Verona Pharma(VRNA) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Verona Pharma plc's unaudited condensed consolidated financial statements as of June 30, 2021, including balance sheets, statements of operations, statements of shareholders' equity, and cash flows, along with notes detailing accounting policies and the Nuance Pharma collaboration Condensed Consolidated Balance Sheets As of June 30, 2021, total assets increased to $218.5 million from $204.2 million at year-end 2020, primarily due to new receivables from the Nuance agreement, while cash and cash equivalents decreased to $146.0 million, and total liabilities rose significantly to $64.1 million due to deferred revenue Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $146,035 | $187,986 | | Total current assets | $216,283 | $202,504 | | Total assets | $218,502 | $204,206 | | Deferred revenue | $40,051 | $0 | | Total liabilities | $64,105 | $19,352 | | Total shareholders' equity | $154,397 | $184,854 | Condensed Consolidated Statements of Operations and Comprehensive Loss The company reported a significantly higher net loss for both the three and six months ended June 30, 2021, with the six-month net loss doubling to $43.4 million, driven by substantial increases in research and development and general and administrative expenses Statement of Operations Summary (in thousands, except per share data) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Research and development | $34,137 | $15,433 | | General and administrative | $17,267 | $10,034 | | Operating loss | $(51,404) | $(25,467) | | Net loss | $(43,358) | $(21,384) | | Loss per ordinary share | $(0.09) | $(0.20) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash used in operating activities more than doubled to $38.8 million, reflecting higher operating losses, resulting in a net decrease in cash and cash equivalents of $42.0 million Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(38,756) | $(16,285) | | Net cash provided by investing activities | $0 | $9,787 | | Net cash used in financing activities | $(3,399) | $0 | | Net decrease in cash and cash equivalents | $(41,951) | $(8,068) | | Cash and cash equivalents at end of period | $146,035 | $22,360 | Notes to Condensed Consolidated Financial Statements The notes detail key events and accounting policies, most notably the collaboration and license agreement with Nuance Pharma, effective June 9, 2021, which provides $40 million in upfront consideration for rights to ensifentrine in Greater China, with revenue expected in Q3 2021 - Entered into a collaboration and license agreement with Nuance Pharma for ensifentrine in Greater China, receiving an unconditional right to $40.0 million in upfront consideration ($25.0 million cash and a $15.0 million equity interest), with eligibility for up to $179.0 million in future milestone payments[61] - The $40.0 million in upfront consideration from the Nuance Agreement was recorded as deferred revenue as of June 30, 2021, and is expected to be recognized as revenue in the third quarter of 2021[68][72] - Ligand has claimed it is owed a 25% sublicense payment on the $40.0 million upfront consideration from the Nuance Agreement, which Verona Pharma disputes, stating it has not granted a sublicense of Ligand's intellectual property[74] - The company has an at-the-market (ATM) offering program to sell up to $100.0 million in ADSs, having raised approximately $0.4 million during Q2 2021, with $99.6 million remaining available[29][30] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's focus on the clinical development of its lead candidate, ensifentrine, for COPD, highlighting increased operating expenses due to Phase 3 trials, the financial impact of the Nuance Pharma collaboration, and a liquidity position deemed sufficient through at least 2023 Overview and Clinical Development The company is advancing its Phase 3 ENHANCE trials for ensifentrine in COPD, but patient recruitment timelines are under pressure due to COVID-19 challenges, potentially delaying top-line data reporting from 2022 to Q3 and Q4 2022 for ENHANCE-2 and ENHANCE-1, respectively - The company is focused on developing ensifentrine, a potential first-in-class, inhaled dual inhibitor of PDE3 and PDE4, for respiratory diseases, with Phase 3 ENHANCE trials for COPD underway[89] - Patient recruitment for the Phase 3 ENHANCE program faces pressure from COVID-19 challenges, with mitigation strategies, such as allowing a subset of patients on ICS to enroll, having been implemented[92] - Top-line data reporting is projected for H1 2022 (ENHANCE-2) and H2 2022 (ENHANCE-1), but could be delayed to Q3 and Q4 2022, respectively, if COVID-19 challenges persist[93] Results of Operations Operating results for the three and six months ended June 30, 2021, show a substantial increase in net loss compared to 2020, with the six-month net loss growing to $43.4 million from $21.4 million, primarily due to an $18.7 million increase in R&D costs for the Phase 3 ENHANCE program and a $7.3 million increase in G&A costs Comparison of Operations - Three Months Ended June 30 (in thousands) | Metric | 2021 | 2020 | Variance | | :--- | :--- | :--- | :--- | | Research and development | $20,563 | $7,811 | $12,752 | | General and administrative | $7,985 | $3,172 | $4,813 | | Net loss | $(22,068) | $(9,038) | $(13,030) | Comparison of Operations - Six Months Ended June 30 (in thousands) | Metric | 2021 | 2020 | Variance | | :--- | :--- | :--- | :--- | | Research and development | $34,137 | $15,433 | $18,704 | | General and administrative | $17,267 | $10,034 | $7,233 | | Net loss | $(43,358) | $(21,384) | $(21,974) | Liquidity and Capital Resources As of June 30, 2021, the company had $146.0 million in cash and cash equivalents, and management believes these funds, combined with the $25 million upfront payment from Nuance, expected UK tax credits, and available term loan funds, are sufficient to fund operations through at least 2023 - The company believes its cash position as of June 30, 2021, along with the Nuance upfront payment, tax credits, and available debt financing, will fund planned operating expenses through at least 2023[170] - An at-the-market (ATM) program is in place to sell up to $100.0 million of ADSs; as of June 30, 2021, $99.6 million remained available for sale[167][168] - The company has a term loan facility of up to $30.0 million with Silicon Valley Bank, with $5.0 million in principal outstanding as of June 30, 2021, and further advances contingent on achieving clinical milestones[169] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Verona Pharma is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and is not required to provide quantitative and qualitative disclosures about market risk[179] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, while noting the need to implement new controls over financial reporting related to the Nuance Agreement - The principal executive officer and principal financial officer concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[181] - Due to the new Nuance Agreement, the company will be required to implement certain new controls over financial reporting in the year ending December 31, 2021[182] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reports that it is not currently subject to any material legal proceedings - As of the reporting date, the company is not a party to any material legal proceedings[183] Item 1A. Risk Factors This section introduces a new material risk factor related to the collaboration and license agreement with Nuance Pharma, highlighting the company's dependence on Nuance Pharma for the development and commercialization of ensifentrine in Greater China - A new risk factor has been identified concerning the collaboration with Nuance Pharma, where the company's business could be adversely affected if Nuance Pharma fails to develop and commercialize ensifentrine in Greater China or if the agreement is terminated[185] - The company is dependent on Nuance Pharma's efforts and resource allocation for success in the Greater China market, and interests between the two companies may differ or conflict[189] - The company faces significant competition in seeking other strategic collaborators for ensifentrine, and failure to secure such partnerships could curtail or delay development and commercialization programs[191][192] Other Items (Items 2, 3, 4, 5, 6) This section confirms standard disclosures, reporting no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures, and provides a list of exhibits filed with the 10-Q - Item 2: No unregistered sales of equity securities[194] - Item 3: No defaults upon senior securities[195] - Item 6: A list of exhibits filed with the report is provided, including the Collaboration and License Agreement with Nuance Pharma[200]