Aclaris Therapeutics(ACRS) - 2023 Q4 - Annual Report

PART I Business Aclaris Therapeutics is a clinical-stage biopharmaceutical company developing novel drug candidates for immuno-inflammatory diseases, actively pursuing strategic partnerships and conducting a business review initiated in January 2024 - The company is a clinical-stage biopharmaceutical firm specializing in immuno-inflammatory diseases, leveraging its proprietary KINect drug discovery platform[13] - Aclaris is pursuing strategic alternatives, including partnerships, to further develop and commercialize its novel drug candidates[13] - In January 2024, the company initiated a strategic review of its business operations[13] Our Drug Candidates The company's clinical pipeline features ATI-1777 for atopic dermatitis, ATI-2138 for T cell-mediated autoimmune diseases, and Zunsemetinib for oncology, with Zunsemetinib's immuno-inflammatory development discontinued in 2023 Clinical Pipeline Summary | Drug Candidate | Target | Indication | Development Phase | | :--- | :--- | :--- | :--- | | ATI-1777 | "Soft" JAK 1/3 inhibitor | Atopic dermatitis | Phase 2b Complete | | ATI-2138 | ITK/JAK3 inhibitor | T cell-mediated autoimmune diseases | Phase 1 Complete | | Zunsemetinib | MK2 inhibitor | Metastatic breast cancer, Pancreatic cancer | Phase 1 (Investigator-Initiated) | - ATI-1777 showed positive top-line results from its Phase 2b study in atopic dermatitis in January 2024, meeting its primary efficacy endpoint, and the company seeks a development and commercialization partner[18][19] - ATI-2138 Phase 1 MAD trial results in September 2023 were positive, showing general tolerability, and the company is evaluating its development pathway[21][22] - Following trial failures in 2023, Aclaris discontinued Zunsemetinib's development for immuno-inflammatory diseases and now plans to support investigator-initiated Phase 1b/2 trials in metastatic breast cancer and pancreatic cancer[25][33] Discovery Programs and KINect Drug Discovery Platform The KINect drug discovery platform, acquired in 2017, is central to the company's R&D, utilizing a proprietary chemical library, SBDD, and novel inhibitor modalities to target difficult kinases for inflammatory, autoimmune, and oncology pathways - The KINect platform combines a proprietary chemical library, novel inhibitor modalities, SBDD expertise, and custom kinase assays to identify drug candidates[26] - The platform's approach involves three key mechanisms: reversible and irreversible covalent inhibitors, molecular glue/complex targeted inhibitors, and targeted protein degraders[27] - Discovery efforts focus on kinases in inflammatory, autoimmune, and oncology pathways, aiming to create assets for internal development or strategic partnerships[32] Competition Aclaris faces intense competition from major pharmaceutical and biotechnology companies, particularly for its lead candidate ATI-1777 in atopic dermatitis, competing with established therapies and numerous developing drug candidates - The pharmaceutical industry is characterized by intense competition and rapidly advancing technologies[35] - For ATI-1777 in atopic dermatitis, key competitors include large pharmaceutical companies like AbbVie, Incyte, LEO Pharma A/S, Pfizer, and Regeneron/Sanofi[38] - Many competitors possess significantly greater financial resources and expertise in R&D, manufacturing, and clinical development[40] Intellectual Property The company's success depends on securing patent protection for its drug candidates, with patents for ATI-1777 expiring between 2038-2042, ATI-2138 between 2035-2039, and Zunsemetinib between 2031-2041, supplemented by trademarks and trade secrets - The "soft" JAK inhibitor program, including ATI-1777, has patents and pending applications expiring between 2038 and 2042[42] - The ITK inhibitor program, including ATI-2138, has U.S. patents and pending applications expiring between 2035 and 2039[43] - The MK2 inhibitor program, including zunsemetinib, has patents and pending applications expiring between 2031 and 2041[44][46] Government Regulation and Product Approval The company's operations are subject to extensive FDA and international regulation, involving a lengthy and complex drug approval process from preclinical studies through clinical trials and NDA submission, with ongoing post-approval compliance requirements - Drug candidates require FDA approval for U.S. marketing, a process demanding substantial time and resources[53] - The U.S. drug approval process involves preclinical testing, IND submission, and typically three phases of well-controlled clinical trials to establish safety and efficacy[54][60] - Post-approval, drugs are subject to continuous regulation, including requirements for recordkeeping, adverse event reporting, and cGMP compliance for manufacturing[70][71] - Marketing in foreign jurisdictions like the European Economic Area requires separate approvals, such as a Marketing Authorization from the European Commission[81] Risk Factors The company faces numerous risks including a history of significant financial losses, the need for substantial additional funding, challenges in drug development and partnerships, reliance on third parties, intense competition, intellectual property protection, and regulatory hurdles - The company has a history of significant net losses, with an accumulated deficit of $770.8 million as of December 31, 2023, and anticipates further losses[127] - Substantial additional funding is required to meet financial obligations and business objectives, with failure to raise capital potentially forcing operational curtailment[134] - The business is highly dependent on the success of its drug candidates in clinical trials and its ability to form strategic partnerships for further development and commercialization[147] - Aclaris relies on third parties for conducting clinical trials and manufacturing drug supplies, introducing risks related to performance, compliance, and supply chain continuity[196][202] - The company faces substantial competition from larger, better-funded pharmaceutical companies, which may develop more successful drugs or bring them to market faster[184] Unresolved Staff Comments There are no unresolved staff comments - None[382] Cybersecurity The company maintains a cybersecurity risk management program overseen by the Audit Committee, involving a multidisciplinary team and third-party experts to identify, assess, and manage threats to IT systems and data, with management responsible for daily implementation - The company's risk management process is designed to identify and manage cybersecurity threats to its critical information technology resources and data[382] - Governance is handled by the Board of Directors' Audit Committee, which oversees the cybersecurity risk management strategy[390] - Management, including the CFO and IT department, implements the cybersecurity program, which includes threat monitoring, vulnerability assessments, and engaging third-party security firms[383][384][391] Properties The company leases office space for its headquarters in Wayne, Pennsylvania, under a lease expiring in February 2029, and subleases office and laboratory space in St Louis, Missouri, through June 2029 - Headquarters are located in a leased 11,564 sq. ft. facility in Wayne, PA, with the lease running through February 2029[394] - An additional 26,694 sq. ft. of office and laboratory space is subleased in St Louis, MO, with the term running through June 2029[394] Legal Proceedings The company is not currently a party to any material legal proceedings and is not aware of any pending or threatened legal actions that could have a material adverse effect on its business - The company is not currently a party to any material legal proceedings[397] Mine Safety Disclosures This item is not applicable to the company - Not applicable[397] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Select Market under "ACRS," with 70,925,042 shares outstanding as of January 31, 2024, and no dividends paid or anticipated, showing significant underperformance against market indexes - Common stock trades on the Nasdaq Global Select Market under the symbol "ACRS"[399] - The company has never paid dividends and does not plan to in the foreseeable future[400] - As of January 31, 2024, there were 70,925,042 shares of common stock outstanding[401] Management's Discussion and Analysis of Financial Condition and Results of Operations For FY2023, Aclaris reported a net loss of $88.5 million, with total revenue increasing to $31.2 million, while R&D expenses rose significantly, partially offset by a $26.9 million gain from contingent consideration revaluation, and the company held $181.9 million in cash, sufficient for over 12 months of operations Results of Operations For fiscal year 2023, total revenue increased to $31.2 million from $29.8 million in 2022, primarily due to higher licensing revenue, while total costs and expenses rose to $128.6 million from $119.6 million, driven by a $20.6 million increase in R&D spending, resulting in a net loss of $88.5 million Consolidated Statement of Operations (in thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $31,249 | $29,752 | $1,497 | | Research and Development | $98,384 | $77,813 | $20,571 | | General and Administrative | $32,412 | $25,133 | $7,279 | | Revaluation of Contingent Consideration | $(26,900) | $4,700 | $(31,600) | | Intangible Asset Impairment | $6,629 | $0 | $6,629 | | Loss from Operations | $(97,357) | $(89,854) | $(7,503) | | Net Loss | $(88,481) | $(86,908) | $(1,573) | - R&D expenses increased primarily due to higher costs for the zunsemetinib Phase 2b trial in rheumatoid arthritis and the ATI-1777 Phase 2b trial in atopic dermatitis[475][476] - The fair value of contingent consideration liability decreased by $26.9 million, resulting in a gain, mainly due to the discontinuation of zunsemetinib development for immuno-inflammatory diseases[487] - An impairment charge of $6.6 million was recorded for the full balance of the IPR&D intangible asset after the decision to discontinue its development for immuno-inflammatory diseases[488] Liquidity and Capital Resources As of December 31, 2023, the company had $181.9 million in cash, cash equivalents, and marketable securities, with net cash used in operating activities at $78.3 million in 2023, and management believes current capital is sufficient to fund operations for more than 12 months Cash and Marketable Securities (in millions) | Date | Cash, Cash Equivalents & Marketable Securities | | :--- | :--- | | Dec 31, 2023 | $181.9 | | Dec 31, 2022 | $229.8 | Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(78,325) | $(67,567) | | Net cash provided by investing activities | $46,220 | $12,628 | | Net cash provided by financing activities | $26,706 | $72,867 | - In April 2023, the company raised gross proceeds of $27.5 million through its at-the-market (ATM) facility[493] - The company believes its existing cash, cash equivalents, and marketable securities are sufficient to fund operations for more than 12 months from the financial statement issuance date[507] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity on its short-term, low-risk investment portfolio, with minor foreign currency exposure, and inflation is not believed to have had a material effect on operations for FY2023 - The primary market risk is interest rate sensitivity on the company's investment portfolio, but due to its short-term and low-risk nature, a 10% change in rates is not expected to be material[517] - The company has some foreign currency risk from foreign government agency debt securities but does not use derivative instruments to manage this exposure[518] - Inflation is not considered to have had a material effect on the business during the fiscal year 2023[519] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, 2022, and 2021, along with the independent auditor's report, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows, with detailed notes Key Balance Sheet Data (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash, cash equivalents & marketable securities | $181,977 | $229,813 | | Total Assets | $197,405 | $254,596 | | Total Liabilities | $40,226 | $56,975 | | Contingent Consideration | $6,200 | $33,100 | | Total Stockholders' Equity | $157,179 | $197,621 | Key Statement of Operations Data (in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenue | $31,249 | $29,752 | $6,761 | | Total Costs and Expenses | $128,606 | $119,606 | $96,484 | | Net Loss | $(88,481) | $(86,908) | $(90,865) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with the company's accountants on accounting and financial disclosure - None[673] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2023, with no material changes during the fourth quarter of 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[674] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[675] - No material changes were made to the internal control over financial reporting during the quarter ended December 31, 2023[676] Other Information During the fourth quarter of 2023, none of the company's directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023[678] PART III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[683] Executive Compensation The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[684] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[684] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[685] Principal Accountant Fees and Services The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[686] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including key corporate documents, equity plans, employment agreements, and material contracts - This section contains the list of all exhibits filed with the Form 10-K[689][692] Form 10-K Summary This item is not applicable - Not applicable[699]