Constellation Pharmaceuticals (CNST) 10-Q2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

OR

For the transition period from                 to                 

Commission File Number: 001-38584

CONSTELLATION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

(617) 714-0555

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐     No  ☒     

As of April 30, 2021, the registrant had 47,914,690 shares of common stock, $0.0001 par value per share, outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plan, objectives of management and expected market growth are forward-looking statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” and include, among other things:

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures, or investments that we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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Risk Factor Summary:

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Constellation Pharmaceuticals, Inc.

Table of Contents

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

.

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CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1. Nature of the Business and Basis of Presentation

Constellation Pharmaceuticals, Inc. (“Constellation” or the “Company”) is a clinical-stage biopharmaceutical company using its expertise in epigenetics to discover and develop novel therapeutics that address serious unmet medical needs in patients with cancers associated with abnormal gene expression or drug resistance. The Company was incorporated in January 2008 as EpiGenetiX, Inc. under the laws of the State of Delaware. On March 31, 2008, the Company changed its name to Constellation Pharmaceuticals, Inc.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The accompanying financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has funded its operations with the proceeds of sales of convertible preferred stock, payments received in connection with collaboration agreements, borrowings under loan agreements, and proceeds from sales of its common stock in public and private offerings.

The Company has incurred losses since inception, including net losses of $40.1 million for the three months ended March 31, 2021, and $126.4 million for the year ended December 31, 2020. As of March 31, 2021, the Company had an accumulated deficit of $485.8 million. The Company expects to continue to generate operating losses in the foreseeable future. Based on the Company’s current operating plan, the Company expects that its cash, cash equivalents and marketable securities at March 31, 2021, will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the issuance date of the interim financial statements. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding sooner than would otherwise be expected. There can be no assurance that the Company will be able to obtain additional funding on acceptable terms, if at all.

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

2. Summary of Significant Accounting Policies

Unaudited Interim Consolidated Financial Information

The accompanying unaudited condensed consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim consolidated financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Constellation Pharmaceuticals, Inc. and its wholly owned subsidiary, Constellation Securities Corporation. All intercompany transactions and balances of the subsidiary have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2021, and results of operations for the three months ended March 31, 2021 and 2020, stockholders’ equity for the three months ended March 31, 2021 and 2020, and cash flows for the three months ended March 31, 2021 and 2020 have been made. The Company’s results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.

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Concentrations of Credit Risk and of Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains most of its cash, cash equivalents and marketable securities at two accredited financial institutions in amounts that exceed federally insured limits. Cash equivalents are invested in an institutional money market fund. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report other than as noted below.

Cash, Cash Equivalents and Restricted Cash

Cash equivalents consists of highly liquid investments that are readily convertible into cash with original maturities of three months or less from the date of purchase. The Company has a policy of making investments only in government securities or with commercial institutions that have at least an investment grade credit rating.

As of March 31, 2021, the Company classified $3.2 million as restricted cash related to a letter of credit issued as a security deposit in connection with Company's lease of its corporate office facilities (See Note 10). Cash, cash equivalents and restricted cash consists of the following (in thousands):

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities.

Recently adopted accounting pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, or ASU 2019-12, which includes amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, or ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by

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clarifying and amending existing guidance. The new guidance is effective for the Company for annual periods beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Early adoption of the amendments was permitted. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s financial position, results of operations or cash flows.

3. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

Money market funds were valued by the Company using observable inputs that reflect quoted prices for identical assets in active markets. The Company measures its marketable securities at fair value on a recurring basis and classifies those instruments and some cash equivalents within Level 2 of the fair value hierarchy.

During the three months ended March 31, 2021, there were 0 transfers between Level 1 and Level 2.

4. Marketable Securities

The following table summarizes the Company’s marketable securities as of March 31, 2021, and December 31, 2020, respectively (in thousands):

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5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

6. Collaboration Agreement

The Company has a collaboration agreement (the “LLS Agreement”) with the Leukemia and Lymphoma Society, (“LLS”) pursuant to which LLS committed to provide funding to the Company for research and development services, conditional on (i) the achievement of milestones in accordance with the LLS Agreement and (ii) equal funding being provided by the Company. Through December 31, 2020, the Company received funding totaling $7.3 million from LLS upon the achievement of specified milestones, which were recorded as a reduction of research and development expense. There was 0 additional funding received in the three months ended March 31, 2021.  

The LLS Agreement requires the Company to make payments to LLS upon the Company’s achievement of specified milestones that could total up to $25.0 million in aggregate (see Note 11).

7. Debt

On March 20, 2019, the Company entered into a loan agreement with Hercules (the “Loan Agreement”), under a term loan facility, pursuant to which the Company could borrow up to $40.0 million. The Company had borrowed $30.0 million under the Loan Agreement. The term loan bore interest at an annual rate equal to the greater of 8.55% and the prime rate of interest plus 2.55%. The Loan Agreement provided for interest-only payments until April 30, 2021, and repayment of the aggregate outstanding principal balance of the term loan in monthly installments starting on May 1, 2021 and continuing through April 1, 2023 (the “Maturity Date”). In addition, the Company paid a fee of $0.3 million upon closing and were required to pay a fee of 6.35% of the aggregate advances under the Loan Agreement at maturity.

On November 3, 2020, the Company repaid in full all principal, accrued and unpaid interest, fees, costs and expenses owed under the Loan Agreement, in an aggregate amount of approximately $32.2 million.

8. Equity

Preferred Stock

The Company has authorized preferred stock amounting to 5,000,000 shares as of March 31, 2021 and December 31, 2020, respectively. The authorized preferred stock was classified under stockholders’ equity at March 31, 2021 and December 31, 2020.

Common Stock

As of March 31, 2021, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 200,000,000 shares of common stock, $0.0001 par value per share.

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Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the Company’s board of directors. No dividends have been declared or paid by the Company since its inception.

At-the-Market Offering

In August 2019, the Company entered into an Open Market Sale Agreement^SM (the “Open Market Sales Agreement”) with Jefferies LLC (“Jefferies”), under which Jefferies may offer and sell, from time to time, shares of common stock having aggregate gross proceeds of up to $50.0 million. At its option, the Company may sell shares of common stock through Jefferies as its sales agent, with any such sales being made by any method that is deemed an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), or in other transactions pursuant to an effective shelf registration statement on Form S-3. The Company agreed to pay Jefferies a commission of up to 3% of the gross proceeds of any sales of common stock pursuant to the Sales Agreement. During the three months ended March 31, 2021, the Company did 0t sell any shares under the Sales Agreement.  

Warrants to Purchase Common Stock

The Company has outstanding warrants to purchase common stock as follows:

In March 2021, the holders of such warrants completed a cashless exercise of the warrants, resulting in the Company’s issuance of 14,165 shares of common stock, whereby 888 shares of common stock were withheld by the Company to pay for the exercise price of the warrants.

9. Stock-Based Compensation

2018 Equity Incentive Plan

In June 2018, the Company’s stockholders approved the 2018 Plan, which became effective on July 18, 2018. The 2018 Plan provides for the grant of incentive stock options, non-qualified options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The number of shares initially reserved for issuance under the 2018 Plan was 3,025,101. The number of shares reserved shall be annually increased on January 1, 2019 and each January 1 thereafter through January 1, 2028 by the least of (i) 2,216,368 shares, (ii) 4% of the number of shares of the Company’s common stock outstanding on the first day of the year or (iii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that are expired, forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2018 Plan or any predecessor plan such as the 2008 Equity Incentive Plan will be added back to the shares of common stock available for issuance under the 2018 Plan. In January 2021, the shares available for issuance under the 2018 Plan were increased by 1,909,779 shares pursuant to the annual increase described above. As of March 31, 2021, 2,189,502 shares remained available for future issuance under the 2018 Plan.

2018 Employee Stock Purchase Plan

In June 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan which became effective on July 18, 2018. A total of 272,504 shares of common stock were reserved for issuance under this plan. The number of shares reserved shall be annually increased on each January 1 through January 1, 2028 by the least of (i) 545,008 shares, (ii) 1% of the number of shares of the Company’s common stock outstanding on the first day of the year or (iii) an amount determined by the Company’s board of directors. In January 2021, the shares available for issuance under the 2018 Plan were increased by 477,445 shares pursuant to the annual increase described above. As of March 31, 2021, no offering periods have commenced, and 1,167,139 shares remained available for future issuance under the 2018 Plan.

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Stock Option Issuances

The following is a summary of stock option activity for the three months ended March 31, 2021:

During the three months ended March 31, 2021, the Company granted options to employees for the purchase of 1,503,006 shares of common stock with a weighted average exercise price of $34.49 per share and a weighted average grant-date fair value of $22.76 per share.

The Company estimated the fair value of each stock option award using the Black-Scholes option-pricing model based on the following assumptions:

As of March 31, 2021, total unrecognized compensation cost related to the unvested stock-based awards was $70.5 million, which is expected to be recognized over a weighted average period of 3.2 years.

Stock-Based Compensation

The Company recorded stock-based compensation expense in the following expense categories of its statements of operations and comprehensive loss (in thousands):

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10. Leases

The Company has leases for office and laboratory space.  The Company occupies approximately 47,546 square feet of office and laboratory space in Cambridge, Massachusetts under a lease (the “Current Lease) that originally expired June 30, 2023.

In November 2020, the Company executed a lease in Watertown, Massachusetts for approximately 79,155 square feet of office and laboratory space (the “New Lease”), which is expected to commence in or around December 2021 upon the Company taking control of the asset. The New Lease has a term of 10 years. The Company has the option to extend the term by five years. The base rent is $5.6 million per year, subject to an increase of 3.0%, and the Company is subject to reduced rent for the first nine months. Variable lease payments include the Company’s allocated share of costs incurred and expenditures made by the landlord in the operation and management of the building. In connection with the facility lease, the Company has secured a letter of credit for $2.8 million which renews automatically each year. Since the Company does not expect to obtain the control of the premises until December 2021, the Company determined that the lease commencement date, for accounting purposes, was not reached and therefore the lease is not included in the Company’s operating lease right-of-use asset or operating lease liabilities as of March 31, 2021.

In connection with entering into the New Lease, in November 2020, the Company also executed an amendment to update the term of the Current Lease to terminate 60 days after the commencement date of the New Lease.

The Company determined that these leases are operating leases.

11. Commitments and Contingencies

Research Agreements

The LLS Agreement requires the Company to make certain milestone payments to LLS, that could total up to $25.0 million in the aggregate, upon the receipt of payments by the Company associated with the licensing or transfer of rights to the related compound (or a product) to a third party, upon first regulatory approval of a product in the U.S., or upon the first regulatory approval of a product in Europe or Japan. As of March 31, 2021, and December 31, 2020, no events have occurred that would require payment of the milestones.

The Company has several in-license agreements with academic organizations. The Company is obligated to pay annual license maintenance fees of less than $0.1 million per year as well as reimburse certain institutions for costs incurred related to the filing, prosecution and maintenance of patent rights licensed under the agreements. In addition, the Company may be obligated to pay contingent milestone payments of up to a maximum of $15.7 million upon the achievement of certain defined events as well as royalties of low single-digit percentages of sales of licensed products. In certain cases, the maximum payments to the academic organizations are capped. If the Company grants any sublicense rights under the license agreements, the Company has agreed to pay a percentage of sublicense fees received by the Company to the licensors. As of March 31, 2021, and December 31, 2020, 0 events have occurred that would require payment of the milestones, royalties, or sublicense fees.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its financial statements as of March 31, 2021 or December 31, 2020.

Legal Proceedings

The Company is not a party to any material legal proceedings and did not have contingency reserves established for any litigation liabilities as of March 31, 2021 or December 31, 2020.

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12. Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

13. Retirement Plan

The Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. As currently established, the Company is not required to make contributions to the 401(k) Plan. The Company made matching contributions of $0.3 million and $0.2 million for each of the three months ended March 31, 2021 and 2020, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the Risk Factors section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biopharmaceutical company using our expertise in epigenetics to discover and develop novel therapeutics that address serious unmet medical needs in patients with cancers associated with abnormal gene expression or drug resistance. Our integrated epigenetics platform enables us to validate targets and generate small molecules impacting these targets to selectively modulate gene expression in tumor and immune cells to drive anti-tumor activity. We have used our epigenetics platform to discover and design our wholly owned product candidates, pelabresib (CPI-0610), which inhibits the function of bromodomain and extra terminal domain (“BET”), proteins, CPI-0209, which inhibits the enzymatic function of enhancer of zeste homolog 2 (“EZH2”) protein, and CPI-482, which inhibits the function of the lysine-specific demethylase 1 (“LSD1”) protein. We believe that our approach to targeting the central gene regulatory mechanisms associated with cancer proliferation may enable us to provide therapeutic benefits to cancer patients. Our vision is to become a fully integrated pharmaceutical company with a broad pipeline of hematology and oncology development and discovery programs.

Pelabresib (CPI-0610) – BET Inhibitor

Our lead product candidate, pelabresib, is a small molecule designed to promote anti-tumor activity by specifically inhibiting the bromodomain function of BET proteins, which normally enhance target gene expression. We are currently conducting two clinical trials of pelabresib.  We are enrolling patients and initiated dosing in MANIFEST-2, a global, double-blinded, randomized pivotal Phase 3 clinical trial with pelabresib in combination with ruxolitinib (marketed as Jakafi®/Jakavi®) versus placebo with ruxolitinib in Janus kinase 1/2 (“JAK”)-inhibitor-naïve patients with myelofibrosis (“MF”) who have splenomegaly and symptoms requiring therapy. We plan to enroll approximately 310 JAK-inhibitor-naïve patients. Patients are randomized 1:1 to the pelabresib with ruxolitinib arm or the placebo with ruxolitinib arm. The primary endpoint of the trial is the proportion of patients who achieve a 35% or greater reduction in spleen volume from baseline (referred to as “SVR35”) after 24 weeks of treatment. A key secondary endpoint of the trial is the proportion of patients who achieve a 50% or greater improvement in Total Symptom Score from baseline (referred to as “TSS50”) after 24 weeks of treatment.  Based on our prior discussions with the FDA regarding MANIFEST-2, we believe we need to meet both of these endpoints. The trial protocol includes a mechanism to re-estimate the sample size to ensure sufficient power for both the primary and the key secondary endpoints.  Other endpoints include bone marrow fibrosis grade improvements, duration of transfusion independence, rate of red-blood-cell transfusion for the first 24 weeks, and hemoglobin response.

Additionally, we are continuing to enroll patients in the second line arms of MANIFEST, our ongoing open-label Phase 2 clinical trial of pelabresib both as a monotherapy and in combination with ruxolitinib in patients with MF. In this trial, we are treating patients who are JAK inhibitor-naïve, a first-line (“1L”) setting, as well as patients who are refractory to or intolerant of, or have had a sub-optimal response to, ruxolitinib, a second-line (“2L”) setting.  Patient enrollment in the 1L setting has completed at approximately 80 patients.  

We have also added a cohort (Arm 4) in MANIFEST to evaluate pelabresib as a monotherapy in patients with essential thrombocythemia (“ET”) as a potential opportunity to expand the potential indications for pelabresib. We plan to enroll approximately 20 high-risk, hydroxyurea-resistant or-intolerant patients with ET in this arm. ET is a myeloproliferative disorder that can progress to MF and that is characterized by excessive production of blood platelets, fatigue, lightheadedness, headaches, vision changes, and an increased risk of blood clots.  The primary endpoint of this arm of the trial will be Complete Hematological Response within 24 weeks as measured by normalization of platelet count and white blood cell count, with a key secondary endpoint of TSS50 at 24 weeks.

As previously disclosed, in December 2020, we presented preliminary clinical and translational data for pelabresib as a monotherapy and in combination with ruxolitinib at the Annual Meeting of the American Society of Hematology, based on a September 29, 2020 data cutoff, that reflected an analysis of 63 1L patients and 94 2L or later patients. We believe that these preliminary data from MANIFEST suggest that pelabresib has the potential to offer meaningful benefits beyond the current standard of care in MF and may have disease-modifying effects.

EZH2 Inhibitor

CPI-0209

CPI-0209 is a small molecule designed to promote anti-tumor activity by specifically inhibiting EZH2, an enzyme that suppresses target gene expression. We designed CPI-0209, which is a second-generation EZH2 inhibitor, to achieve comprehensive coverage of

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EZH2 to potentially enable deeper, more rapid, and more durable tumor regression, as well as to demonstrate improved metabolic properties compared with first-generation EZH2 inhibitors. We believe that CPI-0209 has the potential to be a best-in-class EZH2 inhibitor for use in a broad range of cancer types and to expand the addressable patient populations beyond those that have been targeted by first-generation EZH2 inhibitors.  

We are currently conducting a Phase 1/2 clinical trial of CPI-0209 in patients with solid tumors and hematological malignancies. We recently determined the recommended Phase 2 dose for CPI-0209 as monotherapy to be a once daily oral dose of 350 mg based on data from the Phase 1 dose-escalation portion of the trial. For the Phase 2 proof of concept portion of the trial, we plan on evaluating the anti-tumor activity of CPI-0209 as a monotherapy in cohorts of patients with known ARID1A mutation with the following tumor types: relapsed urothelial carcinoma, relapsed ovarian clear cell carcinoma, relapsed endometrial carcinoma, as well as in patients with relapsed or refractory lymphomas of either B-cell or T-cell histology. We have opened enrollment for these four cohorts and the first patient has been dosed, and we plan to enroll up to 29 patients per cohort.  As part of our future development plans, we plan to add two additional cohorts to the Phase 2 portion of the trial that would include patients with malignant mesothelioma with known BAP1 loss who have progressed on one prior line of therapy, and patients with metastatic castration-resistant prostate cancer who have progressed on at least one androgen receptor signaling inhibitor (ARSi) and at least 1 taxane-based therapy. The goal of these cohorts is to confirm safety and establish the antitumor activity of CPI-0209 as a monotherapy for the tumor types enrolled. The primary endpoint of the trial is objective response rate.  

CPI-1205

CPI-1205 is our first-generation EZH2 inhibitor.  In June 2020, we announced that we plan to discontinue development of CPI-1205 after completion of ProSTAR and to prioritize further clinical development of CPI-0209.  ProSTAR is a Phase 1b/2 clinical study evaluating CPI-1205 combined with enzalutamide or abiraterone in patients with metastatic castration-resistant prostate cancer (mCRPC).  The decision was based on a recent review of ProSTAR data, which did not demonstrate the definitive signal of activity necessary to advance the program into pivotal studies in mCRPC. We intend to present a full data set from ProSTAR in the future.

LSD1 Inhibitor – CPI-482

CPI-482 is an inhibitor of Lysine Specific Demethylase 1 (LSD1), a critical regulator of gene expression, required for hematopoietic stem cell maintenance and proper differentiation of megakaryocyte and erythroid lineages.  In myelofibrosis, aberrant megakaryocyte biology is responsible for elevated inflammatory cytokine production and bone marrow dysfunction. Inhibition of LSD1 by CPI-482 suppressed megakaryocyte formation in ex vivo differentiation experiments and reduced spleen volume and bone marrow fibrosis and improved survival in myelofibrosis and leukemia mouse models. We are exploring the potential of CPI-482 as a potential clinical candidate and therapeutic option in hematologic malignancies, including in myeloproliferative neoplasms (“MPNs”) and plan to complete IND enabling studies by the end of 2021.

COVID-19 Pandemic

The ongoing COVID-19 pandemic has affected and will continue to affect our business and operations.  The section below provides an update of the impact of the COVID-19 pandemic on our business and operations.

Clinical trial execution.  Throughout the COVID-19 pandemic, patient safety has remained paramount in the execution of our clinical trials.  MANIFEST, MANIFEST-2, and CPI-0209 clinical trials have remained open to enrollment throughout the COVID-19 pandemic. However, the pandemic has impacted and may continue to impact various aspects of our clinical trials.  For example, we have experienced enrollment delays for MANIFEST and delays in clinical trial site initiation for MANIFEST-2 due to disruptions and limited resources and staffing at some of our clinical sites in certain regions. Additionally, we have experienced some incidences of incomplete data collection and disruptions in monitoring visits in the MANIFEST and CPI-0209 clinical trials.  We are continuing to work with our clinical sites and third-party contractors to monitor and assess the impact of the pandemic on our clinical trials.

Manufacturing and Supply. While we are not currently experiencing supply chain disruptions in manufacturing for any of our product candidates, we have, in the past, experienced some disruption in our supply chain from our suppliers due to the COVID-19 pandemic. We experienced a brief delay in the third quarter of 2020 in the manufacturing of pelabresib tablets at a manufacturer in the United States due to COVID-19 safety policies at the manufacturing site. Our laboratory kit supplier is experiencing, and may continue to experience, supply chain issues due to the increased demand for kits associated with the pandemic.

Offices. We continue to implement policies at our office and laboratory space to mitigate the risk of exposure to COVID-19 by our personnel, including operating our laboratory facilities at reduced capacity with mandated safety protocols in place, maintaining a work-from-home policy for the majority of our non-laboratory personnel, and providing on-site testing for all lab personnel and employees who have access to our facility.

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Financial Overview

As of March 31, 2021, we have funded our operations with the sales of convertible preferred stock, payments received in connection with collaboration agreements, borrowings under loan agreements, and proceeds from our public and private offerings of our common stock. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. For the three months ended March 31, 2021, we reported a net loss of $40.1 million. As of March 31, 2021, we had an accumulated deficit of $485.8 million. We expect to continue to incur significant expenses and increasing operating losses for at least in the foreseeable future. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings; debt financings; collaborations; strategic alliances; and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and may be forced to reduce or terminate our operations.

As of March 31, 2021, we had cash, cash equivalents and marketable securities of $382.1 million. We expect that our existing cash, cash equivalents and marketable securities will enable us to fund our planned operating expenses and capital expenditure requirements into mid-2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. See “– Liquidity and Capital Resources.”

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Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We have entered into, and we may in the future enter into, license or collaboration agreements for our product candidates or intellectual property, and we may generate revenue in the future from payments as a result of such license or collaboration agreements. To date, all of our revenue has been derived from one collaboration arrangement. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

In July 2012, we entered into a Research, Development and Commercialization Agreement, or the LLS Agreement, with the Leukemia & Lymphoma Society, or LLS, pursuant to which LLS committed to provide funding to us for research and development services, conditional on (i) the achievement of milestones in accordance with the LLS Agreement and (ii) equal funding being provided by us. We recognize the nonrefundable payments received under the LLS Agreement as a reduction to the research and development expenses incurred, based on a proportional methodology comparing the total expenses incurred in the period under the project to the total expenses expected to be incurred under the project. Through December 31, 2020, we had received funding totaling $7.3 million from LLS upon the achievement of specified milestones, which were recorded as a reduction of our research and development expenses. There was no additional funding received in the three months ended March 31, 2021.

We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

Our direct external research and development expenses are tracked on a program-by-program basis and consist of costs that include fees, reimbursed materials and other costs paid to consultants, contractors, CMOs and CROs in connection with our preclinical, clinical development and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform technology and, as such, are not separately classified.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical and preclinical development activities in the near term and in the future as our current development programs progress and new programs are added. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

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A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with our growing operations and any future commercialization and marketing activities.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our invested cash balances and associated with our marketable securities.

Interest Expense

Expense consists of interest expense on borrowings under the Hercules Loan Agreement, as well as amortization of debt discount and debt issuance costs, which was paid off in November 2020.

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Income Taxes

Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

Results of Operations

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020:

Research and Development Expenses

Research and development expenses were $30.8 million for the three months ended March 31, 2021 compared to $20.1 million for the three months ended March 31, 2020.The increase in costs related to our pelabresib program was primarily due to the startup expenses for our MANIFEST-2 trial in the first quarter of 2021. The increase in costs related to our CPI-0209 program was primarily due to increases in process chemistry expenses and increases in clinical expenses as we expanded into the Phase 2 portion of the trial. The increase in costs of our preclinical pipeline was primarily due to increased external expenses due to the stage of preclinical assets, including our LSD1 inhibitor. The decrease in costs related to our CPI-1205 program was primarily due to lower expenses in our ProSTAR trial due to the closure of the trial.  

The increase in personnel related costs was primarily due to overall increase in headcount in the first quarter of 2021. Personnel related costs for the three months ended March 31, 2021 and 2020 included stock-based compensation expense of $2.3 million and $1.0 million, respectively.

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General and Administrative Expenses