Crinetics Pharmaceuticals(CRNX) - 2018 Q4 - Annual Report

PART I This section outlines the company's business, product development, competitive landscape, intellectual property, regulatory environment, and key risks Business Crinetics Pharmaceuticals develops oral nonpeptide therapeutics for rare endocrine diseases, with lead candidate CRN00808 in Phase 2 trials Business Overview and Pipeline Crinetics Pharmaceuticals develops oral small-molecule therapeutics for rare endocrine diseases, with lead candidate CRN00808 in Phase 2 trials - The company's lead product candidate, CRN00808, is an oral selective nonpeptide somatostatin receptor type 2 (sst2) biased agonist for acromegaly, currently in two global Phase 2 clinical trials (EVOLVE and EDGE)[6][8] - CRN01941, an oral sst2 biased agonist for neuroendocrine tumors (NETs), is expected to begin a Phase 1 trial in the first half of 2019[8] - The company is advancing new molecules for congenital hyperinsulinism (CHI) after a toxicity finding with its initial candidate, CRN02481[8] - A discovery program is underway to identify a nonpeptide antagonist of the ACTH receptor for the treatment of Cushing's disease[8] Our Strategy The company's strategy focuses on rare endocrine diseases, advancing candidates, leveraging GPCR expertise, and retaining commercialization rights - Focus on rare endocrine diseases and tumors with high unmet medical need[11] - Advance multiple product candidates in parallel, targeting diseases that allow for smaller clinical trials with validated biomarker endpoints[11] - Leverage internal GPCR discovery expertise to continuously expand the therapeutic pipeline[11] - Retain commercialization rights and build a focused, modest-sized commercial organization to serve specialty endocrinologists[11] Our Product Candidates Crinetics' pipeline includes CRN00808 for acromegaly in Phase 2, CRN01941 for NETs in Phase 1, and programs for CHI and Cushing's disease Product Candidate Pipeline and Milestones | Product Candidate | Indication | Development Stage | Anticipated Milestones | | :--- | :--- | :--- | :--- | | CRN00808 | Acromegaly | Phase 2 | Initiate Phase 2 trials (late 2018) | | CRN01941 | Neuroendocrine Tumors (NETs) | Preclinical (IND-enabling) | Initiate Phase 1 trial (1H 2019), Results (late 2019/early 2020) | | sst5 Agonist | Congenital Hyperinsulinism (CHI) | Preclinical | Select new product candidate | | ACTH Antagonist | Cushing's Disease | Discovery | Ongoing discovery effort | Competition Crinetics faces competition from larger pharmaceutical companies across its therapeutic areas, including acromegaly, NETs, CHI, and Cushing's disease - Acromegaly: Competitors include Novartis (octreotide, pasireotide), Ipsen (lanreotide), Pfizer (pegvisomant), and Chiasma (oral octreotide in Phase 3)[61] - Neuroendocrine Tumors (NETs): Competition includes existing somatostatin analogs, Lexicon's telotristat ethyl, and targeted therapies from Novartis and Pfizer; Novartis' Lutathera was approved in 2018[61] - Congenital Hyperinsulinism (CHI): The only approved therapy is diazoxide (Teva); companies in or entering Phase 3 include Eli Lilly, Zealand Pharma, and Xeris Pharmaceuticals[61] - Cushing's Disease: Competitors include Corcept (mifepristone), Novartis (pasireotide), and Strongbridge Biopharma, with both Novartis and Strongbridge in Phase 3 trials with new agents[61] Intellectual Property The company protects its technology through patents and trade secrets, with CRN00808 patent expiring in 2037, and some IP subject to government rights - The company owns a U.S. patent covering the composition of matter for its lead product candidate, CRN00808, which is expected to expire in July 2037[64] - The company's portfolio includes three issued U.S. patents, multiple pending U.S. applications, and twenty-eight pending foreign patent applications, with expected expiration dates between 2036 and 2039[64] - Intellectual property generated using SBIR Grants is subject to the Bayh-Dole Act, giving the U.S. government a non-exclusive, worldwide license for governmental purposes and "march-in" rights under certain circumstances[64][65][66] Government Regulation The company's operations are subject to extensive FDA regulation, including drug approval processes, orphan drug designation, and post-approval compliance - The FDA drug development process requires completion of preclinical studies, submission of an Investigational New Drug (IND) application, and successful completion of Phase 1, 2, and 3 clinical trials to demonstrate safety and efficacy before an NDA can be submitted[70][72] - The company may utilize programs like Orphan Drug Designation, which can provide seven years of market exclusivity for treating rare diseases affecting fewer than 200,000 individuals in the U.S[78] - Expedited development programs such as Fast Track, Priority Review, and Breakthrough Therapy may be available to accelerate the review and approval process for drugs treating serious conditions with unmet medical needs[79][81] - The business is subject to healthcare laws including the Anti-Kickback Statute, the False Claims Act, and HIPAA, which regulate business practices and carry significant penalties for non-compliance[90][91] - Healthcare reform, such as the Affordable Care Act (ACA), and other legislative initiatives continue to impact drug pricing, coverage, and reimbursement, creating uncertainty and potential cost-containment pressures[86][88] Risk Factors The company faces significant risks including limited operating history, financial losses, capital needs, uncertain clinical development, reliance on third parties, and intense competition Risks Related to Financial Position and Capital Requirements Crinetics has a limited operating history, significant losses, and requires substantial additional financing, risking dilution or program delays - The company has a limited operating history and has incurred significant operating losses since inception, with an accumulated deficit of $43.4 million as of December 31, 2018[99] - Substantial additional financing will be required to achieve goals, and failure to obtain it could force delays, reductions, or termination of product development and commercialization efforts[99][101] - Existing cash is expected to fund operations for at least the next 12 months, but this is based on estimates that may prove wrong[101] Risks Related to Product Development and Regulatory Approval Product development is early-stage, lengthy, expensive, and uncertain, with risks including trial delays, patient enrollment difficulties, and adverse side effects - The company is early in its development efforts with only one product candidate, CRN00808, in clinical development; all other programs are in preclinical or discovery stages[103] - Preclinical and clinical drug development is a lengthy, expensive process with an uncertain outcome, and results from early trials are not necessarily predictive of future success[104] - Difficulties in enrolling patients for rare diseases like acromegaly could delay or adversely affect clinical development activities[110] - Use of product candidates could be associated with undesirable side effects or adverse events, which could cause trials to be halted and delay or prevent regulatory approval[110][112] Risks Related to Reliance on Third Parties The company relies heavily on third-party CROs and manufacturers, posing risks to clinical trials, supply, quality, and regulatory compliance - The company is dependent on third-party CROs to conduct preclinical studies and clinical trials, and any failure by these parties to perform adequately could delay or prevent regulatory approval[121] - The company relies on third-party manufacturers for all clinical and potential commercial supply, creating risks of supply shortages, quality issues, and regulatory non-compliance[121] - Reliance on third parties requires sharing trade secrets, which increases the risk of misappropriation or disclosure[123] Risks Related to Commercialization Commercialization risks include ongoing regulatory scrutiny, uncertain market acceptance, reimbursement challenges, and intense competition from larger companies - Approved products will be subject to ongoing regulatory obligations, and failure to comply can result in significant penalties or market withdrawal[125] - Commercial success is dependent on market acceptance by physicians, patients, and payors, which is uncertain[127] - Failure to obtain and maintain sufficient coverage and adequate reimbursement from governmental and private payors could severely limit commercial success[129] - The company faces significant competition from large pharmaceutical companies with greater resources and established products in its target indications[131] Risks Related to Intellectual Property Intellectual property risks include uncertain patent protection, government rights, potential infringement claims, and challenges in global IP enforcement - Commercial success depends on obtaining and maintaining patent and trade secret protection, which is an uncertain and complex process[153] - Most of the company's intellectual property was discovered through government-funded programs and is subject to federal regulations, including potential "march-in" rights by the U.S. government[157] - The company may face costly litigation if third parties claim infringement of their proprietary rights, which could delay or prevent commercialization[160] - Protecting intellectual property rights worldwide is difficult and expensive, as laws in foreign countries may offer less protection than in the U.S[170] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[193] Properties The company's headquarters is a 29,499 square foot leased facility in San Diego, California, with a lease expiring in August 2025 - The company leases a 29,499 square foot facility in San Diego, California for its headquarters[194] - The lease expires in August 2025, with a five-year extension option[194] Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently a party to any material legal proceedings[195] Mine Safety Disclosures This item is not applicable to the company - None[196] PART II This section covers the company's common equity market, selected financial data, management's discussion and analysis, market risk, and internal controls Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "CRNX"; it has never paid dividends and raised $117.3 million gross from its July 2018 IPO - Common stock is listed on the Nasdaq Global Select Market under the ticker symbol "CRNX"[199] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[200] - In February and March 2018, the company sold $63.5 million of Series B convertible preferred stock in a private placement[201] - The Initial Public Offering (IPO) on July 20, 2018, raised gross proceeds of $117.3 million[203] Selected Financial Data The company's financial data shows increased operating losses to $28.7 million in 2018, with cash and investments growing to $163.9 million due to financing Selected Financial Data (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Grant revenues | $2,428 | $2,045 | $589 | | Research and development expenses | $24,479 | $9,233 | $5,100 | | General and administrative expenses | $6,659 | $1,939 | $1,533 | | Loss from operations | $(28,710) | $(9,127) | $(6,044) | | Net loss | $(27,115) | $(9,157) | $(6,019) | | Cash, equivalents and short-term investments | $163,875 | $14,192 | $12,152 | | Total assets | $171,415 | $15,598 | $12,599 | | Total stockholders' equity (deficit) | $160,225 | $(15,022) | $(6,204) | Management's Discussion and Analysis of Financial Condition and Results of Operations Net loss increased to $27.1 million in 2018 due to higher R&D and G&A expenses, funded by $106.5 million net IPO proceeds, with $163.9 million cash expected to fund operations through 2020 Results of Operations Net loss increased to $27.1 million in 2018, driven by a $15.2 million rise in R&D expenses and a $4.7 million increase in G&A expenses Comparison of Operations (in thousands) | Item | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Grant revenues | $2,428 | $2,045 | $383 | | Research and development | $24,479 | $9,233 | $15,246 | | General and administrative | $6,659 | $1,939 | $4,720 | | Loss from operations | $(28,710) | $(9,127) | $(19,583) | | Net loss | $(27,115) | $(9,157) | $(17,958) | - The increase in R&D expenses was primarily due to manufacturing and development for CRN00808 and other preclinical programs, increased personnel costs, and expanded facilities[230] - The increase in G&A expenses was driven by higher personnel costs, including stock-based compensation, and expenses related to operating as a publicly-traded company[230] Liquidity and Capital Resources As of December 31, 2018, the company had $163.9 million in cash, expected to fund operations through 2020, but future funding will be required due to ongoing losses - As of December 31, 2018, the company had cash, cash equivalents, and short-term investments of $163.9 million[233][236] - Existing cash is expected to be sufficient to fund operations through 2020, covering ongoing Phase 2 trials for CRN00808 and planned Phase 1 trials for CRN01941[236] - The company has an accumulated deficit of $43.4 million as of December 31, 2018 and expects to continue to incur net losses[233] Cash Flow Summary (in thousands) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(19,459) | $(9,479) | | Net cash used in investing activities | $(119,458) | $(304) | | Net cash provided by financing activities | $170,198 | $11,823 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on short-term investments, with minor foreign currency exposure from its Australian subsidiary - The primary market risk is interest rate sensitivity on cash and short-term investments, but the impact of rate changes is not expected to be material due to the short-term nature of the portfolio[243] - The company is exposed to foreign currency risk through its Australian subsidiary and contracts with foreign vendors; it does not hedge this risk[244] - Foreign currency remeasurement resulted in a net loss of approximately $144,000 for the year ended December 31, 2018[244] Financial Statements and Supplementary Data This section incorporates the company's consolidated financial statements and the independent auditor's report by reference - The consolidated financial statements and the report of the independent registered accounting firm are included in Item 15 of the report, starting on page F-1[246] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[247] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2018; no material changes to internal controls were made - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[248][250] - As a newly public company, a management report on internal control over financial reporting is not included, per SEC transition rules[251] - There were no material changes in internal control over financial reporting during the year ended December 31, 2018[252] Other Information The Compensation Committee approved 2018 bonus awards for named executive officers, with some pro-rated based on employment duration 2018 Executive Bonus Awards | Named Executive Officer | Bonus Award | | :--- | :--- | | R. Scott Struthers | $259,875 | | Marc J.S. Wilson | $120,278 | | Alan Krasner | $75,514 | PART III This section covers corporate governance, executive compensation, security ownership, and related party transactions Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information for Items 10-14, including corporate governance, executive compensation, and security ownership, is incorporated by reference from the 2019 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's forthcoming 2019 definitive proxy statement[256][258][259][260][261] - The company has adopted a Code of Business Conduct and Ethics, which is available on its website[257] PART IV This section lists exhibits and financial statement schedules included with the Form 10-K Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements, with all financial statement schedules omitted - The company's financial statements are included with this report[264][265] - All financial statement schedules have been omitted[265] Form 10-K Summary No Form 10-K summary is provided - None[266] Financial Statements This section presents the company's consolidated financial statements and detailed notes for the fiscal year ended December 31, 2018 Consolidated Financial Statements Net loss increased to $27.1 million in 2018; total assets grew to $171.4 million due to financing, shifting to $160.2 million stockholders' equity Key Balance Sheet Data (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash, cash equivalents & short-term investments | $163,875 | $14,192 | | Total Assets | $171,415 | $15,598 | | Total Liabilities | $11,190 | $920 | | Total stockholders' equity (deficit) | $160,225 | $(15,022) | Key Operations Data (in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Grant Revenues | $2,428 | $2,045 | | Total Operating Expenses | $31,138 | $11,172 | | Net Loss | $(27,115) | $(9,157) | Notes to Consolidated Financial Statements Notes detail accounting policies, IPO proceeds of $106.5 million, $163.9 million cash, and significant NOL carryforwards offset by a valuation allowance - The company believes its cash of $163.9 million as of Dec 31, 2018, is sufficient to fund requirements for at least the next 12 months, but expects to continue incurring net losses[295] - The Australian R&D Tax Incentive is recognized as a reduction to R&D expense, amounting to $1.2 million in 2018[311] - In July 2018, the company completed its IPO, selling 6.9 million shares for net proceeds of approximately $106.5 million; all outstanding convertible preferred stock was converted into common stock[330] - As of Dec 31, 2018, the company had federal and state NOL carryforwards of $8.7 million and $10.9 million, respectively, and federal and California R&D credit carryforwards of $1.4 million and $0.9 million, respectively; a full valuation allowance has been recorded against these deferred tax assets[342][344]