Tourmaline Bio(TRML) - 2022 Q4 - Annual Report

Part I Business Talaris Therapeutics, a cell therapy company, discontinued key clinical trials for FCR001 in early 2023 and initiated a strategic review, including a workforce reduction - In February 2023, the company discontinued its FREEDOM-1 and FREEDOM-2 clinical trials for FCR001 in living donor kidney transplant (LDKT) recipients, citing slow enrollment and extended timelines to key milestones[18][36] - Following the trial discontinuations, Talaris initiated a comprehensive review of strategic alternatives to maximize stockholder value, which could include an acquisition, merger, business combination, or divestiture of its cell therapy manufacturing capabilities[19][35] - In connection with the strategic review, the company implemented a restructuring plan, reducing its workforce by approximately one-third to conserve resources[37][244] - Enrollment in the FREEDOM-3 Phase 2 trial for severe autoimmune disease (scleroderma) was voluntarily paused in March 2023 pending the outcome of the strategic review[20][36] Our Therapeutic Approach and Programs The company's core technology is the Facilitated Allo-HSCT Therapy with FCR001, designed to induce immune tolerance, showing promising Phase 2 results but facing trial discontinuations - The company's core technology is its Facilitated Allo-HSCT Therapy, which uses the lead product candidate FCR001[21][58] - In the Phase 2 LDKT trial, 26 of 37 patients (70%) treated with FCR001 were able to completely discontinue chronic immunosuppression, improving to 82% after protocol optimizations[27][73] - A key finding from the Phase 2 trial was that achieving donor T-cell chimerism levels >50% at 3 and 6 months post-transplant was highly predictive of successful immunosuppression weaning[28][77] - A patient death occurred in the FREEDOM-1 Phase 3 trial in October 2022 due to Grade IV Graft versus Host Disease (GvHD) complicated by infections, contributing to trial termination despite DMC recommendations[26][112] Intellectual Property and Manufacturing The company's intellectual property relies on an exclusive license from ULRF, with patents expiring around 2029, and it operates an in-house GMP manufacturing facility now subject to potential divestiture - The company's intellectual property is substantially dependent on an exclusive license agreement with the University of Louisville Research Foundation (ULRF) for patents and know-how related to its Facilitated Allo-HSCT Therapy[132][391] - As of December 31, 2022, the patent portfolio includes four patent families with issued patents expected to expire around 2029 and pending applications expected to expire around 2038[141] - Talaris operates its own 20,000 square foot GMP Cell Processing Facility in Louisville, Kentucky, performing all manufacturing in-house, which is now subject to potential divestiture as part of the strategic review[149][150] Government Regulation The company's biological product candidates, including FCR001, are subject to extensive FDA regulation, with FCR001 receiving RMAT and Orphan Drug Designations, and operations adhering to various healthcare laws - The company's product candidates are regulated as biological products in the U.S. by the FDA, requiring a comprehensive process including preclinical studies, an Investigational New Drug (IND) application, and multi-phase clinical trials before a Biologics License Application (BLA) can be submitted for marketing approval[153][154] - The FDA has granted FCR001 both Regenerative Medicine Advanced Therapy (RMAT) and Orphan Drug Designation for LDKT, providing expedited development and review, along with potential market exclusivity and financial incentives[30][181][173] - The company's operations are subject to numerous healthcare laws, including the federal Anti-Kickback Statute, False Claims Act, and HIPAA, which regulate relationships with healthcare providers and the handling of patient information[198][311] Risk Factors The company faces significant risks including the uncertain outcome of its strategic review, potential dissolution, clinical development failures for FCR001, manufacturing complexities, intellectual property dependence, and ongoing net losses requiring additional funding - A primary risk is the failure to identify and implement a strategic transaction, which is costly and time-consuming, with no assurance of increasing stockholder value[232][233] - If a strategic transaction is not consummated, the board may pursue dissolution and liquidation, making the cash available for distribution to stockholders uncertain and dependent on reserves for liabilities[241] - The business substantially depends on the success of FCR001, and the recent discontinuation of the FREEDOM-1 and FREEDOM-2 trials due to slow enrollment highlights significant clinical development risks[248][250][259] - The company's product candidates may cause undesirable side effects, such as Graft versus Host Disease (GvHD), which resulted in a patient death in the FREEDOM-1 trial and could delay or prevent regulatory approval[281][282] - The company is a late-stage clinical company with a history of net losses ($73.7 million in 2022) and anticipates continued losses, requiring substantial additional funding to continue operations[435] Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - The company has no unresolved staff comments from the Securities and Exchange Commission[513] Properties Talaris Therapeutics leases its primary cell therapy manufacturing facility and corporate offices across Louisville, Wellesley, and Houston, deeming them sufficient for foreseeable needs - The company leases four primary facilities: a 20,705 sq. ft. manufacturing facility in Louisville, KY (lease expires Nov 2023); a 7,410 sq. ft. corporate office in Wellesley, MA (lease expires Sep 2025); a 6,000 sq. ft. lab in Houston, TX (lease expires Jan 2025); and 6,130 sq. ft. of additional office space in Louisville, KY (lease expires Nov 2023)[514] Legal Proceedings As of December 31, 2022, the company is not involved in any material legal proceedings expected to adversely affect its business or financial condition - The company is not currently a party to any material litigation or legal proceedings[515] Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable[516] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "TALS" since May 2021, has never paid dividends, and the use of IPO proceeds is now contingent on the strategic review outcome - The company's common stock trades on the Nasdaq Global Market under the symbol "TALS" since its IPO on May 7, 2021[519] - The company has never paid cash dividends and does not anticipate doing so in the foreseeable future, intending to retain earnings for business development[521] - The planned use of the remaining net proceeds from the IPO is now dependent on the outcome of the comprehensive review of strategic alternatives announced in February 2023[525] Management's Discussion and Analysis of Financial Condition and Results of Operations Talaris reported a net loss of $73.9 million in 2022, driven by increased R&D and G&A expenses, but expects R&D to decrease post-trial discontinuations, with $181.3 million in cash deemed sufficient for the next twelve months Financial Metric (in thousands) | Financial Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Research and development | $57,005 | $34,245 | $22,760 | | General and administrative | $19,472 | $13,262 | $6,210 | | Total operating expenses | $76,477 | $47,507 | $28,970 | | Net loss | $(73,894) | $(47,833) | $(26,061) | - The $22.8 million increase in R&D expenses in 2022 was driven by a $10.3 million rise in personnel costs, a $7.1 million increase in direct clinical trial expenses for the FREEDOM programs, and a $5.3 million increase in external consulting and medical affairs costs[558][559][560] - As of December 31, 2022, the company had $181.3 million in cash, cash equivalents, and marketable securities, which management believes is sufficient to fund operations and capital expenditures for more than twelve months[540][564] - Net cash used in operating activities increased to $60.9 million in 2022 from $40.0 million in 2021, primarily due to the higher net loss[569][570] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity on its cash and marketable securities, with minimal exposure to foreign currency or material inflation impact - The company's main market risk is interest rate sensitivity on its cash and marketable securities ($181.3 million as of Dec 31, 2022), where a 100 basis point change in interest rates is not expected to materially affect the portfolio's fair value[596] - The company has minimal exposure to foreign currency risk and does not believe inflation had a material effect on its business in 2021 or 2022[597][598] Financial Statements and Supplementary Data This section presents the company's audited financial statements for 2021 and 2022, including balance sheets, statements of operations, stockholders' equity, and cash flows, with accompanying notes Balance Sheet (in thousands) | Balance Sheet (in thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $13,670 | $18,614 | | Marketable securities | $167,612 | $225,357 | | Total Assets | $193,715 | $251,422 | | Total Liabilities | $13,660 | $8,613 | | Total Stockholders' Equity | $180,055 | $242,809 | Statement of Operations (in thousands) | Statement of Operations (in thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Research and development | $57,005 | $34,245 | | General and administrative | $19,472 | $13,262 | | Loss from operations | $(76,477) | $(47,507) | | Net loss | $(73,894) | $(47,833) | | Net loss per share | $(1.79) | $(1.64) | Controls and Procedures As of December 31, 2022, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[603] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[605] Other Information On March 30, 2023, the company amended its Executive Severance and Change in Control Plan, clarifying the "change in control" definition and period timing - On March 30, 2023, the company amended its Executive Severance and Change in Control Plan[608] - The amendment clarifies the definition of "change in control" and modifies the "change in control period" to begin three months prior to the announcement of a relevant transaction or liquidation plan[609][610] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the company's forthcoming 2023 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees (Item 14) is incorporated by reference from the company's forthcoming 2023 proxy statement[615][617][618] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and officer certifications, with financial statement schedules omitted - Lists all exhibits filed with the annual report, including the Certificate of Incorporation, Bylaws, material contracts, and executive certifications[624] Form 10-K Summary The company has elected not to include a summary of the Form 10-K - The Company has elected not to include summary information[627]