Adagene(US:ADAG)2024-03-29 18:53PART I Key Information This section details principal investment risks for Adagene Inc., a Cayman Islands holding company with operations in China and the U.S., covering PRC oversight, financial prospects, clinical development, and potential PFIC status Risk Factors The company faces unique risks due to its Cayman Islands holding structure and operations in China, including regulatory oversight, data privacy concerns, and potential adverse U.S. tax implications as a Passive Foreign Investment Company - The company's Cayman Islands holding structure and operations in PRC and U.S. present unique risks, particularly concerning PRC government influence, regulatory approvals for offshore offerings, cybersecurity, data privacy, and historical limitations on PCAOB inspections13 - The company was likely a Passive Foreign Investment Company (PFIC) for the 2023 tax year and faces a significant risk of being a PFIC in 2024, which could lead to adverse U.S. federal income tax consequences for U.S. investors24400402 Information on the Company This section details Adagene's corporate history, structure, and operations as a clinical-stage biotechnology company developing novel antibody-based cancer immunotherapies using its proprietary DPL platform History and Development of the Company Adagene Inc., a Cayman Islands holding company incorporated in 2011, operates through subsidiaries in China and the U.S., having completed its Nasdaq IPO in 2021, while navigating HFCAA and PRC cybersecurity regulations - Adagene Inc. is a Cayman Islands holding company established in 2011, conducting R&D and business operations primarily through its subsidiaries in Suzhou, China, and the United States, completing its IPO on the Nasdaq in February 2021405406 - On December 15, 2022, the PCAOB vacated its 2021 determination that it was unable to inspect auditors in mainland China and Hong Kong, leading Adagene not to expect identification as a Commission-Identified Issuer for the fiscal year ended December 31, 2023, though future risk remains as the PCAOB makes annual determinations410 - The company believes it is not subject to cybersecurity review under current PRC measures as it does not process personal information of more than one million users and is not considered a 'critical information infrastructure operator', having not been investigated by the CAC or received related inquiries or sanctions as of the report date415 Business Overview Adagene is a clinical-stage biotech company leveraging its proprietary Dynamic Precision Library (DPL) platform, including NEObody™, SAFEbody®, and POWERbody™ technologies, to develop novel antibody-based cancer immunotherapies and strategic collaborations - Adagene's core is its Dynamic Precision Library (DPL) platform, which fuels three proprietary antibody technologies: NEObody™, SAFEbody®, and POWERbody™, designed to create differentiated cancer immunotherapies425426427 Adagene's Wholly-Owned Clinical Pipeline | Candidate | Target/Technology | Stage of Development | | :--- | :--- | :--- | | ADG126 | anti-CTLA-4 SAFEbody | Phase 1b/2 Development | | ADG116 | anti-CTLA-4 NEObody | Phase 1b/2 Evaluation | | ADG206 | anti-CD137 POWERbody | Phase 1 Evaluation | | ADG106 | anti-CD137 NEObody | Phase 1b/2 Evaluation | - The lead candidate, ADG126, is a masked anti-CTLA-4 SAFEbody in Phase 1b/2 trials, focusing on metastatic microsatellite-stable (MSS) colorectal cancer (CRC), with clinical data suggesting a best-in-class safety profile and differentiated efficacy, particularly in combination with anti-PD-1 therapy425455 - Adagene has established key technology licensing collaborations, including agreements with Sanofi and Exelixis to develop antibody-based therapeutics using its SAFEbody technology, providing upfront payments, potential milestone payments, and royalties to offset R&D costs437533534 Operating and Financial Review and Prospects This section analyzes Adagene's financial performance, highlighting a narrowed net loss in 2023 to US$18.9 million due to increased collaboration revenue and reduced R&D expenses, with strong liquidity expected to fund operations into 2026 Operating Results Adagene's net loss significantly narrowed to US$18.9 million in 2023, driven by increased collaboration revenue and a 55% reduction in R&D expenses due to strategic prioritization of ADG126 Consolidated Results of Operations (in thousands US$) | Metric | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Licensing and collaboration revenue | 10,175 | 9,293 | 18,111 | | Research and development expenses | (68,099) | (81,340) | (36,639) | | Administrative expenses | (14,440) | (11,874) | (8,673) | | Loss from operations | (72,364) | (83,921) | (23,720) | | Net loss attributable to shareholders | (73,178) | (79,972) | (18,946) | | Net loss per ordinary share (Basic) | (1.46) | (1.48) | (0.35) | - Research and development expenses decreased by 55.0% in 2023 to US$36.6 million, down from US$81.3 million in 2022, a direct result of the company's strategic decision to focus clinical efforts and prioritize its masked, anti-CTLA-4 SAFEbody candidate, ADG126777 R&D Expenses by Program (in thousands US$) | Program | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | ADG126 | 3,543 | 19,229 | 20,855 | | ADG116 | 11,236 | 15,271 | 5,779 | | ADG106 | 14,798 | 4,604 | 2,209 | | Preclinical, research pipeline & others | 38,522 | 42,236 | 7,796 | | Total | 68,099 | 81,340 | 36,639 | Liquidity and Capital Resources As of December 31, 2023, Adagene held US$109.9 million in cash and cash equivalents, a decrease from 2022, with management expecting current liquidity to fund operations into 2026 - As of December 31, 2023, the company held US$109.9 million in cash and cash equivalents, which management believes is sufficient to fund operations into 2026792795 Consolidated Cash Flow Data (in thousands US$) | Cash Flow Activity | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (43,415) | (48,612) | (28,455) | | Net cash used in investing activities | (2,510) | (686) | (77) | | Net cash (used in) generated from financing activities | 145,357 | 17,823 | (5,367) | | Net increase (decrease) in cash | 99,240 | (30,632) | (33,825) | - Net cash used in operating activities decreased to US$28.5 million in 2023 from US$48.6 million in 2022, primarily due to higher revenue from collaborations and lower R&D and administrative expenses798800 Directors, Senior Management and Employees This section details the company's leadership, board composition, compensation, and employee base, noting a decrease to 174 employees in 2023, with most in R&D - For the fiscal year ended December 31, 2023, the company paid an aggregate of US$2.6 million in cash compensation to its executive officers and US$0.3 million to its independent directors854 - The company utilizes two primary share incentive plans: the 2019 Plan (under which no new awards are granted) and the 2021 Performance Incentive Plan, with outstanding awards under the 2019 Plan covering 2,538,070 ordinary shares as of February 29, 2024858 Employee Headcount by Function (as of Dec 31, 2023) | Function | Number of Employees | | :--- | :--- | | Research and Development | 118 | | General Administration | 53 | | Business Development and Marketing | 3 | | Total | 174 | - The total number of employees decreased from 248 at the end of 2022 to 174 employees at the end of 2023888 Major Shareholders and Related Party Transactions This section details major shareholders, including the Peter Luo act-in-concert group (21.8%), and outlines 2023 related party transactions for R&D services with WuXi AppTec Group and WuXi Biologics Principal Shareholders (as of Feb 29, 2024) | Shareholder | Beneficial Ownership % | | :--- | :--- | | Peter Luo act-in-concert group | 21.8% | | HAN 2020 IRREVOCABLE TRUST | 10.9% | | JSR Limited | 9.7% | | Wuxi Pharmatech Healthcare Fund I L.P. | 9.0% | | Asia Ventures II L.P. | 8.7% | | General Atlantic Singapore AI Pte. Ltd. | 8.7% | | F-Prime Capital Partners Healthcare Fund III LP | 6.1% | | Panacea Venture Healthcare Fund II, L.P. | 5.0% | - In 2023, the company purchased research and development services from related parties, including US$0.8 million from WuXi AppTec Group and US$1.9 million from WuXi Biologics900 Financial Information This section presents the company's consolidated financial statements and states its policy of not paying cash dividends, intending to retain earnings for business growth - The company has not previously declared or paid cash dividends and has no plans to do so in the near future, intending to retain earnings to fund business growth903 Additional Information This section details the company's Cayman Islands corporate governance, including tax consequences for shareholders and its likely status as a Passive Foreign Investment Company (PFIC) for 2023 - The company is an exempted company incorporated in the Cayman Islands, and its affairs are governed by its memorandum and articles of association and the Companies Act of the Cayman Islands909910 - The company believes it was likely a Passive Foreign Investment Company (PFIC) for its 2023 taxable year due to a decline in its market capitalization relative to its cash and cash equivalents, with a significant risk it will also be a PFIC for 2024, potentially resulting in adverse U.S. federal income tax consequences for U.S. Holders947 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate risk on cash holdings and foreign exchange risk from RMB fluctuations against the U.S. dollar, with no current hedging - The company's main market risks include interest rate risk on cash holdings and foreign exchange risk, particularly from the fluctuation of the RMB against the U.S. dollar966967 PART II Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the use of approximately US$145.9 million net proceeds from the February 2021 IPO, with US$83 million allocated primarily to R&D by December 31, 2023 - The company raised net proceeds of approximately US$145.9 million from its February 2021 IPO983984 - From the IPO date through December 31, 2023, the company has used US$83 million of the net proceeds, primarily for research and development activities985 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, based on the COSO framework - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective987 - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023989 Corporate Governance and Other Matters This section covers corporate governance, including principal accountant fees (RMB 6.2 million in 2023), adherence to Cayman Islands home country practices as a foreign private issuer, and the company's cybersecurity risk management program - The company, as a foreign private issuer, follows certain Cayman Islands home country practices, exempting it from some Nasdaq corporate governance requirements, such as having a compensation committee composed entirely of independent directors and obtaining shareholder approval for certain securities issuances10021005 Principal Accountant Fees (in thousands RMB) | Service | 2022 | 2023 | | :--- | :--- | :--- | | Audit Fees | 5,800 | 6,200 | | Total | 5,800 | 6,200 | - The company has a cybersecurity risk management program overseen by its information security committee and managed by the Senior VP of Bioinformatics and IT, with no cybersecurity threats identified in 2023 that materially affected the company's business, operations, or financial condition100910101011 PART III Financial Statements This section presents the audited consolidated financial statements for Adagene Inc. and its subsidiaries for 2021-2023, prepared under U.S. GAAP, including balance sheets, comprehensive loss, equity changes, and cash flows Consolidated Balance Sheet Highlights (in thousands US$) | Account | Dec 31, 2022 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | 143,759 | 109,934 | | Total Assets | 152,400 | 115,729 | | Total current liabilities | 55,080 | 31,456 | | Total Liabilities | 69,309 | 45,169 | | Total Shareholders' Equity | 83,090 | 70,559 | Consolidated Statements of Comprehensive Loss Highlights (in thousands US$) | Account | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Licensing and collaboration revenue | 10,175 | 9,293 | 18,111 | | Research and development expenses | (68,099) | (81,340) | (36,639) | | Net loss attributable to shareholders | (73,178) | (79,972) | (18,946) |