Alector(ALEC) - 2019 Q4 - Annual Report

PART I Business Overview Alector, Inc. is a clinical-stage biopharmaceutical company focused on immuno-neurology, developing therapies to treat neurodegenerative diseases by restoring healthy immune function in the brain - Alector is a clinical-stage biopharmaceutical company pioneering immuno-neurology to treat neurodegeneration by restoring healthy immune function in the brain[11] - The company's Discovery Platform has identified over 120 immune system targets, progressed over ten programs into preclinical research, and advanced four product candidates (AL001, AL002, AL003, AL101) into clinical development within six years[11] Clinical Programs Overview | Candidate | Description | Indication | Partner | | :-------- | :------------------ | :----------------------- | :------ | | AL001 | Progranulin | FTD-GRN, FTD-C9orf72 | | | AL101 | Progranulin | Neurology | | | AL002 | TREM2 | Alzheimer's disease (AD) | AbbVie | | AL003 | SIGLEC3 | Alzheimer's disease (AD) | AbbVie | - AL001 received Orphan Drug and Fast Track designations from the FDA for FTD-GRN treatment, demonstrating proof-of-mechanism in Phase 1b by restoring PGRN levels and normalizing disease-associated proteins in CSF[13] - AL002, targeting TREM2 for Alzheimer's, completed Phase 1a with demonstrated safety, target engagement, and proof-of-mechanism in healthy volunteers, and is now in Phase 1b with Alzheimer's patients[16] - AL003, targeting SIGLEC 3 for Alzheimer's, initiated Phase 1a in healthy volunteers, showing dose-dependent target engagement, despite two treatment-related serious adverse events (aseptic hip monoarthritis, rash/fever/thrombocytopenia) in the highest dose cohorts Phase 1b in Alzheimer's patients commenced in January 2020[17][109] - The collaboration with AbbVie for AL002 and AL003 included $205.0 million in upfront payments and eligibility for up to an additional $985.6 million in option exercise and milestone payments, plus global profit sharing[18][120] - The company's intellectual property portfolio includes over 30 patent families, with three issued U.S. patents and over 190 pending applications, covering product candidates, methods of use, and manufacturing processes[150] Risk Factors The company faces substantial risks due to its early stage of clinical drug development, limited operating history, and anticipated continued net losses - The company is in early stages of clinical drug development with no products approved for commercial sale, leading to significant uncertainty in future success and viability[236] Net Losses (2017-2019) | Year Ended December 31 | Net Loss (in millions) | | :--------------------- | :--------------------- | | 2019 | $(105.4) | | 2018 | $(52.2) | | 2017 | $(32.5) | - As of December 31, 2019, the company had an accumulated deficit of $219.8 million and expects to incur increasingly higher operating losses for the foreseeable future[238][239] - The company's ability to fund operations through the next 12 months relies on existing cash, cash equivalents, and marketable securities of $353.1 million as of December 31, 2019, but substantial additional funding will be required for future R&D and commercialization[247][532][534] - Clinical trials are expensive, time-consuming, and subject to uncertainty, with potential for substantial delays or termination due to various factors including safety concerns, regulatory holds, and patient enrollment difficulties[271][273][280][281] - The biopharmaceutical industry, especially in neurodegenerative diseases, is highly competitive, with larger companies possessing greater financial resources and expertise, posing a risk to the commercial success of the company's product candidates[288][289] - The company relies heavily on third parties for manufacturing, clinical trials, and collaborations (e.g., AbbVie, Adimab), which introduces risks related to performance, compliance, and potential termination of agreements[360][362][374] - Intellectual property protection is crucial, but patents may be challenged, narrowed, or invalidated, and the company may face claims of infringement or be unable to obtain necessary licenses, potentially harming its competitive position[381][385][387][397] - The COVID-19 pandemic could adversely impact the business by causing delays in clinical trials, difficulties in patient enrollment, interruption of clinical site activities, and diversion of healthcare resources[454] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[484] Properties The company's corporate headquarters are in South San Francisco, California, with additional office and laboratory space in Milpitas - Corporate headquarters are in South San Francisco, California, leasing approximately 105,000 square feet of office and laboratory space until May 2029[485] - An additional 8,763 square feet of office and laboratory space is leased in Milpitas, California[485] Legal Proceedings The company is not currently involved in material litigation but initiated arbitration against a former co-founder for alleged breaches - The company is not currently involved in any litigation or legal proceedings expected to have a material adverse effect on its business[486] - A confidential arbitration proceeding was initiated on June 18, 2019, against former consulting co-founder Dr. Asa Abeliovich, concerning alleged breaches of his consulting agreement and improper use of confidential information[486] - The outcome and potential financial recovery from the arbitration proceeding are currently uncertain[488] Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to Alector, Inc[488] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Alector's common stock trades on Nasdaq, with no cash dividends paid, and proceeds from public offerings invested in low-risk securities - Alector, Inc. common stock is publicly traded on the Nasdaq Global Select Market under the symbol 'ALEC'[488] - As of March 1, 2020, there were approximately 27 stockholders of record[488] - The company has not declared or paid any cash dividends since inception and intends to retain future earnings for business expansion[489] Public Offering Proceeds | Offering Type | Date | Shares Sold | Price Per Share | Net Proceeds (in millions) | | :-------------- | :--------------- | :---------- | :-------------- | :------------------------- | | Initial Public | Feb 2019 | 9,739,541 | $19.00 | $168.2 | | Follow-on | Jan 2020 | 9,602,500 | $25.00 | $224.5 | - Proceeds from public offerings were invested in interest-bearing, investment-grade securities and government securities, corporate bonds, and commercial paper, with no material change in planned use[496] Selected Financial Data This section presents Alector's selected consolidated financial data, showing consistent net losses and increased liquidity from equity sales and collaboration agreements Consolidated Statement of Operations Data (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Collaboration revenue | $21,219 | $27,508 | $2,872 | $— | | Grant revenue | $— | $169 | $863 | $416 | | Total revenue | $21,219 | $27,677 | $3,735 | $416 | | Research and development | $100,528 | $73,031 | $29,911 | $13,674 | | General and administrative | $35,095 | $11,934 | $6,503 | $1,874 | | Total operating expenses | $135,623 | $84,965 | $36,414 | $15,548 | | Loss from operations | $(114,404) | $(57,288) | $(32,679) | $(15,132) | | Other income, net | $9,019 | $5,040 | $199 | $22 | | Net loss | $(105,385) | $(52,248) | $(32,480) | $(15,110) | | Net loss per share, basic and diluted | $(1.71) | $(4.62) | $(3.55) | $(2.11) | | Shares used in computing net loss per share | 61,734,492 | 11,302,788 | 9,142,688 | 7,173,411 | Consolidated Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Cash, cash equivalents, and marketable securities | $353,073 | $290,408 | $32,451 | $50,838 | | Working capital | $295,467 | $245,228 | $205,571 | $49,681 | | Total assets | $421,913 | $308,359 | $236,060 | $54,111 | | Deferred revenue | $153,401 | $174,620 | $202,128 | $— | | Total liabilities | $227,170 | $195,237 | $210,608 | $1,533 | | Convertible preferred stock | $— | $210,520 | $77,485 | $77,485 | | Accumulated deficit | $(219,820) | $(114,435) | $(62,187) | $(29,707) | | Total stockholders' equity (deficit) | $194,743 | $(97,398) | $(52,033) | $(24,907) | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Alector's financial condition and operational results, detailing net losses, revenue from collaboration, and R&D expenses, with liquidity supported by equity offerings - Alector is a clinical-stage biopharmaceutical company with no product sales revenue to date, and expects to continue incurring net losses[505] Net Loss and Accumulated Deficit | Year Ended December 31 | Net Loss (in millions) | Accumulated Deficit (in millions) | | :--------------------- | :--------------------- | :-------------------------------- | | 2019 | $(105.4) | $(219.8) | | 2018 | $(52.2) | $(114.4) | | 2017 | $(32.5) | $(62.2) | - Total revenue decreased by $6.5 million (23.5%) from $27.7 million in 2018 to $21.2 million in 2019, primarily due to an increase in total expected costs for the AL002 and AL003 programs, leading to a cumulative reduction in recognized collaboration revenue[519] - Research and development expenses increased by $27.5 million (37.7%) from $73.0 million in 2018 to $100.5 million in 2019, driven by higher personnel-related expenses, facilities costs, and increased spending on AL101 and other early-stage programs[520][521] - General and administrative expenses increased by $23.2 million (194.4%) from $11.9 million in 2018 to $35.1 million in 2019, mainly due to increased headcount, new headquarters lease expenses, and higher legal costs, including an ongoing arbitration proceeding[522] - Other income, net, increased by $4.0 million (79.4%) from $5.0 million in 2018 to $9.0 million in 2019, primarily due to higher interest income from investments of IPO proceeds[523] Cash Flows from Operating Activities (in thousands) | Year Ended December 31 | Net Cash Provided by (Used in) Operating Activities | | :--------------------- | :-------------------------------------------------- | | 2019 | $(99,308) | | 2018 | $127,464 | | 2017 | $(17,771) | - Cash used in operating activities in 2019 was $99.3 million, primarily due to net loss and decreased deferred revenue, partially offset by non-cash charges and increased accrued liabilities[539] - Cash provided by operating activities in 2018 was $127.5 million, mainly from a $200.0 million upfront payment from AbbVie, increasing deferred revenue[540] Contractual Obligations (as of December 31, 2019, in thousands) | Contractual Obligations | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | | :---------------------- | :--------------- | :----------- | :----------- | :---------------- | :------- | | Operating lease obligations | $6,882 | $14,268 | $15,010 | $35,512 | $71,672 | Quantitative and Qualitative Disclosures About Market Risk The company's market risks are primarily interest rate sensitivities and foreign currency risk, with investments focused on capital preservation - Primary market risks include interest rate sensitivities and foreign currency risk[565] - As of December 31, 2019, cash, cash equivalents, and marketable securities totaled $353.1 million, primarily in bank deposits, money market funds, and short-term government marketable securities[566] - An immediate 100 basis point change in interest rates would not materially affect the fair market value of cash equivalents and marketable securities due to their short-term maturities and low-risk profile[566] - Foreign currency transaction gains and losses have not been material, and no formal hedging program is in place[567] Financial Statements and Supplementary Data This section presents Alector's audited consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed notes on accounting policies - The consolidated financial statements for Alector, Inc. as of December 31, 2019 and 2018, and for the three years ended December 31, 2019, were audited by Ernst & Young LLP, who issued an unqualified opinion[572] - The company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recording operating right-of-use assets of $31.4 million and lease liabilities of $38.9 million, with no material effect on accumulated deficit[573][604] Consolidated Balance Sheets (in thousands) | Assets | Dec 31, 2019 | Dec 31, 2018 | | :----------------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $89,641 | $65,470 | | Marketable securities | $263,432 | $224,938 | | Total current assets | $357,437 | $293,176 | | Property and equipment, net | $33,852 | $10,937 | | Operating lease right-of-use assets | $28,476 | $— | | Total assets | $421,913 | $308,359 | | Liabilities | | | | Total current liabilities | $61,970 | $47,948 | | Deferred revenue, long-term portion | $123,236 | $139,715 | | Operating lease liabilities, long-term portion | $41,471 | $— | | Total liabilities | $227,170 | $195,237 | | Total stockholders' equity (deficit) | $194,743 | $(97,398) | Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | 2019 | 2018 | 2017 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Total revenue | $21,219 | $27,677 | $3,735 | | Total operating expenses | $135,623 | $84,965 | $36,414 | | Net loss | $(105,385) | $(52,248) | $(32,480) | | Comprehensive loss | $(105,201) | $(52,290) | $(32,480) | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Net cash provided by (used in) operating activities | $(99,308) | $127,464 | $(17,771) | | Net cash used in investing activities | $(48,874) | $(224,119) | $(801) | | Net cash provided by (used in) financing activities | $172,353 | $131,146 | $(15) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $24,171 | $34,491 | $(18,587) | - The company recognized collaboration revenue of $21.2 million in 2019, $27.5 million in 2018, and $2.9 million in 2017, primarily from the AbbVie Agreement, with deferred revenue of $153.4 million as of December 31, 2019[613] - Total stock-based compensation expense was $16.3 million in 2019, $6.9 million in 2018, and $5.4 million in 2017[647] - As of December 31, 2019, the company had federal and state net operating loss (NOL) carryforwards of approximately $10.4 million and $0.7 million, respectively, and federal and California tax credit carryforwards of $8.1 million and $2.0 million, respectively, fully offset by a valuation allowance[662] - A related party transaction with Adimab, LLC, involved expenses of $2.8 million in 2019, $2.3 million in 2018, and $0.4 million in 2017 for research and development services[667] - In January 2020, the company completed a follow-on public offering, raising approximately $224.5 million in net proceeds[672] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[674] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - As of December 31, 2019, disclosure controls and procedures were deemed effective at a reasonable assurance level[675] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2019[676] - The company is exempt from the auditor attestation report on internal control over financial reporting due to its 'emerging growth company' status[677] Other Information The company reported no other information for this item - No other information is reported under this item[678] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance will be incorporated by reference from the definitive proxy statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement, to be filed within 120 days after December 31, 2019[679] Executive Compensation Information regarding executive compensation will be incorporated by reference from the company's definitive proxy statement - Information on executive compensation is incorporated by reference from the definitive proxy statement, to be filed within 120 days after December 31, 2019[680] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of certain beneficial owners and management will be incorporated by reference from the definitive proxy statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement, to be filed within 120 days after December 31, 2019[681] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence will be incorporated by reference from the definitive proxy statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the definitive proxy statement, to be filed within 120 days after December 31, 2019[682] Principal Accounting Fees and Services Information regarding principal accounting fees and services will be incorporated by reference from the company's definitive proxy statement - Information on principal accounting fees and services is incorporated by reference from the definitive proxy statement, to be filed within 120 days after December 31, 2019[683] PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the 10-K report, including consolidated financial statements and an exhibit index - Consolidated financial statements are filed as part of this report under Item 8[685] - All other financial statement schedules are omitted because they are not required, inapplicable, or the information is included in the consolidated financial statements or notes[685] - The exhibit index includes various documents such as the Amended and Restated Certificate of Incorporation, Bylaws, Registration Rights Agreement, Equity Incentive Plans, Offer Letters, Lease agreements, Collaboration Agreements (AbbVie, Adimab), List of subsidiaries, Consent of Independent Registered Public Accounting Firm, Power of Attorney, and Certifications of Principal Executive and Financial Officers[686][688][689][691] Form 10-K Summary The company reported no summary for Form 10-K - No Form 10-K Summary is provided[686] Signatures This section contains the required signatures for the Annual Report on Form 10-K, affirming the report's submission to the SEC - The report is signed by the Co-Founder and Chief Executive Officer, Arnon Rosenthal, Ph.D., and the Vice President, Finance (Principal Financial and Accounting Officer), Calvin Yu, along with other directors[693][696] - A Power of Attorney is included, designating Arnon Rosenthal, Ph.D., Shehnaaz Suliman, M.D., and Calvin Yu as attorneys-in-fact for filing amendments and other related documents[694]