable securities exceeding maturities of such marketable securities. Payments for the purchases of property and equipment were $0.1 millionduring the nine months ended September 30, 2020.
Cash flow from financing activities
Net cash provided by financing activities for the nine months ended
September 30, 2021was $13.2 million, primarily relating to the net proceeds received from sales of common stock under the ATM Agreement and $1.5 millionfrom the issuance of common stock pursuant to our employee equity plans. Net cash provided by financing for the nine months ended September 30, 2020was $99.3 million, which consisted of $99.2 millionof net proceeds received from the underwritten public offerings and $0.1 millionfrom the issuance of common stock pursuant to our employee equity plans.
Contractual obligations and other commitments
During the nine months ended
September 30, 2021, there were no material changes to our contractual obligations and commitments described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report.
Off-balance sheet provisions
We have not entered into any off-balance sheet arrangements and do not hold any interests in variable interest entities.
Critical accounting policies and estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with
United Statesgenerally accepted accounting principles. The 22
-------------------------------------------------------------------------------- preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company," we are not required to, among other things, (i) provide an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the
Public Company Accounting Oversight Boardregarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer's compensation to median employee compensation. These exemptions will apply until December 31, 2023or until we no longer meet the requirements of being an emerging growth company, whichever is earlier. We are also a smaller reporting company as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by nonaffiliates is less than $250.0 millionmeasured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than 0.0 millionduring the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 millionmeasured on the last business day of our second fiscal quarter. 23
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