Ascendis Pharma(ASND) - 2019 Q4 - Annual Report

PART I Item 3. Key Information This section presents selected consolidated financial data for Ascendis Pharma from 2015 to 2019, showing a consistent increase in revenue and research and development costs, leading to growing net losses, and details a comprehensive list of risks related to the company's operations, regulatory environment, intellectual property, and share ownership A. Selected Financial Data The company's selected financial data from 2015 to 2019 shows increasing revenue but significantly rising R&D and G&A costs, resulting in growing operating and net losses, with total equity and assets substantially funded by financing activities Selected Consolidated Financial Data (2015-2019) | Indicator (€ thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | 13,375 | 10,581 | 1,530 | 4,606 | 8,118 | | Research and development costs | (191,621) | (140,281) | (99,589) | (66,022) | (40,528) | | General and administrative expenses | (48,473) | (25,057) | (13,482) | (11,504) | (9,415) | | Operating profit / (loss) | (226,719) | (154,757) | (111,541) | (72,920) | (41,825) | | Net profit / (loss) for the year | (218,016) | (130,097) | (123,897) | (68,505) | (32,922) | | Total assets | 676,732 | 318,968 | 210,979 | 190,071 | 131,774 | | Total equity | 597,114 | 280,050 | 187,211 | 176,613 | 120,329 | Selected Consolidated Cash Flow Data (2015-2019) | Indicator (€ thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash flows from / (used in) operating activities | (175,936) | (138,802) | (95,099) | (60,179) | (43,466) | | Cash flows from / used in investing activities | (5,159) | (2,648) | (941) | (672) | (1,039) | | Cash flows from / (used in) financing activities | 493,593 | 203,267 | 124,721 | 117,462 | 105,742 | D. Risk Factors This section outlines significant risks across five main areas: limited operating history and financial condition, business operations, regulatory environment, intellectual property, and share ownership, including product dependency, uncertain approvals, patent issues, and stock volatility Risks Related to Our Limited Operating History, Financial Condition and Capital Requirements The company's limited operating history, lack of approved products, and history of significant losses make future viability uncertain, requiring substantial additional financing that could dilute existing shareholders - The company has a limited operating history, no approved products, and has incurred significant losses, including a net loss of €218.0 million in 2019 and €130.1 million in 2018[22][23] - The company has never generated revenue from product sales and its future revenue depends on successfully completing R&D, obtaining regulatory approvals, and commercializing its product candidates[25] - Substantial additional financing may be required to achieve company goals; as of December 31, 2019, cash and cash equivalents were €598.1 million, which is believed to be sufficient for at least the next 12 months based on the current operating plan[28][29] Risks Related to Our Business The company's success depends heavily on its product candidates, facing uncertain clinical development, regulatory approval, and commercialization, while relying on third parties for trials and manufacturing, competing intensely, and managing potential side effects and global pandemic impacts - The company is substantially dependent on the success of its lead product candidates: TransCon hGH, TransCon PTH, and TransCon CNP[34] - The company relies on collaboration partners, such as VISEN Pharmaceuticals in Greater China, to develop, obtain regulatory approvals for, and commercialize its endocrinology rare disease therapies[49][55] - The company relies on third parties for manufacturing clinical and potential commercial drug supplies, and any disruption could harm the business; key single-source suppliers include Fujifilm, Vetter, and Philips Medisize for components of TransCon hGH[93][125] - The company faces intense competition from major pharmaceutical companies with greater resources; competitors for long-acting growth hormone therapies include Novo Nordisk and OPKO Health (in collaboration with Pfizer)[70][71] - The global pandemic caused by COVID-19 could materially adversely impact business, including potential delays in clinical trial enrollment, site initiation, and supply chain interruptions[136][138] Risks Related to Government Regulatory and Legal Requirements The company faces lengthy, unpredictable regulatory approval processes, ongoing post-approval obligations, potential negative impacts from healthcare law changes on pricing and reimbursement, and complex data privacy compliance risks - The regulatory approval processes of the FDA and EMA are lengthy, time-consuming, and unpredictable; the company has not yet submitted an NDA, BLA, or MAA for any product candidate[139][146] - Even if approved, products will be subject to ongoing regulatory review, including compliance with cGMP for manufacturing, restrictions on promotion, and safety reporting requirements[161][162] - Failure to obtain adequate coverage and reimbursement from third-party payors like Medicare, Medicaid, and private insurers could limit the ability to market products and generate revenue[174] - Legislative healthcare reforms in the U.S. (such as changes to the ACA) and abroad may increase costs, lengthen review times, and result in lower prices for pharmaceutical products[208][212] - The company is subject to diverse and complex laws regarding data privacy and security, such as GDPR in the EU and HIPAA in the U.S., with non-compliance potentially leading to significant fines and penalties[205][206] Risks Related to Our Intellectual Property The company's success relies on protecting its intellectual property through patents and trade secrets, but faces uncertainties in the patent process, potential infringement lawsuits, and risks from changes in patent law - The company's success depends on its ability to protect its intellectual property, including its TransCon technologies and product candidates like TransCon hGH, PTH, and CNP[218] - As of December 31, 2019, the company holds 24 issued patents in the U.S. and approximately 139 in other jurisdictions; the patent application process is expensive and uncertain, and issued patents may be challenged or invalidated[220][224] - The company may be sued for infringing on the intellectual property rights of third parties, which could be costly and time-consuming and could block the commercialization of its products[231] - Changes to patent law in the U.S. (e.g., the Leahy-Smith Act) and other jurisdictions could increase uncertainties and costs, potentially weakening the company's ability to protect its products[241][242] Risks Related to Our Ordinary Shares and ADSs The company's ADS trading price is highly volatile, ADS holders have differing rights under Danish law, principal shareholders exert substantial control, and as a foreign private issuer, the company has less frequent reporting obligations and may face adverse U.S. tax consequences as a PFIC - The trading price of the company's ADSs is subject to high volatility due to various factors, including clinical trial outcomes, regulatory news, and market fluctuations[255] - As of March 1, 2020, senior management, board members, and 5%+ shareholders beneficially own approximately 60.5% of outstanding voting securities, enabling them to exert significant control over shareholder matters[268] - As a foreign private issuer, the company is exempt from certain U.S. proxy rules and has less frequent reporting obligations than U.S. domestic companies[274] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. investors[283][284] Item 4. Information on the Company This section details Ascendis Pharma's history, business strategy, and operations, providing an overview of its TransCon technology and product pipeline in endocrinology and oncology, strategic collaborations, manufacturing strategy, competitive landscape, intellectual property, and government regulations A. History and Development of the Company Ascendis Pharma A/S was organized in Denmark in September 2006, commenced operations in December 2007 after acquiring Complex Biosystems GmbH, and has its principal executive offices in Hellerup, Denmark, with ADSs traded on Nasdaq - Ascendis Pharma A/S was organized in Denmark in September 2006 and commenced operations in December 2007 following the acquisition of Complex Biosystems GmbH, which invented the TransCon technologies[293] B. Business Overview Ascendis Pharma uses its TransCon technology to develop product candidates in rare disease endocrinology and oncology, with lead candidate TransCon hGH advancing towards regulatory submission, and a strategy to expand therapeutic areas through collaborations like VISEN Pharmaceuticals - The company is applying its innovative TransCon technologies to build a pipeline of product candidates with potential best-in-class profiles, focusing on rare disease endocrinology and oncology[295] - The most advanced product candidate, TransCon hGH, is a once-weekly treatment for Growth Hormone Deficiency (GHD); following positive Phase 3 results, a Biologics License Application (BLA) is planned for submission to the FDA in Q2 2020, and a Marketing Authorisation Application to the EMA in Q4 2020[295][298] - The clinical pipeline also includes TransCon PTH for hypoparathyroidism and TransCon CNP for achondroplasia, both of which are in Phase 2 trials[301][304] - In November 2018, the company formed VISEN Pharmaceuticals to develop and commercialize its endocrinology therapies in Greater China, for which Ascendis received a 50% ownership stake[307] C. Organizational Structure Ascendis Pharma A/S operates through wholly-owned subsidiaries in Germany, the United States, and Denmark, with Danish subsidiaries organized by therapeutic or functional division including Ophthalmology, Endocrinology, Bone Diseases, Growth Disorders, and Oncology - The company conducts operations through wholly-owned subsidiaries in Germany (Ascendis Pharma GmbH), the United States (Ascendis Pharma, Inc.), and Denmark[568] D. Property, Plant and Equipment The company leases all its facilities, including headquarters in Hellerup, Denmark, research facilities in Germany, and office space in California, with a new oncology research laboratory under construction in Redwood City, California, and existing facilities deemed adequate for near-term needs - The company's headquarters are leased in Hellerup, Denmark; it also leases research facilities in Heidelberg, Germany, and office space in Palo Alto, California[569][571][573] - A new research laboratory for oncology is being constructed at a leased site in Redwood City, California, with the lease expiring in April 2030[574] Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting a 26% revenue increase to €13.4 million in 2019, significant rises in R&D and G&A costs leading to a €218.0 million net loss, strong liquidity with €598.1 million in cash from equity offerings, and covers critical accounting policies, market risks, and contractual obligations A. Operating Results For 2019, revenue increased by 26% to €13.4 million due to the Visen collaboration, while R&D costs grew 37% to €191.6 million and G&A expenses rose 93% to €48.5 million, resulting in a net loss of €218.0 million Results of Operations (2017-2019) | (€ thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | 13,375 | 10,581 | 1,530 | | Research and development costs | (191,621) | (140,281) | (99,589) | | General and administrative expenses | (48,473) | (25,057) | (13,482) | | Operating profit / (loss) | (226,719) | (154,757) | (111,541) | | Net profit / (loss) for the year | (218,016) | (130,097) | (123,897) | - Revenue increased by 26% in 2019 to €13.4 million, primarily due to revenue recognition related to the investment in and clinical supply sales to Visen[616] - Research and development costs increased by 37% in 2019 to €191.6 million, mainly due to manufacturing validation batches for TransCon hGH, increased personnel costs, and development in oncology[619][621][622] - General and administrative expenses increased by 93% in 2019 to €48.5 million, driven by higher personnel costs, IT expenses, and pre-commercialization activities[626] B. Liquidity and Capital Resources As of December 31, 2019, the company had €598.1 million in cash and no debt, primarily funded by equity offerings including a €480.3 million follow-on offering in March 2019, with existing cash believed sufficient for at least the next 12 months - As of December 31, 2019, the company had cash and cash equivalents of €598.1 million and no debt to third parties[675] - In March 2019, a follow-on public offering of ADSs was completed, raising net proceeds of approximately €480.3 million ($539.4 million)[28][676][687] Summary of Cash Flows (2017-2019) | (€ thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Cash flows from/(used in) operating activities | (175,936) | (138,802) | (95,099) | | Cash flows from/(used in) investing activities | (5,159) | (2,648) | (941) | | Cash flows from/(used in) financing activities | 493,593 | 203,267 | 124,721 | | Net increase in cash and cash equivalents | 312,498 | 61,817 | 28,681 | F. Tabular Disclosure of Contractual Obligations As of December 31, 2019, the company's total contractual obligations are €52.1 million, primarily comprising €43.6 million in lease obligations and €8.5 million for leasehold improvements construction Contractual Obligations as of December 31, 2019 | Contractual Obligations (€ thousands) | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Lease Obligations | 6,191 | 11,153 | 8,603 | 17,605 | 43,552 | | Construction of leasehold improvements | 8,523 | — | — | — | 8,523 | | Total contractual obligations | 14,714 | 11,153 | 8,603 | 17,605 | 52,075 | Item 6. Directors, Senior Management and Employees This section details the company's two-tier governance structure, providing biographical information and compensation for directors and senior management, including significant share-based payments, and describes board committees and employee statistics, noting 330 full-time employees with 250 in R&D as of year-end 2019 A. Directors and Senior Management The company operates with a two-tier governance structure, including a seven-member Board of Directors for strategic oversight and an Executive Board for day-to-day management, comprising the President & CEO and CFO, supported by an experienced senior management team - The company has a two-tier governance structure with a separate Board of Directors and an Executive Board; the Board of Directors consists of seven members divided into two classes for election purposes[696][698] - The Executive Board, responsible for day-to-day management, includes President & CEO Jan Møller Mikkelsen and SVP & CFO Scott T. Smith[707] B. Compensation In 2019, senior management's aggregate compensation was approximately €21.7 million, including €15.9 million in share-based payments, with non-employee board members receiving fees and warrant grants, and employment agreements outlining notice periods and severance provisions - Aggregate compensation for senior management in 2019 was approximately €21.7 million, which included €15.9 million in share-based payments[728] - On December 10, 2019, non-employee board members were each granted 7,500 warrants with an exercise price of $108.00 per share[725] - The company has a warrant incentive program for employees, consultants, and board members; warrants generally vest monthly over a 48-month period for employees and have a ten-year term[734][736][739] C. Board Practices The Board of Directors, responsible for strategic management, consists of seven members, five independent, classified into two-year terms, and has established Audit, Remuneration, and Nominating and Corporate Governance Committees, following Danish home country practices for certain Nasdaq governance requirements - The Board of Directors is responsible for overall and strategic management and consists of seven members, with five determined to be independent[747][758] - The Board has three committees: Audit, Remuneration, and Nominating and Corporate Governance[759] - As a foreign private issuer, the company follows certain home country governance practices instead of Nasdaq rules, such as not having a quorum requirement for general shareholder meetings[755][763] D. Employees As of December 31, 2019, Ascendis Pharma employed 330 full-time employees, with 250 in research and development and 80 in general and administrative roles, and 121 employees holding advanced degrees - As of December 31, 2019, the company had 330 full-time employees[763] - Employee distribution is 250 in research and development and 80 in general and administrative functions; 121 employees hold a Ph.D., M.D., or equivalent degree[763] Item 7. Major Shareholders and Related Party Transactions This section discloses major shareholders owning over 5% as of March 1, 2020, including T. Rowe Price Associates, Inc. (16.2%) and FMR LLC (9.9%), and details related party transactions such as employment agreements and R&D/supply agreements with Visen Pharmaceuticals Major Shareholders (as of March 1, 2020) | Name of Beneficial Owner | Percentage of Beneficial Ownership | | :--- | :--- | | T. Rowe Price Associates, Inc. | 16.2% | | Entities affiliated with FMR LLC | 9.9% | | Entities affiliated with RA Capital Management, LLC | 8.7% | | Baker Bros. Advisors LP | 7.1% | | Entities affiliated with OrbiMed Private Investments V, L.P. | 6.9% | - Related party transactions include employment and indemnification agreements with senior management and board members, as well as R&D and clinical supply agreements with its associate, Visen Pharmaceuticals[776][777][778] Item 8. Financial Information This section refers to the detailed consolidated financial statements and confirms the company is not currently involved in any material legal proceedings, nor does it plan to pay cash dividends in the foreseeable future, intending to retain earnings for growth - The company is not currently a party to any legal proceedings that are likely to have a material adverse effect on its business[779] - The company does not plan to pay cash dividends on its ordinary shares in the foreseeable future, intending to retain earnings for growth[780] Item 10. Additional Information This section details the company's corporate structure and governance, outlining Board authorizations for share capital increases and warrant issuance, key Articles of Association provisions, a comparison of Danish and Delaware corporate law, and material Danish and U.S. federal income tax considerations for ADS investors B. Memorandum and Articles of Association The company's articles of association authorize the Board to increase share capital and issue warrants and convertible notes until 2021-2024, establish a classified board with two-year terms and one vote per share, and provide a comparison of Danish and Delaware corporate law regarding director duties, shareholder rights, and anti-takeover measures - The Board of Directors is authorized to increase share capital by up to 9,000,000 shares without pre-emptive rights and up to 9,000,000 shares with pre-emptive rights, with both authorizations valid until May 28, 2024[785] - The Board is also authorized to issue up to 1,237,525 additional warrants and obtain loans against convertible notes for up to 9,000,000 shares[785] - A detailed comparison highlights key differences between Danish and Delaware corporate law, including director duties, shareholder proposal rights, appraisal rights, and anti-takeover provisions[822] E. Taxation This section outlines tax consequences for investors, noting non-Danish residents face a 27% Danish withholding tax on dividends, potentially reduced to 15% under treaties, while U.S. Holders may treat dividends as qualified income, and the company does not believe it was a PFIC for 2019, though this status is annually re-evaluated - For non-Danish residents, dividends are generally subject to a 27% Danish withholding tax, which can often be reduced to 15% under tax treaties, such as the one with the United States[898][899] - For U.S. Holders, dividends are generally included in gross income and may qualify for preferential tax rates as "qualified dividend income," provided certain conditions are met, including that the company is not a PFIC[915][916] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2019 taxable year, but its status is subject to annual re-evaluation and could change[921] Item 11. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency exchange rate risks, particularly the U.S. Dollar, managing it by holding cash in corresponding currencies, with a 10% USD strengthening against EUR increasing net profit by €47.8 million, while interest rate and credit risks are considered minimal - The company is exposed to foreign exchange risk, primarily with respect to the U.S. Dollar; as of December 31, 2019, a 10% strengthening of the USD against the EUR would increase net profit and equity by €47.8 million[637][638][639] - Interest rate risk is not considered material as the company has no interest-bearing debt; credit risk is managed by holding cash reserves in banks with high credit ratings[640][642] Item 12. Description of Securities Other than Equity Securities This section describes the American Depositary Shares (ADSs), where each ADS represents one ordinary share, administered by The Bank of New York Mellon as depositary, outlining the deposit agreement and a schedule of fees payable by ADS holders for various services - Each American Depositary Share (ADS) represents one ordinary share of the company; The Bank of New York Mellon serves as the depositary[940] ADS Holder Fees | 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 | PART II Item 15. Control and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, and assessed the internal control over financial reporting as effective based on the COSO framework, which was audited and confirmed by the independent registered public accounting firm - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[947] - Management assessed the internal control over financial reporting based on the COSO framework and concluded it was effective as of December 31, 2019; this was audited and confirmed by the independent registered public accounting firm[951][952][953] Item 16. Corporate Governance and Other Matters This section covers corporate governance, identifying Lars Holtug as the audit committee financial expert, noting the adoption of a code of business conduct and ethics, detailing principal accountant fees for 2019 where audit fees constituted 99% of €707,000, and explaining the company's adherence to Danish home country practices instead of certain Nasdaq rules Item 16A. Audit Committee Financial Expert The company's board of directors has determined that Mr. Lars Holtug, an independent director and Audit Committee member, qualifies as an "audit committee financial expert" as defined in Item 16A of Form 20-F - Mr. Lars Holtug is designated as the "audit committee financial expert"[956] Item 16B. Code of Ethics The company has adopted a code of business conduct and ethics applicable to all employees, senior management, and board members, which is available on its website - A code of business conduct and ethics has been adopted and applies to all employees, senior management, and board members[957] Item 16C. Principal Accountant Fees and Services For fiscal year 2019, the company's principal accountant billed a total of €707,000, with audit fees comprising 99% (€700,000) and tax fees making up the remaining 1%, and all non-audit services requiring pre-approval from the Audit Committee Principal Accountant Fees (2018-2019) | Fee Type (€ thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | 700 | 693 | | Tax Fees | 7 | — | | All Other Fees | — | 62 | | Total | 707 | 755 | Item 16G. Corporate Governance As a foreign private issuer, the company follows certain Danish home country practices instead of Nasdaq corporate governance standards, including not having a quorum requirement for shareholder meetings, not providing U.S. standard proxy statements, and allowing the board to issue securities without shareholder approval in specific instances - The company follows Danish home country practice in lieu of Nasdaq's quorum requirements for shareholder meetings[963] - The company does not follow Nasdaq requirements for proxy solicitations or for shareholder approval of all equity compensation plans and certain other security issuances, adhering instead to Danish corporate law[964] PART III Item 18. Financial Statements This section contains the company's audited consolidated financial statements for 2017-2019, prepared under IFRS, including Deloitte's unqualified opinion on both financial statements and internal control over financial reporting, highlighting the adoption of IFRS 16 for leases and clinical trial accruals as a critical audit matter Report of Independent Registered Public Accounting Firm Deloitte issued an unqualified opinion on the company's consolidated financial statements for the three years ended December 31, 2019, and on the effectiveness of internal control over financial reporting, noting the adoption of IFRS 16 and identifying clinical trial accruals as a critical audit matter - The auditor issued an unqualified opinion on the financial statements for the three years ended December 31, 2019, and on the company's internal control over financial reporting as of December 31, 2019[967][976] - The report highlights a change in accounting principle due to the adoption of IFRS 16 (Leases) effective January 1, 2019[968] - Clinical trial accruals were identified as a critical audit matter due to the subjectivity and judgment required in estimating the progress of research and development activities[972][974] Consolidated Financial Statements The consolidated financial statements show a net loss of €218.0 million for 2019, increased total assets to €676.7 million, and total equity to €597.1 million, primarily due to capital increases, with €598.1 million in cash at year-end, and notes detailing critical accounting policies including IFRS 16 adoption, revenue recognition, and share-based payments Consolidated Statement of Profit or Loss (2017-2019) | (€ thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | 13,375 | 10,581 | 1,530 | | Research and development costs | (191,621) | (140,281) | (99,589) | | General and administrative expenses | (48,473) | (25,057) | (13,482) | | Net profit/(loss) for the year | (218,016) | (130,097) | (123,897) | Consolidated Statement of Financial Position (as of Dec 31) | (€ thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total assets | 676,732 | 318,968 | | Total equity | 597,114 | 280,050 | | Total liabilities | 79,618 | 38,918 | | Cash and cash equivalents | 598,106 | 277,862 | - The company adopted IFRS 16 "Leases" as of January 1, 2019, using the modified retrospective approach, resulting in a lease liability of €17.7 million and right-of-use assets of €18.4 million[996][997][998] - The company's investment in its associate, Visen Pharmaceuticals, had a carrying amount of €15.5 million as of December 31, 2019, with the company's share of Visen's loss for the year being €8.1 million[1151][1152][1155]