# CORCEPT THERAPEUTICS INC (CORT) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from CORCEPT THERAPEUTICS INC's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1088856/000162828022002714/cort-20211231.htm Accession: 0001628280-22-002714 Filing date: 2022-02-15 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/CORT/ All MD&A years: /company/CORT/mda/ Next year: /company/CORT/mda/fy2022/ (FY 2022) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition and is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes to financial statements, risk factors and other disclosures included in this Form 10-K. Our consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of such forward-looking statements and the potential risks and uncertainties that may affect their accuracy, see “Forward-Looking Statements” included in “Risk Factors” in this Form 10-K and the “Overview” and “Liquidity and Capital Resources” sections of this MD&A. Overview We are a commercial-stage company engaged in the discovery and development of drugs that treat severe metabolic, oncologic and neuropsychiatric disorders by modulating the effects of the hormone cortisol. Since 2012, we have marketed Korlym (mifepristone) for the treatment of patients suffering from Cushing’s syndrome. Our portfolio of proprietary selective cortisol modulators consists of four structurally distinct series totaling more than 1,000 compounds. Cushing’s Syndrome Korlym. We sell Korlym in the United States, using experienced clinical sales representatives to call on physicians caring for patients with endogenous Cushing’s syndrome (hypercortisolism). Because many people who suffer from Cushing’s syndrome are undiagnosed or inadequately treated, we have developed and continue to refine and expand programs to educate physicians and patients about screening for hypercortisolism and the role Korlym can play in treating patients with the disorder. We also have a field-based force of medical science liaisons. We use one specialty pharmacy and one specialty distributor to distribute Korlym and provide logistical support to physicians and patients. Our policy is that no patient with Cushing’s syndrome will be denied access to Korlym for financial reasons. To help us achieve that goal, we fund our own patient support programs and donate money to independent charitable foundations that help patients pay for all aspects of their Cushing’s syndrome care, whether or not that care includes taking Korlym. Relacorilant. We are conducting two Phase 3 trials (named GRACE and GRADIENT) of our proprietary, selective cortisol modulator, relacorilant, as a treatment for patients with Cushing’s syndrome. Each patient in GRACE receives relacorilant for 22 weeks. Patients who exhibit pre-specified improvements in hypertension or glucose metabolism enter a 12-week, double-blind, “randomized withdrawal” phase, in which half of the patients continue receiving relacorilant and half receive placebo. The trial’s primary endpoint is the rate and degree of relapse in patients receiving placebo measured against the rate and degree of relapse in those continuing relacorilant. GRACE has a planned enrollment of 130 patients with any etiology of endogenous Cushing’s syndrome at sites in the United States, Canada, Europe and Israel. Our GRADIENT trial is studying patients whose Cushing’s syndrome is caused by a benign adrenal tumor. Half of the patients in GRADIENT will receive relacorilant for 26 weeks and half will receive placebo. The trial’s primary endpoints are improvement in glucose metabolism and hypertension. The planned enrollment for this study is 130 patients. Many of the clinical sites in GRACE are participating in GRADIENT. The FDA and the EC have designated relacorilant as an orphan drug for the treatment of Cushing’s syndrome. Oncology There is substantial in vitro, in vivo and clinical evidence that cortisol’s activity allows certain types of solid tumors to resist treatment. Many types of solid tumors express GR and are potential targets for cortisol modulation therapy. Relacorilant in Patients with Advanced Ovarian Cancer. In May 2021, we announced positive preliminary results from our 178-patient, controlled, multi-center, Phase 2 trial of relacorilant combined with nab-paclitaxel in patients with platinum resistant ovarian cancer. Based on these positive results, we plan to initiate a pivotal Phase 3 trial in the second quarter of 2022. 31 Exicorilant and Relacorilant in Patients with Castration-Resistant Prostate Cancer (“CRPC”). Androgen deprivation is the standard treatment for metastatic prostate cancer. Tumors often escape androgen deprivation therapy when cortisol activity at GR supplants androgen activity at its receptor in stimulating tumor growth. We are conducting a dose-finding trial of our proprietary, selective cortisol modulator exicorilant in combination with enzalutamide in patients with metastatic CRPC. Investigators at the University of Chicago are conducting a dose-finding trial of relacorilant combined with enzalutamide in the same patient population. Relacorilant in Patients with Adrenal Cancer with Cortisol Excess. We are conducting an open-label, Phase 1b trial of relacorilant plus the PD-1 checkpoint inhibitor pembrolizumab in 20 patients with metastatic or unresectable adrenal cancer with cortisol excess. The trial is examining whether adding relacorilant to pembrolizumab therapy reduces cortisol-activated immune suppression sufficiently to help pembrolizumab achieve its intended tumor-killing effect, while relacorilant treats the Cushing’s syndrome caused by excess cortisol activity. Metabolic Diseases AIWG. We are conducting two double-blind, placebo-controlled, Phase 2 trials of miricorilant in patients with AIWG – GRATITUDE and GRATITUDE II. GRATITUDE is evaluating whether a daily dose of miricorilant can reverse recent AIWG. Study participants receive their established antipsychotic medication plus either miricorilant or placebo for 12 weeks. GRATITUDE has planned enrollment of 100 patients with schizophrenia or bipolar disorder and is being conducted at 30 sites in the United States. GRATITUDE II is evaluating whether miricorilant can reverse long-standing AIWG. Study participants receive their established antipsychotic medication plus either miricorilant or placebo for 26 weeks. GRATITUDE II has planned enrollment of 150 patients with schizophrenia and is being conducted at 35 centers in the United States. The primary endpoint in both the GRATITUDE and GRATITUDE II trials is the change in body weight from baseline, relative to placebo. Liver Disease. We are also studying miricorilant as a potential treatment for nonalcoholic steatohepatitis (“NASH”). In April 2021, we suspended our Phase 2a trial after observing elevated liver enzymes in four of the five patients who received miricorilant, which resolved after miricorilant was withdrawn. The patients with elevated liver enzymes exhibited large, rapid reductions in liver fat. We are conducting a Phase 1b dose-finding trial in patients with presumed NASH to see if an alternative dosing regimen can capture this benefit without causing excessive liver irritation. Neurological Disorders Our selective cortisol modulator dazucorilant (formerly “CORT113176”), which has shown promise in animal models of amyotrophic lateral sclerosis (“ALS”), has completed its Phase 1 trial. We plan to advance it to Phase 2 as a potential treatment for that disease. COVID-19 Pandemic Much of the world is subject to varying degrees of pandemic-related public health restrictions, including California, where we are headquartered, and in the jurisdictions where our vendors are located and where we sell Korlym and conduct clinical trials. These restrictions, as well as measures voluntarily undertaken by patients, physicians, hospitals and medical clinics, have reduced our revenue and make it difficult to grow our Korlym business. The pandemic’s impact on the pace of our clinical development programs has been variable. Our trials of indications not considered immediately life-threatening, such as Cushing’s syndrome, CRPC and AIWG have experienced slower enrollment. In addition, some clinical sites have stopped enrolling new patients or have reduced the frequency with which physicians see study participants. Some sites have suspended or halted the initiation of new clinical trials. Our trials in patients with immediately life-threatening diseases, such as advanced pancreatic and ovarian cancer, did not encounter delays. We expect that pandemic-related impediments to our business will continue so long as there are COVID-19 public health restrictions and risk-reducing behavior by physicians and patients in the locations where we do business and conduct our clinical trials. Please see “COVID-19 Pandemic” under Item 1 of this Annual Report and the risk factor under Item 1A of this Annual Report, “The COVID-19 pandemic has adversely affected and is continuing to adversely affect our business. Other public 32 health emergencies, natural disasters, terrorism or other catastrophes could disrupt our activities and render our own or our vendors’ facilities and equipment inoperable or inaccessible and require us to curtail or cease operations.” Results of Operations Net Product Revenue – Net product revenue is gross product revenue from sales to our customers less deductions for estimated government rebates and chargebacks. Net product revenue was $366.0 million for the year ended December 31, 2021, compared to $353.9 million and $306.5 million for the years ended December 31, 2020 and 2019, respectively. For the years ended December 31, 2021 and 2020, higher sales volumes accounted for 20.7 percent and 31.9 percent of the increases, respectively, as we shipped Korlym to more patients. Increases in the average price of Korlym accounted for the remaining growth. The increase in Korlym’s price for the year ended December 31, 2021 was primarily due to a price increase effective March 1, 2021. Cost of sales – Cost of sales includes the cost of API, tableting, packaging, personnel, overhead, stability testing and distribution. Cost of sales was $5.3 million for the year ended December 31, 2021, compared to $5.6 million and $5.5 million for the years ended December 31, 2020 and 2019, respectively. Cost of sales as a percentage of revenue was 1.4 percent, 1.6 percent and 1.8 percent for the years ended December 31, 2021, 2020 and 2019, respectively. The decreases in cost of sales as a percentage of revenue are due to the increased average price of Korlym and reduced manufacturing costs. Research and development expense – Research and development expense includes the cost of (1) recruiting and compensating development personnel, (2) clinical trials, (3) drug product and preclinical studies in support of clinical trials and regulatory submissions, (4) discovery research and (5) the development of drug formulations and manufacturing processes. Research and development expense was $113.9 million for the year ended December 31, 2021, compared to $114.8 million for the comparable period in 2020. The decrease was primarily due to a decline in spending on our oncology program due to timing and completion of patient enrollments in our clinical trials, partially offset by increased spending on employee recruiting and compensation expenses and the advancement of our other development programs. Research and development expense was $114.8 million for the year ended December 31, 2020, compared to $89.0 million for the comparable period in 2019. The increase was due to increased spending on the advancement of our development programs and employee recruiting and compensation expenses. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020(1)","","2019(1)"],["","(in thousands)"],["Development programs:"],["Oncology","$","17,984","","","$","34,207","","","$","20,657"],["Cushing\u2019s syndrome","28,639","","","26,821","","","24,010"],["Metabolic diseases","20,594","","","20,408","","","19,545"],["Pre-clinical and early-stage selective cortisol modulators","21,924","","","14,726","","","10,546"],["Unallocated activities, including manufacturing and regulatory activities","10,617","","","7,380","","","4,718"],["Stock-based compensation","14,106","","","11,222","","","9,541"],["Total research and development expense","$","113,864","","","$","114,764","","","$","89,017"],["(1) Beginning in the first quarter of 2021, expenses for the years ended December 31, 2020 and 2019 previously allocated to oncology and endocrinology were re-allocated between Cushing's syndrome, metabolic diseases and pre-clinical development programs."]] [[/GREPCENT_TABLE]] It is difficult to predict the timing and cost of development activities, which are subject to many uncertainties and risks, including inconclusive or negative results, slow patient enrollment, adverse side effects, difficulties in the formulation or manufacture of study drugs and the lack of drug-candidate efficacy. In addition, clinical development is subject to government oversight and regulations that may change without notice. We expect our research and development expense to be higher in 2022 than in 2021 as our clinical programs advance. Research and development spending in future years will depend on the outcome of our pre-clinical and clinical trials and our development plans. 33 Selling, general and administrative expense - Selling, general and administrative expense includes (1) compensation of employees, consultants and contractors engaged in commercial and administrative activities, (2) the cost of vendors supporting commercial activities and (3) legal and accounting fees. Selling, general and administrative expense was $122.4 million for the year ended December 31, 2021, compared to $105.3 million for the comparable period in 2020. The increase was primarily due to increases in employee recruiting and compensation expenses, sales and marketing expenses and professional services. Selling, general and administrative expense was $105.3 million for the year ended December 31, 2020, compared to $100.4 million for the comparable period in 2019. The increase was primarily due to increases in employee recruiting and compensation expenses, legal and marketing costs, volume-related pharmacy and other distribution costs and professional service fees. We expect our selling, general and administrative expense to be higher in 2022 than in 2021 due to increased commercial and administrative activities, including litigation and administrative support for increased research and development. Interest and other income - Interest and other income for the years ended December 31, 2021, 2020 and 2019 was $0.5 million, $3.4 million and $5.1 million, respectively, and consisted primarily of interest income from marketable securities. Interest and other income decreased for the year ended December 31, 2021 from the comparable periods in 2020 and 2019 primarily due to market-wide reductions in interest rates. Income tax expense - Income tax expense was $12.5 million for the year ended December 31, 2021, compared to $25.6 million for the comparable period in 2020. The decrease in income tax expense was due to a decrease in our effective tax rate from 10 percent for the year ended December 31, 2021 compared to 19.4 percent for the comparable period in 2020. The decrease in the effective tax rate in 2021 as compared to 2020 and 2019 is primarily due to increased excess tax benefits from stock-based compensation in 2021. While our core effective tax rate has remained relatively consistent throughout the years, the tax rate can vary based upon the timing of provisions related to discrete tax items, including current and future excess tax benefits from stock-based compensation. Liquidity and Capital Resources Since 2015, we have relied on revenues from the sale of Korlym to fund our operations. Based on our current plans and expectations, we expect to fund our operations and planned research and development activities over the next 12 months and beyond without needing to raise additional funds, although we may choose to raise additional funds for other reasons. If we were to raise funds, equity financing would be dilutive, debt financing could involve restrictive covenants and funds raised through collaborations with other companies may require us to relinquish certain rights in our product candidates. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $335.8 million, consisting of cash and cash equivalents of $77.6 million and marketable securities of $258.2 million, compared to cash, cash equivalents and marketable securities of $476.9 million, consisting of cash and cash equivalents of $76.2 million and marketable securities of $400.7 million as of December 31, 2020. The cash in our bank accounts and our marketable securities could be affected if the financial institutions holdings them were to fail or severely adverse conditions were to rise in the markets for public or private debt securities. We have never experienced a loss or lack of access to cash. Net cash provided by operating activities for the years ended December 31, 2021, 2020 and 2019 was $167.9 million, $152.0 million and $136.1 million, respectively. These increases were primarily due to higher revenue as a result of increases in Korlym’s price and shipping volume. Net cash provided by investing activities for the year ended December 31, 2021 was $136.1 million. Net cash used in investing activities for the years ended December 31, 2020 and 2019 was $119.3 million and $117.8 million, respectively. The change in net cash from investing activities for the year ended December 31, 2021 compared to 2020 was primarily due to our use of cash for financing activities (specifically, the repurchase of our common stock) instead of increasing our investment in marketable securities. The change in net cash used in investing activities for the years ended December 31, 2020 compared to 2019 was primarily due to increased purchases of marketable securities with cash generated by our operating activities. In the year ended December 31, 2021, we spent $318.8 million acquiring shares of our common stock ($207.5 million pursuant to our tender offer, $88.5 million pursuant to our Stock Repurchase Program that expired on September 31, 2021 and $22.8 million in connection with the net exercise of employee and director stock options), offset by $16.2 million received from 34 the exercise of stock options, resulting in net cash used in financing activities of $302.6 million. In the comparable periods in 2020 and 2019, we spent $11.0 million and $37.1 million, respectively, acquiring shares of our common stock, offset by $23.2 million and $8.4 million received from the exercise of stock options, respectively, resulting in net cash provided by financing activities of $12.2 million for the year ended December 31, 2020 and net cash used in financing activities of $28.6 million for the year ended December 31, 2019. As of December 31, 2021, we had retained earnings of $195.0 million. Manufacturing Purchase Commitments We have other contractual payment obligations and purchase commitments, the timing of which are contingent on future events, including the initiation and completion of manufacturing projects. In March 2014, we entered into a long-term agreement with one contract manufacturer, PCAS to produce mifepristone, the API for Korlym. On July 25, 2018, we amended this agreement to add a second manufacturing site and extend its term to December 31, 2021, with two one-year automatic renewals, unless either party provides 12 months advance written notice of its intent not to renew. The amendment provides exclusivity between PCAS and Corcept. If PCAS is unable to meet our requirements, we may purchase mifepristone from another supplier. We have agreements with two third-party manufacturers to produce and bottle Korlym tablets. As of December 31, 2021, we had $2.0 million remaining in commitments to purchase API from PCAS and have a $0.1 million commitment to purchase Korlym tablets. Net Operating Loss Carryforwards See Note 9, Income Taxes in our audited consolidated financial statements. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and judgments that affect the amount of assets, liabilities and expenses we report. We base our estimates on historical experience and on other assumptions we believe to be reasonable. Actual results may differ from our estimates. Our significant accounting policies are described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. We believe the following accounting estimates and policies to be critical: Net Product Revenue To determine net product revenue, we deduct from sales the cost of our patient co-pay assistance program and our estimates of (i) government chargebacks and rebates, (ii) discounts provided to our specialty distributor (“SD”) for prompt payment and (iii) reserves for expected returns. We record these estimates at the time we recognize revenue and update them as new information becomes available. Our estimates take into account our understanding of the range of possible outcomes. If results differ from our estimates, we adjust our estimates, which changes our net product revenue and earnings. We report any changes in the period they become known, even if they concern transactions occurring in prior periods. Government Rebates Korlym is eligible for purchase by, or qualifies for reimbursement from, Medicaid and other government programs that are eligible for rebates on the price they pay for Korlym. To determine the appropriate amount to reserve against these rebates, we identify Korlym sold to patients covered by government-funded programs, apply the applicable government discount to these sales, then estimate the portion of total rebates we expect will be claimed. We (i) deduct this reserve from revenue in the period to which the rebates relate and (ii) include in accrued expenses on our consolidated balance sheet a current liability of equal amount. Chargebacks Although we sell Korlym to the SD at full price, some of the government entities to which the SD sells receive a discount. The SD recovers the full amount of any related discounts by reducing its payment to us (this reduction is called a “chargeback”). Chargebacks sometimes relate to Korlym sold to the SD in prior periods. We deduct from our revenue in each period chargebacks claimed by the SD for Korlym we sold to the SD that period. We also create a reserve for chargebacks we estimate the SD will claim in future periods against Korlym it purchased in the current period but has not yet resold. We determine the amount of this reserve based on our experience with SD chargebacks and our understanding of the SD’s customer 35 base and business practices. We deduct this reserve from revenue and include in accrued expenses on our consolidated balance sheet a current liability of equal amount. Patient Assistance Program and Charitable Support It is our policy that no patient be denied Korlym due to inability to pay. We provide financial assistance to eligible patients whose insurance policies have high deductibles or co-payments and deduct the amount of such assistance from gross revenue. We determine the assistance we provide each patient by applying our program guidelines to that patient’s financial position and their insurance policy’s co-payment and deductible requirements. We also donate cash to charities that help patients with financial need pay for the treatment of Cushing’s syndrome (which treatment may not include Korlym). We do not include in our revenue payments these charities make on behalf of patients receiving Korlym. We provide Korlym at no cost to uninsured patients who do not qualify for charitable support. Sales Returns Federal law prohibits the return of Korlym sold to patients. Sales to our SD are subject to return. We deduct the amount of Korlym we estimate the SD will return from each period’s gross revenue. We base our estimates on quantitative and qualitative information including, but not limited to, historical return rates, the amount of Korlym held by the SD and projected demand. To date, returns have not been material. Inventory and Cost of Sales We value inventory at the lower of cost or net realizable value and determine the cost of inventory we sell using the specific identification method, which approximates a first-in, first-out basis. We assess our inventory levels at each reporting period and write down inventory that is either expected to be at risk of expiration prior to sale, has a cost basis in excess of its expected net realizable value, or for which there are inventory quantities in excess of expected requirements. We destroy expired inventory and recognize the related costs as cost of sales in that period’s statement of comprehensive income. Cost of sales includes the cost of manufacturing Korlym, including materials, third-party manufacturing costs and indirect personnel and other overhead costs, based on the number of Korlym tablets for which we recognize revenue, as well as costs of stability testing, logistics and distribution. Recently Issued Accounting Pronouncements See Note 1, Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements.