Crinetics Pharmaceuticals(CRNX) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, and disclosures about market risk and controls Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, income statements, equity, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and stockholders' equity from December 2021 to March 2022, with increased liabilities | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Total Assets | $333,286 | $351,015 | | Total Liabilities | $30,242 | $19,071 | | Total Stockholders' Equity | $303,044 | $331,944 | | Cash and cash equivalents | $145,548 | $200,695 | | Investment securities | $174,177 | $133,012 | Condensed Consolidated Statements of Operations and Comprehensive Loss For Q1 2022, the company reported new license revenues but significantly increased R&D and G&A expenses, leading to a higher net and comprehensive loss | Metric (in thousands, except per share data) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | | License revenues | $3,131 | $0 | | Research and development | $28,252 | $17,584 | | General and administrative | $8,706 | $5,334 | | Net loss | $(34,627) | $(22,901) | | Net loss per share - basic and diluted | $(0.73) | $(0.69) | | Comprehensive loss | $(36,437) | $(22,907) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from January to March 2022, primarily due to net and comprehensive loss, partially offset by stock-based compensation and option exercises | Metric (in thousands) | Balance at January 1, 2022 | Balance at March 31, 2022 | | :-------------------- | :------------------------- | :------------------------ | | Total Stockholders' Equity | $331,944 | $303,044 | | Net loss | | $(34,627) | | Stock-based compensation | | $5,755 | | Exercise of stock options | | $1,780 | Condensed Consolidated Statements of Cash Flows Q1 2022 cash flows show a $55.1 million net outflow, driven by investing activities and operating losses, despite reduced operating cash usage | Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(13,543) | $(20,067) | | Net cash (used in) provided by investing activities | $(43,384) | $32,502 | | Net cash provided by financing activities | $1,780 | $57 | | Net change in cash, cash equivalents and restricted cash | $(55,147) | $12,492 | | Cash, cash equivalents and restricted cash at end of period | $146,048 | $106,079 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's business, accounting policies, financial instrument valuations, lease commitments, and equity transactions 1. ORGANIZATION AND BASIS OF PRESENTATION This section describes Crinetics Pharmaceuticals as a clinical-stage company, detailing its business, liquidity, and potential COVID-19 impacts, operating as a single segment Description of Business Crinetics Pharmaceuticals is a clinical-stage company developing novel therapeutics for rare endocrine diseases and tumors, with an Australian subsidiary for preclinical and clinical work - Crinetics Pharmaceuticals, Inc. is a clinical-stage pharmaceutical company focused on the discovery, development, and commercialization of novel therapeutics for rare endocrine diseases and endocrine-related tumors[25] - The company established a wholly-owned Australian subsidiary, Crinetics Australia Pty Ltd (CAPL), in January 2017 to conduct various preclinical and clinical activities[25] Unaudited Interim Financial Information Interim condensed consolidated financial statements are unaudited, prepared consistently with audited statements, and not necessarily indicative of full fiscal year results - The interim condensed consolidated financial statements are unaudited but prepared on the same basis as the audited consolidated financial statements[26] - The results for the three months ended March 31, 2022, are not necessarily indicative of the results expected for the full fiscal year or any other interim period[26] Principles of Consolidation and Foreign Currency Transactions Consolidated financial statements include the Company and its Australian subsidiary, with intercompany eliminations, using the U.S. dollar as functional currency, and immaterial foreign currency impacts - The condensed consolidated financial statements include the accounts of Crinetics Pharmaceuticals, Inc. and Crinetics Australia Pty Ltd (CAPL)[27] - The functional currency of both the Company and CAPL is the U.S. dollar[27] - Net realized and unrealized gains and losses from foreign currency transactions and remeasurement were not material for all periods presented[27] Segment Reporting The Company operates and manages its business as a single operating segment - The Company views its operations and manages its business in one operating segment[28] Liquidity Despite a $309.9 million accumulated deficit, the company's $319.7 million in cash and investments, plus $117.3 million raised in April 2022, provides liquidity for 12 months, though future capital raises are anticipated - Accumulated deficit as of March 31, 2022: $309.9 million[29] - Unrestricted cash, cash equivalents, and investment securities as of March 31, 2022: $319.7 million, believed to be sufficient for at least the next 12 months[29] - Raised an additional $117.3 million through an underwritten follow-on offering in April 2022[29] - Expects to continue to incur net losses and will need to raise substantial additional capital for its business plan over the next several years[29] COVID-19 The COVID-19 pandemic has caused business disruption but no material financial effect, with the company monitoring evolving impacts on operations and clinical trials - The COVID-19 pandemic has caused significant business disruption globally[31] - The pandemic has not yet had a material effect on the Company's financial results[31] - The degree to which COVID-19 may impact future financial condition or results of operations is uncertain, including the timing and ability to complete clinical trials and raise additional capital[31] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the company's key accounting policies, covering estimates, investments, fair value, cash, derivatives, credit risk, leases, revenue, R&D, tax incentives, stock compensation, and recent pronouncements Use of Estimates Financial statement preparation requires management estimates and assumptions for R&D, stock awards, financial instrument fair values, revenue, and equity investments, where actual results may differ - Significant estimates relate to accrual of research and development expenses, valuation of stock-based awards, fair values of financial instruments, revenue recognition, and equity method investment[32] - Actual results may ultimately materially differ from these estimates and assumptions[32] Equity Method Investment The company accounts for its Radionetics investment using the equity method due to significant influence over the VIE, writing it down to zero by March 2022 due to shared losses - Radionetics Oncology, Inc. is considered a Variable Interest Entity (VIE)[35] - The Company accounts for its investment in Radionetics under the equity method of accounting due to its ability to exercise significant influence[35] - The Company's equity method investment in Radionetics was written down to zero as of March 31, 2022, as a result of the allocation of the Company's share of losses[35] Fair Value Measurements Fair value, defined as an exit price, is measured using a three-tier hierarchy (Level 1, 2, 3), with derivative assets and investment securities recorded at fair value - Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants[36] - Fair value hierarchy: Level 1 (observable inputs such as quoted prices in active markets), Level 2 (observable inputs other than quoted prices), Level 3 (unobservable inputs)[36][38] - The Company recorded the derivative asset and investment securities at fair value[38] Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include liquid accounts and short-term debt, while restricted cash serves as long-term collateral for the facility lease - Cash and cash equivalents include cash held in readily available checking and money market accounts, as well as short-term debt securities with maturities of three months or less when purchased[39] - Restricted cash represents cash held as collateral for the Company's facility lease and is reported as a long-term asset[39] Investment Securities All available-for-sale investments are carried at fair value, with temporary unrealized gains/losses in OCI, and no impairment recognized as losses were not other-than-temporary - All investments have been classified as "available-for-sale" and are carried at fair value[40] - Unrealized gains and losses that are determined to be temporary in nature are reported as a component of accumulated other comprehensive income (loss)[40] - The Company determined that its unrealized losses were not considered to be other-than-temporary as of March 31, 2022, and December 31, 2021[60] Derivative Asset The Radionetics Warrant, a single derivative, is recorded as a long-term asset at fair value, with changes recognized in other income (expense) - The Company has a single derivative instrument, a warrant ("Radionetics Warrant") received on October 15, 2021[41] - The Radionetics Warrant is recorded as long-term on the balance sheets due to lack of marketability[41] - Changes in fair value of the Radionetics Warrant are recognized in other income (expense)[41] Concentrations of Credit Risk The company's financial instruments are subject to credit risk, but it mitigates significant exposure through federally insured deposits and strict investment guidelines - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and investment securities[42] - The Company believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institution and established guidelines for investments[42] Leases Operating leases over 12 months are recognized as ROU assets and liabilities, with straight-line expense recognition using an incremental borrowing rate if no implicit rate exists - Leases with a term longer than 12 months that are determined to be operating leases are included in operating lease right-of-use assets and liabilities[43] - Lease expense for lease payments is recognized on a straight-line basis over the lease term[43] - An incremental borrowing rate is used based on information available at commencement dates in determining the present value of lease payments when the Company's leases do not provide an implicit rate[43] Revenue Recognition Revenue from licensing is recognized when goods/services are transferred, following a five-step model, with variable consideration estimated and included if a significant reversal is improbable - The Company recognizes revenues when, or as, the promised goods or services are transferred to customers in an amount that reflects the consideration to which it expects to be entitled[44] - Revenue recognition follows a five-step model: identify contract, identify performance obligation(s), determine transaction price, allocate transaction price, and recognize revenue when performance obligation(s) are satisfied[45] - Variable consideration, such as milestone payments, is estimated using the most likely method and included in the transaction price if it is probable that a significant revenue reversal will not occur[45] - For licenses that are distinct performance obligations, revenue from non-refundable, up-front fees is recognized at the point in time when the license is transferred[45] - For performance obligations satisfied over time, the cost-to-cost measure of progress is used to recognize revenue[45] Research and Development Expenses R&D expenses, including personnel, third-party costs, and supplies, are expensed as incurred, with clinical trial accruals based on service provider estimates - R&D expenses consist primarily of salaries, payroll taxes, employee benefits, stock-based compensation, consulting expenses, third-party R&D expenses, laboratory supplies, clinical materials, and overhead[46] - R&D expenses are charged to expense as incurred[46] - Expenses related to clinical trials are accrued based on estimates and/or representations from service providers regarding work performed[48] Australian Tax Incentive CAPL is eligible for a cash refund from the Australian Taxation Office for R&D expenditures, recognized as an R&D expense reduction when receipt is assured and measurable - CAPL is eligible to obtain a cash refund from the Australian Taxation Office for eligible R&D expenditures under the Australian R&D Tax Incentive Program[49] - The Australian Tax Incentive is recognized as a reduction to R&D expense when there is reasonable assurance that it will be received, the expenditure incurred, and the amount reliably measured[49] | Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Reduction to R&D expense | $146 | $55 | Stock-Based Compensation Stock-based compensation expense, representing the estimated grant date fair value of equity awards, is recognized straight-line over the vesting period, using Black-Scholes for options - Stock-based compensation expense represents the estimated grant date fair value of equity awards (stock options, restricted stock units, ESPP shares)[50] - Expense is recognized over the requisite service period (usually vesting period) on a straight-line basis[50] - Stock option grants are valued using the Black-Scholes option pricing model, and restricted stock units are valued using the grant date stock price[50] Comprehensive Loss Comprehensive loss includes the company's net loss and unrealized gains or losses on investment securities for all periods presented - Comprehensive loss is comprised of the Company's net loss and the unrealized gain or loss on the Company's investment securities[51] Net Loss Per Share Basic net loss per share is calculated by net loss divided by weighted-average shares, with diluted loss per share being identical due to anti-dilutive securities - Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding[52] - For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be anti-dilutive[52] | Potentially Dilutive Securities (in thousands) | 2022 | 2021 | | :--------------------------------------------- | :--- | :--- | | Common stock awards | 8,279 | 5,996 | | Unvested common stock subject to repurchase | — | 12 | | Total | 8,279 | 6,008 | Recently Adopted Accounting Pronouncements The company adopted ASU 2021-04 on January 1, 2022, clarifying accounting for equity-classified call options, with no impact on financial statements - The Company adopted ASU 2021-04 as of January 1, 2022[56] - ASU 2021-04 clarifies and reduces diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options[53] - The adoption did not have an impact on its condensed consolidated financial statements[56] Recent Accounting Pronouncements The company is evaluating ASU 2016-13, effective after December 15, 2022, which amends guidance on reporting credit losses for financial instruments - ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)" is effective for the Company for fiscal years beginning after December 15, 2022[57] - The Company is currently evaluating the impact of the pending adoption of this new standard on its condensed consolidated financial statements[57] 3. INVESTMENT SECURITIES Available-for-sale investment securities increased in fair value from December 2021 to March 2022, primarily in government and corporate debt, with unrealized losses deemed temporary | Available-for-sale investment securities (Fair Market Value, in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------------------------------------------- | :------------- | :---------------- | | U.S. government and agency obligations | $98,124 | $54,457 | | Certificates of deposit | $4,465 | $5,732 | | Corporate debt securities | $69,183 | $70,402 | | Asset-backed securities | $2,405 | $2,421 | | Total | $174,177 | $133,012 | | Due in one year or less | $89,810 | $31,078 | | Due after one year through five years | $84,367 | $101,934 | - The Company reviewed its investment holdings and determined that its unrealized losses were not considered to be other-than-temporary as of March 31, 2022, and December 31, 2021[60] 4. FAIR VALUE MEASUREMENTS This section details fair value measurements for investment securities (Level 1/2) and the Radionetics Warrant (Level 3), with no inter-level transfers during the periods - Investment securities are valued based on quoted market prices (Level 1) or valuation models using observable inputs (Level 2)[61][62] - The Radionetics Warrant is valued using unobservable inputs (Level 3) due to little to no market data[62] | Financial assets measured at fair value (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------------------------- | :------------- | :---------------- | | Investment securities: | | | | Level 1 | $86,840 | $44,984 | | Level 2 | $87,337 | $88,028 | | Level 3 | $0 | $0 | | Derivative Assets: | | | | Radionetics Warrant (Level 3) | $68 | $68 | | Total assets measured at fair value | $174,245 | $133,080 | - There were no transfers into or out of Level 3 during the three months ended March 31, 2022, or year ended December 31, 2021[62] 5. BALANCE SHEET DETAILS Prepaid expenses and other current assets decreased from December 2021 to March 2022, mainly due to lower prepaid R&D and tax incentive receivables, with a slight decrease in net property and equipment | Prepaid expenses and other current assets (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------------------------- | :------------- | :---------------- | | Prepaid research and development costs | $4,843 | $7,184 | | Australian tax incentive receivable | $410 | $977 | | Due from Radionetics | $619 | $553 | | Other | $1,617 | $912 | | Total | $8,524 | $11,013 | | Property and equipment, net (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------------- | :------------- | :---------------- | | Total property and equipment at cost | $6,393 | $6,305 | | Less: accumulated depreciation and amortization | $3,721 | $3,480 | | Net | $2,672 | $2,825 | 6. OPERATING LEASE The San Diego facility's operating lease has a 3.3-year remaining term, with $4.3 million in future payments and $0.3 million rent expense for Q1 2022 and Q1 2021 - The operating lease for the San Diego facility has an initial term of seven years, expiring in August 2025[65] - As of March 31, 2022, the weighted average remaining term was 3.3 years, and the weighted-average discount rate was 8%[65] - Rent expense was $0.3 million for each of the three-month periods ended March 31, 2022, and 2021[65] | Future Minimum Lease Payments (in thousands) | Amount | | :------------------------------------------- | :----- | | Year ending December 31, 2022 (9 months) | $909 | | 2023 | $1,244 | | 2024 | $1,280 | | 2025 | $871 | | Total future minimum lease payments | $4,304 | 7. COMMITMENTS AND CONTINGENCIES The company may face ordinary course claims but does not anticipate a material adverse effect on its financial position or operations from their resolution Litigation The company is not involved in material legal proceedings and expects no material adverse effect from ordinary course claims on its financial position - The Company is not currently a party to any material legal proceedings[67] - The Company does not expect that the resolution of ordinary course claims will have a material adverse effect on its financial position or results of operations[67] 8. LICENSE AGREEMENTS This section details two significant license agreements: with Radionetics for radiotherapeutics and Sanwa for paltusotine in Japan, both involving upfront payments, milestones, and royalties Radionetics Oncology, Inc. Crinetics co-founded Radionetics in October 2021, granting an exclusive radiotherapeutics license, receiving a majority equity stake and a $1.1 million warrant, with the equity investment written down to zero due to losses Formation Crinetics, 5AM Ventures, and Frazier Healthcare Partners formed Radionetics Oncology in October 2021 to develop novel radiopharmaceuticals for oncology - Radionetics Oncology, Inc. was formed in October 2021 by Crinetics, 5AM Ventures, and Frazier Healthcare Partners[68] - Radionetics aims to develop a deep pipeline of novel, targeted, nonpeptide radiopharmaceuticals for the treatment of a broad range of oncology indications[68] Collaboration and License Agreement Crinetics granted Radionetics an exclusive radiotherapeutics license, receiving 50.5 million shares (a 64% stake) and a $1.1 million warrant, with potential sales milestones exceeding $1.0 billion and single-digit royalties - Crinetics granted Radionetics an exclusive world-wide license to its radiotherapeutics technology platform and associated intellectual property[68] - In exchange, Crinetics received 50,500,000 shares of common stock of Radionetics (initial 64% stake) and a warrant[68] - The upfront noncash considerations were valued at $1.1 million and recognized as license revenue in October 2021[68] - Crinetics may receive potential sales milestones in excess of $1.0 billion and single-digit royalties on net sales[68] Investment in Radionetics Crinetics accounts for its Radionetics investment using the equity method, writing down the initial $1.0 million to zero by March 2022 due to shared losses - The Company accounted for its investment in Radionetics under the equity method of accounting due to its ability to exercise significant influence[69] - The Company's initial investment in Radionetics was recorded at the fair value of common stock received in the amount of $1.0 million[69] - The Company's investment in Radionetics was written down to zero during the three months ended March 31, 2022, as a result of the allocation of the Company's share of losses[71] Other Radionetics Transactions Radionetics completed a $30.0 million convertible notes financing in 2021, with Crinetics' CEO serving as chairman, and Crinetics had $0.6 million due from Radionetics by March 2022 - Radionetics completed a $30.0 million convertible notes financing with 5AM and Frazier in 2021[71] - Crinetics' President and CEO serves as chairman of the Radionetics board of directors, receiving restricted common stock and an annual retainer[71] - As of March 31, 2022, the Company had approximately $0.6 million due from Radionetics for reimbursement of certain expenses[71] Sanwa Kagaku Kenkyusho Co., Ltd In February 2022, Crinetics granted Sanwa exclusive rights for paltusotine in Japan, receiving a $13.0 million upfront payment, recognizing $3.1 million in Q1 2022, with $9.9 million deferred, and potential future milestones up to $25.5 million plus royalties - On February 25, 2022, Crinetics granted Sanwa Kagaku Kenkyusho Co., Ltd. an exclusive license to develop and commercialize paltusotine in Japan[72] - Crinetics received a $13.0 million nonrefundable, upfront payment[72] - During the three months ended March 31, 2022, $3.1 million of the upfront payment was recognized as license revenues ($1.5 million for the license, $1.6 million for data exchange)[72] - $9.9 million is included as deferred revenues in the accompanying condensed consolidated balance sheets[72] - Crinetics will be eligible to receive up to an additional $25.5 million in milestone payments and certain sales-based royalties[72] 9. STOCKHOLDERS' EQUITY This section details various stock offerings and shelf registration statements, including follow-on offerings in April and October 2021, a private placement in July 2021, and an additional offering in April 2022 Stock Offerings The company completed several stock offerings in 2021, raising substantial capital, including a $72.6 million net follow-on in April, a $15.0 million private placement in July, and a $162.0 million net follow-on in October - On April 12, 2021, the Company completed an underwritten follow-on offering of 4,562,044 shares, generating approximately $72.6 million net proceeds[73] - On July 28, 2021, the Company completed a private placement of 851,306 shares, generating approximately $15.0 million proceeds[75] - On October 21, 2021, the Company completed an underwritten follow-on offering of 8,712,400 shares, generating approximately $162.0 million net proceeds[75] Shelf Registration Statement and ATM Offerings The company has a $300.0 million Shelf Registration Statement and a $75.0 million ATM Offering, raising $6.4 million to date, with a new Shelf Registration filed in August 2021 - On August 13, 2019, the Company filed a Shelf Registration Statement covering the offering of up to $300.0 million of common stock, preferred stock, debt securities, warrants and units[76] - The Company may sell up to $75.0 million of common stock through an ATM Offering, having issued 275,764 shares for net proceeds of $6.4 million to date, with no additional shares issued since the first quarter of 2020[76] - On August 10, 2021, the Company filed a 2021 Shelf Registration Statement for the future sale of an unlimited amount of common stock and other securities[76] 10. EQUITY INCENTIVE PLANS This section describes the company's equity incentive plans (2021 Inducement, 2018, 2015, ESPP), detailing stock option and RSU activity, and valuation assumptions for awards 2021 Employment Inducement Incentive Award Plan The 2021 Employment Inducement Plan, adopted in December 2021, initially reserved 1.5 million shares for new employees, with 1,083,500 shares available by March 2022 - The 2021 Employment Inducement Incentive Award Plan was adopted in December 2021[77] - Initially reserved 1,500,000 shares of common stock for issuance[77] - As of March 31, 2022, 1,083,500 shares were available for future issuance[77] 2018 Incentive Award Plan The 2018 Incentive Award Plan, adopted in July 2018, grants equity awards vesting over four years, with an evergreen provision adding 2,379,911 shares on January 1, 2022, leaving 1,989,166 available by March 2022 - The 2018 Incentive Award Plan was adopted in July 2018[78] - Options issued under the 2018 Plan generally expire ten years from the grant date and vest over a four-year period[78] - Under an evergreen provision, an additional 2,379,911 shares became available for future issuance on January 1, 2022[78] - As of March 31, 2022, 1,989,166 shares were available for future issuance[78] 2015 Stock Incentive Plan The 2015 Stock Incentive Plan no longer issues new awards after the 2018 Plan's adoption, with no unvested shares subject to repurchase by March 2022 - Subsequent to the adoption of the 2018 Plan, no additional equity awards can be made under the 2015 Plan[79] - As of March 31, 2022, there were no unvested shares issued under early-exercise provisions subject to repurchase by the Company[79] 2018 Employee Stock Purchase Plan The ESPP allows stock purchases via payroll deductions, with an evergreen provision adding 475,982 shares on January 1, 2022, leaving 1,329,090 shares available by March 2022 - The ESPP permits participants to purchase common stock through payroll deductions[81] - Under an evergreen provision, an additional 475,982 shares became available for future issuance on January 1, 2022[81] - As of March 31, 2022, an aggregate of 1,329,090 shares of common stock were available for issuance under the ESPP[81] Stock Awards This section details Q1 2022 stock option and restricted stock unit activity, showing increased outstanding options and new RSU grants Stock Options Stock options outstanding reached 7,975,426 by March 2022, with a $17.10 weighted-average exercise price and $43.4 million aggregate intrinsic value, while 203,047 options were exercised in Q1 2022 | Stock Option Activity | March 31, 2022 | | :-------------------- | :------------- | | Options Outstanding | 7,975,426 | | Weighted-Average Exercise Price | $17.10 |\ | Aggregate Intrinsic Value (000's) | $43,369 | - The aggregate intrinsic value of options exercised during the three months ended March 31, 2022, was $2.2 million[82] Restricted Stock Units The company granted 306,194 RSUs in Q1 2022, with 304,069 units outstanding at period-end, having an aggregate fair value of $6.1 million | Restricted Stock Unit Activity | March 31, 2022 | | :----------------------------- | :------------- | | Granted | 306,194 | | Balance at March 31, 2022 | 304,069 | | Aggregate Fair Value (000's) | $6,087 | Fair Value of Stock Awards The weighted-average fair value of stock options awarded increased to $14.77 per share in Q1 2022, valued using the Black-Scholes model with specific assumptions for term, volatility, and interest rate - The weighted-average fair value of stock options awarded was $14.77 per share for the three months ended March 31, 2022, compared to $11.01 per share for the same period in 2021[86] - The Black-Scholes option pricing model is used to value awards[84] | Stock Option Awards Assumptions | 2022 | 2021 | | :------------------------------ | :---------- | :---------- | | Expected option term | 6.0 years | 6.0 years | | Expected volatility | 88% | 87% | | Risk free interest rate | 1.8% | 0.9% | | Expected dividend yield | —% | —% | Stock-Based Compensation Expense Total stock-based compensation expense increased to $5.8 million in Q1 2022, with $70.2 million unrecognized as of March 2022, to be recognized over 1.4 to 4.0 years | Stock-Based Compensation Expense (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Included in research and development | $3,191 | $1,813 | | Included in general and administrative | $2,564 | $1,593 | | Total stock-based compensation expense | $5,755 | $3,406 | - As of March 31, 2022, unrecognized stock-based compensation cost related to option awards, restricted stock units, and ESPP was $62.3 million, $6.0 million, and $1.9 million, respectively[87] - These unrecognized costs are expected to be recognized over remaining weighted-average periods of approximately 2.2 years (options), 4.0 years (RSUs), and 1.4 years (ESPP)[87] 11. SUBSEQUENT EVENT On April 18, 2022, the company completed a follow-on offering of 5,625,563 shares at $22.22 per share, generating approximately $117.3 million in net proceeds - On April 18, 2022, the Company completed an underwritten follow-on offering of 5,625,563 shares of its common stock[88] - The shares were offered at a price to the public of $22.22 per share[88] - Net proceeds from the offering were approximately $117.3 million, after underwriting discounts and estimated offering costs[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operating results, product pipeline, and future outlook, discussing revenues, expenses, cash flows, and liquidity Forward Looking Statements This section contains forward-looking statements about future financial results, strategy, and development, subject to risks and uncertainties, which the company does not plan to update unless legally required - The discussion contains forward-looking statements regarding future results of operations, financial position, business strategy, prospective products, and research and development costs[91] - These statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part II, Item 1A, "Risk Factors"[91] - The Company does not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law[91] Overview Crinetics is a clinical-stage pharmaceutical company developing novel oral nonpeptide therapeutics for rare endocrine diseases and tumors, with a pipeline including paltusotine, CRN04777, and CRN04894 - Crinetics is a clinical-stage pharmaceutical company focused on the discovery, development, and commercialization of novel therapeutics for rare endocrine diseases and endocrine-related tumors[92] - The company has discovered a pipeline of oral nonpeptide (small molecule) new chemical entities that target peptide GPCRs[92] - Product candidates include paltusotine (acromegaly, NETs), CRN04777 (congenital hyperinsulinism), and CRN04894 (Cushing's Disease, congenital adrenal hyperplasia)[92] Paltusotine (SST2 Agonist Program) Paltusotine, the lead SST2 agonist, is in Phase 3 for acromegaly (data expected 2023) and Phase 2 for NETs, holding FDA orphan drug designation, with a Japan license signed in February 2022 - Paltusotine is the lead product candidate, an oral selective nonpeptide somatostatin receptor type 2 (SST2) agonist[93] - It is in Phase 3 development for acromegaly (PATHFNDR-1 and PATHFNDR-2 trials) with topline data expected in 2023, and a Phase 2 trial for NETs complicated by carcinoid syndrome[95] - The FDA has granted orphan drug designation for paltusotine for the treatment of acromegaly[93] - In February 2022, an exclusive license agreement was entered with Sanwa Kagaku Kenkyusho Co., Ltd. for paltusotine in Japan[95] CRN04777 (SST5 Agonist) CRN04777, an oral SST5 agonist for congenital HI, showed positive Phase 1 data with potent insulin suppression and a 40-hour half-life, with Phase 2 initiation planned for H2 2022, holding FDA and EMA orphan designations - CRN04777 is an investigational, oral, nonpeptide somatostatin receptor type 5 (SST5) agonist designed for the treatment of congenital hyperinsulinism (HI)[96] - Positive topline data from Phase 1 studies (SAD in Sep 2021, MAD in Mar 2022) demonstrated pharmacologic proof-of-concept with potent suppression of stimulated insulin, good absorption, and a half-life of approximately 40 hours[96] - The company is preparing for regulatory interactions to discuss the design of the Phase 2 clinical study, planned for initiation in the second half of 2022[96] - CRN04777 has received FDA rare pediatric disease designation and EMA orphan drug designation for the treatment of congenital HI[96] CRN04894 (ACTH Antagonist) CRN04894, an oral ACTH antagonist for Cushing's and CAH, showed dose-dependent cortisol reductions in Phase 1 SAD, with MAD data expected in Q2 2022 and clinical studies planned for H2 2022 - CRN04894 is an investigational, oral, nonpeptide product candidate designed to antagonize ACTH for diseases caused by excess ACTH, including Cushing's disease and congenital adrenal hyperplasia (CAH)[97] - Positive topline data from the SAD cohorts of the Phase 1 study (Aug 2021) demonstrated dose-dependent reductions of both basal cortisol and elevated cortisol following an ACTH challenge[99] - The MAD portion of the Phase 1 study is ongoing, with topline data expected in the second quarter of 2022, and plans to initiate clinical studies in the second half of 2022[99] Parathyroid Hormone Antagonist The company is developing oral nonpeptide PTH receptor antagonists for PHPT and HHM, with preclinical models showing activity, and is evaluating candidates for clinical trials - The company is developing antagonists of the parathyroid hormone (PTH) receptor for the treatment of primary hyperparathyroidism (PHPT) and humoral hypercalcemia of malignancy (HHM)[100] - Investigational, orally available nonpeptide PTH antagonists have shown activity and drug-like properties in preclinical models[100] Radionetics Oncology, Inc. Crinetics co-founded Radionetics Oncology in October 2021, granting an exclusive radiotherapeutics license, receiving a majority equity stake, a warrant, and potential sales milestones exceeding $1.0 billion plus royalties - Crinetics, together with 5AM Ventures and Frazier Healthcare Partners, announced the formation of Radionetics Oncology, Inc. in October 2021[101] - Crinetics granted Radionetics an exclusive world-wide license to its technology for the development of radiotherapeutics and related radio-imaging agents[101] - In exchange, Crinetics received a majority equity stake in Radionetics, a warrant, potential sales milestones in excess of $1.0 billion, and single-digit royalties on net sales[101] Research Discovery Crinetics continuously evaluates new therapeutic options for endocrine diseases, with all internally discovered product candidates subject to patent applications, retaining worldwide commercialization rights except for specific licenses - The company continuously evaluates where to next deploy its drug discovery efforts for other debilitating endocrine diseases[102] - All product candidates have been discovered, characterized, and developed internally and are the subject of composition of matter patent applications[102] - Crinetics has retained worldwide rights to commercialize its product candidates, other than the Sanwa License and the Radionetics License[102] Australian operations CAPL, a wholly-owned subsidiary, conducts preclinical and clinical activities and is eligible for a 43.5% refundable tax credit on qualified R&D expenditures under the Australian R&D Tax Incentive Program - Crinetics Australia Pty Ltd (CAPL), a wholly-owned subsidiary, was formed to conduct various preclinical and clinical activities[103] - CAPL is eligible for a refundable tax credit equal to 43.5% of qualified research and development expenditures under the Australian R&D Tax Incentive Program[103] - Eligibility requires the Australian subsidiary to retain rights to data and intellectual property generated in Australia, and the parent company's total revenues to be less than $20.0 million Australian dollars[103] COVID-19 The company actively monitors COVID-19's impact on manufacturing, nonclinical activities, and clinical trials, acknowledging potential alterations to timelines and operations - The company is in close contact with principal investigators and clinical sites to assess any impacts of the ongoing COVID-19 global pandemic on drug manufacturing, nonclinical activities, and clinical trials[104] - The direct and indirect impacts of COVID-19 on the business could alter forecasted timelines[104] Financial operations overview Crinetics, funded by grants and stock sales, has an accumulated deficit of $309.9 million by March 2022, anticipating increased expenses and future capital needs for R&D and clinical trials - The company has funded operations primarily through grant and license revenues, private placement of preferred stock, and sales of common stock[106] - As of March 31, 2022, the company had an accumulated deficit of $309.9 million and unrestricted cash, cash equivalents, and investment securities of $319.7 million[106] - Expenses and operating losses are expected to increase substantially due to ongoing clinical trials, R&D activities, hiring additional personnel, protecting intellectual property, and public company costs[106] - The company expects to finance its cash needs through equity offerings, debt financings, or other sources, including potential collaborations, licenses, and similar arrangements[106] Revenues All revenue to date is from grants and licenses, with deferred revenue from the Sanwa License expected, and no commercial product sales anticipated in the foreseeable future - All revenue to date has been derived from grant awards and licenses[107] - The company expects to recognize deferred revenue amounts from the Sanwa License as the data exchange performance obligation is fulfilled[107] - The company does not expect to generate revenues from the commercial sale of approved products for at least the foreseeable future[107] License revenues License revenues in 2021 stemmed from the Radionetics equity stake, while 2022 revenues were from the Sanwa License for paltusotine in Japan - License revenues in 2021 were derived from the majority equity stake obtained in Radionetics pursuant to a Collaboration and License Agreement[107] - License revenues for 2022 were derived from the Sanwa License, granting the exclusive right to develop and commercialize paltusotine in Japan[107] Research and development R&D expenses, including personnel, CROs, and manufacturing, are expensed as incurred and offset by the Australian Tax Incentive, with substantial increases anticipated due to development uncertainties - Research and development expenses primarily relate to discovery efforts and preclinical and clinical development of product candidates[108] - R&D expenses include salaries, payroll taxes, employee benefits, stock-based compensation, consulting expenses, third-party R&D expenses, laboratory supplies, clinical materials, and overhead[108] - The Australian Tax Incentive is recognized as a reduction of research and development expense[110] - The company plans to substantially increase its research and development expenses for the foreseeable future as it continues the development of its product candidates and the discovery of new product candidates[110] - Clinical and preclinical development timelines, the probability of success, and development costs can differ materially from expectations[110] General and administrative G&A expenses, including personnel, legal, and professional fees, are expected to increase to support R&D, potential commercialization, and public company operations - General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance, and other administrative functions[111] - Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, insurance costs, and commercial planning expenses[111] - General and administrative expenses are anticipated to increase in the future to support continued research and development activities and, if any product candidates receive marketing approval, commercialization activities[111] Critical Accounting Policies and Estimates Financial statements rely on GAAP and subjective estimates, particularly for license revenue recognition, where significant judgment in variable consideration and standalone selling prices could materially affect reported revenues - The preparation of condensed consolidated financial statements requires management to make subjective estimates and judgments that affect reported amounts[112] - Revenue recognition for licensing arrangements follows a five-step model, involving significant judgment in estimating variable consideration and allocating transaction price[114] - Estimates for standalone selling price for license-related performance obligations involve assumptions regarding forecasted revenues, development timelines, discount rates, and probabilities of success[114] - Material changes in estimates of expected total costs and timing of activities, or initial assumptions for standalone selling price, could affect reported license revenues[116] Results of Operations This section compares Q1 2022 and Q1 2021 financial results, detailing changes in license revenues, operating expenses, other income/expense, and equity investment loss, resulting in a higher net loss Comparison of the three months ended March 31, 2022 and 2021 Q1 2022 license revenues increased to $3.1 million, R&D expenses rose by $10.7 million to $28.3 million, and G&A expenses increased by $3.4 million to $8.7 million, leading to a higher net loss including a $1.0 million equity investment loss | Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Dollar Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------ | | License revenues | $3,131 | $0 | $3,131 | | Research and development | $28,252 | $17,584 | $10,668 | | General and administrative | $8,706 | $5,334 | $3,372 | | Loss from operations | $(33,827) | $(22,918) | $(10,909) | | Other income (expense), net | $210 | $17 | $193 | | Loss on equity method investment | $(1,010) | $0 | $(1,010) | | Net loss | $(34,627) | $(22,901) | $(11,726) | - The increase in R&D expenses was primarily due to an increase in personnel costs of $3.0 million (including $1.4 million of stock-based compensation) and increased spending on manufacturing and development activities of $7.0 million[117] - The increase in G&A expenses was primarily due to an increase in personnel costs of $2.1 million (including $1.0 million of stock-based compensation) and increased consulting and outside services of $0.9 million[117] Cash Flows Net cash used in operating activities decreased to $13.5 million in Q1 2022 due to the $13.0 million Sanwa License payment, while investing activities saw a $43.4 million net outflow, and financing provided $1.8 million | Cash Flow Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(13,543) | $(20,067) | | Net cash (used in) provided by investing activities | $(43,384) | $32,502 | | Net cash provided by financing activities | $1,780 | $57 | | Net change in cash, cash equivalents and restricted cash | $(55,147) | $12,492 | - The decrease in cash used in operations was primarily attributable to the $13.0 million upfront payment received upon the execution of the Sanwa License in February 2022[121] - Net cash provided by financing activities during 2022 and 2021 resulted from the exercise of stock options[121] Liquidity and Capital Resources The company's $319.7 million in capital and $117.3 million raised in April 2022 are sufficient for 12 months, but substantial future capital is needed for R&D and operations, likely through equity, debt, or collaborations, with potential dilution - The company believes its existing capital resources, together with investment income, will be sufficient to satisfy current and projected funding requirements for at least the next twelve months[122] - Future capital requirements will depend on factors such as the type, number, scope, progress, and costs of preclinical studies and clinical trials, manufacturing, regulatory review, and intellectual property costs[122] - The company expects to finance its cash needs through equity offerings, debt financings, or other capital sources, including potential collaborations, licenses, and other similar arrangements[122] - To the extent additional capital is raised through equity or convertible debt, ownership interest of stockholders may be diluted, and debt/preferred equity financing may involve restrictive covenants[124] - On April 18, 2022, the company completed an underwritten follow-on offering, generating approximately $117.3 million in net proceeds[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, foreign currency, and inflation; interest rate risk is minimal, foreign currency risk is unhedged and immaterial, and inflation has not materially affected operations Interest Rate Risk The company's interest rate risk on cash, cash equivalents, and investment securities is minimal due to their short-term nature, with no material impact expected from sudden rate changes - The company is exposed to market risk related to fluctuations in interest rates, primarily affecting cash, cash equivalents, and investment securities[126] - A sudden change in market interest rates is not expected to have a material impact due to the short-term nature of the instruments in its portfolio[126] Foreign Currency The company faces foreign currency risk from international vendors and its Australian subsidiary, with immaterial net gains/losses of $17,000 in Q1 2022, and does not hedge this exposure - The company contracts with vendors, CROs, and investigational sites in several foreign countries, exposing it to fluctuations in foreign currency rates[127] - The functional currency of Crinetics Australia Pty Ltd (CAPL) is the U.S. dollar[127] - Net realized and unrealized gains and losses from foreign currency transactions totaled approximately $17,000 for the three months ended March 31, 2022[127] - The company does not hedge its foreign currency exchange rate risk[127] Inflation Risk Inflation impacts labor and clinical trial costs, but the company believes it has not materially affected its results of operations for the periods presented - Inflation generally affects the company by increasing its cost of labor and clinical trial costs[128] - The company does not believe that inflation has had a material effect on its results of operations for the periods presented[128] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, at the reasonable assurance level[130] - There has been no change in internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[130] PART II — OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety disclosures, other information, and a list of exhibits Item 1. Legal Proceedings The company is not involved in material legal proceedings and expects no material adverse effect from ordinary course claims on its financial position - The Company is not currently a p