Aerpio Pharmaceuticals(AADI) - 2019 Q4 - Annual Report

Part I Business Aerpio Pharmaceuticals develops Tie2 pathway compounds for ocular and diabetic diseases, with lead candidate AKB-9778 for glaucoma, and is exploring strategic alternatives to maximize shareholder value Overview - Aerpio is a biopharmaceutical company focused on developing compounds that activate the Tie2 pathway for treating ocular diseases and diabetic complications[6] - The Phase 2b trial of subcutaneous AKB-9778 for non-proliferative diabetic retinopathy (NPDR) did not meet its primary endpoint[6] - Based on observed reductions in intraocular pressure (IOP), the company has developed a topical ocular formulation of AKB-9778 for open-angle glaucoma (OAG) and initiated a Phase 1b trial in June 2019[6] - The company has licensed AKB-4924 (now GB004) to Gossamer Bio, Inc. for the treatment of inflammatory bowel disease (IBD). Gossamer is responsible for all further development and commercialization[6] Our Strategy - Advance the development of AKB-9778 for open-angle glaucoma, with plans for a Phase 2 clinical trial with results expected in Q1 2021[8] - Explore strategic options for further development of AKB-9778 in diabetic nephropathy, based on positive UACR data from two clinical trials[9] - Advance preclinical assets ARP-1536 (monoclonal antibody) and a bispecific antibody for diabetic vascular complications and macular edema[10] - Engaged financial advisors in October 2019 to explore strategic alternatives, including potential acquisition, merger, or asset sale, to maximize stockholder value[10] - Implemented a realignment plan in April 2019, reducing the workforce by approximately 41% to conserve cash for ongoing clinical trials[11] Product Pipeline - The company's lead product, AKB-9778, is a first-in-class small molecule inhibitor of vascular endothelial protein tyrosine phosphatase (VE-PTP), which activates the Tie2 pathway[15][25] - In a Phase 1b trial for OAG, topical AKB-9778 added to standard prostaglandin therapy showed a statistically significant, placebo-corrected decrease in IOP on Day 7[21][23] - ARP-1536 is a humanized monoclonal antibody in preclinical development targeting VE-PTP, similar to AKB-9778, for diabetic vascular complications[28] - A bispecific antibody that binds both VEGF and VE-PTP is in development for wet AMD and diabetic macular edema[29] - AKB-4924 (GB004), a selective HIF-1 alpha stabilizer, was licensed to Gossamer Bio for IBD. Gossamer expects Phase 1b results in ulcerative colitis patients in the first half of 2020[30] Intellectual Property Patent Portfolio as of December 31, 2019 | Category | U.S. Patents | U.S. Pending Applications | Foreign Patents | Foreign Pending Applications | | :--- | :--- | :--- | :--- | :--- | | Total Owned | 32 | 26 | 274 | 103 | | ARP-1536 Related | 7 | 8 | 44 | 36 | | AKB-9778 Related | 25 | 18 | 230 | 67 | - Patents and applications cover compositions of matter, methods of use, formulations, and methods of manufacture, with expected expiration dates from 2027 to 2039, excluding potential extensions[34] - The core composition of matter patents for both ARP-1536 and AKB-9778 are set to expire in 2027, without accounting for possible patent term adjustments or extensions[34] Government Regulation - The company's products are subject to extensive regulation by the FDA in the United States and other government authorities internationally, covering manufacturing, clinical development, marketing, and pricing[39] - The FDA approval process for a new drug generally involves extensive nonclinical studies, an Investigational New Drug (IND) application, and multi-phase human clinical trials (Phase 1, 2, 3) to establish safety and efficacy before submitting a New Drug Application (NDA) or Biologics License Application (BLA)[40][43] - The company may seek expedited review programs such as Fast Track Designation, Priority Review, or Breakthrough Therapy Designation to accelerate FDA review and approval[50] - In the European Union, medicines can be authorized via a centralized procedure through the European Medicines Agency (EMA) or through national authorization procedures. New chemical entities can qualify for eight years of data exclusivity and an additional two years of market exclusivity[64][65][67] - Sales of approved products will depend on coverage and reimbursement from third-party payors, who are increasingly challenging prices and examining cost-effectiveness. The Affordable Care Act (ACA) and other legislative measures continue to create uncertainty and potential downward pressure on drug pricing[69][71] Risk Factors The company faces significant financial, clinical, regulatory, and market risks, including substantial losses, reliance on its lead candidate, and stock volatility - Financial Risks: The company has a history of significant net losses ($23.3 million in 2019) and an accumulated deficit of $142.2 million as of year-end 2019. It will require substantial additional financing to continue development, and failure to obtain it could force termination of programs[81][84] - Clinical & Regulatory Risks: The business heavily depends on the success of AKB-9778. The subcutaneous formulation failed its primary endpoint in a Phase 2b trial for NPDR. The new topical formulation for glaucoma faces a lengthy and uncertain clinical and regulatory process[93][95] - Third-Party Reliance: Aerpio relies on third-party CROs for clinical trials and contract manufacturers for product supply. Any failure by these third parties to perform adequately could delay or derail development and commercialization[107][109] - Strategic Risks: The ongoing exploration of strategic alternatives may not result in a transaction and could be disruptive to business operations and employee retention. A corporate restructuring in April 2019 reduced the workforce by 41%, which may have unanticipated negative consequences[87] - Market & Stock Risks: The company faces competition from major pharmaceutical companies with greater resources. If approved, its products may not achieve market acceptance or adequate reimbursement. The company's stock price is highly volatile, and it faces a risk of being delisted from the Nasdaq Capital Market for failing to meet the minimum bid price requirement[143][163][164] Properties The company's corporate headquarters are located in a leased 7,580 square foot office space in Cincinnati, Ohio. The lease for this facility is set to expire on July 31, 2021 - Corporate headquarters are located in a 7,580 square foot leased office space in Cincinnati, Ohio[179] - The current lease expires on July 31, 2021[179] Legal Proceedings As of the filing date of this Annual Report on Form 10-K, Aerpio Pharmaceuticals, Inc. is not involved in any material legal proceedings - The company is not currently involved in any material legal proceedings[181] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'ARPO', experienced price volatility in 2019, and does not plan to pay dividends - The company's common stock trades on the Nasdaq Capital Market under the symbol "ARPO"[184] 2019 Common Stock Price Range | Quarter | High | Low | | :--- | :--- | :--- | | First | $4.25 | $0.88 | | Second | $1.16 | $0.85 | | Third | $0.90 | $0.61 | | Fourth | $0.70 | $0.45 | - As of March 9, 2020, there were 125 stockholders of record[186] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[187] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, Aerpio shifted focus to glaucoma, incurred a $23.3 million net loss, reduced expenses, and holds $38.5 million cash, sufficient through Q2 2021 Results of Operations Consolidated Operations (Years Ended December 31) | Line Item | 2019 | 2018 | | :--- | :--- | :--- | | License revenue, and other | $0 | $20,157,430 | | Research and development | $12,824,402 | $17,852,756 | | General and administrative | $9,756,185 | $13,485,918 | | Restructuring expense | $1,863,495 | $0 | | Total operating expenses | $24,444,082 | $31,338,674 | | Loss from operations | ($24,444,082) | ($11,181,244) | | Net and comprehensive loss | ($23,270,514) | ($10,396,635) | - Research and development expenses decreased by $5.0 million (28.2%) in 2019 due to lower spending on clinical trials (TIME-2b completion vs. Phase 1 Glaucoma initiation) and reduced R&D personnel costs[210] - General and administrative expenses decreased by $3.7 million (27.7%) in 2019, primarily due to a $2.5 million decrease in stock-based compensation and lower employee-related expenses following the company's restructuring[211] - Restructuring expenses of $1.9 million were recorded in 2019 due to a reduction in headcount, with no similar expenses in 2018[212] Liquidity and Capital Resources Key Financial Position Data (as of December 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $38.5 million | $62.6 million | | Accumulated deficit | $142.2 million | $119.0 million | - The company believes its existing cash and cash equivalents of $38.5 million will be sufficient to fund planned operations at least through the second quarter of 2021[218] Summary of Cash Flows (Years Ended December 31) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($23,852,522) | ($5,808,046) | | Net cash used in investing activities | ($236,952) | ($37,912) | | Net cash provided by financing activities | $0 | $48,195,859 | | Net (decrease) increase in cash | ($24,089,474) | $42,349,901 | | Cash at end of year | $38,524,536 | $62,614,010 | - Net cash used in operating activities was significantly higher in 2019 ($23.9 million) compared to 2018 ($5.8 million), as 2018 results were offset by the $20.0 million upfront payment from the Gossamer License Agreement[219][222] - Financing activities provided $48.1 million in 2018 from an underwritten public offering, with no similar financing activity in 2019[224] Consolidated Financial Statements and Supplementary Data Audited consolidated financial statements for 2019 and 2018 show a $23.3 million net loss in 2019, with total assets decreasing to $39.9 million Consolidated Balance Sheets Consolidated Balance Sheet Data (as of December 31) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $38,524,536 | $62,614,010 | | Total current assets | $39,570,475 | $63,984,083 | | Total assets | $39,936,786 | $64,123,492 | | Liabilities & Equity | | | | Total current liabilities | $3,334,005 | $5,456,917 | | Total liabilities | $3,401,443 | $5,456,917 | | Total stockholders' equity | $36,535,343 | $58,666,575 | | Total liabilities and stockholders' equity | $39,936,786 | $64,123,492 | Consolidated Statements of Operations and Comprehensive Loss Consolidated Statement of Operations Data (Years Ended December 31) | Account | 2019 | 2018 | | :--- | :--- | :--- | | License revenue, and other | $0 | $20,157,430 | | Research and development | $12,824,402 | $17,852,756 | | General and administrative | $9,756,185 | $13,485,918 | | Restructuring expense | $1,863,495 | $0 | | Loss from operations | ($24,444,082) | ($11,181,244) | | Net and comprehensive loss | ($23,270,514) | ($10,396,635) | | Net loss per share (basic and diluted) | ($0.57) | ($0.31) | Consolidated Statements of Cash Flows Consolidated Statement of Cash Flows Data (Years Ended December 31) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($23,852,522) | ($5,808,046) | | Net cash used in investing activities | ($236,952) | ($37,912) | | Net cash provided by financing activities | $0 | $48,195,859 | | Net (decrease) increase in cash | ($24,089,474) | $42,349,901 | | Cash at end of year | $38,524,536 | $62,614,010 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019[336] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[337] - There were no changes in internal control over financial reporting during the fourth quarter of 2019 that materially affected, or are reasonably likely to materially affect, these controls[339] Part III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Definitive Proxy Statement[342] Executive Compensation The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Definitive Proxy Statement[343] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Definitive Proxy Statement[343] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Definitive Proxy Statement[344] Principal Accounting Fees and Services The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Definitive Proxy Statement[344] Part IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements included in the report and provides an index of all exhibits filed with the Form 10-K - The consolidated financial statements required by this item are located in a separate section beginning on page 73 of the report[347] - An index of exhibits is provided, listing key documents such as the Certificate of Incorporation, By-laws, Warrant Agreements, equity incentive plans, the Gossamer License Agreement, and various employment agreements[349][350][351]