Verona Pharma(VRNA) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the three months ended March 31, 2021 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $169,598 | $187,986 | | Total current assets | $188,601 | $202,504 | | Total assets | $190,150 | $204,206 | | Total current liabilities | $12,698 | $14,203 | | Total liabilities | $17,736 | $19,352 | | Total shareholders' equity | $172,414 | $184,854 | Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Research and development | $13,574 | $7,622 | | General and administrative | $9,282 | $6,862 | | Total operating expenses | $22,856 | $14,484 | | Operating loss | $(22,856) | $(14,484) | | Net loss | $(21,290) | $(12,346) | | Loss per ordinary share - basic and diluted | $(0.05) | $(0.12) | Condensed Consolidated Statements of Shareholders' Equity Condensed Consolidated Statements of Shareholders' Equity | Metric (in thousands) | March 31, 2021 | January 1, 2021 | March 31, 2020 | January 1, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total shareholders' equity | $172,414 | $184,854 | $30,157 | $42,741 | | Net loss | $(21,290) | — | $(12,346) | — | | Share-based compensation | $8,850 | — | $1,867 | — | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,551) | $(13,224) | | Net cash provided by investing activities | — | $9,787 | | Net cash provided by financing activities | — | — | | Cash and cash equivalents at end of the period | $169,598 | $24,983 | Notes to Condensed Consolidated Financial Statements Note 1 - Organization and description of business operations - Verona Pharma plc is a clinical-stage biopharmaceutical group focused on developing and commercializing innovative therapeutics for respiratory diseases, with its ADSs listed on Nasdaq under the symbol "VRNA"[21] - The Company has incurred recurring losses and negative cash flows from operations since inception, with an accumulated deficit of $228.4 million as of March 31, 2021[22] - Cash and cash equivalents as of March 31, 2021, are expected to fund operating expenses and capital expenditure requirements for at least the next 12 months[23] Note 2 - Basis of Presentation and Summary of Significant Accounting policies - The unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP and include Verona Pharma plc and its wholly-owned subsidiaries[25] - The Company operates as one operating and reportable segment: pharmaceutical development[28] Note 3 - Prepaid expenses Prepaid Expenses | Prepaid Expense (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Clinical trial and other development costs | $6,296 | $2,551 | | Insurance | $574 | $1,701 | | Other | $377 | $286 | | Total prepaid expenses and other current assets | $7,247 | $4,538 | Note 4 - Tax and tax incentive receivables Tax Receivables | Tax Receivable (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Research and development tax credit receivable - U.K. | $10,272 | $8,202 | | Tax receivable - U.S. | — | $58 | | Total tax receivable | $10,272 | $8,260 | Note 5 - Accrued expenses Accrued Expenses | Accrued Expense (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Clinical trial and other development costs | $6,536 | $8,607 | | Professional fees and general corporate costs | $1,454 | $2,149 | | People related costs | $524 | $107 | | Total accrued expenses | $8,514 | $10,863 | Note 6 - Warrants - The fair value of warrants increased to $2.753 million as of March 31, 2021, from $2.246 million as of December 31, 2020, valued using the Black-Scholes model[37] Warrant Valuation Assumptions | Warrant Valuation Assumption | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Shares potentially issued under warrants | 12,401,262 | 12,401,262 | | Exercise price in pounds sterling | £1.7238 | £1.7238 | | Risk-free interest rate | 0.08 % | — % | | Expected term to exercise | 1.09 years | 1.33 years | | Annualized volatility | 109.1 % | 105.4 % | | Dividend rate | — % | — % | | Calculated value of the warrants (in thousands of U.S. dollars) | $2,753 | $2,246 | Note 7 - Term loan - The Company entered into a term loan facility of up to $30.0 million in November 2020, with $5.0 million principal outstanding as of March 31, 2021[38] - The carrying value of the Term Loan was approximately $4.7 million as of March 31, 2021, categorized within Level 3 of the fair value hierarchy[39] Note 8 - Share-based compensation Share-based Compensation Expense | Share-based Compensation (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Research and development | $3,432 | $493 | | General and administrative | $5,418 | $1,374 | | Total | $8,850 | $1,867 | Share Option Activity (2021) | Share Option Activity (2021) | Number of share options outstanding | Weighted average exercise price | | :--- | :--- | :--- | | Outstanding at January 1 | 13,125,672 | $1.41 | | Forfeited | (996,720) | $1.17 | | Outstanding at March 31 | 12,128,952 | $1.43 | Restricted Stock Unit (RSU) Activity (2021) | Restricted Stock Unit (RSU) Activity (2021) | Number of RSUs outstanding | Weighted average remaining contractual term (years) | | :--- | :--- | :--- | | Outstanding at January 1 | 61,992,360 | 1.5 | | Granted | 750,928 | | | Vested | (441,304) | | | Outstanding at March 31 | 62,301,984 | 1.3 | Note 9 - Net loss per share Net Loss Per Share Calculation | Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Net loss available to ordinary shareholders (in thousands) | $21,290 | $12,346 | | Weighted-average shares outstanding - basic and diluted | 469,465,085 | 105,453,364 | | Net loss per share - basic and diluted | $(0.05) | $(0.12) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The company discusses its financial condition and results of operations for the three months ended March 31, 2021 Overview - Verona Pharma is a clinical-stage biopharmaceutical company focused on developing ensifentrine, a potential first-in-class inhaled dual PDE3 and PDE4 inhibitor, for respiratory diseases like COPD[51] - The company has an accumulated deficit of $228.4 million as of March 31, 2021, and expects increased expenses for clinical development, manufacturing, intellectual property, and commercialization[52][53] - Current cash and cash equivalents, along with debt financing and UK tax credits, are expected to fund operations into 2023[54] Clinical development update - Positive Phase 2 efficacy and safety data for ensifentrine pMDI formulation in moderate to severe COPD patients were announced in February 2021, supporting twice-daily dosing[55] - Data from a pilot study showed ensifentrine pMDI was well tolerated in SARS-CoV-2 patients, but no clinical efficacy benefit was observed, and no further COVID-19 studies are planned[56] - Enrollment for Phase 3 ENHANCE trials is expected to complete in H2 2021, with top-line data from ENHANCE-2 in H1 2022 and ENHANCE-1 in H2 2022[57] Intellectual property update - As of March 31, 2021, the patent portfolio includes nine issued U.S. patents, three pending U.S. applications, forty-eight issued foreign patents, and fifty-three pending foreign applications[59] - Patents cover respirable formulations, a crystalline form, combinations with other drugs, salts, use in cystic fibrosis, and manufacturing methods for ensifentrine, with expiry dates up to 2041[59] COVID-19 impact - The company is closely monitoring the potential impact of the COVID-19 pandemic on clinical trial timelines and costs, and will provide updates on any meaningful disruptions[60] - Measures are in place to ensure the safety of clinical trial participants and employees, including remote work and restricted business travel[61][63] - Contract manufacturers have plans to ensure uninterrupted clinical supply of ensifentrine, subject to potential supply chain limitations[62] Significant contracts - The Ligand Agreement involves contingent liabilities for milestone payments upon regulatory approval, low single-digit royalties on sales, and a mid-twenty percent share of sub-license consideration for ensifentrine-related patents and know-how[66] - Warrants issued in a 2016 private placement are accounted for as a liability at fair value using the Black-Scholes model, exercisable until April 2022[68][69] - A Term Loan facility of up to $30.0 million was entered into in November 2020, with $5.0 million funded at closing[70] Critical accounting policies and significant judgments and estimates - Significant estimates include the accrual and prepayment of research and development expenses, the fair value of share-based compensation, and the fair value of warrants[71] - There have been no material changes to the critical accounting policies and estimates disclosed in the 2020 Form 10-K during the three months ended March 31, 2021[71] Components of results of operations - Expenses are anticipated to increase substantially due to ongoing Phase 3 clinical trials for ensifentrine, development of other formulations, new clinical trials for other indications, and potential commercialization efforts[73] Operating expenses - Research and development costs, including personnel and third-party clinical/manufacturing expenses, are expected to increase significantly as the ENHANCE program progresses[74][75] - General and administrative costs, including personnel, public company expenses, and commercial-related costs, are expected to rise with the development of potential commercial operations[76][77] Other income / (expense) - Other income/expense is primarily influenced by interest income/expense, fair value movements of warrant liability, foreign exchange gains, and U.K. research and development tax credits[78] - A proposed cap on the U.K. R&D tax relief program, effective January 1, 2022, could reduce the potential cash received by approximately $6 million for the 2022 financial year[80] Taxation - The Company is subject to corporate taxation in the U.S. and U.K., with U.S. income tax expense arising from intercompany service arrangements[81] - U.K. losses can be carried forward indefinitely, subject to an annual offset limit of £5.0 million plus an incremental 50% of U.K. taxable profits[82] Results of operations for the three months ended March 31, 2021 and 2020 - The company transitioned to U.S. GAAP and U.S. dollar reporting as of January 1, 2021, impacting comparability with prior IFRS/GBP figures[84] Results of Operations | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Variance | | :--- | :--- | :--- | :--- | | Research and development | $13,574 | $7,622 | $5,952 | | General and administrative | $9,282 | $6,862 | $2,420 | | Total operating expenses | $22,856 | $14,484 | $8,372 | | Operating loss | $(22,856) | $(14,484) | $(8,372) | | Net loss | $(21,290) | $(12,346) | $(8,944) | Research and development costs - Research and development costs increased by $6.0 million to $13.6 million for the three months ended March 31, 2021, primarily due to a $3.4 million increase in clinical trial costs for the Phase 3 ENHANCE program and a $2.9 million increase in share-based compensation[86][87] General and administrative costs - General and administrative costs increased by $2.4 million to $9.3 million for the three months ended March 31, 2021, driven by a $4.0 million increase in share-based compensation and higher Directors' and Officers' insurance costs, partially offset by prior year severance expenses[88] Other income / (expense) - The research and development tax credit increased by $0.4 million to $2.1 million for the three months ended March 31, 2021, due to higher qualifying R&D expenditure[89] - A $0.5 million expense was recorded for fair value movements on warrants in Q1 2021, compared to a $0.1 million gain in Q1 2020, reflecting the impact of share price changes[90] Net loss - Net loss increased by $8.9 million to $21.3 million for the three months ended March 31, 2021, primarily due to increased operating costs and a decrease in net other income[91] Cash flows Cash Flow Summary | Cash Flow Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Variance | | :--- | :--- | :--- | :--- | | Cash and cash equivalents at beginning of period | $187,986 | $30,428 | $157,558 | | Net cash used in operating activities | $(18,551) | $(13,224) | $(5,327) | | Net cash provided by investing activities | — | $9,787 | $(9,787) | | Net cash provided by financing activities | — | — | — | | Effect of exchange rate changes on cash and cash equivalents | $163 | $(2,008) | $2,171 | | Cash and cash equivalents at end of period | $169,598 | $24,983 | $144,615 | Operating activities - Net cash used in operating activities increased by $5.4 million to $18.6 million for the three months ended March 31, 2021, primarily due to an $8.4 million increase in operating expenses, of which $7.0 million was non-cash share-based compensation, and timing of supplier payments[93] Investing activities - Net cash provided by investing activities decreased to nil for the three months ended March 31, 2021, compared to $9.8 million in the prior period, as funds were moved from short-term investments to cash in 2020[94] Financing activities - There was no cash used in or provided by financing activities in either the three months ended March 31, 2021, or 2020[95] Liquidity and capital resources - The company has no approved products and has not generated revenue from product sales, financing operations primarily through equity issuances and a term loan[96] - An accumulated deficit of $228.4 million as of March 31, 2021, and expected continued operating losses necessitate significant additional capital for future clinical, regulatory, and commercialization activities[97][102] - Current cash and cash equivalents, along with expected funding from the Term Loan and U.K. tax credits, are projected to fund operations into 2023[101] Open market sale agreement - On March 19, 2021, the company entered into an at-the-market (ATM) equity offering program with Jefferies LLC to sell up to $100.0 million of ADSs, but no shares had been sold as of March 31, 2021[99] Indebtedness - A term loan facility of up to $30.0 million was secured with Silicon Valley Bank in November 2020, with $5.0 million principal outstanding as of March 31, 2021[100] Funding requirements - Significant additional capital is required to advance clinical and regulatory activities, fund pre-launch and launch costs, and establish a sales and marketing organization for ensifentrine[102] - Future funding may come from public or private financings, debt, collaborations, or licensing agreements, with risks of shareholder dilution or unfavorable terms[102][103][104] - Capital requirements depend on factors such as clinical trial progress, new product candidates, organizational growth, intellectual property costs, regulatory approvals, and commercialization expenses[105][112] Off-balance sheet arrangements - The company does not have any relationships with unconsolidated entities or financial partnerships, nor does it engage in off-balance sheet financing arrangements or trading activities involving non-exchange traded contracts[107] Recent accounting pronouncements - There are no recently adopted accounting standards or recent accounting standards not yet adopted that the Company believes will have a material impact on its consolidated financial statements[32][108] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is exempt from providing disclosures about market risk - Verona Pharma plc is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[109] Item 4. Controls and Procedures Disclosure controls were deemed effective as of March 31, 2021, with no material changes to internal controls Limitations on Effectiveness of Controls and Procedures - Management acknowledges that any controls and procedures, regardless of design, can only provide reasonable assurance of achieving desired control objectives due to inherent limitations, resource constraints, and judgment[110] Evaluation of Disclosure Controls and Procedures - As of March 31, 2021, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[111] Changes in Internal Control over Financial Reporting - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[112] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently subject to any material legal proceedings[114] Item 1A. Risk Factors The company's risk factors have not materially changed from those previously disclosed in its 2020 Form 10-K - The company's risk factors have not changed materially from those described in Part I, Item 1A of the 2020 Form 10-K[115] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - There were no unregistered sales of equity securities and use of proceeds to report[116] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - There were no defaults upon senior securities to report[117] Item 4. Mine Safety Disclosure Mine safety disclosure is not applicable to the company's operations - Mine safety disclosure is not applicable to the company[118] Item 5. Other Information There is no other information to report for the period - There is no other information to report[119] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q Filed Exhibits | Exhibit Number | Exhibit Description | Filed / Furnished | | :--- | :--- | :--- | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Filed herewith | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | Filed herewith | | 32.1 | Section 1350 Certification of Chief Executive Officer | Furnished herewith| | 32.2 | Section 1350 Certification of Chief Financial Officer | Furnished herewith| | 101.INS | Inline XBRL Instance Document | Filed herewith | | 104 | Cover Page Interactive Data File | |