Enanta Pharmaceuticals(ENTA) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This chapter provides the company's unaudited consolidated financial statements as of March 31, 2022, and September 30, 2021, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, with detailed notes, prepared in accordance with GAAP - Consolidated financial statements are unaudited, prepared according to SEC interim financial statement rules, and should be read with the company's 10-K annual report as of September 30, 2021[28] - Management believes all adjustments have been made to fairly present the financial position as of March 31, 2022, and the results of operations and cash flows for the three and six months ended March 31, 2022, and 2021[28] Consolidated Balance Sheets As of March 31, 2022, total assets were $406,818 thousand, a decrease from $438,791 thousand as of September 30, 2021, with changes in cash and cash equivalents, marketable securities, total liabilities, and stockholders' equity Consolidated Balance Sheets Key Data (Thousands of Dollars) | Indicator | March 31, 2022 | September 30, 2021 | | :--------------------------------- | :------------- | :------------- | | Assets | | | | Cash and cash equivalents | 40,989 | 57,206 | | Short-term marketable securities | 239,338 | 186,796 | | Total current assets | 341,869 | 319,021 | | Long-term marketable securities | 42,218 | 108,416 | | Total assets | 406,818 | 438,791 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | 30,738 | 36,172 | | Operating lease liabilities, net of current portion | 15,115 | 1,126 | | Total liabilities | 48,235 | 39,362 | | Total stockholders' equity | 358,583 | 399,429 | Consolidated Statements of Operations For the three months ended March 31, 2022, royalty revenue was $18,716 thousand, a decrease from the prior year, while R&D and G&A expenses increased, leading to an expanded net loss of $33,592 thousand, with a significant increase in net loss for the six-month period as well Consolidated Statements of Operations Key Data (Thousands of Dollars, except per share amounts) | Indicator | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Royalty revenue | 18,716 | 20,132 | 46,364 | 51,875 | | Research and development expenses | 42,087 | 41,506 | 90,636 | 78,171 | | General and administrative expenses | 10,476 | 8,326 | 19,984 | 15,703 | | Operating loss | (33,847) | (29,700) | (64,256) | (41,999) | | Net loss | (33,592) | (22,045) | (63,707) | (30,373) | | Basic net loss per share | (1.63) | (1.09) | (3.11) | (1.51) | | Diluted net loss per share | (1.63) | (1.09) | (3.11) | (1.51) | Consolidated Statements of Comprehensive Loss For the three months ended March 31, 2022, comprehensive loss expanded to $35,623 thousand from $22,395 thousand in the prior year, primarily due to increased net loss and unrealized net loss on marketable securities Consolidated Statements of Comprehensive Loss Key Data (Thousands of Dollars) | Indicator | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :--------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Net loss | (33,592) | (22,045) | (63,707) | (30,373) | | Unrealized net loss on marketable securities | (2,031) | (350) | (2,655) | (789) | | Comprehensive loss | (35,623) | (22,395) | (66,362) | (31,162) | Consolidated Statements of Stockholders' Equity As of March 31, 2022, total stockholders' equity was $358,583 thousand, a decrease from $399,429 thousand as of September 30, 2021, primarily due to stock option exercises, RSU vesting, stock-based compensation, net loss, and accumulated other comprehensive loss Changes in Stockholders' Equity (Thousands of Dollars, except share count) | Indicator | Balance as of September 30, 2021 | Stock option exercises | RSU vesting | Stock-based compensation expense | Other comprehensive loss | Net loss | Balance as of March 31, 2022 | | :------------------- | :---------------- | :----------- | :----------------- | :----------- | :----------- | :------- | :---------------- | | Common stock (shares) | 20,238 | 248 | 20 | — | — | — | 20,618 | | Common stock (amount) | 202 | 2 | 1 | — | — | — | 206 | | Additional paid-in capital | 351,033 | 10,407 | (778) | 6,062 | — | — | 376,545 | | Accumulated other comprehensive loss | (382) | — | — | — | (624) | — | (3,037) | | Retained earnings (accumulated deficit) | 48,576 | — | — | — | — | (30,115) | (15,131) | | Total stockholders' equity | 399,429 | 10,409 | (777) | 6,062 | (624) | (30,115) | 358,583 | Consolidated Statements of Cash Flows For the six months ended March 31, 2022, the company experienced a net cash outflow from operating activities of $39,646 thousand, a net cash inflow from investing activities of $10,446 thousand, and a net cash inflow from financing activities of $12,983 thousand, resulting in a net decrease of $16,217 thousand in cash, cash equivalents, and restricted cash Consolidated Statements of Cash Flows Key Data (Thousands of Dollars) | Indicator | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :------------------------------------- | :----------------------- | :----------------------- | | Net cash outflow from operating activities | (39,646) | (19,469) | | Net cash inflow from investing activities | 10,446 | 8,013 | | Net cash inflow from financing activities | 12,983 | 1,451 | | Net decrease in cash, cash equivalents, and restricted cash | (16,217) | (10,005) | | Cash, cash equivalents, and restricted cash at end of period | 41,597 | 77,734 | Notes to Consolidated Financial Statements (unaudited) The notes detail the company's business, accounting policies, fair value of financial assets and liabilities, marketable securities, accrued expenses, AbbVie collaboration, preferred stock, equity compensation, net loss per share, income taxes, commitments, contingencies, and updated lease information - The company is a biotechnology firm focused on discovering and developing small molecule drugs for viral infections and liver diseases, primarily generating royalty revenue from the AbbVie collaboration for HCV drug MAVYRET®/MAVIRET®, which funds its wholly-owned R&D programs for RSV, HBV, SARS-CoV-2, and hMPV[26][60] - The COVID-19 pandemic has led to decreased sales of AbbVie's HCV drug and may impact the supply chain and patient enrollment for the company's clinical trials, but existing cash flow and financial resources are expected to support R&D programs for at least two years[27][60][70] Fair Value Measurement of Financial Assets and Liabilities (Thousands of Dollars) | Indicator | Total as of March 31, 2022 | Total as of September 30, 2021 | | :--------------------------- | :---------------- | :---------------- | | Assets | | | | Cash equivalents: Money market funds | 36,356 | 54,819 | | Marketable securities: U.S. Treasury bills | 106,992 | 83,038 | | Marketable securities: Corporate bonds | 108,190 | 124,703 | | Marketable securities: Commercial paper | 66,374 | 87,471 | | Liabilities | | | | Series 1 non-convertible preferred stock | 1,506 | 1,506 | Accrued Expenses and Other Long-Term Liabilities (Thousands of Dollars) | Indicator | March 31, 2022 | September 30, 2021 | | :--------------------------- | :------------- | :------------- | | Accrued Expenses | | | | Accrued drug manufacturing expenses | 14,412 | 8,402 | | Accrued research and development expenses | 2,616 | 6,062 | | Accrued salaries and related expenses | 2,960 | 6,094 | | Other Long-Term Liabilities | | | | Uncertain tax positions | 530 | 558 | | Asset retirement obligations | 346 | — | - As of March 31, 2022, the company has received approximately $1,169,000 thousand in license fees, preferred stock proceeds, R&D funding, milestone payments, and royalties from the AbbVie collaboration[43] Stock-Based Compensation Expense (Thousands of Dollars) | Expense Type | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Research and development | 2,710 | 2,536 | 5,294 | 4,955 | | General and administrative | 3,761 | 2,744 | 7,239 | 5,208 | | Total | 6,471 | 5,280 | 12,533 | 10,163 | - As of March 31, 2022, total unrecognized stock-based compensation cost was $66,162 thousand, expected to be recognized over a weighted-average period of 2.9 years[50] - For the three and six months ended March 31, 2022, the company recognized no income tax benefit, whereas in the prior year, it recognized $7,110 thousand and $10,404 thousand respectively, due to federal net operating loss carrybacks under the CARES Act, and has a valuation allowance against all net deferred tax assets[54] - The company extended its lease for office and laboratory space at 500 Arsenal Street on November 19, 2021, for an additional five years until September 1, 2027, increasing the right-of-use asset and lease liability by $15,048 thousand[57] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This chapter provides management's detailed discussion of the company's financial condition and operating results, covering an overview, wholly-owned R&D programs, AbbVie royalty collaboration, COVID-19 impact, financial operations, liquidity, and capital resources, with comparative analysis of key financial metrics - The company is a biotechnology firm focused on discovering and developing small molecule drugs for viral infections and liver diseases, primarily generating royalty revenue from the AbbVie collaboration for HCV drug MAVYRET®/MAVIRET®, which funds its wholly-owned R&D programs for RSV, HBV, SARS-CoV-2, and hMPV[60] - As of March 31, 2022, the company held $322.5 million in cash, cash equivalents, and short-term and long-term marketable securities, with existing funds and HCV royalty revenue expected to support wholly-owned R&D programs for at least two years[60][70] - The COVID-19 pandemic has led to decreased sales of AbbVie's HCV drug and impacted patient enrollment for the company's RSV clinical studies, but the company has taken measures to address this and anticipates continued pandemic effects on its business[68][70][71] - The company anticipates higher R&D expenses in fiscal year 2022 compared to 2021, driven by advancing wholly-owned programs like EDP-938 for RSV and EDP-235 for COVID-19, while seeking external licensing for its liver disease program (NASH FXR agonist)[71][82][83] Overview The company is a biotechnology firm leveraging its chemistry-driven drug discovery capabilities to find and develop small molecule drugs for viral infections and liver diseases, with primary revenue from AbbVie's MAVYRET®/MAVIRET® HCV drug royalties, funding its R&D programs in RSV, SARS-CoV-2, HBV, and hMPV - The company primarily generates royalty revenue from AbbVie's MAVYRET®/MAVIRET® HCV drug collaboration, which funds its wholly-owned R&D programs in RSV, SARS-CoV-2, HBV, and hMPV[60] - As of March 31, 2022, the company held $322.5 million in cash, cash equivalents, and short-term and long-term marketable securities, with existing funds and HCV royalty revenue expected to support wholly-owned R&D programs for at least two years[60] Our Wholly-Owned Programs The company's wholly-owned R&D programs focus on virology, including RSV, COVID-19, HBV, and hMPV, with EDP-938 in three Phase II RSV studies, EDP-323 (new L-protein inhibitor) planned for Phase I in H2 2022, EDP-235 (oral 3CL protease inhibitor) for COVID-19 in first-in-human study since February 2022, EDP-514 (HBV core inhibitor) completing Phase I, and hMPV program optimizing nanomolar inhibitors for a clinical candidate in H2 2022 - RSV program: EDP-938 is undergoing three Phase II studies: RSVP (adult outpatients), RSVPEDs (pediatric), and RSVTx (adult hematopoietic stem cell transplant recipients); a new L-protein inhibitor, EDP-323, is planned to initiate a Phase I study in the second half of 2022[61][63] - COVID-19 program: The oral 3CL protease inhibitor, EDP-235, initiated first-in-human studies in February 2022, with preliminary data expected in the second quarter of 2022; EDP-235 demonstrates nanomolar inhibitory activity against SARS-CoV-2 and its variants (including Delta and Omicron), with favorable pharmacokinetics and tissue penetration[63] - HBV program: The core inhibitor, EDP-514, completed Phase I studies, showing good tolerability and pharmacokinetics in healthy subjects and NUC-suppressed patients, and significant reductions in HBV DNA and RNA levels in viremic patients[63] - hMPV program: Nanomolar inhibitors are being optimized, with the goal of selecting a first clinical candidate in the second half of 2022[65] Our Royalty Revenue Collaboration The company earns royalties through its collaboration agreement with AbbVie, primarily from net sales of MAVYRET®/MAVIRET® (glecaprevir/pibrentasvir), calculated at annual tiered double-digit rates based on 50% of the combination's net sales - The company's royalty revenue primarily stems from AbbVie's net sales of the MAVYRET®/MAVIRET® (glecaprevir/pibrentasvir) combination[67] - Royalties are calculated at annual tiered double-digit rates, based on 50% of MAVYRET/MAVIRET combination net sales, with tiers resetting annually on January 1[67] COVID-19 Update The COVID-19 pandemic continues to significantly impact the company's business operations, clinical trials, and royalty revenue, leading to reduced HCV patient volumes, diagnoses, and treatment rates, affecting MAVYRET/MAVIRET sales, while clinical trial enrollment and completion times remain uncertain despite employees gradually returning to on-site work, though existing funds and royalties are expected to support R&D for at least two years - The COVID-19 pandemic has led to decreased HCV patient volumes, diagnoses, and treatment rates, with MAVYRET/MAVIRET sales remaining below pre-pandemic levels, impacting the company's royalty revenue[70] - The pandemic has slowed enrollment in RSV clinical studies, and other clinical trials face disruptions and complexities, leading to uncertainty regarding future enrollment and completion timelines[70] - The company has resumed full laboratory operations, most employees are on a hybrid work model, and existing cash and investments (totaling $322.5 million as of March 31, 2022) are expected to support R&D programs for at least two years[70] Financial Operations Overview The company primarily funds operations through royalties from its AbbVie collaboration and existing cash, cash equivalents, and marketable securities, but anticipates continued net losses in fiscal year 2022 due to decreased HCV revenue from COVID-19 and increased expenses from advancing wholly-owned R&D programs (RSV, SARS-CoV-2, hMPV) - The company primarily funds operations through royalties from the AbbVie collaboration and existing cash, cash equivalents, and marketable securities[71] - Due to decreased HCV revenue and increased R&D expenses, the company anticipates continued net losses in fiscal year 2022[71] - The company is advancing wholly-owned programs such as RSV and SARS-CoV-2, and expects R&D expenses to continue increasing in the future[71] Internal Programs The company's wholly-owned product candidates are currently in Phase I or Phase II clinical development, have not generated product sales revenue, and are not expected to do so for several years, with operating expenses, including R&D and G&A, increasing for the three and six months ended March 31, 2022 - The company's wholly-owned product candidates are currently in Phase I or Phase II clinical development, have not generated product sales revenue, and are not expected to do so for several years[72] Operating Expenses (Thousands of Dollars) | Indicator | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Research and development expenses | 42,087 | 41,506 | 90,636 | 78,171 | | General and administrative expenses | 10,476 | 8,326 | 19,984 | 15,703 | | Total Operating Expenses | 52,563 | 49,832 | 110,620 | 93,874 | Research and Development Expenses R&D expenses encompass costs for basic research, preclinical, and clinical development activities, primarily comprising personnel costs, third-party contract costs, lab supplies, facility-related costs, and third-party license fees, with an expectation of continued increases in the future, though completion dates and costs are difficult to predict due to clinical trial enrollment uncertainties (impacted by COVID-19) - R&D expenses primarily include personnel costs, third-party contract costs (research, formulation, manufacturing, preclinical, and clinical trials), laboratory supplies, facility-related costs, and third-party license fees[74] - The company anticipates R&D expenses will continue to increase, but completion dates and costs are difficult to predict due to clinical trial enrollment uncertainties (impacted by COVID-19) and inherent risks in the development process[74] General and Administrative Expenses G&A expenses primarily include compensation, benefits, and stock-based compensation for executive, finance, business, corporate development, and other administrative personnel, as well as travel, facility-related costs, D&O insurance, and audit, tax, legal, and patent fees, with an expectation of future increases due to expanding operational activities - G&A expenses primarily include compensation, benefits, and stock-based compensation for executive, finance, business, corporate development, and other administrative personnel, as well as travel, facility-related costs, D&O insurance, and professional service fees[75] - The company anticipates G&A expenses will increase in the future to support the expansion of operational activities for its wholly-owned R&D programs[75] Other Income (Expense), Net Other income (expense), net, includes interest and investment income, as well as changes in the fair value of Series 1 non-convertible preferred stock, with interest income derived from cash equivalents and marketable securities, and investment income representing amortization or accretion of marketable securities - Other income (expense), net, includes interest and investment income, as well as changes in the fair value of Series 1 non-convertible preferred stock[76] - Interest income is derived from cash equivalents and marketable securities, while investment income represents the amortization or accretion of marketable securities[76] Income Tax Benefit Income tax benefit typically arises from federal and state tax credits, release of tax reserves, or refunds from current year tax losses carried back to prior years, with CARES Act benefits no longer applicable from fiscal year 2022 - Income tax benefit typically arises from federal and state tax credits, the release of tax reserves, or refunds generated by current year tax losses carried back to prior years[77] - CARES Act benefits are no longer applicable from fiscal year 2022[77] Results of Operations This section provides a detailed comparison of operating results for the three and six months ended March 31, 2022, and 2021, showing decreased royalty revenue due to lower AbbVie HCV sales, and increased R&D and G&A expenses, leading to an expanded net loss Operating Results Comparison (Thousands of Dollars) | Indicator | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Royalty revenue | 18,716 | 20,132 | 46,364 | 51,875 | | Research and development expenses | 42,087 | 41,506 | 90,636 | 78,171 | | General and administrative expenses | 10,476 | 8,326 | 19,984 | 15,703 | | Other income (expense), net | 255 | 545 | 549 | 1,222 | | Income tax benefit | — | 7,110 | — | 10,404 | | Net loss | (33,592) | (22,045) | (63,707) | (30,373) | - Royalty revenue decreased by $1.4 million and $5.5 million for the three and six months ended March 31, 2022, respectively, primarily due to lower AbbVie-reported HCV sales, as HCV patient volumes remain below pre-pandemic levels[79][87] - R&D expenses increased by $0.6 million and $12.5 million for the three and six months ended March 31, 2022, respectively, driven by higher manufacturing costs for clinical studies in virology programs and increased personnel expenses, partially offset by decreased clinical trial costs for liver disease programs[82][90] - G&A expenses increased by $2.2 million and $4.3 million for the three and six months ended March 31, 2022, respectively, primarily due to increased personnel expenses supporting the expansion of R&D operations[84][91] - There was no income tax benefit in the 2022 periods, whereas the 2021 periods recognized income tax benefits from federal net operating loss carrybacks under the CARES Act, which is no longer applicable after September 30, 2021[86][92] Liquidity and Capital Resources As of March 31, 2022, the company held $322.5 million in cash, cash equivalents, and marketable securities, a decrease from $352.4 million as of September 30, 2021, with increased cash outflow from operating activities, increased cash inflow from investing activities, and significantly increased cash inflow from financing activities, resulting in a net decrease in cash, though existing funds are expected to meet cash needs for at least two years, subject to various future funding factors - As of March 31, 2022, the company held $322.5 million in cash, cash equivalents, and short-term and long-term marketable securities, a decrease from $352.4 million as of September 30, 2021[93] Cash Flow Summary (Thousands of Dollars) | Cash Flow Type | For the six months ended March 31, 2022 | For the six months ended March 31, 2021 | | :--------------------------- | :----------------------- | :----------------------- | | Net cash outflow from operating activities | (39,646) | (19,469) | | Net cash inflow from investing activities | 10,446 | 8,013 | | Net cash inflow from financing activities | 12,983 | 1,451 | | Net decrease in cash, cash equivalents, and restricted cash | (16,217) | (10,005) | - Net cash outflow from operating activities increased by $20.2 million, primarily due to increased R&D costs, partially offset by $8.5 million in federal tax refunds[94] - Net cash inflow from financing activities increased by $11.5 million, primarily due to increased stock option exercises[97] - The company expects existing cash, cash equivalents, and marketable securities to be sufficient to meet cash needs for at least two years, but future capital requirements are influenced by royalties, COVID-19 impact, R&D program progress, manufacturing costs, regulatory approvals, commercialization costs, and intellectual property litigation[98] Off-Balance Sheet Arrangements The company has not engaged in any off-balance sheet financing activities nor does it own any variable interest entities - The company has not engaged in any off-balance sheet financing activities nor does it own any variable interest entities[100] Contractual Obligations and Commitments The company extended its lease for its 500 Arsenal Street location in November 2021 for an additional five years until September 1, 2027, with updated total minimum lease payments of $20.3 million - The company extended its lease for its 500 Arsenal Street location for an additional five years until September 1, 2027, with updated total minimum lease payments of $20.3 million[102] Critical Accounting Policies The company's consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions, where actual results may differ, with detailed critical accounting policies available in the company's fiscal year 2021 10-K annual report - The company's consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), requiring management estimates and assumptions, where actual results may differ from these estimates[103] - Detailed critical accounting policies are available in the company's fiscal year 2021 10-K annual report[103] Recently Issued Accounting Pronouncements This section refers to recently issued accounting pronouncements, whose potential impact on the company's financial condition and operating results is discussed in Note 2 to the financial statements - The potential impact of recently issued accounting pronouncements on the company's financial condition and operating results is discussed in Note 2 to the financial statements[104] Item 3. Quantitative and Qualitative Disclosures About Market Risk This chapter discloses the company's market risks, primarily interest rate sensitivity and foreign currency risk, noting that due to the nature of investments, interest rate changes are not expected to significantly impact financial condition or operating results, and foreign currency risk is currently immaterial but may increase with international clinical trials - Interest rate sensitivity: As of March 31, 2022, the company held $322.5 million in cash, cash equivalents, and marketable securities, but a 100 basis point change in market interest rates is not expected to have a material impact on financial condition or operating results due to the nature of these investments[105] - Foreign currency risk: Currently, foreign currency risk is not material, but as the company conducts clinical trials abroad, it may face greater risks from fluctuations in the British Pound and Euro against the U.S. Dollar in the future[106] Item 4. Controls and Procedures This chapter describes management's assessment of the effectiveness of disclosure controls and procedures, confirming their effectiveness as of March 31, 2022, with no significant changes in internal control over financial reporting - As of March 31, 2022, the company's management (with the participation of the Chief Executive Officer and Chief Financial Officer) assessed and concluded that disclosure controls and procedures are effective[108] - There were no changes in internal control over financial reporting during the three months ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[110] PART II. OTHER INFORMATION Item 1A. Risk Factors This chapter details significant risks and uncertainties facing the company, including business dependencies, competition, COVID-19 impact, clinical development, regulatory approval, commercialization, third-party collaborations, intellectual property, industry-specific risks, and risks related to common stock, all of which could materially and adversely affect the company's business prospects, financial condition, and operating results - The company's financial prospects are highly dependent on the success of AbbVie's sales of MAVYRET/MAVIRET, and the COVID-19 pandemic may lead to a sustained decline in HCV sales volumes[113][116] - The company faces intense competition in disease areas such as RSV, SARS-CoV-2, HBV, and hMPV, with many competitors having product candidates in more advanced stages of development[113][125] - The COVID-19 pandemic continues to impact the company's business operations and clinical trials, potentially causing supply chain disruptions, clinical trial delays, and patient enrollment difficulties[113][133][134] - The clinical drug development process is lengthy, expensive, and uncertain, and any failure or delay in clinical trials for wholly-owned product candidates could hinder their commercialization[115][159][163] - The company may not be able to obtain or maintain adequate patent protection and may face third-party intellectual property infringement claims, leading to costly litigation and business disruptions[115][228][231] - The company relies on third-party manufacturers and contract research organizations (CROs) for drug supply and clinical trials, and any failure by these parties could delay or harm product development and commercialization[115][213][221] - The company's common stock price is highly volatile, influenced by clinical trial results, regulatory approvals, competition, COVID-19 impact, financial performance, key personnel changes, and market sentiment[113][252] SUMMARY OF PRINCIPAL RISK FACTORS This section outlines the company's main risks, including financial dependence on AbbVie's MAVYRET/MAVIRET sales, the ongoing COVID-19 impact on sales and clinical trials, intense competition in the HCV market, disadvantages of wholly-owned R&D programs in competition, continuous operating losses due to increased R&D expenses, clinical trial uncertainties, intellectual property protection challenges, and stock price volatility - The company's financial prospects are highly dependent on the success of AbbVie's sales of MAVYRET/MAVIRET, and the COVID-19 pandemic may lead to a sustained decline in HCV sales volumes[113][116] - The company faces intense competition in disease areas such as RSV, SARS-CoV-2, HBV, and hMPV, with many competitors having product candidates in more advanced stages of development[113][125] - The COVID-19 pandemic continues to impact the company's business operations and clinical trials, potentially causing supply chain disruptions, clinical trial delays, and patient enrollment difficulties[113][133][134] - Increased R&D expenses will lead to continuous operating losses unless the company develops other revenue sources[113][145] - The clinical drug development process is lengthy, expensive, and uncertain, and any failure or delay in clinical trials for wholly-owned product candidates could hinder their commercialization[115][159][163] Risks Related to Our Business This section details core risks in the company's business operations, including ongoing reliance on AbbVie's MAVYRET/MAVIRET sales and the risk of declining sales, intense competition in the HCV market, the continuing adverse impact of the COVID-19 pandemic on business operations and clinical trials, limited in-house clinical development experience, risks of failing to successfully develop wholly-owned product candidates, expectations of continuous operating losses, reliance on senior management and key scientific personnel, challenges in managing growth and expansion, and the potential need for substantial additional financing in the future - The company's financial prospects in the coming years primarily depend on the success of AbbVie's sales of MAVYRET/MAVIRET, and a decline in AbbVie's sales will adversely affect the company's revenue[116][120] - The COVID-19 pandemic continues to significantly impact the company's business operations, clinical trials, and royalty revenue, potentially causing supply chain disruptions, clinical trial delays, and decreased HCV patient treatment volumes[133][134][135] - The company has not independently developed any approved products and has limited clinical development experience, making it difficult to assess its ability to independently develop and commercialize product candidates[138][139] - The company has reported net losses and expects continuous operating losses in the future, primarily due to declining royalty revenue and increasing R&D expenses[145][149] - The company's success depends on its ability to attract and retain senior management and key scientific personnel, and the loss of any key personnel could delay or hinder product development[150][151] - The company may require substantial additional financing in the future, and if it cannot obtain the necessary capital in a timely manner, it may be forced to delay, limit, reduce, or terminate some or all product development efforts[154][158] Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates This section details inherent risks in product candidate development, including the lengthy, expensive, and uncertain clinical drug development process that may lead to clinical trial failures or delays; the potential for adverse side effects that could delay or prevent market approval; the unreliability of early clinical trial results in predicting later outcomes; and the lengthy, time-consuming, and unpredictable approval processes of the FDA, EMA, and other regulatory agencies, which may prevent timely regulatory approval - The clinical drug development process is lengthy, expensive, and uncertain, and any failure or delay in clinical trials for wholly-owned product candidates could hinder their commercialization[159][163] - Product candidates may produce adverse side effects, which could delay or prevent market approval, or even lead to market withdrawal or sales restrictions after approval[166][171] - Early clinical trial results do not necessarily predict later clinical trial outcomes, and product candidates may fail in later trials due to safety or efficacy issues[175] - The approval processes of the FDA, EMA, and other regulatory agencies are lengthy, time-consuming, and unpredictable, which may prevent the company from obtaining timely regulatory approval and severely harm its business[178][179] - The regulatory approval pathway for COVID-19 treatments (such as EDP-235) is continuously evolving, potentially leading to unexpected challenges and longer approval times[181][182] Risks Related to Commercialization of Our Product Candidates This section discusses risks in product candidate commercialization, including adverse pricing regulations, third-party reimbursement policies, or healthcare reform measures that could harm the company's business; uncertainty regarding the market opportunity for EDP-235 as a COVID-19 treatment; strict price controls by foreign governments potentially impacting future profitability; and the risk that the company may not successfully commercialize product candidates if it cannot establish its own sales, marketing, and distribution capabilities or secure collaboration agreements - Adverse pricing regulations, third-party reimbursement policies, or healthcare reform measures could harm the company's business, limiting market acceptance and revenue for MAVYRET/MAVIRET or any future products[191][195] - Significant uncertainty exists regarding the future course of the COVID-19 pandemic, and the market opportunity for EDP-235 as a COVID-19 treatment may diminish if the pandemic ends or new infections substantially decrease[196] - Strict price controls by foreign governments (especially in the EU and Japan) could delay product launch and adversely affect future profitability[199][200] - If the company cannot establish its own sales, marketing, and distribution capabilities, or secure favorable licensing or collaboration agreements, it may not successfully commercialize any product candidates[201][205] Risks Related to Our Dependence on Third Parties This section outlines risks from the company's reliance on third parties, including the failure to establish new product collaborations potentially harming its ability to develop and commercialize product candidates; dependence on third-party manufacturers for development-stage and commercial product supply, where any failure could delay or harm clinical trials or product sales; and the conduct of some R&D and key intermediate manufacturing activities in China, which may face supply chain disruptions, increased costs, or political risks - The company may not successfully establish new product collaborations, which could harm its ability to develop and commercialize product candidates and increase cash expenditures[209][212] - The company relies on third-party manufacturers for development-stage and commercial product supply, and any failure by a manufacturer to produce as required or comply with regulations could delay or harm clinical trials or product sales[213][215] - Some R&D and key intermediate manufacturing activities are conducted in China, potentially facing risks such as production disruptions, increased costs, trade wars, political instability, or pandemics (e.g., COVID-19)[217][219] - The company relies on third parties (CROs, hospitals, etc.) to monitor, support, and supervise clinical trials, and if these third parties fail to perform their duties as required, it could lead to clinical trial delays or rejection of data[220][221] Risks Related to Our Intellectual Property Rights This section details risks related to the company's intellectual property, including the potential inability to obtain or maintain adequate patent protection in the highly competitive drug development field; the possibility of third parties claiming the company's products or their use infringe their patents or other intellectual property, leading to costly litigation; and the potential ineffectiveness of confidentiality agreements with employees and third parties in preventing unauthorized disclosure of trade secrets and other proprietary information - In the highly competitive field of small molecule drug development, the company may not be able to obtain or maintain adequate patent protection, or existing patents may be deemed invalid or unenforceable[227][228] - Third parties may claim that the company's products or their use infringe their patents or other intellectual property, leading to costly litigation, royalty payments, or business disruptions[230][231][234] - Confidentiality agreements with employees and third parties may not effectively prevent unauthorized disclosure of trade secrets and other proprietary information, thereby harming the company's competitive position[236][239] Risks Related to Our Industry This section discusses industry-specific risks, including product liability lawsuits potentially leading to substantial liabilities and commercialization restrictions; potential failures or security breaches in internal computer systems or third-party systems causing development project disruptions; and relationships with customers and third-party payors being subject to healthcare laws and regulations such as anti-kickback, fraud, and abuse, which could result in criminal sanctions, civil penalties, and reputational damage - Product liability lawsuits could expose the company to substantial liabilities and may restrict the commercialization of product candidates, consuming significant resources even if successful[240][241] - Failures or security breaches in the company's internal computer systems or third-party systems could disrupt development projects, lead to data loss, reputational damage, and significant liabilities[243][247] - The company's relationships with customers and third-party payors are subject to healthcare laws and regulations such as anti-kickback, fraud, and abuse, and non-compliance could result in criminal sanctions, civil penalties, and reputational damage[248][249][250] Risks Related to Our Common Stock This section outlines risks related to the company's common stock, including high stock price volatility potentially leading to significant shareholder losses; provisions in the company's charter and Delaware law that could make acquisitions more difficult and prevent shareholders from replacing management; employment agreements with executives that may require severance payments upon a change of control; the company's intention not to pay cash dividends in the foreseeable future, meaning investors may not receive a return on investment; and the potential for a significant drop in stock price if a large number of common shares are sold in the open market - The company's stock price is highly volatile, influenced by clinical trial results, regulatory approvals, competition, COVID-19 impact, financial performance, key personnel changes, and market sentiment, potentially leading to significant shareholder losses[252] - Provisions in the company's charter and Delaware law could make it more difficult for the company to be acquired and may prevent shareholders from replacing management[253][256][257] - Employment agreements with executives may require severance payments of up to $5.9 million and accelerated vesting of equity awards totaling $26.8 million upon a change of control, potentially harming the company's financial condition[258][259] - The company does not intend to pay cash dividends in the foreseeable future, requiring investors to rely on stock price appreciation for returns[260][261] - The sale of a large number of common shares in the open market (including existing outstanding shares and shares under equity incentive plans) could lead to a significant drop in the company's stock price[261][262][263] General Risk Factors This section covers broader general risks, including the potential for existing patents to be deemed invalid or unenforceable; intellectual property litigation possibly leading to adverse outcomes and reputational damage; limitations of intellectual property rights in fully protecting competitive advantages; changes in patent law potentially weakening patent value; failure to comply with environmental, health, and safety laws and regulations possibly resulting in fines and costs; insurance policies potentially being insufficient to cover all risks; failure to maintain effective internal control over financial reporting possibly harming financial reporting reliability; and information technology system failures, cyberattacks, or social media use potentially leading to liabilities or reputational damage - Existing patents may be deemed invalid or unenforceable, or intellectual property litigation could lead to adverse outcomes, limiting R&D activities or commercialization capabilities[265][268] - Intellectual property rights have limitations and may not fully protect the company's competitive advantage, for example, competitors may develop similar but non-patented products[272] - Changes in patent law could weaken patent value, affecting the company's ability to protect its products[273][275] - Failure to comply with environmental, health, and safety laws and regulations could result in fines, penalties, or significant costs[276][278] - The company's insurance policies are expensive and only protect against specific business risks, potentially exposing it to significant uninsured liabilities[280][281] - Failure to maintain effective internal control over financial reporting could lead to inaccurate financial reporting or fraud, undermining investor confidence[282][283] - Information technology system failures, cyberattacks, or information security breaches could adversely affect the business, leading to data loss, reputational damage, and legal liabilities[284][288] - The use of social media could lead to liabilities or reputational damage[290] Item 6. Exhibits This chapter lists the exhibits filed with this quarterly report, including financial statements in XBRL format, articles of incorporation, equity incentive plans, and certifications from the Chief Executive Officer and Chief Financial Officer - Exhibits include financial statements in XBRL format (101, 104), articles of incorporation (3.1, 3.2), the 2019 Equity Incentive Plan (10.2), and certifications from the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1)[293][294][295] Signatures This chapter contains the report's signature by Paul J. Mellett, Chief Financial Officer of Enanta Pharmaceuticals, Inc., as required by the Securities Exchange Act of 1934 - This report was signed by Paul J. Mellett, Chief Financial Officer of Enanta Pharmaceuticals, Inc., on May 9, 2022[299][303]