argenx(ARGX) - 2019 Q4 - Annual Report

PART I Key Information This section provides a five-year summary of the company's key financial data, showing significant revenue growth, increasing operating losses, and rising R&D expenses Selected Financial Data The company's five-year financial data shows significant revenue growth, increasing operating losses, and substantial asset expansion driven by financing activities Consolidated Statement of Profit and Loss | Indicator | 2019 (€ thousands) | 2018 (€ thousands) | 2017 (€ thousands) | 2016 (€ thousands) | 2015 (€ thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | 69,783 | 21,482 | 36,415 | 14,713 | 6,854 | | Research and development expenses | (197,665) | (83,609) | (51,740) | (31,557) | (20,635) | | Operating loss | (178,554) | (81,849) | (22,932) | (21,416) | (15,605) | | Loss for the year | (162,965) | (66,641) | (28,076) | (21,374) | (15,312) | | Basic and diluted loss per share | (4.22) | (1.99) | (1.14) | (1.14) | (0.97) | Condensed Consolidated Statement of Financial Position | Indicator | As of Dec 31, 2019 (€ thousands) | As of Dec 31, 2018 (€ thousands) | As of Dec 31, 2017 (€ thousands) | As of Dec 31, 2016 (€ thousands) | As of Dec 31, 2015 (€ thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash, cash equivalents and current financial assets | 1,335,821 | 564,569 | 359,775 | 96,728 | 42,327 | | Total assets | 1,433,339 | 578,458 | 370,908 | 105,772 | 45,962 | | Total equity | 1,050,746 | 538,395 | 344,931 | 63,374 | 37,278 | Risk Factors The company faces significant financial, developmental, commercialization, intellectual property, and foreign private issuer risks - The company is a clinical-stage biopharmaceutical firm with a history of significant operating losses, reporting a total comprehensive loss of €163.0 million for the year ended December 31, 2019, and accumulated losses of €332.6 million as of that date[20] - Future expenses are expected to increase substantially due to the execution of Phase 3 trials for efgartigimod, Phase 2 trials for cusatuzumab, and the continued development of other candidates, along with building commercial infrastructure[22] - The company's product candidates are in preclinical or clinical development, a process that is lengthy, expensive, and has an uncertain outcome; delays in clinical trials could prevent or postpone regulatory approvals and commercialization[37] - The COVID-19 pandemic poses a risk of disrupting clinical trials and preclinical studies by impairing patient recruitment, affecting third-party CROs, and causing delays in the supply of product candidates[75][77][78] - The company faces significant competition in both autoimmune and oncology fields from large pharmaceutical companies with greater resources; key competitors for its FcRn-targeting product include UCB, Momenta, Alexion, and Immunovant[69] - As a foreign private issuer, the company is exempt from certain U.S. SEC reporting and governance requirements, such as U.S. proxy rules and filing quarterly reports on Form 10-Q, which may result in fewer protections for shareholders compared to U.S. domestic companies[323][324] Information on the Company This section details the company's history, business operations, organizational structure, and properties, outlining its strategy to become a global immunology company History and Development of the Company argenx SE, incorporated in 2008, restructured its intellectual property to Belgium in 2017, incurring a tax liability but creating significant tax-deductible costs Capital Expenditures | Year | Amount (€ millions) | | :--- | :--- | | 2017 | 0.4 | | 2018 | 0.7 | | 2019 | 41.7 | - In May 2017, the company restructured by transferring legal ownership of all intellectual property rights from argenx SE (Netherlands) to its Belgian subsidiary, argenx BV, retroactive to January 1, 2017, to align IP ownership with the location of R&D activities[343] - The restructuring involved an €80 million indemnification payment from the Belgian subsidiary to the Dutch parent company, resulting in a €2.4 million tax liability for argenx SE in the Netherlands but creating up to €80 million in tax-deductible costs for argenx BV in Belgium[344][347] Business Overview argenx is a clinical-stage biotech company focused on antibody therapies for autoimmune diseases and cancer, aiming for global immunology leadership by 2021 - The company's 'argenx 2021' vision is to become a global, fully integrated immunology company, with the potential U.S. launch of its first product, efgartigimod, in 2021[348] - The lead product candidate, efgartigimod (ARGX-113), is in a Phase 3 trial (ADAPT) for myasthenia gravis (MG), with topline data expected in mid-2020, and is also in a Phase 3 trial (ADVANCE) for immune thrombocytopenia (ITP)[350][352] - The second lead product, cusatuzumab (ARGX-110), is being co-developed with Janssen for acute myeloid leukemia (AML) and high-risk myelodysplastic syndrome (MDS), with a registration-directed Phase 2 trial (CULMINATE) initiated in July 2019[357] - The company has a strategic collaboration with Janssen for cusatuzumab, which included a $300 million upfront payment and a $197.2 million equity investment from Johnson & Johnson Innovation Inc. in January 2019[358] - The company utilizes third-party contract manufacturers, primarily Lonza, for the cGMP manufacture of its drug substances and products[529] Organizational Structure As of December 31, 2019, argenx SE operates with three wholly-owned subsidiaries in Belgium, the U.S., and Japan, focusing on research and pharmaceutical distribution Principal Subsidiaries as of December 31, 2019 | Company | Country of Incorporation | Ownership Interest | Main Activity | | :--- | :--- | :--- | :--- | | argenx BV | Belgium | 100.00% | Biotechnical research on drugs and pharma processes | | argenx US, Inc. | United States | 100.00% | Pharmaceuticals and pharmacy supplies merchant wholesalers | | argenx Japan KK | Japan | 100.00% | Pharmaceuticals and pharmacy supplies merchant wholesalers | Property, Plants and Equipment The company leases all its facilities, including a primary operational and laboratory space in Belgium and offices in the Netherlands, U.S., and Japan Leased Facilities as of December 31, 2019 | Facility Location | Use | Approx. Size (m²) | Lease Expiry | | :--- | :--- | :--- | :--- | | Zwijnaarde, Belgium | Operations and Laboratory Space | 2,900 | March 31, 2025 | | Breda, the Netherlands | Headquarters | 12 | July 31, 2020 | | Boston, Massachusetts | Office Space | 813 | August 31, 2025 | | Tokyo, Japan | Office Space | 50 | January 31, 2020 | Operating and Financial Review and Prospects This section provides management's discussion and analysis of the company's financial condition and results of operations, detailing revenue, expense, and liquidity changes Operating Results Total operating income increased significantly in 2019 due to collaborations, but rising R&D and SG&A expenses led to a substantial increase in operating loss Comparison of Years Ended December 31, 2019 and 2018 | Item | 2019 (€ thousands) | 2018 (€ thousands) | % Change | | :--- | :--- | :--- | :--- | | Total operating income | 82,584 | 29,231 | 183% | | Research and development expenses | (197,665) | (83,609) | 136% | | Selling, general and administrative expenses | (64,569) | (27,471) | 135% | | Operating loss | (178,554) | (81,849) | 118% | | Loss for the period | (162,965) | (66,641) | 145% | - Revenue increased by 225% to €69.8 million in 2019, primarily due to the partial recognition of the upfront payment from the Janssen collaboration and a milestone payment from the AbbVie collaboration[767][768][769] - External R&D expenses for efgartigimod increased by 172% to €84.2 million in 2019, driven by Phase 3 trials in MG and ITP and Phase 2 trials in CIDP and PV[776] - External R&D expenses for cusatuzumab increased by 317% to €38.7 million in 2019, mainly due to the initiation of a Phase 2 trial as part of the Janssen collaboration[776][777] Liquidity and Capital Resources Cash and equivalents significantly increased to €1.34 billion in 2019, driven by operating cash flow and financing activities, ensuring liquidity for the next 12 months Cash Flow Summary | Cash Flow Activity | 2019 (€ thousands) | 2018 (€ thousands) | | :--- | :--- | :--- | | Net cash from operating activities | 134,584 | (53,839) | | Net cash used in investing activities | (744,338) | (107,542) | | Net cash from financing activities | 659,359 | 244,671 | | Cash and cash equivalents at end of period | 331,282 | 281,040 | - As of December 31, 2019, the company held €1,335.8 million in cash, cash equivalents, and current financial assets[783] - Financing activities in 2019 provided €659.4 million, primarily from a €479.2 million global offering in November and a €176.7 million private placement related to the Janssen collaboration[791] Tabular Disclosure of Contractual Obligations As of December 31, 2019, total contractual obligations were €98.4 million, primarily comprising lease liabilities and purchase obligations with manufacturing contractors Contractual Obligations as of December 31, 2019 | Obligation Type | Total (€ thousands) | Less than 1 year (€ thousands) | 1–3 years (€ thousands) | 3–5 years (€ thousands) | More than 5 years (€ thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Lease liabilities | 7,025 | 2,205 | 3,137 | 1,251 | 432 | | Purchase obligations | 91,409 | 52,032 | 32,790 | 4,001 | 2,586 | - The company has a commercial supply agreement with Lonza for efgartigimod with a minimum commitment of £25.3 million over five years starting in 2020; total outstanding commitments for efgartigimod are approximately €53.4 million, with additional commitments of €34.4 million for cusatuzumab and €3.6 million for ARGX-117[803][805] Directors, Senior Management, and Employees This section details the company's leadership and workforce, including board composition, executive management, compensation structures, committee roles, and employee growth Directors and Senior Management The company operates with a one-tier board, including one executive and seven independent non-executive directors, supported by an experienced executive management team - The Board of Directors consists of one executive director (CEO Tim Van Hauwermeiren) and seven non-executive directors; all non-executive directors are considered independent under Nasdaq listing requirements and the Dutch Corporate Governance Code[807][809] Compensation Executive compensation includes base salary, annual bonuses, and long-term stock options, with the CEO's total compensation reaching €6.15 million in 2019 CEO Compensation (2019) | Component | Compensation (€) | | :--- | :--- | | Base salary | 525,000 | | Option awards | 5,257,360 | | Non-equity incentive plan compensation | 326,288 | | Other | 33,110 | | Total | 6,152,325 | Aggregate Executive Management Compensation (excluding CEO) (2019) | Component | Compensation (€) | | :--- | :--- | | Base salary | 2,002,255 | | Option awards | 16,589,721 | | Employer social security contribution stock options | 9,160,263 | | Non-equity incentive plan compensation | 648,999 | | Total | 29,905,992 | - The Employee Stock Option Plan allows for the issuance of options up to 14.5% of the company's fully-diluted share capital; as of March 16, 2020, 4,250,535 options were outstanding, representing approximately 9.9% of total voting financial instruments[859][862] Board Practices The board, composed of independent non-executive directors, oversees risk management through established committees including Audit, Remuneration, R&D, and Commercial - The Board of Directors has established four committees: Audit, Remuneration and Nomination, Research and Development, and Commercial; all members of these committees are non-executive directors determined to be independent[878][881][889][894] - The Audit Committee is chaired by Werner Lanthaler, who qualifies as an "audit committee financial expert"; its responsibilities include overseeing financial reporting, internal controls, and the relationship with external auditors[880][881][883] Employees Employee headcount significantly increased to 188 in 2019, with growth across R&D and SG&A functions, primarily based in Belgium and the USA Employee Headcount by Function and Year-End | Function | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Research and development | 118 | 75 | 58 | | Selling, general and administrative | 70 | 30 | 15 | | Total | 188 | 105 | 73 | Major Shareholders and Related Party Transactions This section identifies the company's major shareholders and details related party transactions, including executive compensation and indemnification agreements Major Shareholders As of March 16, 2020, FMR LLC and T. Rowe Price Group, Inc. are the largest shareholders, with directors and executive management collectively owning 2.96% Major Shareholders (3% or Greater) as of March 16, 2020 | Shareholder | Percentage Owned | | :--- | :--- | | FMR LLC | 9.99% | | T. Rowe Price Group, Inc. | 9.54% | | Entities affiliated with Baker Bros. | 5.28% | | Wellington Management Group LLP | 5.04% | | Federated Investors, Inc. | 4.43% | | Johnson & Johnson Innovation - JJDC, Inc | 4.13% | | RTW Investments | 3.36% | | The Vanguard Group | 3.31% | | Baillie Gifford & Co. | 3.27% | | Blackrock, Inc. | 3.02% | - All directors and executive management as a group (14 persons) beneficially owned 1,300,885 shares, representing 2.96% of the total outstanding ordinary shares as of March 16, 2020[916] Related Party Transactions The company has management and employment agreements with executives, including compensation and severance terms, and indemnification agreements with directors and management - The CEO's management agreement includes a base salary of €525,000 and a cash bonus potential of up to 55% of base salary; the company may terminate the agreement with 18 months' notice or an equivalent payment in lieu of notice[939][940] - Key executives such as the CFO, COO, CMO, CSO, and General Counsel have employment contracts that may be terminated by the company subject to a notice period and a severance payment of at least 12 months[942][943][944][945][947] - The company entered into indemnification agreements with all non-executive directors and members of its executive management in connection with its initial U.S. public offering[948] Financial Information The company has not paid cash dividends and plans to reinvest earnings, with future payments subject to shareholder approval and Dutch legal requirements - The company has not paid any cash dividends since its incorporation and does not plan to in the foreseeable future, intending to reinvest earnings to support business growth[956] - The company is not currently a party to any legal, governmental, or arbitration proceedings that could have a significant adverse impact[955] Additional Information This section covers supplementary corporate and legal information, including Dutch exchange controls and a detailed analysis of U.S., Dutch, and Belgian tax consequences for ADS holders Taxation This subsection details U.S., Dutch, and Belgian tax implications for ADS holders, including dividend withholding taxes and potential PFIC status for U.S. investors - For U.S. holders, the company does not anticipate being treated as a Passive Foreign Investment Company (PFIC) for the 2019 taxable year, but this is a factual determination made annually and is subject to change[337][985] - The Netherlands imposes a 15% dividend withholding tax; however, U.S. resident holders eligible for benefits under the U.S.-Netherlands tax treaty may qualify for a reduced rate (e.g., 5% for certain corporate shareholders) or a full exemption (e.g., for certain pension funds)[1005][1013] - A Belgian withholding tax of 30% is typically levied on dividends paid through a Belgian intermediary; relief may be available under applicable domestic or tax treaty provisions[1071] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign exchange, arising from multi-currency transactions and USD cash holdings, with minimal interest rate risk - The company's primary market risk is foreign exchange risk, stemming from transactions in USD, CHF, GBP, and JPY, and holding significant cash and financial assets in USD[1121][1122] - Interest rate risk is not considered significant because interest-bearing assets are primarily short-term cash deposits[1120] Description of Securities Other Than Equity Securities This section outlines the terms of American Depositary Shares (ADSs), including their representation of ordinary shares, governing deposit agreement, and associated fees ADS Holder Fees and Charges | Fee | For | | :--- | :--- | | $5.00 (or less) per 100 ADSs | Issuance or cancellation of ADSs | | $0.05 (or less) per ADS | Any cash distribution | | $0.05 (or less) per ADS per calendar year | Depositary services | | Registration or transfer fees | Transfer of shares on the company's register | | Expenses of the depositary | Cable, currency conversion, etc. | PART II Controls and Procedures Management confirmed effective disclosure controls and internal control over financial reporting as of December 31, 2019, remediating a prior material weakness - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective[1134] - Management assessed internal control over financial reporting as effective as of December 31, 2019, based on the COSO 2013 framework; this assessment was audited by Deloitte Accountants B.V., which also issued an unqualified opinion[1139][1140] - The company successfully remediated the material weakness in internal control over financial reporting that was identified as of December 31, 2018; remediation actions included hiring an Internal Controls Manager and implementing enhanced IT controls[1146][1147] Audit Committee Financial Expert Dr. Werner Lanthaler has been designated as the independent audit committee financial expert, as defined by SEC rules - The Board of Directors has identified Werner Lanthaler as the audit committee financial expert[1150] Principal Accountant Fees and Services Deloitte Accountants B.V. billed €889,000 in total fees for 2019, primarily for audit and audit-related services, with all services pre-approved by the audit committee Accountant Fees | Fee Type | 2019 (€ thousands) | 2018 (€ thousands) | | :--- | :--- | :--- | | Audit Fees | 730 | 648 | | Audit-Related Fees | 159 | 143 | | Tax Fees | — | — | | All Other Fees | — | — | | Total | 889 | 791 | Corporate Governance As a foreign private issuer, the company follows Dutch corporate governance practices, differing from Nasdaq rules in areas like quorum, committee structure, and shareholder approvals - The company relies on home country governance practices, which differ from Nasdaq rules in several key areas, including quorum requirements, committee structure, and shareholder approval for certain actions[1160] - Specific exemptions from Nasdaq rules include: no generally applicable quorum for shareholder meetings, combining the nomination and compensation committees, and not requiring shareholder approval for certain security issuances related to acquisitions or equity plans[1162][1163][1166] PART III Financial Statements This section presents the company's audited consolidated financial statements for 2017-2019, prepared under IFRS, including the independent auditor's unqualified opinion - The independent auditor's report expresses an unqualified opinion on the financial statements and on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[1179][1180] - A critical audit matter identified was the revenue recognition and deferred revenue related to the global collaboration and license agreement with Janssen, specifically the judgment involved in determining it as a single performance obligation[1185][1189] - Another critical audit matter was the estimation of research and development cost accruals, due to the subjectivity in evaluating the progress of numerous ongoing clinical trial activities[1192][1194] Exhibits This section lists all exhibits filed with the annual report, including corporate documents, material contracts, and CEO/CFO certifications - The report includes key corporate documents such as the Articles of Association (Exhibit 1.1) and the ADS Deposit Agreement (Exhibit 2.1)[1172] - Material contracts filed as exhibits include the collaboration and license agreement with Janssen (Exhibit 4.5) and the related investment agreement (Exhibit 4.6)[1172]