Eliem Therapeutics(ELYM) - 2022 Q4 - Annual Report

Part I Business Eliem Therapeutics is a biotechnology company developing therapies for neuronal excitability disorders, focusing on its lead preclinical program ETX-123 after a significant 2023 restructuring Company Overview Eliem Therapeutics develops therapies for neuronal excitability disorders, with its lead program ETX-123 planned for Phase 1 trials while its other program ETX-155 is paused - The company's lead program is ETX-123, a Kv7.2/3 potassium channel opener, with Phase 1 studies planned for the first half of 2024[21] - In February 2023, the company paused further investment in its clinical-stage program, ETX-155, due to a challenging capital environment and unfavorable investor sentiment[22] - The company's strategy is to focus on clinically validated mechanisms of action to reduce translational risk and develop differentiated product candidates for CNS disorders[20] Our Strategy The company's strategy is to advance ETX-123 into clinical trials, expand into new indications, and build a fully integrated biotechnology company - Advance the preclinical Kv7.2/3 program, ETX-123, into Phase 1 studies in the first half of 2024 for potential treatment of epilepsy, pain, and depression[26] - Expand lead programs into additional indications with compelling commercial opportunities, leveraging the team's neuroscience expertise[31] - Plan to build a fully integrated company for global registrational trials, regulatory approvals, and commercialization, while also being open to strategic partnerships[31] Kv7.2/3 Program The lead program, ETX-123, is a next-generation Kv7.2/3 channel opener designed for high potency and selectivity to avoid past toxicity issues seen in this class - ETX-123 is a novel chemical entity designed to improve upon first-generation Kv7.2/3 openers by eliminating toxicity liabilities while retaining strong activity and selectivity[30] - In vitro, ETX-123 displays potent activation of Kv7.2/3 with an EC50 of approximately 0.7 nM and about 14,000-fold selectivity over the Kv7.4 subtype[30] - Initial preclinical in vivo data demonstrates a 7-fold separation between the effective dose in a rat seizure model and the dose inducing CNS side effects[32][36] Competition Eliem faces significant competition from major pharmaceutical and biotechnology companies with substantially greater financial and operational resources - Key competitors for epilepsy include Xenon Pharmaceuticals (XEN1101) and Biohaven (BHV-7000), which are developing next-generation therapies, including other Kv7.2/3 openers[35] - The company acknowledges that many competitors have substantially greater financial, technical, manufacturing, and marketing resources[36] Intellectual Property The company's IP strategy focuses on multi-layered patent protection for its product candidates, supplemented by trade secrets and confidentiality agreements - For the Kv7 program, a pending Great Britain patent application covers compositions, methods of use, and manufacturing processes for ETX-123 and related compounds[40] - The ETX-155 portfolio includes two issued U.S. patents with claims covering methods of use and a controlled-release formulation, with expected expiration in September 2039[41] - The company relies on trade secrets and confidentiality agreements with employees, consultants, and collaborators to protect proprietary know-how that is not patented[46] Manufacturing Eliem Therapeutics operates without its own manufacturing facilities, fully outsourcing its nonclinical and clinical compound supply to third-party CDMOs - The company has no manufacturing facilities and relies entirely on third-party CDMOs for all nonclinical and clinical compound supply[49] - Eliem intends to identify and qualify additional manufacturers for active pharmaceutical ingredients and fill-and-finish services before submitting any New Drug Application (NDA)[50] Government Regulation The company's operations are subject to extensive regulation by the FDA and comparable foreign authorities, covering the entire product lifecycle - The FDA drug approval process is lengthy and complex, involving preclinical studies, an IND application, three phases of human clinical trials, and an NDA submission[53][54][57] - The company is subject to healthcare fraud and abuse laws, such as the federal Anti-Kickback Statute and the False Claims Act[82][84] - Recent legislation like the Inflation Reduction Act of 2022 (IRA) will impact the industry by allowing HHS to negotiate drug prices for Medicare[93] - Commercial success depends on securing coverage and reimbursement from government and private payors, who are increasingly challenging drug prices[105][108] Employees and Human Capital The company is undergoing a significant workforce reduction as part of a restructuring plan to conserve resources and focus on key programs - As of December 31, 2022, the company had 43 employees, with 25 in R&D[110] - A restructuring plan approved in February 2023 will reduce the company's workforce by approximately 55% during the first half of 2023[110] Risk Factors The company faces risks from a history of financial losses, dependence on a single preclinical candidate, material weaknesses in internal controls, and a major corporate restructuring - The company has a history of significant losses, with an accumulated deficit of $120.9 million as of December 31, 2022, and has never generated revenue[18][115] - The business is substantially dependent on the successful development and commercialization of a single preclinical product candidate, ETX-123[18][125] - Material weaknesses in internal control over financial reporting have been identified, which could prevent accurate or timely financial reporting[18][294] - A February 2023 restructuring plan, which includes a 55% workforce reduction and executive departures, poses risks related to execution, employee morale, and potential development delays[261][262][263] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[321] Properties The company leases office space in the U.K. and Washington and is re-evaluating facility needs following its 2023 restructuring - The company leases office space in Cambridge, U.K., and Bellevue, Washington under non-cancelable operating leases[322] - The company is re-evaluating its facility needs due to the restructuring announced in February 2023[323] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently party to any material legal matters or claims[324] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[325] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, and it has never paid dividends, retaining earnings from its $83.1 million IPO to fund growth - The company's common stock has been listed on the Nasdaq Global Market under the symbol "ELYM" since August 10, 2021[327] - The company has never declared or paid cash dividends and intends to retain all future earnings to support operations[330] - The August 2021 IPO generated net proceeds of $83.1 million after underwriting discounts and other expenses[333] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2022 net loss decreased to $45.2 million, with cash reserves expected to fund operations into 2027 following a major restructuring Results of Operations Net loss decreased to $45.2 million in 2022 from $47.5 million in 2021, as a prior-year non-cash charge was not repeated, despite a 26.5% rise in operating expenses Results of Operations (in thousands) | | Year Ended December 31, | | Change | | | :--- | :--- | :--- | :--- | :--- | | | 2022 | 2021 | $ | % | | Operating expenses: | | | | | | Research and development | $26,214 | $23,322 | $2,892 | 12.4% | | General and administrative | $18,921 | $12,350 | $6,571 | 53.2% | | Total operating expenses | $45,135 | $35,672 | $9,463 | 26.5% | | Loss from operations | $(45,135) | $(35,672) | $(9,463) | 26.5% | | Other income (expense): | | | | | | Change in fair value of redeemable convertible preferred stock tranche liability | — | $(11,718) | $11,718 | (100.0)% | | Foreign currency loss | $(1,484) | $(170) | $(1,314) | * | | Interest income, net | $1,375 | $80 | $1,295 | * | | Net loss | $(45,244) | $(47,480) | $2,236 | (4.7)% | - R&D expenses increased by $2.9 million (12.4%) in 2022, mainly due to a $3.6 million increase in personnel costs from higher headcount and stock-based compensation[358][359] - G&A expenses increased by $6.6 million (53.2%) in 2022, driven by a $3.5 million increase in personnel costs and a $2.1 million increase in consulting and legal fees[360] Liquidity and Capital Resources With $123.6 million in cash, the company has sufficient funds into 2027 but will require substantial future funding for product advancement Financial Position (in millions) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash, cash equivalents and marketable securities | $123.6 | $161.4 | | Accumulated deficit | $120.9 | $75.6 | - The company estimates its current cash, cash equivalents, and marketable securities of $123.6 million will be sufficient to fund operations into 2027[368] Cash Flow Summary (in thousands) | | Year Ended Dec 31, | | | :--- | :--- | :--- | | | 2022 | 2021 | | Net cash used in operating activities | $(37,369) | $(36,072) | | Net cash provided by (used in) investing activities | $34,440 | $(114,970) | | Net cash provided by financing activities | $— | $177,232 | Critical Accounting Policies and Estimates Key accounting estimates involve stock-based compensation, historical common stock fair value, and the valuation of a now-settled preferred stock liability - Stock-based compensation is a critical estimate, valued using the Black-Scholes model which requires assumptions about stock volatility, term, and risk-free rate[381] - Prior to the IPO, the fair value of common stock was determined by the board of directors, using third-party valuations and subjective factors[384] - The redeemable convertible preferred stock tranche liability, settled in March 2021, was a freestanding financial instrument accounted for at fair value, with changes recorded in earnings[387][388] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, this information is not required - Not required as the company is a smaller reporting company[394] Financial Statements and Supplementary Data The audited financial statements show a net loss of $45.2 million for 2022 and total assets of $135.0 million as of year-end Consolidated Balance Sheets Total assets decreased to $135.0 million in 2022 from $173.2 million in 2021, primarily due to cash used in operations Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $43,585 | $46,922 | | Marketable securities (Short & Long-term) | $79,981 | $114,477 | | Total current assets | $134,393 | $148,252 | | Total assets | $134,992 | $173,241 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $6,097 | $6,031 | | Total liabilities | $6,277 | $6,038 | | Total stockholders' equity | $128,715 | $167,203 | | Total liabilities and stockholders' equity | $134,992 | $173,241 | Consolidated Statements of Operations and Comprehensive Loss The company reported a net loss of $45.2 million in 2022, a decrease from the $47.5 million net loss reported in 2021 Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, | | | :--- | :--- | :--- | | | 2022 | 2021 | | Research and development | $26,214 | $23,322 | | General and administrative | $18,921 | $12,350 | | Loss from operations | $(45,135) | $(35,672) | | Net loss | $(45,244) | $(47,480) | | Net loss per share, basic and diluted | $(1.72) | $(4.24) | Consolidated Statements of Cash Flows Net cash used in operations was $37.4 million in 2022, while investing activities provided $34.4 million from maturities of marketable securities Consolidated Statement of Cash Flows Data (in thousands) | | Year Ended Dec 31, | | | :--- | :--- | :--- | | | 2022 | 2021 | | Net cash used in operating activities | $(37,369) | $(36,072) | | Net cash provided by (used in) investing activities | $34,440 | $(114,970) | | Net cash provided by financing activities | $— | $177,232 | | Net change in cash and cash equivalents | $(3,337) | $26,435 | | Cash and cash equivalents at end of period | $43,585 | $46,922 | Notes to Consolidated Financial Statements Key notes detail accounting policies, stock-based compensation, and the significant restructuring plan approved in February 2023 - The company adopted the new lease accounting standard (ASC 842) on January 1, 2022, recognizing $0.9 million in right-of-use assets and lease liabilities (Note 2)[471] - In 2021, the company issued preferred stock for $34.0 million and $60.0 million before all preferred stock converted to common stock upon the IPO (Note 5)[487][488] - Total stock-based compensation expense was $7.0 million in 2022, up from $3.7 million in 2021 (Note 8)[511] - A restructuring plan approved in February 2023 will reduce the workforce by ~55% and is expected to incur charges of approximately $17.1 million (Note 12)[520][521] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[522] Controls and Procedures Management concluded disclosure controls were ineffective due to two unremediated material weaknesses in internal financial controls - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal control[524][527] - Two material weaknesses remain: (1) insufficient number of qualified accounting professionals, and (2) lack of formal accounting policies and controls[528] - Remediation efforts include hiring qualified personnel, implementing improved policies and financial systems, and engaging third-party professionals for testing[531][535] - A previously disclosed material weakness related to ineffective IT general controls (ITGCs) has been remediated as of December 31, 2022[532][533] Other Information This section is not applicable - Not applicable[535] Part III Directors, Executive Officers and Corporate Governance This information will be incorporated by reference from the company's 2023 Proxy Statement - Required information is incorporated by reference from the definitive Proxy Statement to be filed for the 2023 Annual Meeting of Stockholders[539] Executive Compensation This information will be incorporated by reference from the company's 2023 Proxy Statement - Required information is incorporated by reference from the definitive Proxy Statement[541] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This information will be incorporated by reference from the company's 2023 Proxy Statement - Required information is incorporated by reference from the definitive Proxy Statement[542] Certain Relationships and Related Transactions, and Director Independence This information will be incorporated by reference from the company's 2023 Proxy Statement - Required information is incorporated by reference from the definitive Proxy Statement[543] Principal Accounting Fees and Services This information will be incorporated by reference from the company's 2023 Proxy Statement - Required information is incorporated by reference from the definitive Proxy Statement[544] Part IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and all exhibits filed with the report - The consolidated financial statements of Eliem Therapeutics, Inc. are included in the filing[545] - No financial statement schedules were filed[545] Form 10-K Summary The company did not provide a Form 10-K summary - None[550]