Assembly Biosciences(ASMB) - 2020 Q4 - Annual Report

PART I Business A clinical-stage biotech company developing oral HBV therapies and prioritizing its core inhibitor pipeline - The company is a clinical-stage biotechnology firm focused on developing oral therapies for chronic hepatitis B virus (HBV) infection, targeting an estimated 270 million people worldwide[8] - In January 2021, the company wound down its Microbiome program to prioritize resources on discovering and developing curative therapies for HBV[9][43] - The business strategy focuses on advancing its core inhibitor pipeline (VBR, 2158, 3733), assessing them in multi-drug combination studies, and discovering new compounds[13] - The company relies on third-party manufacturers for its product candidates and currently has no plans to establish its own manufacturing facilities[96] HBV Program and Strategy The company focuses on developing a cure for HBV by advancing its pipeline of core inhibitors in combination therapies - Vebicorvir (VBR): Phase 2 studies are complete; VBR plus NrtI therapy alone is not sufficient to cure HBV, and it will be used in future combination therapies[20][21][24] - ABI-H2158 (2nd Gen): A Phase 2 clinical study was initiated in June 2020, with interim data expected in the second half of 2021[25] - ABI-H3733 (3rd Gen): A Phase 1a study was completed in Q4 2020, showing the candidate was generally well-tolerated with favorable pharmacokinetics[26][28] - Entered a collaboration with BeiGene in July 2020, granting exclusive rights in China for a $40.0 million upfront payment and up to $500.0 million in potential milestones[32][33] - Initiated a collaboration with Door Pharmaceuticals in November 2020 to develop a novel class of HBV inhibitors targeting cccDNA[38][39] Government Regulation and Reimbursement Operations are subject to extensive FDA regulation, a lengthy approval process, and uncertain third-party reimbursement - The FDA drug approval process is extensive, requiring nonclinical studies and Phase 1, 2, and 3 clinical trials to establish safety and efficacy[46][50][51] - The FDA granted Fast Track designation to Vebicorvir (VBR) in 2018 and ABI-H2158 in 2020, which may facilitate development and expedite review[61] - Sales of approved products will depend on coverage and reimbursement from third-party payors, who are increasingly focused on cost-effectiveness[77][79] - The company is subject to various healthcare laws, including the federal Anti-Kickback Statute and False Claims Act, with significant penalties for violations[88][93] Competition and Human Capital The company faces intense competition from major pharmaceutical firms and reduced its workforce to focus on HBV - Competitors in the HBV space include major pharmaceutical companies like Johnson & Johnson, Roche, and Gilead Sciences, as well as other biotech firms[95] - As of December 31, 2020, the company had 139 employees, which was reduced to 95 following the wind-down of the Microbiome program[97] - The company established a COVID-19 Task Force and implemented measures including remote work and travel prohibitions to ensure employee safety[102] Risk Factors The company faces risks from its dependence on its HBV program, clinical trial outcomes, and the COVID-19 pandemic - The company has no approved products and is entirely dependent on the future success of its HBV program, with no certainty of regulatory approval[110] - The COVID-19 pandemic poses a risk of delaying or disrupting clinical trials, patient enrollment, regulatory interactions, and supply chains[114][115] - The company has a history of losses and will require additional financing; failure to raise capital could force program delays or discontinuation[119] - Reliance on third-party CROs and CMOs increases risks related to quality, timeliness, and control over clinical testing and manufacturing[124][130] - The business depends on protecting its intellectual property, but patents may be challenged, invalidated, or circumvented by competitors[177][181] Properties The company leases its primary office and lab space in California and is exiting leases for discontinued programs - The company leases its main office and lab space in South San Francisco, CA, under a sub-sublease expiring in December 2023[204] - The lease for the Groton, CT facility, which supported the Microbiome program, expires in March 2021[204] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[206] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq ('ASMB'), it has never paid dividends, and the report details equity plans - Common stock is traded on The Nasdaq Global Select Market under the symbol 'ASMB'[209] - The company has never declared or paid dividends and does not plan to in the foreseeable future[211] Equity Compensation Plan Information as of December 31, 2020 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by securityholders | 5,515,752 | $14.39 | 2,355,332 | | Equity compensation plans not approved by securityholders | 2,067,708 | $18.86 | 24,020 | | Total | 7,583,460 | | 2,379,352 | Selected Financial Data Five-year financial data shows a narrowed net loss in 2020 due to increased collaboration revenue Selected Financial Data (in thousands, except per share amounts) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Balance Sheet Data: | | | | | | | Total assets | $283,254 | $339,907 | $268,045 | $169,303 | $98,119 | | Total stockholders' equity | $240,578 | $273,217 | $210,653 | $113,120 | $79,878 | | Statement of Operations Data: | | | | | | | Collaboration revenue | $79,105 | $15,963 | $14,804 | $9,019 | $— | | Operating expenses | $143,881 | $118,676 | $107,539 | $61,246 | $45,278 | | Loss from operations | $(64,776) | $(102,713) | $(92,735) | $(52,227) | $(45,278) | | Net loss | $(62,152) | $(97,634) | $(90,751) | $(42,809) | $(44,261) | | Basic and dilutive loss per share | $(1.75) | $(3.72) | $(3.98) | $(2.41) | $(2.57) | Management's Discussion and Analysis of Financial Condition and Results of Operation The 2020 net loss narrowed due to higher collaboration revenue, despite increased R&D spending Results of Operations Collaboration revenue surged 396% in 2020, while R&D and G&A expenses also increased, reducing the net loss Comparison of Results for Years Ended Dec 31, 2020 and 2019 (in thousands) | Financial Item | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Collaboration Revenue | $79,105 | $15,963 | $63,142 | 396% | | Research and Development Expenses | $106,823 | $85,757 | $21,066 | 25% | | General and Administrative Expenses | $37,058 | $32,919 | $4,139 | 13% | | Net Loss | $(62,152) | $(97,634) | $35,482 | -36% | - The increase in 2020 collaboration revenue was driven by the recognition of $37.0 million from the terminated Allergan agreement and $31.0 million from the new BeiGene agreement[299] - 2020 R&D expenses included $5.5 million in restructuring costs related to the wind-down of the Microbiome program[302] Liquidity and Capital Resources The company has sufficient cash for the next year but will require substantial future funding to cover operations Summary of Cash Flows (in thousands) | Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(62,957) | $(84,067) | $(64,958) | | Net cash provided by (used in) investing activities | $68,070 | $(50,318) | $(135,397) | | Net cash provided by financing activities | $7,599 | $139,646 | $159,793 | - As of December 31, 2020, the company had an accumulated deficit of $501.6 million[245][298] - In 2020, the company raised $5.5 million in net proceeds from an 'at-the-market' (ATM) offering[321][330] - Management believes current funds are sufficient for at least the next twelve months, but substantial additional funding will be required for long-term operations[336] Critical Accounting Policies and Estimates Key accounting estimates involve revenue recognition, goodwill impairment, and R&D expense accruals - Revenue Recognition: The company analyzes collaboration agreements to identify performance obligations and allocate transaction prices, constraining variable consideration[259][262][271] - Goodwill and Intangible Asset Impairment: Goodwill and IPR&D are tested for impairment annually using market capitalization and discounted cash flow analyses[276][282] - R&D Accruals: The company estimates R&D expenses incurred but not yet invoiced, especially for CROs and CMOs, based on estimates of services received[286][289] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate sensitivity affecting its cash and investment portfolio - The primary market risk is interest rate sensitivity affecting income from cash and marketable securities[344] - The company invests in high-quality securities and diversifies to minimize risk, but maintains cash balances at financial institutions that exceed federally insured limits[345][346] Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal controls were effective - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2020[348] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[350] - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[351] PART III Directors, Executive Compensation, and Corporate Governance Details on directors, compensation, and governance are incorporated by reference from the company's proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2021 proxy statement[354][356][357][358] - The company has adopted a Code of Ethics and a Code of Conduct, which are available on its website[355] Financial Statements Reports of Independent Registered Public Accounting Firm The auditor issued unqualified opinions on financial statements and internal controls, citing two critical audit matters - The auditor, Ernst & Young LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[372] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[373][389] - A critical audit matter was the estimation of accrued clinical trial expenses, which is complex due to judgments on work completion and unbilled services[378][379] - A second critical audit matter was revenue recognition for the BeiGene agreement due to its complex terms and allocation of the transaction price[383][384] Consolidated Financial Statements Financial statements show decreased assets and liabilities in 2020, with a reduced net loss from the prior year Consolidated Balance Sheets (in thousands) | | As of Dec 31, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $224,493 | $282,780 | | Cash and cash equivalents | $59,444 | $46,732 | | Marketable securities | $156,969 | $227,311 | | Total Assets | $283,254 | $339,907 | | Total Current Liabilities | $24,433 | $24,440 | | Deferred revenue - long-term | $8,987 | $30,637 | | Total Liabilities | $42,676 | $66,690 | | Total Stockholders' Equity | $240,578 | $273,217 | Consolidated Statements of Operations (in thousands) | | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | :--- | | Collaboration revenue | $79,105 | $15,963 | $14,804 | | Research and development | $106,823 | $85,757 | $72,741 | | General and administrative | $37,058 | $32,919 | $34,798 | | Loss from operations | $(64,776) | $(102,713) | $(92,735) | | Net loss | $(62,152) | $(97,634) | $(90,751) | | Net loss per share | $(1.75) | $(3.72) | $(3.98) | Notes to Consolidated Financial Statements Notes detail accounting for collaborations, restructuring charges, stock compensation, and subsequent events - Note 9 (Collaboration Agreements): In 2020, the company recognized the remaining $36.0 million from the terminated Allergan agreement and $31.0 million from the new BeiGene agreement[547][567] - Note 6 (Restructurings): The company incurred $5.7 million in restructuring costs in 2020, primarily for employee severance and asset impairments related to the Microbiome program wind-down[512][514] - Note 8 (Stock-Based Compensation): Total stock-based compensation expense was $21.9 million in 2020, compared to $20.6 million in 2019[543] - Note 11 (Income Taxes): As of Dec 31, 2020, the company had federal net operating loss carryforwards of $378.8 million and maintains a full valuation allowance[585][586] - Note 15 (Subsequent Events): After year-end, the company sold 4,177,080 shares through its ATM program, resulting in net proceeds of $25.5 million[604]