Nuvalent, Inc. (NUVL) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | ||||||||||
| (in thousands) | ||||||||||||
| Operating expenses: | ||||||||||||
| Research and development | $ | 35,559 | $ | 15,403 | $ | 20,156 | ||||||
| General and administrative | 10,258 | 1,502 | 8,756 | |||||||||
| Total operating expenses | 45,817 | 16,905 | 28,912 | |||||||||
| Loss from operations | (45,817 | ) | (16,905 | ) | (28,912 | ) | ||||||
| Other income (expense): | ||||||||||||
| Change in fair value of preferred stock tranche rights | (635 | ) | 2,384 | (3,019 | ) | |||||||
| Other income (expense), net | 114 | (35 | ) | 149 | ||||||||
| Total other income (expense), net | (521 | ) | 2,349 | (2,870 | ) | |||||||
| Net loss | $ | (46,338 | ) | $ | (14,556 | ) | $ | (31,782 | ) |
Research and development expenses
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | |||||||||
| (in thousands) | |||||||||||
| Direct research and development expenses by program: | |||||||||||
| NVL-520 | $ | 11,411 | $ | 4,583 | $ | 6,828 | |||||
| NVL-655 | 7,302 | 2,948 | 4,354 | ||||||||
| Discovery programs | 7,388 | 3,835 | 3,553 | ||||||||
| Unallocated research and development expenses: | |||||||||||
| Personnel-related (including stock-based compensation) | 8,067 | 3,024 | 5,043 | ||||||||
| Other | 1,391 | 1,013 | 378 | ||||||||
| Total research and development expenses | $ | 35,559 | $ | 15,403 | $ | 20,156 |
Research and development expenses were $35.6 million for the year ended December 31, 2021, compared to $15.4 million for the year ended December 31, 2020. The increase in direct research and development expenses related to
NVL-520
of $6.8 million was primarily due to increased manufacturing and clinical costs, partially offset by a decrease in preclinical costs as we progressed
NVL-520
and prepared for the Phase 1 portion of our
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ARROS-1
clinical trial. The increase in direct research and development expenses related to
NVL-655
of $4.4 million was primarily due to increased manufacturing and clinical costs to support our planned clinical trial and increased costs for
IND-enabling
studies, partially offset by a decrease in preclinical costs as we progressed
NVL-655.
The increase in direct research and development expenses related to our discovery programs of $3.6 million was primarily due to an increase in preclinical costs due to progress of our discovery programs. The increase in personnel-related expenses of $5.0 million was primarily due to an increase in headcount. Personnel-related costs for the years ended December 31, 2021 and 2020 included stock-based compensation expense of $1.3 million and $0.7 million, respectively.
General and administrative expenses
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Change | |||||||||
| (in thousands) | |||||||||||
| Personnel-related (including stock-based compensation) | $ | 5,131 | $ | 797 | $ | 4,334 | |||||
| Professional and consultant fees | 3,095 | 525 | 2,570 | ||||||||
| Other | 2,032 | 180 | 1,852 | ||||||||
| Total general and administrative expenses | $ | 10,258 | $ | 1,502 | $ | 8,756 |
General and administrative expenses were $10.3 million for the year ended December 31, 2021, compared to $1.5 million for the year ended December 31, 2020. The increase in personnel-related costs of $4.3 million was primarily due to an increase in headcount. Personnel-related costs for the years ended December 31, 2021 and 2020 included stock-based compensation expense of $2.2 million and less than $0.1 million, respectively. The increase in professional and consultant fees of $2.6 million was primarily due to increased legal and audit fees associated with operating as a public company and our ongoing business activities. The increase in other of $1.9 million was primarily due to increased insurance and recruiting expenses associated with operating as a public company and to support our growing organization.
Other income (expense)
Change in fair value of preferred stock tranche rights
The change in the fair value of the Series A Tranche Rights for the year ended December 31, 2021, compared to the year ended December 31, 2020 was primarily due to the change in the fair value of our preferred stock during that period.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for the foreseeable future, if at all. Through December 31, 2021, we have funded our operations primarily with proceeds from the sales of Series A and Series B convertible preferred stock, the issuance or convertible notes (which converted to convertible preferred stock in 2018), debt financing from stockholders (which was settled in convertible preferred stock in February 2021) and most recently, with proceeds from the sale of common stock in the IPO completed in August 2021. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $288.1 million.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net cash used in operating activities | $ | (40,000 | ) | $ | (14,949 | ) | ||
| Net cash used in investing activities | (220,028 | ) | — | |||||
| Net cash provided by financing activities | 318,222 | 22,265 | ||||||
| Net increase in cash and cash equivalents | $ | 58,194 | $ | 7,316 |
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Operating activities
During the year ended December 31, 2021, operating activities used $40.0 million of cash, primarily resulting from our net loss of $46.3 million, partially offset by net
non-cash
charges of $4.4 million and net cash provided by changes in our operating assets and liabilities of $1.9 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2021, consisted primarily of a $5.4 million increase in accounts payable and accrued expenses, partially offset by an increase of $3.2 million in other assets.
During the year ended December 31, 2020, operating activities used $14.9 million of cash, resulting from our net loss of $14.6 million and net
non-cash
income of $1.7 million, partially offset by net cash provided by changes in our operating assets and liabilities of $1.3 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2020, consisted primarily of an increase in accounts payable and accrued expenses and other current liabilities of $1.3 million.
Changes in accounts payable, accrued expenses and other current liabilities, prepaid expenses and other current assets and other assets were generally due to growth in our business, the advancement of our research programs and the timing of vendor invoicing and payments.
Investing activities
During the year ended December 31, 2021, net cash used in investing activities was $220.0 million, due to the purchases of marketable securities during the period, partially offset by sales and maturities of marketable securities.
Financing activities
During the year ended December 31, 2021, net cash provided by financing activities was $318.2 million, consisting of proceeds from our IPO, net of underwriting discounts and commissions of $177.3 million and proceeds from the issuance of our Series A and Series B convertible preferred stock of $144.7 million, partially offset by payment of IPO costs of $3.0 million.
During the year ended December 31, 2020, net cash provided by financing activities was $22.3 million, consisting of proceeds from the issuance of our Series A convertible preferred stock, partially offset by the issuance of a promissory note to our scientific founder.
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical and clinical activities and clinical trials for our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our discovery programs and product candidates, including the advancement of NVL-520 and planned advancement of NVL-655 throughout clinical development; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the clinical development plans we establish for our product candidates; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the number and characteristics of product candidates that we discover and develop through our product discovery and research efforts; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the terms of any collaboration agreements we may choose to pursue; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the outcome, timing and cost of meeting regulatory requirements established by the FDA, the EMA and other comparable foreign regulatory authorities; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us; |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the effect of competing technological and market developments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the cost and timing of completion of commercial-scale outsourced manufacturing activities; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own. |
As of December 31, 2021, we had cash, cash equivalents and marketable securities of $288.1 million. We expect that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements into 2024. Our existing cash, cash equivalents and marketable securities will not be sufficient to fund any of our product candidates through regulatory approval, and we anticipate needing to raise additional capital to complete the development and commercialization of our product candidates. Our estimate as to how long we expect our existing cash, cash equivalents and marketable securities to fund our operations is based on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including those listed above.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Other Commitments
We lease certain office space in Cambridge, Massachusetts pursuant to a
month-to-month
lease. We enter into contracts in the normal course of business with our CMOs, CROs and other third parties to support preclinical research studies and other research and development activities. These contracts are generally cancelable by us.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S. (GAAP). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
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Accrued research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated cost incurred for the services when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on
a pre-determined schedule
or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | vendors in connection with preclinical development activities; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | CROs in connection with preclinical and clinical studies and testing; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | CMOs in connection with the process development and scale up activities and the production of materials. |
We base the expense recorded related to contract research and manufacturing on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs and CMOs that conduct services and supply materials. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. While the majority of our service providers invoice us in arrears for services performed, on a
pre-determined
schedule or when contractual milestones are met, some require advance payments. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. We record these as prepaid expenses on our consolidated balance sheet.
Stock-based compensation
We measure stock options with service-based vesting granted to employees,
non-employees
and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. We measure restricted common stock awards using the difference between the purchase price per share of the award, if any, and the fair value of our common stock at the date of grant. Compensation expense for the awards is recognized over the requisite service period, which is generally the vesting period of the respective award. We use the straight-line method to record the expense of awards with only service-based vesting conditions. We account for forfeitures of stock-based awards as they occur.
We classify stock-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements included in this Annual Report.