TRACON(TCON) - 2018 Q4 - Annual Report

Part I Business TRACON Pharmaceuticals develops targeted cancer and wet AMD therapies, focusing on endoglin receptor antibodies like TRC105, utilizing a capital-efficient model and strategic collaborations Overview TRACON Pharmaceuticals focuses on developing novel targeted therapies for cancer and wet AMD by targeting the endoglin receptor, employing a capital-efficient model and strategic collaborations to advance its lead candidate TRC105 and other pipeline assets - The company's primary focus is on developing and commercializing novel targeted therapeutics for cancer and wet AMD by targeting the endoglin receptor, which is essential for angiogenesis[16] - TRACON utilizes a capital-efficient product development platform, managing significant aspects of its clinical trials with internal resources to minimize costs associated with using contract research organizations (CROs)[23][24] - The company has formed strategic collaborations to diversify its pipeline without upfront payments, including agreements with Janssen for TRC253 and I-Mab for TJ004309 and up to five bispecific antibodies[24] Ongoing Development Pipeline and Expected Data | Product Candidate | Indication | Phase | Data Expected | | :--- | :--- | :--- | :--- | | TRC105 | Angiosarcoma | Randomized Phase 3 | Interim analysis April 2019 | | | Hepatocellular Carcinoma | Phase 1/2 | 2020 | | | Lung Cancer | Phase 1 | 2019 | | | Breast Cancer | Phase 1/2 | 2019 | | | Prostate Cancer | Phase 2 | 2019 | | DE-122 (Santen) | Wet AMD | Randomized Phase 2 | 2020 | | TRC102 | Mesothelioma | Phase 2 | 2020 | | | Solid Tumors | Phase 1 | 2020 | | | Solid Tumors and Lymphomas | Phase 1/2 | 2019 | | | Lung Cancer | Phase 1 | 2020 | | TRC253 | Prostate Cancer | Phase 1/2 | 2020 | | TJ004309 (I-Mab) | Solid Tumors | Phase 1 | 2020 | Product Candidates TRACON's pipeline features lead candidate TRC105 in a pivotal Phase 3 trial for angiosarcoma, alongside DE-122 for wet AMD, TRC102 for various cancers, TRC253 for prostate cancer, and TJ004309 for solid tumors - TRC105 is in a randomized, multicenter international Phase 3 TAPPAS trial for angiosarcoma. An interim analysis of 120 patients is expected in April 2019 to determine the final sample size, with top-line data expected in 2020[17][43] - DE-122, the ophthalmic formulation of TRC105, is being developed by Santen for wet AMD. It is currently in a Phase 2a AVANTE randomized controlled trial, with top-line data expected in early 2020[20][70][71] - TRC102 is a small molecule designed to reverse resistance to chemotherapy by inhibiting base excision repair (BER). It is being studied in multiple NCI-sponsored trials, including a Phase 2 trial in mesothelioma[21][72][76] - TRC253 is a novel oral small molecule inhibitor of the androgen receptor (AR) and its mutations, developed for prostate cancer. The Phase 2 portion of its trial began in August 2018, with completion expected in 2020[81][83] - TJ004309 is a novel humanized antibody against CD73. An IND was cleared by the FDA in January 2019, with a Phase 1 trial in advanced solid tumors expected to begin in the first half of 2019[84] Collaboration and License Agreements TRACON maintains strategic collaborations, including co-development agreements with I-Mab, a licensing agreement with Janssen for TRC253, an exclusive worldwide license with Santen for DE-122, and development agreements with the NCI - Entered into collaboration agreements with I-Mab in November 2018 for co-development of TJ004309 and up to five bispecific antibodies, with shared development costs and rights to future royalties or profit-sharing in North America[85][86][91] - Licensed TRC253 from Janssen in 2016. Janssen has an option to reacquire full rights for a $45.0 million upfront payment and up to $137.5 million in milestones. If Janssen declines, TRACON retains worldwide rights and would owe Janssen up to $45.0 million in milestones[99][100] - Granted Santen an exclusive worldwide license to develop and commercialize TRC105 for ophthalmology indications in 2014. TRACON received a $10.0 million upfront fee and is eligible for up to $155.0 million in milestones plus tiered royalties[102][105] - Maintains Cooperative Research and Development Agreements (CRADAs) with the National Cancer Institute (NCI) for the development of TRC105 and TRC102, under which NCI conducts and funds multiple clinical and non-clinical studies[119][120] Manufacturing, Competition, and Commercialization TRACON relies on third-party manufacturers like Lonza, faces intense competition in oncology and wet AMD, and plans to build a North American oncology sales force while seeking ex-North America commercialization partners - The company relies on third-party manufacturers and does not own or operate its own facilities. A long-term manufacturing agreement is in place with Lonza for the supply of TRC105[124][125] - Faces significant competition from large pharmaceutical companies with greater resources in both oncology (e.g., Amgen, Eli Lilly, Roche) and wet AMD (e.g., Regeneron, Novartis)[132][134][138] - Plans to build an oncology-focused specialty sales force in North America for any approved products and will seek partners for commercialization in other regions[139] Intellectual Property TRACON's intellectual property strategy combines patents, trade secrets, and exclusivity, with a worldwide patent estate including 19 U.S. and 60 foreign patents as of 2018, covering key assets like TRC105, TRC102, and TRC253 - As of December 31, 2018, the company's patent estate includes 19 issued/allowed U.S. patents and applications and 60 issued/allowed foreign patents and applications[141] - Key patent protection for TRC105 includes combination therapy with VEGF inhibitors (expiring 2030) and formulations (expiring 2033)[145][146] - Patent protection for TRC102 in combination with pemetrexed is expected to expire in 2027[151] - Holds an exclusive license to a U.S. patent covering TRC253 with an expected expiration date of 2037[154] Government Regulation TRACON's product candidates are subject to extensive FDA and international regulation, requiring multi-phase clinical trials for approval, with TRC105 benefiting from Orphan Drug designation and potential data exclusivity periods - Product candidates are subject to extensive regulation by the FDA, requiring preclinical studies, an effective IND, and adequate and well-controlled human clinical trials (Phase 1, 2, and 3) before a BLA or NDA can be submitted for marketing approval[157][158] - TRC105 has received orphan drug designation for soft tissue sarcoma in both the U.S. and EU, which could provide seven years of marketing exclusivity in the U.S. and ten years in the EU if approved[171][172] - New biological products, if approved, could benefit from 12 years of data exclusivity in the U.S., 10-11 years in the EU, and 8 years in Japan, protecting them from biosimilar competition[167][173][174] - The company has utilized the FDA's Special Protocol Assessment (SPA) process for its Phase 3 TAPPAS trial, reaching an agreement with the FDA on the trial's design[164] Risk Factors TRACON faces substantial risks including recurring losses, going concern doubts, heavy reliance on lead candidate TRC105 and third parties, intellectual property challenges, and market acceptance uncertainties - The company has a history of significant operating losses, with a net loss of $35.0 million in 2018 and an accumulated deficit of $139.7 million, and anticipates continued losses. These conditions raise substantial doubt about its ability to continue as a going concern[196][200] - The business is heavily dependent on the success of its lead product candidate, TRC105. Any delay or setback in its development, particularly the Phase 3 TAPPAS trial, could severely harm the company[209] - TRACON relies on third parties for critical functions, including manufacturing (Lonza), clinical trial sponsorship (NCI), and commercialization partnerships (Santen, Janssen, I-Mab), making it vulnerable to their performance and strategic decisions[234][239][241] - The company faces risks related to obtaining and protecting its intellectual property, potential infringement claims from third parties, and its dependence on licensors to maintain patents[251][259][261] - As of December 31, 2018, executive officers, directors, and 5% or greater stockholders beneficially owned over 45% of the company's voting stock, allowing them to exert significant control over corporate matters[332] Unresolved Staff Comments Not applicable - Not applicable[344] Properties The company's principal executive offices are located in a leased 10,458 square-foot facility in San Diego, California, with the current lease expiring in April 2022 - The company leases 10,458 square feet of office space for its principal executive offices at 4350 La Jolla Village Drive, Suite 800, San Diego, California 92122[345] - The current lease expires in April 2022, with an option to extend for an additional five-year term[345] Legal Proceedings TRACON Pharmaceuticals is not currently a party to any legal proceedings, though future involvement in claims is possible - The company is not currently a party to any legal proceedings[346] Mine Safety Disclosures Not applicable - Not applicable[347] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities TRACON's common stock trades on The NASDAQ Global Market under "TCON"; the company has never paid dividends and intends to retain earnings for business development, also restricted by its credit agreement - The company's common stock is listed on The NASDAQ Global Market under the ticker symbol "TCON"[350] - The company has never declared or paid dividends and does not intend to in the foreseeable future, retaining funds for business development. The credit agreement with Silicon Valley Bank also prohibits cash dividends without prior consent[351] Selected Financial Data Selected financial data for 2018 shows $3.0 million in collaboration revenue, a $35.0 million net loss, and an accumulated deficit of $139.7 million, reflecting increased losses compared to 2017 Selected Financial Data (in thousands, except per share data) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Statement of Operations Data: | | | | | Collaboration revenue | $3,000 | $8,755 | $3,449 | | Research and development | $30,460 | $19,355 | $21,566 | | General and administrative | $7,280 | $7,610 | $7,859 | | Loss from operations | $(34,740) | $(18,210) | $(25,976) | | Net loss | $(34,959) | $(19,103) | $(27,008) | | Net loss per share, basic and diluted | $(1.30) | $(1.14) | $(2.13) | | Balance Sheet Data (as of Dec 31): | | | | | Cash and cash equivalents | $25,136 | $29,467 | N/A | | Total assets | $40,648 | $36,130 | N/A | | Accumulated deficit | $(139,660) | $(104,701) | N/A | | Total stockholders' equity | $21,442 | $16,987 | N/A | Management's Discussion and Analysis of Financial Condition and Results of Operations TRACON's 2018 net loss of $35.0 million increased due to decreased revenue and higher R&D expenses, raising substantial doubt about its going concern ability despite $39.1 million in cash and available financing options Results of Operations In 2018, collaboration revenue decreased by $5.8 million to $3.0 million, while R&D expenses increased by $11.1 million to $30.5 million, primarily due to higher manufacturing and clinical trial costs for TRC105 and TRC253 Comparison of Years Ended December 31, 2018 and 2017 (in thousands) | | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Collaboration revenue | $3,000 | $8,755 | $(5,755) | | Research and development expenses | $30,460 | $19,355 | $11,105 | | General and administrative expenses | $7,280 | $7,610 | $(330) | Comparison of Years Ended December 31, 2017 and 2016 (in thousands) | | 2017 | 2016 | Change | | :--- | :--- | :--- | :--- | | Collaboration revenue | $8,755 | $3,449 | $5,306 | | Research and development expenses | $19,355 | $21,566 | $(2,211) | | General and administrative expenses | $7,610 | $7,859 | $(249) | Research and Development Expenses by Product Candidate (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | TRC105 | $18,732 | $10,684 | $14,240 | | TRC253 | $3,573 | $1,494 | $266 | | TRC102 | $164 | $87 | $523 | | TRC694 | $1,401 | $355 | $144 | | Unallocated expenses | $6,569 | $6,719 | $6,322 | | Total R&D Expenses | $30,460 | $19,355 | $21,566 | Liquidity and Capital Resources As of December 31, 2018, TRACON held $39.1 million in cash and investments, expected to fund operations into early 2020, but recurring losses raise going concern doubts, necessitating reliance on recent private placements and active ATM and stock purchase agreements - As of December 31, 2018, the company had cash, cash equivalents, and short-term investments totaling $39.1 million, which is expected to fund operations into early 2020[441] - The company's financial condition raises substantial doubt about its ability to continue as a going concern for one year following the issuance of the financial statements[441] - In March 2018, the company raised gross proceeds of $38.7 million through a private placement of common stock and warrants[433] - The company has an active at-the-market (ATM) sales agreement with JonesTrading for up to $11.6 million and a common stock purchase agreement with Aspire Capital for up to $21.0 million to provide additional financing options[434][436] Summary of Cash Flows (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(30,783) | $(13,243) | $(27,150) | | Net cash (used in) provided by investing activities | $(8,869) | $3,674 | $2,073 | | Net cash provided by financing activities | $35,321 | $3,326 | $19,414 | | Decrease in cash and cash equivalents | $(4,331) | $(6,243) | $(5,663) | Contractual Obligations and Commitments As of December 31, 2018, TRACON's total contractual obligations were $11.3 million, comprising debt, operating leases, and purchase commitments, with additional contingent milestone payments of up to $66.0 million under license agreements Contractual Obligations at December 31, 2018 (in thousands) | | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $8,425 | $2,012 | $6,413 | $— | $— | | Operating lease obligations | $1,482 | $423 | $903 | $156 | $— | | Purchase obligations | $1,424 | $1,424 | $— | $— | $— | | Total | $11,331 | $3,859 | $7,316 | $156 | $— | - The company has a long-term manufacturing agreement with Lonza requiring the purchase of TRC105 batches. Pre-approval commitments are estimated at $16.6 million, and post-approval annual commitments are estimated at $26.1 million[446] - The company has potential future milestone payments under various license agreements totaling approximately $66.0 million, contingent on development, regulatory, and commercial success[530] Quantitative and Qualitative Disclosures About Market Risk TRACON's market risk is primarily from interest rate and foreign currency fluctuations, though interest rate risk is minimal due to fixed-rate debt and short-term investments, and foreign currency impacts have not been material - Interest rate risk is considered minimal as investments are short-term U.S. Treasury securities and money market funds, and long-term debt is at a fixed rate[454] - Foreign currency exchange risk exists due to contractual obligations denominated in foreign currencies (primarily Pounds Sterling) for clinical trials and manufacturing, but fluctuations have not been significant to date[455] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2016-2018, including the auditor's report from Ernst & Young LLP, which highlights substantial doubt about the company's going concern ability due to recurring losses - The Report of Independent Registered Public Accounting Firm includes an explanatory paragraph stating that the company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern[461] Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $25,136 | $29,467 | | Short-term investments | $13,968 | $4,999 | | Total current assets | $40,603 | $36,057 | | Total assets | $40,648 | $36,130 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $13,495 | $11,798 | | Long-term debt, less current portion | $5,343 | $4,603 | | Total stockholders' equity | $21,442 | $16,987 | Consolidated Statement of Operations Data (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Collaboration revenue | $3,000 | $8,755 | $3,449 | | Total operating expenses | $37,740 | $26,965 | $29,425 | | Loss from operations | $(34,740) | $(18,210) | $(25,976) | | Net loss | $(34,959) | $(19,103) | $(27,008) | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None - None[593] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective at a reasonable assurance level as of December 31, 2018, with no material changes reported during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018[595] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[598] - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, internal controls[601] Other Information None - None[602] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 definitive proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 proxy statement[605] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 definitive proxy statement - Information regarding executive compensation is incorporated by reference from the company's 2019 proxy statement[606] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2019 definitive proxy statement - Information regarding security ownership is incorporated by reference from the company's 2019 proxy statement[607] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2019 definitive proxy statement - Information regarding related party transactions and director independence is incorporated by reference from the company's 2019 proxy statement[609] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2019 definitive proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the company's 2019 proxy statement[610] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the Annual Report, noting the omission of schedules where information is included elsewhere - This section provides a list of all financial statements and exhibits filed with the Form 10-K[612][614]