The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and the accompanying notes to the financial statements and other disclosures included in this report (including the "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report and the "Risk Factors" section in Part II, Item 1A of this report).
We are a commercial-stage biotechnology company that discovers novel, oral, small-molecule medicines. We focus on oral treatments for rare diseases in which significant unmet medical needs exist and an enzyme plays the key role in the biological pathway of the disease. We integrate the disciplines of biology, crystallography, medicinal chemistry, and computer modeling to discover and develop small molecule pharmaceuticals through the process known as structure-guided drug design. In addition to these discovery and development efforts, our business strategy includes the efficient commercialization of these drugs in
the United Statesand certain other regions upon regulatory approval. By focusing on rare disease markets, we believe that we can more effectively control the costs of, and our strategic allocation of financial resources toward, post-approval commercialization.
Products and product candidates
ORLADEYO® (berotralstat). ORLADEYO is an oral, once-daily therapy discovered and developed by us for the prevention of hereditary angioedema ("HAE") attacks. ORLADEYO is approved in
the United Statesand multiple global markets for the prevention of HAE attacks in adults and pediatric patients 12 years and older. We built out our U.S.commercial infrastructure in 2020 to support the launch of ORLADEYO in the United Statesand are continuing to build our commercial infrastructure to support additional launches in Europeand elsewhere. Based on proprietary analyses of HAE prevalence and market research studies with HAE patients, physicians, and payors in the United Statesand Europe, and our first full year of experience with the ORLADEYO launch in 2021, we anticipate the commercial market for ORLADEYO has the potential to reach a global peak of $1 billionin annual net ORLADEYO revenues. We expect at least 70 to 80 percent of our revenue at peak to come from the United States. These expectations are subject to numerous risks and uncertainties that may cause our actual results, performance, or achievements to be materially different. There can be no assurance that our commercialization methods and strategies will succeed, or that the market for ORLADEYO will develop in line with our current expectations. See "Risk Factors-Risks Relating to Our Business-Risks Relating to Drug Development and Commercialization-There can be no assurance that our or our partners' commercialization efforts, methods, and strategies for our products or technologies will succeed, and our future revenue generation is uncertain" in Part II, Item 1A of this report for further discussion of these risks. Revenue from sales of ORLADEYO for the three and nine months ended September 30, 2022is discussed under "Results of Operations" in this MD&A, and expected ORLADEYO revenue for 2022 is discussed under "Financial Outlook for 2022" in this MD&A. Revenue from sales of ORLADEYO in future periods is subject to uncertainties and will depend on several factors, including the success of our and our partners' commercialization efforts in the United Statesand elsewhere, the number of new patients switching to ORLADEYO, patient retention and demand, the number of physicians prescribing ORLADEYO, the rate of monthly prescriptions, reimbursement from third-party and government payors, the conversion of patients from our clinical trials and early access programs to commercial customers, our pricing strategy, and market trends. We are continuing to monitor and analyze this data as we continue to commercialize ORLADEYO. Complement Program. The goal of our overall complement program is to advance several oral compounds across multiple pathways in the complement system to treat many complement-mediated diseases. These compounds include BCX9930 and BCX10013, which target the alternative pathway of complement. In addition, we are pursuing oral medicines directed at other targets across the classical, lectin, and terminal pathways of the complement system. BCX9930 is a novel, oral, potent, and selective small molecule inhibitor of Factor D discovered by us and in clinical development for the treatment of complement-mediated diseases. Based on the safety and proof-of-concept data generated in patients with paroxysmal nocturnal hemoglobinuria ("PNH"), the program has advanced to pivotal studies of oral BCX9930 in PNH and to a proof-of-concept trial of oral BCX9930 in three renal complement-mediated diseases, C3 glomerulopathy ("C3G"), IgA nephropathy ("IgAN"), and primary membranous nephropathy ("PMN"). The goal of the program is to develop oral BCX9930 as a monotherapy for complement-mediated diseases. Refer to the "Recent Developments" section below for updates on the BCX9930 program. Refer also to "Risk Factors-Risks Relating to Our Business-Risks Relating to Drug Development and Commercialization-Our success depends upon our ability to manage our product candidate pipeline, advance our product candidates through the various stages of development, especially 29
through the clinical trial process, and to receive regulatory approval for the commercial sale of our product candidates" in Part II, Item 1A of this report for a discussion of certain risks and uncertainties associated with our BCX9930 program. There can be no assurance that our development plan for the program will succeed. BCX10013 is a novel, potent, and specific Factor D inhibitor. The preclinical and early clinical profile from approximately 90 healthy volunteers to date suggests BCX10013 could have the properties of a once-daily oral therapy, and we expect to report preliminary data from healthy volunteers in the first quarter of 2023. A goal of the ongoing clinical program is to confirm this once-daily profile with healthy volunteer and patient data. Galidesivir. Galidesivir is a broad-spectrum antiviral ("BSAV") that has been shown to be active against more than 20 RNA viruses in nine different families. The objective of our BSAV program is to develop galidesivir as a broad-spectrum therapeutic for viruses that pose a threat to national health and security. The primary focus of the program is treatment of hemorrhagic fever viruses. The galidesivir program has been substantially funded with federal funds from the
National Institute of Allergy and Infectious Diseaseswithin the U.S. Department of Health and Human Services("NIAID/HHS") and by the Biomedical Advanced Research and Development Authoritywithin the HHS ("BARDA/HHS"). Refer to the "Recent Developments" section below for updates on the galidesivir program, including the expected expiration of government funding for galidesivir in 2022. The Company has no plans to continue the galidesivir program without government funding. BCX9250. The goal of our activin receptor-like kinase-2 inhibitor program is to discover and develop orally administered kinase inhibitor drug candidates that are able to slow or prevent the irregular formation of bone outside the normal skeleton, also known as heterotopic ossification ("HO"), that affects patients with fibrodysplasia ossificans progressiva ("FOP"). In a phase 1 clinical trial in healthy volunteers, BCX9250 was safe and well tolerated at all doses studied, with linear and dose-proportional exposure supporting once-daily dosing. Refer to the "Recent Developments" section below for updates on the BCX9250 program, including our decision to stop the BCX9250 program and redirect the investment to the other opportunities we have to serve patients with complement-mediated diseases. RAPIVAB®/RAPIACTA®/PERAMIFLU® (peramivir injection). RAPIVAB (peramivir injection) is approved in the United Statesfor the treatment of acute uncomplicated influenza for patients six months and older. Peramivir injection is also approved in Canada(RAPIVAB), Australia(RAPIVAB), Japan(RAPIACTA), Taiwan(RAPIACTA), and Korea(PERAMIFLU).
Income and expenses
Our revenues are difficult to predict and depend on several factors, including those discussed in the "Risk Factors" section in Part II, Item 1A of this report. For example, our revenues depend, in part, on regulatory approval decisions for our products and product candidates, the effectiveness of our and our collaborative partners' commercialization efforts, market acceptance of our products, particularly ORLADEYO, the resources dedicated to our products and product candidates by us and our collaborative partners, and ongoing discussions with government agencies regarding contract awards for development and procurement, as well as entering into or modifying licensing agreements for our product candidates. Furthermore, revenues related to our collaborative development activities are dependent upon the progress toward, and the achievement of, developmental milestones by us or our collaborative partners. Our operating expenses are also difficult to predict and depend on several factors, including research and development expenses (and whether these expenses are reimbursable under government contracts), drug manufacturing, clinical research activities, the ongoing requirements of our development programs, the costs of commercialization, the availability of capital and direction from regulatory agencies, which are difficult to predict, and the factors discussed in the "Risk Factors" section in Part II, Item 1A of this report. Management may be able to control the timing and level of research and development and selling, general and administrative expenses, but many of these expenditures will occur irrespective of our actions due to contractually committed activities and/or payments. As a result of these factors, we believe that period-to-period comparisons are not necessarily meaningful, and you should not rely on them as an indication of future performance. Due to the foregoing factors, it is possible that our operating results will be below the expectations of market analysts and investors. In such event, the prevailing market price of our common stock could be materially adversely affected.
Significant Accounting Policies and Estimates
The accompanying discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements and related information, which have been prepared in accordance with accounting standards
principles generally accepted in
the United States(" U.S.GAAP"). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, judgments and the policies underlying these estimates on a periodic basis, as situations change, and regularly discuss financial events, policies, and issues with members of our audit committee and our independent registered public accounting firm. In particular, we routinely evaluate our estimates and policies regarding revenue recognition, administration, inventory and manufacturing, taxes, stock-based compensation, research and development, consulting and other expenses and any associated liabilities. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See "Critical Accounting Policies" at the end of this MD&A for a description of accounting policies that we believe are the most critical to aid you in fully understanding and evaluating our reported financial results and that affect the more significant judgments and estimates that we use in the preparation of our financial statements.
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility in financial markets. To date, our financial condition, results of operations, and liquidity have not been materially impacted by the direct effects of the COVID-19 pandemic. Please refer to "Risk Factors-Risks Relating to Our Business-Risks Relating to COVID-19" in Part II, Item 1A of this report for a discussion of COVID-19 risks as they relate to our business. We are continuing to monitor developments with respect to the COVID-19 pandemic and to make adjustments as needed to assist in protecting the safety of our employees and communities while continuing our business activities. Our remote working arrangements continue to be flexible where it is both practical and possible for the business. Business-related travel has resumed, and we will continue to monitor developments with respect to COVID-19 going forward. To date, implementation of specific COVID-19 measures has not required material expenditures or significantly impacted our ability to operate our business or our internal control over financial reporting and disclosure controls and procedures. We continue to monitor the potential impacts of COVID-19 on our operations and those of our partners, suppliers, customers, and regulators.
July 1, 2022, we announced new long-term efficacy and safety data from the APeX-2 and APeX-S clinical trials evaluating ORLADEYO for the prophylactic treatment of HAE showing sustained reductions in attack rates and improvement in quality of life among patients living with HAE, as well as improved management of symptoms after switching to ORLADEYO from an injectable long-term prophylactic treatment.
August 4, 2022, we announced that the FDA lifted its partial clinical hold on the BCX9930 program and that we will resume enrollment in global clinical trials under revised protocols at a reduced dose of 400 mg twice-daily of BCX9930. This includes the REDEEM-1 and REDEEM-2 pivotal trials in patients with PNH and the RENEW proof-of-concept trial in patients with C3G, IgAN, and PMN. Clinical evidence and recent laboratory and nonclinical studies have informed our hypothesis that crystals form in the kidneys of some patients. We believe that lowering the dose to 400 mg and ensuring adequate hydration will dilute the concentration of drug in the urine below the threshold where crystals can form. Our goal is to find a safe and effective dose for BCX9930. We expect this can be accomplished in a reasonable timeframe after resuming enrollment, in a relatively small number of patients given the rate and timing of the serum creatinine rises in patients prior to the enrollment pause. If successful, we plan to invest more significantly in BCX9930 to tap the full potential of reaching many patients suffering from a number of alternative pathway diseases, and, if not successful, we will stop investment in BCX9930 and move on to other molecules in the pipeline. 31
November 1, 2022, we announced that screening has begun for new patients to participate in the clinical trials with BCX9930, and we expect to have data from approximately 15 newly-enrolled patients by the middle of 2023 to inform our decision to either fully invest in the pivotal program, or to discontinue the BCX9930 program. BCX10013 On November 1, 2022, we announced that we have begun a clinical program with BCX10013, a novel, potent, and specific Factor D inhibitor, and we expect to report preliminary data from healthy volunteers in the first quarter of 2023. The preclinical and early clinical profile from approximately 90 healthy volunteers to date suggests BCX10013 could have the properties of a once-daily oral therapy. A goal of the ongoing clinical program is to confirm this once-daily profile with healthy volunteer and patient data.
Additional complement targets
November 1, 2022, we announced that, in addition to BCX9930 and BCX10013, which target the alternative pathway of complement, we are pursuing oral medicines directed at other targets across the classical, lectin and terminal pathways of the complement system. The goal of our overall complement program is to advance several oral compounds across multiple pathways in the complement system to treat many complement-mediated diseases.
We previously disclosed that we are commencing the close out of our
September 2013galidesivir contract with NIAID/HHS. On August 25, 2022, we announced that our other government funding for galidesivir is expected to expire in 2022 and that we have no plans to continue the galidesivir program without government funding.
Progressive fibrodysplasia ossificans
November 1, 2022, we announced that we believe that patients with FOP, an ultra-rare disease, are likely to benefit from other oral ALK-2 inhibitors that currently are substantially ahead of BCX9250 in development. Considering the expectation that patients will be well-served by these other products, and the approximately $100 millionin additional investment that would be required to advance BCX9250 to approval, we are stopping the BCX9250 program and redirecting this investment to the other opportunities we have to serve patients with complement-mediated diseases.
RAPIVAB (peramivir injection)
August 25, 2022, we announced that the U.S. Department of Health and Human Serviceshas exercised its option to purchase an additional 10,000 doses of RAPIVAB for $6.9 million. The order is the final of five purchase options from a $34.7 millioncontract the Centers for Disease Control and Preventionawarded in 2018 for the procurement of up to 50,000 doses of RAPIVAB over a five-year period.
Results of operations (three months ended
For the three months ended
September 30, 2022, total revenues were $75.8 millionas compared to $41.0 millionfor the three months ended September 30, 2021. The increase was primarily due to ORLADEYO net revenue, including royalties, of $66.0 million, an increase of $29.0 million. RAPIVAB revenue increased $4.5 millionfor the three months ended September 30, 2022due to a stockpiling sale of 10,000 units to HHS for $6.9 millionas compared to a partial delivery of 3,420 units of RAPIVAB for $2.4 millionfor the same period in the prior year. Additionally, there was an increase in peramivir revenue of $2.9 millionon a sale to one of our partners for the three months ended September 30, 2022. Contract revenue for the three months ended September 30, 2022decreased $1.5 millioncompared to the same period in the prior year as existing contracts continue to close out. Cost of product sales for the three months ended September 30, 2022and 2021 was $3.5 millionand $0.6 million, respectively. The cost of product sales in 2022 was primarily associated with the peramivir product sales to our partners and the RAPIVAB stockpiling sale to HHS whereas the cost of product sales in 2021 relates primarily to the partial RAPIVAB stockpiling sale to HHS. Research and development ("R&D") expenses increased to $52.7 millionfor the three months ended September 30, 2022from $50.0 millionfor the three months ended September 30, 2021, primarily due to additional investment in the berotralstat program and expenses for BCX9250 prior to its discontinuation, partially offset by a reduction in spend on the 32
Factor D program, primarily BCX9930, as a result of the paused enrollment in clinical trials with BCX9930 that we announced on
April 8, 2022. On August 4, 2022, it was announced that we would resume enrollment for the BCX9930 program. The following table summarizes our R&D expenses for the periods indicated (amounts are in thousands). Certain prior period amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the total R&D expenses. Three Months Ended September 30, 2022 2021 R&D expenses by program: Factor D program $ 22,108 $ 33,089Berotralstat 9,339 6,821 FOP 7,245 600 Galidesivir 226 390 Peramivir 106 191 Other research, preclinical and development costs 13,716 8,880 Total R&D expenses $ 52,740 $ 49,971Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2022were $36.9 millioncompared to $35.0 millionin the three months ended September 30, 2021. The increase was primarily due to increased investment to support the U.S.commercial launch of ORLADEYO and the expansion of international operations. SG&A expenses for the three months ended September 30, 2021included a one-time non-cash stock compensation charge of $7.0 millionin connection with the accelerated vesting of certain outstanding stock options. Interest expense for the three months ended September 30, 2022was $24.8 millioncompared to $14.1 millionfor the three months ended September 30, 2021. The increase in interest expense was primarily associated with the sale of certain royalty payments under the 2021 RPI Royalty Purchase Agreement and the OMERS Royalty Purchase Agreement, which were entered into in November 2021, as well as the additional borrowing of $75.0 millionby way of the Term B and Term C Loans under the Credit Agreement, which were funded on July 29, 2022. The nature of the royalty sales requires that we recognize a liability (the "Royalty Financing Obligations") for the future sale of royalties under these agreements. These liabilities are amortized using the effective interest rate method, resulting in the recognition of non-cash interest expense over the estimated term of the Royalty Purchase Agreements (as defined in "Note 6-Royalty Monetizations-ORLADEYO and Factor D Inhibitors" in the Notes to Consolidated Financial Statements in Part I, Item 1 of this report). Interest expense for the three months ended September 30, 2022included $18.5 millionof non-cash interest expense due to the amortization of interest associated with the Royalty Financing Obligations and $6.3 millionof interest expense, net of deferred financing amortization, associated with the borrowings under the Credit Agreement. Interest expense for the three months ended September 30, 2021included $8.5 millionof non-cash interest expense due to the amortization of interest associated with the Royalty Financing Obligation under the 2020 RPI Royalty Purchase Agreement and $3.9 millionof interest expense, net of deferred financing amortization, associated with the Term A Loan under the Credit Agreement. Additionally, we recognized $1.7 millionin interest expense on the non-recourse PhaRMA Notes issued in March 2011, which were written-off in December 2021. For the three months ended September 30, 2022, other income, net of $1.2 millionwas comprised primarily of interest income of $1.8 millionand net foreign currency losses of $0.5 million. Other expense for the three months ended September 30, 2021was primarily related to net foreign currency losses of $0.1 million.
Results of operations (nine months ended
For the nine months ended
September 30, 2022, total revenues were $191.3 millionas compared to $110.0 millionfor the nine months ended September 30, 2021. The increase was primarily due to ORLADEYO net revenue, including royalties, of $180.9 million, an increase of $104.5 million. Additionally, other royalties increased $0.9 millionfor the nine months ended September 30, 2022as compared to the nine months ended September 30, 2021. These increases were partially offset by a decrease in peramivir revenue of $4.4 millionon sales to our partners. Additionally, a $15.0 million33
milestone payment related to NHI approval of ORLADEYO in
Cost of product sales for the nine months ended
September 30, 2022and 2021 was $4.0 millionand $6.8 million, respectively. The cost of product sales in both 2022 and 2021 was primarily associated with the peramivir product sales to our partners and RAPIVAB stockpiling sales to HHS. For the nine months ended September 30, 2021, sales of peramivir were higher than for the nine months ended September 30, 2022. R&D expenses increased to $180.1 millionfor the nine months ended September 30, 2022from $145.3 millionfor the nine months ended September 30, 2021, primarily due to increased investment in the development of the Factor D program (including BCX9930 and BCX10013), the FOP program, as well as other research, preclinical and development costs. The following table summarizes our R&D expenses for the periods indicated (amounts are in thousands). Certain prior period amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the total R&D expenses. Nine Months Ended September 30, 2022 2021 R&D expenses by program: Factor D program $ 102,799 $ 90,420Berotralstat 23,028 24,472 FOP 14,937 1,621 Galidesivir 1,146 4,309 Peramivir 627 745 Other research, preclinical and development costs 37,553 23,712 Total R&D expenses $ 180,090 $ 145,279SG&A expenses for the nine months ended September 30, 2022were $109.2 millioncompared to $83.4 millionin the nine months ended September 30, 2021. The increase was primarily due to increased investment to support the U.S.commercial launch of ORLADEYO and the expansion of international operations. SG&A expenses for the nine months ended September 30, 2021included a one-time non-cash stock compensation charge of $7.0 millionin connection with the accelerated vesting of certain outstanding stock options. Interest expense for the nine months ended September 30, 2022was $72.6 millioncompared to $40.5 millionfor the nine months ended September 30, 2021. The increase in interest expense was primarily associated with the sale of certain royalty payments under the 2021 RPI Royalty Purchase Agreement and the OMERS Royalty Purchase Agreement, which were entered into in November 2021, as well as the additional borrowing of $75.0 millionby way of the Term B and Term C Loans under the Credit Agreement, which were funded on July 29, 2022. The nature of the royalty sales requires that we recognize the Royalty Financing Obligations for the future sale of royalties under these agreements. These liabilities are amortized using the effective interest rate method, resulting in the recognition of non-cash interest expense over the estimated term of the Royalty Purchase Agreements. Interest expense for the nine months ended September 30, 2022included $57.8 millionof non-cash interest expense due to the amortization of interest associated with the Royalty Financing Obligations and $14.7 millionof interest expense, net of deferred financing amortization, associated with the borrowings under the Credit Agreement. Interest expense for the nine months ended September 30, 2021included $24.1 millionof non-cash interest expense due to the amortization of interest associated with the Royalty Financing Obligation under the 2020 RPI Royalty Purchase Agreement and $11.4 millionof interest expense, net of deferred financing amortization, associated with the Term A Loan under the Credit Agreement. Additionally, we recognized $4.9 millionin interest expense on the non-recourse PhaRMA Notes issued in March 2011, which were written-off in December 2021. For the nine months ended September 30, 2022, other income, net of $1.8 millionwas comprised of interest income of $2.4 million, partially offset by net foreign currency losses of $0.6 million. Other expense for the nine months ended September 30, 2021was primarily related to net foreign currency losses of $0.3 million. 34
Cash and capital resources
Our operations have principally been funded through public offerings and private placements of equity securities; cash from collaborative and other research and development agreements, including
U.S. Governmentcontracts for RAPIVAB and galidesivir; to a lesser extent, the PhaRMA Notes financing; our credit facilities; and more recently, the Royalty Sales and revenues from ORLADEYO. To date, we have been awarded a BARDA/HHS RAPIVAB development contract totaling $234.8 million, which expired on June 30, 2014; a NIAID/HHS galidesivir development contract totaling $47.3 million, which is in the process of being closed out; a second NIAID/HHS galidesivir development contract with a potential value totaling $43.9 million; and a BARDA/HHS galidesivir development contract with a potential value totaling $39.1 million. The total amount of funding obligated under awarded options under the active NIAID/HHS and BARDA/HHS galidesivir contracts is $53.6 millionand $20.6 million, respectively. All government funding for galidesivir is expected to expire in 2022. In addition to the above, we have previously received funding from other sources, including other collaborative and other research and development agreements, government grants, equipment lease financing, facility leases, research grants, and interest income on our investments. Our Credit Agreement with Athyrium provides for three term loans. We received the proceeds from the $125.0 millionTerm A Loan in December 2020. The Term B Loan and the Term C Loan were both funded in the respective principal amounts of $25.0 millionand $50.0 millionon July 29, 2022. The maturity date of the Credit Agreement is December 7, 2025. See "Note 7-Debt-Credit Agreement" in the Notes to Consolidated Financial Statements in Part I, Item 1 of this report for additional information about the Credit Agreement.
We intend to contain costs and cash flow requirements by closely managing our third-party costs and headcount, leasing scientific equipment and facilities, contracting with other parties to conduct certain research and development projects, and using consultants. We expect to incur additional expenses, potentially resulting in significant losses, as we continue to pursue our research and development activities, commercialize ORLADEYO, and hire additional personnel. We may incur additional expenses related to the filing, prosecution, maintenance, defense, and enforcement of patent and other intellectual property claims and additional regulatory costs as our clinical programs advance through later stages of development. The objective of our investment policy is to ensure the safety and preservation of invested funds, as well as to maintain liquidity sufficient to meet cash flow requirements. We place our excess cash with high credit quality financial institutions, commercial companies, and government agencies in order to limit the amount of our credit exposure. We have not realized any significant losses on our investments.
We plan to fund our short-term and long-term needs primarily from the following:
•lease, royalty, or loan financing and future public or private equity and/or debt financing; •our existing capital resources and interest earned on that capital; •revenues from product sales; •payments under existing, and executing new, contracts with the
U.S. Government; and •payments under current or future collaborative and licensing agreements with corporate partners. As our commercialization activities and research and development programs continue to advance, our costs will increase. Our current and planned clinical trials, plus the related development, manufacturing, regulatory approval process requirements, and additional personnel resources and testing required for the continuing development of our product candidates and the commercialization of our products will consume significant capital resources and will increase our expenses. Our expenses, revenues and cash utilization rate could vary significantly depending on many factors, including our ability to raise additional capital, the development progress of our collaborative agreements for our product candidates, the amount of funding or assistance, if any, we receive from new U.S. Governmentcontracts or other new partnerships with third parties for the development and/or commercialization of our products and product candidates, the progress and results of our current and proposed clinical trials for our most advanced product candidates, the progress made in the manufacturing of our lead product candidates, the success of our commercialization efforts for, and market acceptance of, our products, and the overall progression of our other programs. The impact of the ongoing COVID-19 pandemic on one or more of the foregoing factors could negatively affect our expenses, revenues, and cash utilization rate. 35
Based on our expectations for revenue and operating expenses, we believe our financial resources will be sufficient to fund our operations for at least the next 12 months. However, we have sustained operating losses for the majority of our corporate history and expect that our 2022 expenses will exceed our 2022 revenues. We expect to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoing operations. Our liquidity needs will be largely determined by the success of operations in regard to the successful commercialization of our products and the future progression of our product candidates. We regularly evaluate other opportunities to fund future operations, including: (1) securing or increasing
U.S. Governmentfunding of our programs, including obtaining procurement contracts; (2) out-licensing rights to certain of our products or product candidates, pursuant to which we would receive cash milestone payments; (3) raising additional capital through equity or debt financings or from other sources, including royalty or other monetization transactions; (4) obtaining additional product candidate regulatory approvals, which would generate revenue, milestone payments and cash flow; (5) reducing spending on one or more research and development programs, including by discontinuing development; and/or (6) restructuring operations to change our overhead structure. We may issue securities, including common stock, preferred stock, depositary shares, purchase contracts, warrants, debt securities, and units, through private placement transactions or registered public offerings. Our future liquidity needs, and our ability to address those needs, will largely be determined by the success of our products and product candidates; the timing, scope, and magnitude of our research and development and commercial expenses; and key developments and regulatory events and our decisions in the future.
Our long-term capital requirements and the adequacy of our short-term and long-term available funds will depend on many factors, including:
•market acceptance of approved products and successful commercialization of such products by either us or our partners; •our ability to perform under our government contracts and to receive reimbursement and stockpiling procurement contracts; •the magnitude of work under our government contracts; •the progress and magnitude of our research, drug discovery and development programs; •changes in existing collaborative relationships or government contracts; •our ability to establish additional collaborative relationships with academic institutions, biotechnology or pharmaceutical companies and governmental agencies or other third parties; •the extent to which our partners, including governmental agencies, will share in the costs associated with the development of our programs or run the development programs themselves; •our ability to negotiate favorable development and marketing strategic alliances for certain products and product candidates; •any decision to build or expand internal development and commercial capabilities; •the scope and results of preclinical studies and clinical trials to identify and develop product candidates; •our ability to engage sites and enroll subjects in our clinical trials; •the scope of manufacturing of our products to support our commercial operations and of our product candidates to support our preclinical research and clinical trials; •increases in personnel and related costs to support the development and commercialization of our products and product candidates; •the scope of manufacturing of our drug substance and product candidates required for future new drug application ("NDA") filings; •competitive and technological advances; •the time and costs involved in obtaining regulatory approvals; •post-approval commitments for ORLADEYO, RAPIVAB, and other products that receive regulatory approval; and •the costs involved in all aspects of intellectual property strategy and protection, including the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims. We expect that we will be required to raise additional capital to complete the development and commercialization of our current products and product candidates, and we may seek to raise capital in the future, including to take advantage of favorable opportunities in the capital markets. Additional funding, whether through additional sales of equity or debt securities, collaborative or other arrangements with corporate partners or from other sources, including governmental agencies in general and existing government contracts specifically, may not be available when needed or on terms acceptable to us. The issuance of preferred or common stock or convertible securities, with terms and prices significantly more favorable than those of the currently outstanding common stock, could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. In addition, collaborative arrangements may require us to transfer certain material rights to such corporate partners. Insufficient funds may require us to delay, scale back or 36
eliminate certain of our research and development programs. Our future working capital requirements, including the need for additional working capital, will be largely determined by the advancement of our portfolio of product candidates and the commercialization of ORLADEYO, as well as any future decisions regarding the future of the RAPIVAB and galidesivir programs, including those relating to stockpiling procurement. More specifically, our working capital requirements will be dependent on the number, magnitude, scope and timing of our development programs; regulatory approval of our product candidates; obtaining funding from collaborative partners; the cost, timing and outcome of regulatory reviews, regulatory investigations, and changes in regulatory requirements; the costs of obtaining patent protection for our product candidates; the timing and terms of business development activities; the rate of technological advances relevant to our operations; the efficiency of manufacturing processes developed on our behalf by third parties; the timing, scope and magnitude of commercial spending; and the level of required administrative support for our daily operations. The restrictive covenants contained in our Credit Agreement could cause us to be unable to pursue business opportunities that we or our stockholders may consider beneficial without the lenders' permission or without repaying all obligations outstanding under the Credit Agreement. These covenants limit our ability to, among other things, grant certain types of liens on our assets; make certain investments; incur or assume certain debt; engage in certain mergers, acquisitions, and similar transactions; dispose of assets; license certain property; distribute dividends; make certain restricted payments; change the nature of our business; engage in transactions with affiliates and insiders; prepay other indebtedness; or engage in sale and leaseback transactions. A breach of any of these covenants could result in an event of default under the Credit Agreement. As of
September 30, 2022, we were in compliance with the covenants under the Credit Agreement.
Financial outlook for 2022
Based on the reduced spending on the BCX9930 program in the first three quarters of the year, and lower than projected spending on the program for the remainder of the year, we now expect operating expenses for full year 2022, not including non-cash stock compensation, to be between
$365 millionand $370 million.
Critical accounting policies
We have established various accounting policies that govern the application of
U.S.GAAP, which were utilized in the preparation of our consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations. While our significant accounting policies are more fully described in "Note 1-Significant Accounting Policies and Concentrations of Risk" in the Notes to Consolidated Financial Statements in Part I, Item 1 of this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Pursuant to Accounting Standards Codification ("ASC") Topic 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, Topic 606 includes provisions within a five step model that includes (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations, and (v) recognizing revenue when, or as, an entity satisfies a performance obligation. At contract inception, we identify the goods or services promised within each contract, assess whether each promised good or service is distinct, and determine those that are performance obligations. We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied. 37
Product sales, net
Our principal sources of product sales are sales of ORLADEYO, which we began shipping to patients in
December 2020, sales of peramivir to our licensing partners and sales of RAPIVAB to HHS under our procurement contract. In the United States, we ship ORLADEYO directly to patients through a single specialty pharmacy, which is considered our customer. In the European Union, United Kingdomand elsewhere, we sell ORLADEYO to specialty distributors as well as hospitals and pharmacies, which collectively are considered our customers. We recognize revenue for sales when our customers obtain control of the product, which generally occurs upon delivery. For ORLADEYO, we classify payments to our specialty pharmacy customer for certain services provided by our customer as selling, general and administrative expenses to the extent such services provided are determined to be distinct from the sale of our product. Net revenue from sales of ORLADEYO is recorded at net selling price (transaction price), which includes estimates of variable consideration for which reserves are established for (i) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates, (ii) estimated chargebacks, (iii) estimated costs of co-payment assistance programs and (iv) product returns. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or as a current liability. Overall, these reserves reflect our best estimates of the amount of consideration to which the Company is entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from estimates, we adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. Government and Managed Care Rebates. We contract with government agencies and managed care organizations or, collectively, third-party payors, so that ORLADEYO will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. We estimate the rebates we will provide to third-party payors and deduct these estimated amounts from total gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. We estimate the rebates that we will provide to third-party payors based upon (i) our contracts with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) product distribution information obtained from our specialty pharmacy. Chargebacks. Chargebacks are discounts that occur when certain contracted customers, pharmacy benefit managers, insurance companies, and government programs purchase directly from our specialty pharmacy. These customers purchase our products under contracts negotiated between them and our specialty pharmacy. The specialty pharmacy, in turn, charges back to us the difference between the price the specialty pharmacy paid and the negotiated price paid by the contracted customers, which may be higher or lower than the specialty pharmacy purchase price with us. We estimate chargebacks and adjust gross product revenues and accounts receivable based on the estimates at the time revenues are recognized. Co-payment assistance and patient assistance programs. Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Based upon the terms of the program and co-payment assistance utilization reports received from the specialty pharmacy, we are able to estimate the co-payment assistance amounts, which are recorded in the same period in which the related revenue is recognized, resulting in a reduction of product revenue. We also offer a patient assistance program that provides free drug product, for a limited period of time, to allow a patient's insurance coverage to be established. Based on patient assistance program utilization reports provided by the specialty pharmacy, we record gross revenue of the product provided and a full reduction of the revenue amount for the free drug discount. Product returns. We do not provide contractual return rights to our customers, except in instances where the product is damaged or defective. Non-acceptance by the patient of shipped drug product by the specialty pharmacy is reflected as a reversal of sales in the period in which the sales were originally recorded. Reserves for estimated non-acceptances by patients are recorded as a reduction of revenue in the period that the related revenue is recognized, as well as a reduction to accounts receivable. Estimates of non-acceptance are based on quantitative information provided by the specialty pharmacy. 38
We recognize revenue when we satisfy a performance obligation by transferring promised goods or services to a customer. Revenue is measured at the transaction price that is based on the amount of consideration that we expect to receive in exchange for transferring the promised goods or services to the customer. The transaction price includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur.
We have collaboration and licensing agreements with a number of third parties as well as research and development agreements with certain government entities.
Our main sources of revenue from these collaboration agreements and other research and development agreements are license, service and royalty income.
Revenue from license fees, royalty payments, milestone payments, and research and development fees are recognized as revenue when the earnings process is complete and we have no further continuing performance obligations or we have completed the performance obligations under the terms of the agreement. Arrangements that involve the delivery of more than one performance obligation are initially evaluated as to whether the intellectual property licenses granted by us represent distinct performance obligations. If they are determined to be distinct, the value of the intellectual property licenses would be recognized up-front while the research and development service fees would be recognized as the performance obligations are satisfied. For performance obligations based on services performed, we measure progress using an input method based on the effort we expend or costs we incur toward the satisfaction of the performance obligation in relation to the total estimated effort or costs. Variable consideration is assessed at each reporting period as to whether it is not subject to significant future reversal and, therefore, should be included in the transaction price at the inception of the contract. If a contract includes a fixed or minimum amount of research and development support, this also would be included in the transaction price. Changes to collaborations, such as the extensions of the research term or increasing the number of targets or technology covered under an existing agreement, are assessed for whether they represent a modification or should be accounted for as a new contract. For contracts with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling price using either an adjusted market assessment approach or an expected cost plus margin approach, representing the amount that we believe the market is willing to pay for the product or service. Analyzing the arrangement to identify performance obligations requires the use of judgment, and each may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. Milestone payments are recognized as licensing revenue upon the achievement of specified milestones if (i) the milestone is substantive in nature and the achievement of the milestone was not probable at the inception of the agreement and (ii) we have a right to payment. Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue. Reimbursements received for direct out-of-pocket expenses related to research and development costs are recorded as revenue in the Consolidated Statements of Comprehensive Loss rather than as a reduction in expenses. Under our contracts with BARDA/HHS and NIAID/HHS, revenue is recognized as reimbursable direct and indirect costs are incurred. Under certain of our license agreements, we receive royalty payments based upon our licensees' net sales of covered products. Royalties are recognized at the later of when (i) the subsequent sale or usage occurs; or (ii) the performance obligation to which some or all of the sales-based or usage-based royalty has been satisfied. Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue and billings in excess of revenue recognized (contract liabilities) on the Consolidated Balance Sheets.
Contract assets. Our long-term contracts are billed as work progresses in accordance with the terms and conditions of the contract, either at periodic intervals or upon the achievement of certain milestones. This often results in invoicing
after revenue recognition, resulting in contract assets. Contract assets are generally classified as current assets on the consolidated balance sheets.
Contract liabilities. We often receive cash payments from customers in advance of our performance, resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the Consolidated Balance Sheets based on the timing of when we expect to recognize the revenue.
We may incur direct and indirect costs associated with obtaining a contract. Incremental contract costs that we expect to recover are capitalized and amortized over the expected term of the contract. Non-incremental contract costs and costs that we expect to recover are expensed as incurred.
Our inventories mainly concern ORLADEYO. Additionally, our inventory includes RAPIVAB and peramivir.
We value our inventories at the lower of cost or estimated net realizable value. We determine the cost of our inventories, which includes amounts related to materials, labor, manufacturing overhead and shipping and handling costs on a first-in, first-out (FIFO) basis. Raw materials and work-in-process includes all inventory costs prior to packaging and labeling, including raw material, active product ingredient, and drug product. Finished goods include packaged and labeled products. Our inventories are subject to expiration dating. We regularly evaluate the carrying value of our inventories and provide valuation reserves for any estimated obsolete, short-dated or unmarketable inventories. In addition, we may experience spoilage of our raw materials and supplies. Our determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires us to utilize significant judgment. We expense costs related to the production of inventories as research and development expenses in the period incurred until such time it is believed that future economic benefit is expected to be recognized, which generally is upon receipt of regulatory approval. Upon regulatory approval, we capitalize subsequent costs related to the production of inventories.
We enter into contractual agreements with third-party vendors who provide research and development, manufacturing, distribution, and other services in the ordinary course of business. Some of these contracts are subject to milestone-based invoicing, and services are completed over an extended period of time. We record liabilities under these contractual commitments when we determine an obligation has been incurred. This accrual process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed and estimating the level of service performed and the associated cost when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date based on the facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include (i) fees paid to clinical research organizations ("CROs") in connection with preclinical and toxicology studies and clinical trials; (ii) fees paid to investigative sites in connection with clinical trials; (iii) fees paid to contract manufacturers in connection with the production of our raw materials, drug substance, drug products, and product candidates; and (iv) professional fees. We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of these costs, our actual expenses could differ from our estimates. 40
Research and development costs
Our research and development costs are charged to expense when incurred. Advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as expense when the related goods are delivered or the related services are performed. Research and development expenses include, among other items, personnel costs, including salaries and benefits, manufacturing costs, clinical, regulatory, and toxicology services performed by CROs, materials and supplies, and overhead allocations consisting of various administrative and facilities related costs. Most of our manufacturing and clinical and preclinical studies are performed by third-party CROs. Costs for studies performed by CROs are accrued by us over the service periods specified in the contracts and estimates are adjusted, if required, based upon our ongoing review of the level of services actually performed. Additionally, we have license agreements with third parties, such as
Albert Einstein College of Medicine of Yeshiva University("AECOM"), Industrial Research, Ltd.("IRL"), and the University of Alabama("UAB"), which require fees related to sublicense agreements or maintenance fees. We expense sublicense payments as incurred unless they are related to revenues that have been deferred, in which case the expenses are deferred and recognized over the related revenue recognition period. We expense maintenance payments as incurred. Deferred collaboration expenses represent sublicense payments paid to our academic partners upon receipt of consideration from various commercial partners, and other consideration to our academic partners for modification to existing license agreements. These deferred expenses would not have been incurred without receipt of such payments or modifications from our commercial partners and are being expensed in proportion to the related revenue being recognized. We believe that this accounting treatment appropriately matches expenses with the associated revenue. We group our R&D expenses into two major categories: direct external expenses and indirect expenses. Direct expenses consist of compensation for R&D personnel and costs of outside parties to conduct laboratory studies, develop manufacturing processes and manufacture the product candidate, conduct and manage clinical trials, as well as other costs related to our clinical and preclinical studies. These costs are accumulated and tracked by active program. Indirect expenses consist of lab supplies and services, facility expenses, depreciation of development equipment and other overhead of our research and development efforts. These costs apply to work on non-active product candidates and our discovery research efforts.
All share-based payments, including grants of stock option awards and restricted stock unit awards, are recognized in our Consolidated Statements of Comprehensive Loss based on their fair values. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period of the award. Determining the appropriate fair value model and the related assumptions for the model requires judgment, including estimating the life of an award, the stock price volatility, and the expected term. We utilize the Black-Scholes option-pricing model to value our stock option awards and recognize compensation expense on a straight-line basis over the vesting periods. The estimation of share-based payment awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. In addition, we have outstanding performance-based stock options and restricted stock units for which no compensation expense is recognized until "performance" has occurred. Significant management judgment is also required in determining estimates of future stock price volatility and forfeitures to be used in the valuation of the options. Actual results, and future changes in estimates, may differ substantially from our current estimates.
Obligations to finance interest charges and royalties
The royalty financing obligations are eligible to be repaid based on royalties from net sales of ORLADEYO, BCX9930, and another earlier stage Factor D inhibitor (BCX10013). Interest expense is accrued using the effective interest rate method over the estimated period each of the related liabilities will be paid. This requires us to estimate the total amount of future royalty payments to be generated from product sales over the life of the agreement. We impute interest on the carrying value of each of the royalty financing obligations and record interest expense using an imputed effective interest rate. We reassess the expected royalty payments each reporting period and account for any changes through an adjustment to the effective interest rate on a prospective basis. The assumptions used in determining the expected repayment term of the debt and amortization period of the issuance costs requires that we make estimates that could impact the carrying value of each of the liabilities, as well as the periods over which associated issuance costs will be amortized. A 41
a significant increase or decrease in expected net sales could have a material impact on each of the liability balances, interest expense and repayment terms.
We account for uncertain tax positions in accordance with
U.S.GAAP. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We have recorded a valuation allowance against substantially all potential tax assets, due to uncertainties in our ability to utilize deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable.
Beginning in fiscal 2021, we began accounting for foreign income taxes due to an increased connection in foreign jurisdictions where we historically had no presence.
In addition, starting in 2022, amendments to Section 174 of the Internal Revenue Code of 1986, as amended ("IRC"), will no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. Instead, these IRC Section 174 development costs must now be capitalized and amortized over either a five- or 15-year period, depending on the location of the activities performed. The new amortization period begins with the midpoint of any taxable year that IRC Section 174 costs are first incurred, regardless of whether the expenditures were made prior to or after
July 1, and runs until the midpoint of year five for activities conducted in the United Statesor year 15 in the case of development conducted on foreign soil. As a result of this tax law change, we have recorded a U.S.state tax provision for the nine months ended September 30, 2022.
Recent accounting pronouncements
"Note 1-Significant Accounting Policies and Concentrations of Risk" in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report discusses accounting pronouncements recently issued or proposed but not yet required to be adopted.
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