Please read the following discussion and analysis of our financial condition and
results of operations together with our consolidated financial statements and
related notes included under Part II, Item 8 of this Annual Report on Form 10-K.
In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited, to those set forth under "Item 1A - Risk Factors" and elsewhere in this
Annual Report on Form 10-K. Unless otherwise noted or the context otherwise
requires, references in this Annual Report on Form 10-K to "we," "us" or "our"
refer to Zogenix Inc. and its subsidiaries.
This discussion and analysis generally addresses 2021 and 2020 items and
year-over-year comparisons between 2021 and 2020. Discussions of 2019 items and
year-over-year comparisons between 2020 and 2019 that are not included in this
Annual Report on Form 10-K can be found in Part II, Item 7 of our 2020 Annual
Report on Form 10-K filed with the SEC on March 1, 2021.
Overview
We are a global biopharmaceutical company committed to developing and
commercializing therapies with the potential to transform the lives of patients
and their families living with rare diseases. Our first rare disease therapy,
Fintepla (fenfluramine) oral solution has been approved by the U.S. Food and
Drug Administration (FDA) and the European Medicines Agency (EMA) for the
treatment of seizures associated with Dravet syndrome, a rare, severe lifelong
epilepsy. We have two additional late-stage development programs underway:
Fintepla for the treatment of seizures associated with Lennox-Gastaut syndrome
(LGS), another rare epilepsy and MT-1621, an investigational therapy for the
treatment of TK2 deficiency (TK2d), a rare genetic disease.
We own and control worldwide development and commercialization rights to
Fintepla, which was originally obtained in 2014 pursuant to an acquisition of
Brabant Pharma, a privately-held U.K.-based pharmaceutical company. In March
2019, we entered into an exclusive distribution agreement with Nippon Shinyaku
Co., Ltd. to distribute Fintepla in Japan, if approved for marketing in that
country.
Merger Agreement
On January 18, 2022, we entered into a definitive Agreement and Plan of Merger
(the "Merger Agreement"), with UCB S.A., a société anonyme formed under the laws
of Belgium ("Parent") and Zinc Merger Sub, Inc., a Delaware corporation and an
indirect wholly owned subsidiary of Parent ("Purchaser"), pursuant to which, on
the terms and subject to the conditions set forth therein, Merger Sub commenced
a tender offer (the "Offer") on February 1, 2022 to acquire all of the Company's
outstanding shares of common stock, par value $0.001 per share (the "Company
Shares"), at a purchase price of (i) $26.00 per Company Share (the "Closing
Amount"), net to the seller thereof in cash, subject to reduction for any
applicable withholding taxes and without interest, plus (ii) one
non-transferrable contingent value right per Company Share representing the
right to receive a contingent payment of $2.00 (each, a "CVR", and the Closing
Amount plus one CVR, collectively, or any greater amount per Company Share that
may be paid pursuant to the Offer, being hereinafter referred to as the "Offer
Price"), net to the holder thereof in cash, subject to reduction for any
applicable withholding taxes and without interest, upon the achievement of the
milestone specified in, and on the other terms and subject to the other
conditions set forth in, the CVR Agreement (as defined in the Merger Agreement).
Each CVR represents a non-transferable contractual contingent right to receive a
cash payment of $2.00, without interest and less any applicable withholding
taxes (the "Milestone Payment"), if, and only if, no later than December 31,
2023, the European Commission approves Zogenix's product Fintepla® as an orphan
medicinal product for treatment of seizures associated with Lennox-Gastaut
syndrome, following an opinion rendered by the Committee for Orphan Medicinal
Products of the European Medicines Agency ("EMA") recommending that fenfluramine
hydrochloride for the treatment of Lennox-Gastaut syndrome not be removed from
the Community Register of Orphan Medicinal Products (the "Milestone").
Completion of the Offer is subject to the satisfaction or waiver of customary
conditions, including (i) (i) there having been validly tendered in accordance
with the terms of the Offer and not validly withdrawn, as of immediately prior
to the expiration of the Offer, a number of Company Shares that, together with
the Company Shares then owned by Parent or Merger Sub, represents at least a
majority of the Company Shares then outstanding; (ii) the accuracy of the
representations and warranties of the Company contained in the Merger Agreement,
subject to certain materiality qualifications; (iii) the Company's compliance in
all material respects with its covenants and
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agreements contained in the Merger Agreement; (iv) the expiration or termination
of any waiting period (and any extension thereof) applicable to the Offer or the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the receipt of any other clearance, approval or consent applicable
to Offer or the Merger (as defined below) under any applicable antitrust law;
(v) the absence of a Company Material Adverse Effect (as defined in the Merger
Agreement) that is continuing; and (vi) the absence of any law, regulation,
order, injunction or ruling issued or enacted by any government authority of
competent jurisdiction that would prohibit or make illegal the consummation of
the Offer or the Merger, or that would impose certain remedies or restrictions
on the ability of Parent to fully own or operate the Company, its businesses or
assets.
We expect the Merger to close in the first half of 2022, subject to the
regulatory approvals and other customary closing conditions described above and
in the Merger Agreement.
Additional information about the Merger and related transactions is set forth in
our filings with the Securities and Exchange Commission, or the SEC.
Fintepla for Patients with Rare Epilepsy Disorders
Dravet Syndrome
On June 25, 2020, the FDA granted approval of Fintepla for the treatment of
seizures associated with Dravet syndrome in patients 2 years of age and older.
During the third quarter of 2020, we commercially launched Fintepla through a
restricted distribution program, called the Fintepla Risk Evaluation and
Mitigation Strategy (REMS) Program. On December 18, 2020, the European
Commission (EC) granted marketing authorization for Fintepla for the treatment
of seizures associated with Dravet syndrome as an add-on therapy to other
anti-epileptic medicines for patients two years of age and older. Fintepla will
be available in Europe under a controlled access program requested by the EMA to
prevent off-label use for weight management and to confirm that prescribing
physicians have been informed of the need for periodic cardiac monitoring in
patients taking Fintepla. We initially launched Fintepla for sale in Germany in
February 2021 and proceeded with a commercial launch in France and expect to
expand into other European markets thereafter. The approval for marketing of
Fintepla in the U.S. and in the EU was based on positive safety and efficacy
results from two randomized, international, multi-center, placebo-controlled
Phase 3 trials (Study 1 and Study 2), as well as data from an interim analysis
of a long-term, open-label extension study in 330 Dravet syndrome patients
treated up to three years.
In September 2020, we reported positive top-line results from our third Phase 3
trial (Study 3) of Fintepla for the treatment of seizures associated with Dravet
syndrome. Study 3 corroborates the substantial impact of Fintepla on convulsive
seizure reduction in patients with Dravet syndrome as previously demonstrated in
Studies 1 and 2. Study 3 expands the countries where Fintepla has been evaluated
to include Japan. On December 12, 2021, the Company submitted a New Drug
Application to the Japanese Ministry of Health, Labour & Welfare (MHLW) for the
marketing approval of Fintepla for the treatment of epileptic seizures
associated with Dravet syndrome in Japan. Fintepla received Orphan Drug
Designation from Japan's Ministry of Health, Labour & Welfare (MHLW) in August
2021.
Lennox-Gastaut Syndrome
In February 2020, we reported positive top-line results from our Phase 3
multicenter, global LGS trial (Study 1601), a double-blind, placebo-controlled
study to assess the safety, tolerability and efficacy of Fintepla when added to
a patient's current anti-epileptic regimen. Study 1601 included a total of 263
patients between the ages of 2 and 35 years whose seizures were uncontrolled
while on one or more anti-epileptic drugs. The trial met its primary objective
of demonstrating that Fintepla at a dose of 0.7 mg/kg/day was superior to
placebo in reducing the frequency of drop seizures and demonstrated
statistically significant improvements versus placebo in key secondary efficacy
measures, including proportion of patients with a clinically meaningful
reduction in drop seizure frequency. .
In September 2021, we submitted a supplemental New Drug Application (sNDA) to
the FDA for Fintepla for the treatment of seizures associated with LGS. In
December 2021, Zogenix announced that the FDA accepted for filing the sNDA,
granted our request for Priority Review, and set a Prescription Drug User Fee
Act (PDUFA) goal date of March 25, 2022. In December 2021, we submitted a Type
II Variation Market Authorization Application to the EMA for Fintepla for the
treatment of seizures associated with LGS. If approved, the application would
expand the use of Fintepla in the European Union and the United Kingdom beyond
patients with Dravet syndrome to include patients with LGS. We plan to make an
MAA submission in Japan for LGS in the first quarter of 2023 with an anticipated
approval approximately twelve months later.
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Fintepla for Other Potential Indications
In addition to Dravet syndrome and LGS, we are evaluating the treatment
potential of Fintepla in other serious, treatment-resistant epileptic syndromes.
MT-1621 for Patients with TK2 Deficiency
As a result of our acquisition of Modis in September 2019, we became a party to
the Exclusive License Agreement, by and between Modis and Columbia, dated as of
September 26, 2016 (the Columbia Agreement), related to MT-1621. MT-1621 is an
investigational deoxynucleoside-combination substrate enhancement therapy in
development for the treatment of TK2d, a rare, debilitating, and often fatal
genetic mitochondrial DNA depletion disease that primarily affects infants and
children and for which there are currently no approved therapies.
In April 2020, we held an End-of-Phase 2 meeting with the FDA and in June 2020,
we met with the FDA to discuss chemistry, manufacturing, and controls (CMC) for
MT1621. In the meetings, the FDA outlined the additional clinical and
non-clinical information needed for an NDA submission. In July 2021, we had a
Type B Meeting with the FDA where the FDA confirmed the adequacy of the proposed
data packages for an NDA submission due to the rare and serious nature of TK2d
and the unmet medical need.
Based on this feedback, we are targeting an NDA submission to the FDA for TK2d
in the second half of 2022. In addition, we are conducting a Phase 1
pharmacokinetic (PK) study in renal impairment, as recommended by the FDA, to
provide dosing recommendations in the setting of impaired renal function and
include the results in the NDA submission. The FDA also concurred with our
proposed CMC plan for the prospective NDA submission.
In December 2021, we received Scientific Advice feedback from the EMA supportive
of our clinical and non-clinical plan to pursue marketing authorization for the
treatment of TK2d patients with the age of onset of TK2d younger than 12 years
of age. We are targeting an MAA submission after our anticipated NDA submission.
Collaborative Arrangement with Nippon Shinyaku
In March 2019, we entered into an exclusive distribution agreement (Shinyaku
Agreement) with Nippon Shinyaku Co., Ltd. (Shinyaku) for the potential
commercialization of Fintepla in Japan. We retained responsibility for clinical
development programs for Fintepla, including completion of an additional Phase 3
trial (Study 3) to expand the countries to include Japan, amongst others, where
Fintepla for the treatment of Dravet syndrome has been evaluated. Upon signing
of the agreement, Shinyaku agreed to make upfront payments of $20.0 million. In
addition, we are eligible to receive regulatory and sales-based milestone
payments of up to $108.5 million. As of December 31, 2021, we have met the
criteria to recognize $3.0 million for a regulatory submission milestone related
to Dravet syndrome. Once Fintepla is approved for marketing in Japan, if ever,
we are obligated to supply product to Shinyaku and will receive a tiered
transfer price of up to a high-double digit percentage of the annual net sales
of Fintepla in Japan. In September 2020, we reported positive top-line results
from Study 3, which corroborates the substantial impact of Fintepla on
convulsive seizure reduction in patients with Dravet syndrome as previously
demonstrated in Study 1 and Study 2. On December 12, 2021, the Company submitted
a New Drug Application to the Japanese Ministry of Health, Labour & Welfare
(MHLW) for the marketing approval of Fintepla for the treatment of epileptic
seizures associated with Dravet syndrome in Japan..
Tevard Collaboration, Option and License Agreement
In October 2019, we entered into an option agreement with Tevard Biosciences
(Tevard), a privately-held company focused on tRNA-based gene therapies. Under
the agreement, Tevard granted us an option to license exclusive rights related
to a preclinical development program to identify and develop novel tRNA-based
gene therapies for Dravet syndrome. During 2020, we extended the option period
to exercise our license rights prior to entering into a collaboration, option
and license agreement with Tevard. Payments made under the option agreement were
nonrefundable, but may be credited against the upfront payment due if we
exercise our option on the preclinical development program. Payments made under
the option agreement of $2.0 million in 2019 and $5.5 million in 2020 were
included in acquired IPR&D expense and related costs in our consolidated
statement of operations.
In December 2020, we exercised the option on the Dravet syndrome program and
entered into a collaboration, option and license agreement with Tevard (the
Tevard Agreement). The financial terms of the Tevard Agreement included an
upfront payment of $5.2 million. In connection with the transaction, we also
purchased a convertible
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promissory note issued by Tevard in the amount of $5.0 million. The note matures
in December 2022 and carries interest at 3.5% per year. The note will
automatically convert into equity securities issued by Tevard in their next
equity financing transaction at a conversion price equal to the price paid per
share by other investors of the financing transaction.
In addition to the upfront payments, we have agreed to fund Tevard's early
discovery activities under the licensed Dravet syndrome program in accordance
with the development plan as determined by the parties to the agreement. Once
Tevard completes the early discovery activities for a program, we will be
responsible for any potential future development and commercialization
activities. Tevard is also eligible to receive additional development,
regulatory and commercial-related milestone payments of up to $100.0 million for
the Dravet program, as well as tiered royalties on future net sales in the
single digits that result from the collaboration. We are also entitled to rights
of negotiation and rights of first refusal to potentially obtain licenses to
compounds subsequently discovered and developed by Tevard. The agreement, if not
terminated sooner, would expire upon the expiration of all applicable royalty
terms under the agreement with respect to a licensed program or product;
however, we have the unilateral right to terminate the agreement with 180 days
advanced notice.
As of December 31, 2021, we do not have any current legal or contractual
obligations to provide financing to Tevard and our maximum exposure to future
loss is limited to the $5.0 million note receivable, which matures in December
2022. While we have committed to fund the Dravet syndrome development program
for Tevard's early discovery activities, our obligation to fund these efforts is
contingent upon continued involvement in the program and/or the lack of any
adverse events which could cause the discontinuance of the program. Our exposure
to future losses is limited as we have the unilateral right to terminate the
agreement with 180 days advanced notice.
See the above "Business" section for a more complete discussion of our business.
Business Update Regarding the COVID-19 Pandemic
The full extent to which the ongoing coronavirus disease 2019 (COVID-19
pandemic) will directly or indirectly impact our business continues to evolve
and its results on our operations and financial condition, will depend on future
developments that are highly uncertain, including as a result of new information
that may emerge concerning COVID-19, including any related variants, and the
actions taken to contain it or treat COVID-19. As a result, we are unable to
predict the full impact of the COVID-19 pandemic but it could have a material
adverse effect on our business, financial condition, and results of operations.
We are continuing to assess the ongoing impact of COVID-19 on our business
operations in an effort to mitigate interruption to our commercialization of
Fintepla, clinical programs, research efforts, and other business activities and
to ensure the safety and well-being of our employees, partners and patients.
COVID-19 infections continue to fluctuate in the U.S. and in many countries
worldwide as local surges and new waves of infection continue to be reported, in
particular as caused by new variants of the virus that causes COVID-19 and the
lack of availability of effective vaccines in certain countries or regions, or
failure to utilize available vaccines in other geographies. Although some of the
restrictions aimed at minimizing the spread of COVID-19 have been and may from
time to time be eased or lifted in the U.S. and other countries from the height
of the pandemic, in response to local surges and waves of infection, including
those caused by certain variants of the virus, some countries, states, and local
governments have maintained or reinstituted these restrictions, or may
reinstitute these restrictions from time to time, in response to rising rates of
infection. In response to the COVID-19 pandemic, we have implemented
precautionary measures to protect the health and safety of our employees,
partners, and patients, including providing our employees the flexibility to
work remotely from home, as duties permit, and requiring adherence to onsite
occupancy limits and appropriate safety measures designed to comply with
federal, state, and local guidelines. These safety measures may be eased,
lifted, or reinstituted in accordance with updates to such guidelines.
Our ability to successfully commercialize and generate revenue from Fintepla may
be directly or indirectly impacted by the COVID-19 pandemic. In addition to our
ongoing launch of Fintepla for Dravet syndrome in existing and new markets, we
are preparing for a potential product launch of Fintepla for LGS in the U.S.,
which the FDA granted our supplemental New Drug Application (sNDA) Priority
Review with a Prescription Drug User Fee Act (PDUFA) target action date in March
2022. While restrictive safety measures are in place, our sales professionals
did not have the same level of in-person interactions with physicians and
healthcare providers to conduct educational and promotional activities for
Fintepla as they would have absent the COVID-19 pandemic. In response, we have
implemented a virtual sales model to supplement traditional means of customer
engagement. Although some of these restrictions have been, and may continue to
be lifted in certain jurisdictions, the impact of prior and
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continued COVID-19 related safety measures, and the potential for re-imposition
of restrictions due to local surges and new waves of infection, including those
caused by certain variants of the virus, may adversely affect the ability of our
sales professionals to effectively market Fintepla, which may have a negative
impact on our sales and our market penetration. In addition, the evolving
COVID-19 pandemic could directly or indirectly impact the pace of patient
enrollment of our Phase 3 study of Fintepla for the treatment of seizures
associated with CDKL5 syndrome (CDD), which we initiated in September 2021. To
date, we have not experienced any significant interruptions in our ability to
supply Fintepla for commercial use in Dravet syndrome or clinical trials for
LGS, or MT1621 to our patients currently enrolled in our clinical trials. We
currently do not anticipate any interruptions in supply. Any delays in the
completion of our clinical trials and any disruption in our supply chain could
have a material adverse effect on our business, results of operations and
financial condition.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in conformity with generally accepted accounting principles in the
United States (GAAP). The preparation of these consolidated financial statements
requires management to make judgments, assumptions, and estimates that affect
the amounts reported in our consolidated financial statements and accompanying
notes. We evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other assumptions that
we believe to be reasonable under the circumstances.
The significant accounting policies followed, and methods used, in the
preparation of our financial statements are detailed in Note 2 to the
consolidated financial statements included in this Form 10-K. Due to the
material balances of the financial statement elements to which they relate
and/or significant judgments, assumptions, and estimates used in the preparation
of the consolidated financial statements, we believe the following are critical
accounting policies. Actual results could differ from these estimates under
different assumptions or conditions and adjustments to such estimates may have a
material impact on our financial position and future operating results.
Revenue Recognition
Our revenues consist of product sales of Fintepla and revenues derived from our
collaboration arrangement with Nippon Shinyaku Co., Ltd. (Shinyaku).
Net Product Sales
We recognize revenue when control of the promised good or service is transferred
to the customer, in an amount that reflects the consideration we expect to be
entitled to in exchange for those goods or services. We determine revenue
recognition through the following steps: (i) identify the contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as)
we satisfy a performance obligation. We only apply the five-step model to
contracts when collectability of the consideration to which we are entitled in
exchange for the goods or services we transfer to the customer is determined to
be probable.
We distribute Fintepla in the U.S. through an arrangement with a specialty
distributor who is our customer. The specialty distributor subsequently resells
our product through its related specialty pharmacy provider to patients and
health care providers. Separately, we have or may enter into payment
arrangements with various third-party payers including pharmacy benefit
managers, private healthcare insurers and government healthcare programs who
provide coverage and reimbursement for our products that have been proscribed to
a patient.
Revenue from product sales is recorded at the net sales price (transaction
price), which includes estimates of consideration payable to our customer and
third-party payers for which reserves are established and that result from
government rebates, chargebacks, co-pay assistance, prompt-payment discounts and
other allowances that are offered under arrangements between us, our customer,
and third-party payers related to the sales of Fintepla. These reserves are
classified as either reductions of accounts receivable (if the amounts are
payable to our customer) or as refund liabilities within current liabilities (if
the amounts are payable to a party other than our customer). Amounts billed or
invoiced are included in accounts receivable, net on our consolidated balance
sheet. Under our current product sales arrangements, we do not have contract
assets (unbilled receivables), as we generally invoice our customer before or at
the time of revenue recognition, nor contract liabilities, as we do not receive
prepayments from our customers prior to product delivery.
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Inputs and assumptions used in our estimates related to our reserves and
allowances may fluctuate due to changes in government sponsored programs, payor
mix of our customers and the overall economic environment. Historically, actual
deductions from sales have not differed significantly from estimated reserves
and allowances and we do not expect the differences to be material to our
financial position or results of operations.
Research and Development Expense and Accruals
Research and development costs are expensed as incurred unless there is an
alternative future use in other research and development projects. Research and
development costs include personnel-related costs, outside contracted services
including clinical trial costs, contract manufacturing costs for products that
have not obtained regulatory approval, facilities costs, fees paid to
consultants, milestone payments prior to FDA approval, license fees prior to FDA
approval, professional services, travel costs, dues and subscriptions,
depreciation, materials used in clinical trials and research and development and
costs incurred related to our agreement with Nippon Shinyaku Co., Ltd. We
expense costs relating to the purchase and production of pre-approval
inventories as research and development expense in the period incurred until FDA
approval is received. Payments made prior to the receipt of goods or services to
be used in research and development are recorded as prepaid assets on our
consolidated balance sheets until the goods or services are realized or
consumed. We classify such prepaid assets as current or non-current assets based
on our estimates of the timing of when the goods or services will be realized or
consumed.
Our expense accruals for clinical trials are based on estimates of the services
received from clinical trial investigational sites, contract research
organizations (CROs) and other third-party vendors that support us in our
research and development efforts. Payments under some of our contracts with
these service providers depend on factors such as the achievement of clinical
milestones such as the successful enrollment of certain numbers of patients,
site initiation, or completion of a clinical trial. In accruing for these
services at each reporting date, we estimate the time period over which services
will be performed and the level of effort to be expended in each period. If
available, we obtain information regarding unbilled services directly from these
service providers. However, we may be required to estimate our accrual based
only on information available to us. Once established, accruals are adjusted
from time to time, as appropriate, in light of additional information. Amounts
ultimately incurred in relation to amounts accrued for these services at a
reporting date may be substantially higher or lower than our estimates.
Results of Operations
Revenues
Year Ended December 31,
(In thousands) 2021 2020 $ Change
Net product sales $ 74,740 $ 9,587 $ 65,153
Collaboration revenue 6,950 4,056 2,894
Total revenues $ 81,690 $ 13,643 $ 68,047We began to generate product revenue following the approval of Fintepla for
Dravet syndrome by the FDA and the EMA in 2020. Prior to the commercial launch
of Fintepla in July 2020, our revenues were generated solely from a
collaboration agreement with Shinyaku entered into in March 2019.
Net Product Sales
Net product sales increased by $65.2 million during the year ended December 31,
2021, compared to the year ended December 31, 2020, as a result of an entire
year of Fintepla sales following commercial launch in the U.S. in the third
quarter of 2020, and Germany and France in 2021.
We expect net product sales to increase during 2022 as compared to 2021 as we
continue to retain and expand our patient base in existing markets, as well as
launch our approved product into additional markets following the
country-by-country reimbursement approval process in Europe, including the
United Kingdom, Italy and Spain.
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Collaboration Revenue
Collaboration revenue increased by $2.9 million during the year ended December
31, 2021, compared to the year ended December 31, 2020, primarily due to the
achievement of a $3.0 million regulatory submission milestone for Dravet
syndrome under the collaboration arrangement during the fourth quarter of 2021.
This resulted in an adjustment in the estimate of the overall transaction price
and was recorded on a cumulative catch-up basis, which increased collaboration
revenue in the period of adjustment.
As recognition of our collaboration revenue is based on costs incurred to date
relative to total estimated costs at completion when measuring progress combined
with the uncertainty of when the events underlying various milestones are
resolved, we expect our collaboration revenue will fluctuate from period to
period.
Cost of Product Sales (Excluding Intangible Asset Amortization)
Cost of product sales (excluding intangible asset amortization) includes the
cost of producing and distributing inventories that are related to product
revenues during the respective period (including salary-related and stock-based
compensation expenses for employees involved with production and distribution,
freight and indirect overhead costs) and third-party royalties payable on our
net product revenues. Cost of product sales may also include costs related to
excess or obsolete inventory adjustment charges, abnormal costs, unabsorbed
manufacturing and overhead costs, and manufacturing variances.
For the year ended December 31, 2021, cost of sales primarily consisted of
royalties payable on net sales of Fintepla under a license agreement and
labeling and packaging costs. Substantially all of the cost of product sold in
2021 were for packaging and labeling as our inventory had a zero-cost basis.
Prior to receiving FDA approval for Fintepla, we recorded all manufacturing
product costs as research and development expense. We expect our cost of sales
for Fintepla to increase as a percentage of net sales in beginning in mid-2022
as we produce and then sell inventory that reflects the full cost of
manufacturing.
Research and Development Expense
Research and development (R&D) expense consist of expenses incurred in
developing, testing and seeking marketing approval of our product candidates,
including: payments made to third-party clinical research organizations (CROs)
and investigational sites, which conduct our clinical trials on our behalf, and
consultants; expenses associated with regulatory submissions, pre-clinical
development and clinical trials; payments to third-party manufacturers, which
produce our active pharmaceutical ingredient and finished product; commercial
quantities of certain product candidates prior to the date we anticipate that
such products will receive regulatory approval, personnel related expenses, such
as salaries, benefits, travel and other related expenses, including stock-based
compensation; and facility, maintenance, depreciation and other related
expenses.
For each of our R&D programs, we incur both external and internal costs.
External costs include clinical and non-clinical activities performed by CROs,
lab services, purchases of product candidate materials and manufacturing
development costs. We track external R&D expenses for each of our key
development programs. We have not tracked internal costs on a program-by-program
basis because our R&D employees and infrastructure resources are utilized across
our product candidate development programs.
The table below sets forth components of our research and development expenses
for the periods presented.
Year Ended December 31,
(In thousands) 2021 2020 $ Change
External costs:
Fintepla for Dravet syndrome $ 22,023 $ 32,287 $ (10,264)
Fintepla for LGS 25,013 34,920 (9,907)
MT-1621 23,911 13,703 10,208
Tevard gene-therapy program for Dravet syndrome 3,535 739 2,796
Other(1) 3,904 1,942 1,962
Total external costs 78,386 83,591 (5,205)
Internal costs 64,273 54,411 9,862
Total research and development expense $ 142,659 $ 138,002 $ 4,657
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(1)Other external costs include early-phase exploratory research programs.
R&D expenses related to Fintepla for Dravet syndrome decreased by $10.3 million
year-over-year primarily due to wind-down of clinical activities, partially
offset by costs incurred in conjunction with our Phase 3 clinical trial to
support the submission of a New Drug Application to the Japanese Ministry of
Health, Labour & Welfare (MHLW) for the marketing approval of Fintepla for
Dravet syndrome in Japan, which occurred in the fourth quarter of 2021. R&D
expenses related to Fintepla for LGS decreased by $9.9 million year-over-year
due to lower program costs incurred for external service providers. In the
fourth quarter of 2021, we submitted applications in the U.S. and in the EU for
regulatory approvals to market Fintepla for the treatment of seizures associated
with LGS. R&D expenses related to MT1621 increased by $10.2 million
year-over-year as we continued to advance the MT1621 development program,
including work related to chemistry, manufacturing, and controls process
requirements. We plan to submit an NDA to the FDA in the second half of 2022.
Internal costs for research and development activities increased by $9.9 million
year-over-year primarily driven by personnel-related expenses from increased R&D
headcount.
Selling, General and Administrative Expense
Year Ended December 31,
(In thousands) 2021 2020 $ Change
Selling, general and administrative $ 148,524 $ 99,574 $ 48,950
Selling, general and administrative expense consists primarily of salaries and
related costs for our personnel, including stock-based compensation, market
research expenses for our product and product candidates that are in development
and marketing expenses to support our commercial launch efforts, executive,
finance, accounting, business development and internal support functions,
facility-related costs and consulting fees, in each case not otherwise included
in research and development expenses.
Selling, general and administrative expense increased by $49.0 million in 2021
compared to 2020. The increase was primarily attributable to a $16.0 million
increase in personnel-related costs, which included a $4.9 million increase for
stock-based compensation as we build out our specialized and focused commercial
teams in support of our Fintepla product launch in the U.S. and in preparation
of our product launch in Europe and headcount additions in general and
administrative to support our commercial team. In addition, commercial spend
related to market research, strategic and logistic planning for our product
launch also contributed $12.9 million to the increase. The remainder of the
increase was attributable to higher insurance premium costs and an increase in
utilization of professional services, as well as infrastructure and
facilities-related costs.
Intangible Asset Amortization
Our intangible asset consist of worldwide development, commercialization and
related intellectual property rights including patents and licenses for our
product, Fintepla, which at the time of our acquisition in October 2014 was
classified as an indefinite-lived IPR&D asset. Upon FDA approval of Fintepla in
June 2020, this indefinite-lived asset was reclassified to a finite-lived
intangible asset subject to amortization.
In July 2020, we commercially launched Fintepla and commenced amortization of
this asset on a straight-line basis over its estimated useful life of 13 years.
For the year ended December 31, 2021, intangible asset amortization expense was
$7.9 million.
Acquired In-Process Research and Development and Related Costs
Acquired IPR&D consists of existing research and development projects at the
time of the acquisition. Projects that qualify as IPR&D assets represent those
that have not yet reached technological feasibility and have no alternative
future use.
For the year ended December 31, 2021, we did not incur acquired IPR&D expense.
For the year ended December 31, 2020, acquired IPR&D expense of $10.7 million
consisted of non-refundable, option maintenance payments and exercise fees paid
to Tevard to acquire license rights under the Dravet syndrome development
program.
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Change in Fair Value of Contingent Consideration
Year Ended December 31,
(In thousands) 2021 2020
Change in fair value of contingent consideration $ 1,885 $ 8,600The contingent consideration liability relates to milestone payments under an
existing agreement in connection with our prior acquisition in October 2014. At
each reporting period, the estimated fair value of the liability is determined
by applying an income approach which utilizes variable inputs, such as the
probability of success for achieving regulatory/commercial milestones,
anticipated future cash flows, risk-free adjusted discount rates, and
nonperformance risk. Any change in the fair value of contingent consideration is
recorded within operating expenses.
For the year ended December 31, 2021, the $1.9 million increase in the estimated
fair value of our contingent consideration liabilities was primarily
attributable to the passage of time. For the year ended December 31, 2020, the
$8.6 million increase in the estimated fair value of our contingent
consideration liabilities was due to the achievement of milestones based on
Fintepla regulatory approvals obtained in the U.S. and in the EU.
Other Income (Expense), Net
Year Ended December 31,
(In thousands) 2021 2020 $ Change
Interest income $ 659 $ 2,891 $ (2,232)
Interest expense (15,276) (3,759) 11,517
Other income 11,406 21,777 (10,371)
Total other income, net $ (3,211) $ 20,909 $ (1,086)
Interest income decreased by $2.2 million during the year ended December 31,
2021, compared to the year ended December 31, 2020, as a result of lower average
investment balances, which is used to fund our operations. Interest expense
increased by $11.5 million during the year ended December 31, 2021, as compared
to the year ended December 31, 2020, as our senior convertible notes were
outstanding for an entire year. Other income primarily consist of tax election
claims made under U.K.'s small and medium-sized enterprises (SMEs) R&D tax
relief scheme where we elected to surrender net operating losses that arise from
our eligible R&D activities in exchange for a cash payment from the U.K. tax
authorities. For the year ended December 31, 2021, we recognized income of $12.4
million related to a tax election claim for the 2019 tax year. For the year
ended December 31, 2020, we recognized $19.7 million related to tax election
claims for both the 2018 and 2017 tax years.
Income Taxes
For the year ended December 31, 2021, a provision for income taxes of
$0.1 million has been recognized related primarily to our subsidiaries located
outside of the United States. For the year ended December 31, 2020, income tax
benefit of $17.4 million resulted from a change in our valuation allowance
balance associated with the completion of our in-process research and
development program for Fintepla. Prior to regulatory approval of Fintepla in
June 2020, our indefinite-lived asset was not subject to amortization. Upon
completion of the IPR&D program, the indefinite-lived intangible asset was
reclassified to an intangible asset subject to amortization over its estimated
useful life. As a result, future reversals of deferred tax liabilities related
to finite-lived intangible assets provided a source of income when assessing the
realizability of our U.K. net operating loss carryforwards. We therefore
recorded a $17.4 million income tax benefit in 2020 with a corresponding
reduction to our valuation allowance on our U.K. deferred tax assets. The income
tax benefit included the effects of foreign exchange differences on
remeasurement of the deferred tax liability. An immaterial portion of the
adjustment for foreign exchange differences was related to prior periods.
Liquidity and Capital Resources
Excluding gains from two discrete business divestitures, we have incurred
significant net losses and negative cash flows from operating activities since
inception resulting in an accumulated deficit of $1.6 billion as of December 31,
2021. For the years ended December 31, 2021 and 2020, we incurred net losses of
$227.4 million and $209.4 million, respectively. We expect to incur operating
losses and negative cash flow for additional future periods due to costs
associated with the commercialization of Fintepla for Dravet syndrome and
pre-commercialization activities
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related to Fintepla for LGS in the U.S. and in the EU, the advancement of our
clinical programs related to MT-1621 and CDD, and other infrastructure support
costs. In addition, excluding amounts accrued for contingent consideration
related to our acquisition of Brabant, we may be required to pay $100.0 million
and $50.0 million in milestone payments upon regulatory approval of MT-1621 by
the FDA and the EMA, respectively, related to our acquisition of Modis. These
contingent consideration payments have not be recognized in the consolidated
balance sheets as the regulatory approval contingency has not been resolved and
the consideration is not yet payable. Historically, we have relied primarily on
the proceeds from equity and convertible debt offerings to finance our
operations. Our recent financing activities include offerings of common stock
and convertible debt.
Underwritten Public Offerings
In March 2020, we completed an underwritten public offering of 9,798,000 shares
of our common stock at an offering price of $23.50 per share, including
1,278,000 shares sold pursuant to the underwriters' full exercise of their
option to purchase additional shares. Net proceeds realized from the offering
amounted to approximately $221.7 million, after deducting commissions and other
offering costs.
2.75% Convertible Senior Notes Due 2027
In September and October 2020, we issued $230.0 million principal amount of
2.75% convertible senior notes due 2027 in a private offering (collectively, the
Convertible Senior Notes or Notes). Total proceeds realized from the sale of the
Notes, net of issuance costs of $7.5 million, were $222.5 million. The Notes are
governed by an indenture (Indenture), dated as of September 28, 2020, between
Zogenix and U.S. Bank National Association, as trustee. Under the Indenture, the
Notes are senior, unsecured obligations of Zogenix, are equal in right of
payment with its future senior, unsecured indebtedness of Zogenix, and
structurally subordinated to all indebtedness and liabilities of its
subsidiaries. The principal amount of the Notes was issued at par value and the
Notes accrue interest at a rate of 2.75% per year, payable semi-annually in
arrears on April 1 and October 1 of each year, beginning on April 1, 2021. The
Notes mature on October 1, 2027, unless earlier converted by the holders or
redeemed or repurchased by us in accordance with their terms prior to such date.
The Indenture contains customary terms and covenants, including certain events
of default upon which the Notes may be due and payable immediately, but does not
contain any financial covenants. As of December 31, 2021, we were in compliance
with all covenants under the Indenture.
Material Cash Requirements
Our primary uses of cash are to fund our operations as we continue to grow our
business and discover further indications and uses for our therapies. We will
require a significant amount of cash for clinical trials and research and
development as we invest in our therapies, the commercialization of our
therapies and collaborative arrangements to expand our distribution channels. We
expect that our sales and marketing, general and administrative, and research
and development expenses will continue to increase as we increase our sales
volume, expand our marketing efforts, increase our headcount to drive increased
sales of our therapies and continue research and development efforts to further
enhance our therapies. Our future funding requirements will depend on many
factors, including, but not limited to:
•our ability to successfully market and sell, and the level of demand for,
Fintepla;
•delays and cost increases as a result of the COVID-19 pandemic;
•the costs incurred to manage our commercial infrastructure, including our sales
and marketing personnel, and costs incurred under our agreements with third
parties for warehousing, distribution, cash collection and related commercial
activities;
•the rate of progress and cost of our clinical trials and other product
development programs for our product candidates and any future product
candidates that we may develop, in-license or acquire;
•the timing of regulatory approval for any of our product candidates and the
commercial success of approved products;
•the costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights associated with our product candidates;
•the costs, terms and timing of manufacturing for Fintepla and our product
candidates;
•the effect of competing technological and market developments; and
Zogenix, Inc. | 2021 Form 10-K | 86
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•the terms and timing of any additional collaborative, licensing, co-promotion
or other arrangements that we may establish, including our ability to secure a
global strategic development and commercialization partner for Fintepla.
Until we can generate a sufficient amount of product revenue and cash flow from
operations and achieve profitability, we expect to finance future cash needs
through public or private equity offerings, debt financings, receivables
financings or corporate collaboration and licensing arrangements. We cannot be
certain that additional funding will be available on acceptable terms, or at
all. If we are unsuccessful in raising additional funds when needed, we may be
required to significantly delay, reduce the scope of or eliminate one or more of
our development programs or our commercialization efforts, or cease operating as
a going concern. We also may be required to relinquish, license or otherwise
dispose of rights to product candidates or products that we would otherwise seek
to develop or commercialize ourselves on terms that are less favorable than
might otherwise be available. If we raise additional funds by issuing equity
securities, substantial dilution to existing stockholders would likely result.
If we raise additional funds by incurring debt financing, the terms of the debt
may involve significant cash payment obligations as well as covenants and
specific financial ratios that may restrict our ability to operate our business.
If we are unable to maintain sufficient financial resources, including by
raising additional funds when needed, our business, financial condition and
results of operations will be materially and adversely affected and we may be
unable to continue as a going concern.
The following table summarizes our cash and cash equivalents and marketable
securities:
December 31,
(In thousands) 2021 2020 $ Change
Cash and cash equivalents $ 101,180 $ 166,916 $ (65,736)
Marketable securities 200,548 338,193 (137,645)
Total $ 301,728 $ 505,109 $ (203,381)As of December 31, 2021, we had cash, cash equivalents and marketable securities
of $301.7 million, compared to $505.1 million as of December 31, 2020. We
believe our cash, cash equivalents and marketable securities, together with the
cash we expect to generate from product sales and under our collaboration
arrangement will be sufficient to meet our anticipated operating requirements
for at least the next 12 months following the date of issuance of these
consolidated financial statements.
Sources and Uses of Cash
The following table summarizes our cash flow activities:
Year Ended December 31,
(In thousands) 2021 2020
Net cash used in operating activities $ (185,305) $ (167,531)
Net cash (used in) provided by investing activities 137,395 (165,100)
Net cash provided by financing activities (17,826) 437,477
Operating Activities
Net cash used in operating activities of $185.7 million in 2021 was primarily
attributable to our net loss as we continue to invest in research and
development related to our various late-stage development programs, expansion of
our infrastructure to support the commercialization of Fintepla and anticipated
growth. Non-cash items included stock-based compensation expense of $35.1
million, amortization of debt discount and issuance costs of $8.8 million
related to our convertible senior notes and intangible asset amortization of
$7.9 million. Net changes in operating assets and liabilities totaled an outflow
of $14.3 million principally due to the timing of vendor payments and increases
in accounts receivable and inventory as a result of growth in Fintepla product
sales.
Net cash used in operating activities of $167.5 million in 2020 was primarily
attributable to our net loss and research and development spend related to
clinical trials and manufacturing process development for Fintepla. Cash used in
operating activities included R&D expenses related to ongoing open-label
clinical trials for Fintepla and manufacturing process development for Fintepla
and MT1621, commercial preparedness and planning
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expenses including additions in headcount to build out our sales force of key
account managers and general and administrative costs to support our business
objectives.
Investing Activities
Net cash provided by investing activities of $137.4 million in 2021 was
primarily attributable to maturities of available-for-sale marketable
securities.
Net cash used in investing activities of $165.1 million in 2020 was primarily
attributable to net purchases of available-for-sale marketable securities.
Financing Activities
Net cash used in financing activities of $17.8 million in 2021 was primarily
attributable to payments of contingent consideration for regulatory and
sales-based milestones related to Fintepla, partially offset by net proceeds
from the issuance of common stock pursuant to our equity incentive plans.
Net cash provided by financing activities of $437.5 million in 2020 primarily
consisted of net proceeds realized from the issuance of our common stock in a
public offering, the issuance of convertible debt and proceeds from the sale of
common stock under our "at-the-market" program, as well as net proceeds received
related to our equity incentive program. In July 2020, we made a $15.0 million
milestone payment pursuant to our purchase agreement of Brabant in 2014 upon FDA
approval of Fintepla.
Recent Accounting Pronouncements
For the summary of recent accounting pronouncements applicable to our
consolidated financial statements, see Note 2, Summary of Significant Accounting
Policies, in Part IV, Item 8, Notes to Consolidated Financial Statements, which
is incorporated herein by reference.
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