# Prime Medicine, Inc. (PRME) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Prime Medicine, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1894562/000162828024008116/prme-20231231.htm
Accession: 0001628280-24-008116
Filing date: 2024-03-01
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PRME/
All MD&A years: /company/PRME/mda/
Previous year: /company/PRME/mda/fy2022/ (FY 2022)
Next year: /company/PRME/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review "Item 1A, Risk Factors" of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biotechnology company committed to delivering a new class of differentiated one-time curative genetic therapies to address the widest spectrum of diseases. We are deploying Prime Editing technology, which we believe is a versatile, precise, and efficient gene editing technology.

To maximize the potential of our Prime Editing technology, we have built a diversified portfolio of investigational therapeutic programs organized around core areas of focus: hematology and immunology, liver, lung, ocular, and neuromuscular. We are advancing additional programs as potential partnership opportunities.

Chronic granulomatous disease, is our most advanced blood program, and we have designated PM359 as our development candidate. We plan to submit an investigational new drug application with the U.S. Food and Drug Administration in the first half of 2024.

Programs within our other areas of focus are in earlier stages of preclinical development and include:

•Liver programs: Wilson’s disease and glycogen storage disease 1b

•Lung program: Cystic fibrosis

•Ocular program: Retinitis pigmentosa caused by Rhodopsin mutations.

•Neuromuscular programs: Friedreich’s ataxia and myotonic dystrophy type 1

•Additional program: CAR-T

We believe our Prime Editing programs are well-positioned to leverage the clinical, regulatory, and manufacturing advancements made to date across gene therapy, gene editing, and delivery modalities to accelerate progression to clinical trials and potential approval.

Components of Our Results of Operations

Research and Development Expenses

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

•the cost allocated to acquire in-process research and development, with no alternative future use associated with asset acquisitions or transactions to license intellectual property, such as our Broad License Agreement;

•expenses incurred in connection with our Pledge to Broad Institute;

•personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation for employees engaged in manufacturing, research and development functions;

•expenses incurred in connection with continuing our current research programs and preclinical development of any product candidates we may identify, including under agreements with third parties, such as consultants and contractors;

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•the cost of developing and validating our manufacturing process for use in our preclinical studies and future clinical trials;

•laboratory supplies and research materials; and

•facilities, depreciation and other expenses related to research and development activities, which include direct or allocated expenses for rent and maintenance of facilities, and utilities.

We expense all research and development costs in the periods in which they are incurred. Most of our research and development expenses have been related to early stage development activities. In the future, external research and development costs for any individual product candidate will be tracked commencing upon product candidate nomination. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform and, as such, are not separately classified.

Upfront and milestone payments made are accrued for and expensed when the achievement of the milestone is probable up to the point of regulatory approval. Milestone payments made upon regulatory approval will be capitalized and amortized over the remaining useful life of the related product.

We expect our research and development expenses to continue to increase substantially for the foreseeable future with our planned research and development activities related to developing any future product candidates, including investments in manufacturing, as we advance any product candidates we may identify and begin to conduct clinical trials.

General and Administrative Expenses

General and administrative expenses consist of salaries and personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources and other administrative functions. General and administrative expenses also include legal fees relating to patents and corporate matters; professional fees paid for accounting, auditing, consulting and tax service; insurance costs; office and information technology costs; and facilities, depreciation and other general and administrative expenses, which include direct or allocated expenses for rent and maintenance of facilities and utilities.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support research and development activities; increased accounting, legal, insurance, and investor and public relations costs as we continue to operate as a public company; and additional intellectual property-related expenses as we file patent applications to protect innovations arising from our research and development activities.

Other Income (Expense)

Other income (expense), net consists of:

•interest and other income earned on our short-term investments; and

•the change in the fair value of our short-term investment in Beam Therapeutics Inc. (“Beam”), a related party, in connection with the Beam Collaboration Agreement, which is discussed in greater detail in Item 1. Business, of this Annual Report on Form 10-K.

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Results of Operations — Comparison of the Years Ended December 31, 2023 and 2022

Operating Expenses

Research and Development Expenses

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[["","","Year ended December 31,"],["(in thousands)","","2023","","2022","","Change"],["Research and development expenses:"],["Lab supplies","","$","59,609","","","$","30,658","","","$","28,951"],["Personnel expenses","","51,095","","","31,624","","","19,471"],["Facility related","","24,221","","","16,100","","","8,121"],["Professional and consultant fees","","6,845","","","2,186","","","4,659"],["License, intellectual property fees, and other","","6,135","","","6,157","","","(22)"],["Total research and development expenses","","$","147,905","","","$","86,725","","","$","61,180"]]
[[/GREPCENT_TABLE]]

The $61.2 million increase in research and development expense for the year ended December 31, 2023 as compared to the year ended December 31, 2022 is primarily driven by:

•$29.0 million increase in lab supplies expense due to continued discovery efforts and expansion of our research and development activities, including ongoing IND-enabling activities, and increased personnel in our R&D function;

•$19.5 million increase in personnel expense, including an increase in stock-based compensation expense of $3.5 million, and $4.7 million increase in professional and consultant fees, both driven by our increased headcount as we continue to build out our research and development function; and

•$8.1 million increase in facility-related expense primarily due to the expansion and build out of our office and laboratory space.

Settlement Payment — Related Party

In January 2024, we entered into a settlement agreement with Myeloid to resolve two arbitration proceedings. Under the terms of the agreement, the parties agreed to resolve and settle all disputes between the parties and release all claims between them relating to the parties’ license agreement and the arbitrations in exchange for our payment to Myeloid of $13.5 million, certain mutual covenants, and other consideration.

General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2023","","2022","","Change"],["General and administrative expenses:"],["Professional and consultant fees","","$","17,642","","","$","13,013","","","$","4,629"],["Personnel expenses","","17,076","","","11,094","","","5,982"],["Facility related and other","","8,669","","","5,712","","","2,957"],["Total general and administrative expenses","","$","43,387","","","$","29,819","","","$","13,568"]]
[[/GREPCENT_TABLE]]

The $13.6 million increase in general and administrative expense for the year ended December 31, 2023 as compared to the year ended December 31, 2022 is primarily driven by:

•$4.6 million increase in professional and consultant fees and $6.0 million increase in personnel expenses, which includes an increase in stock-based compensation expense of $3.9 million, both driven by growth in

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personnel as we operate as a public company and to support our growing research and development function; and

•$3.0 million increase in facility related expenses primarily due to the expansion and build out of our office space.

Other Income (Expense)

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2023","","2022","","Change"],["Other income (expense):"],["Change in fair value of short-term investment \u2014 related party","","$","(2,382)","","","$","(8,128)","","","$","5,746"],["Other income, net","","8,762","","","1,903","","","6,859"],["Total other income (expense), net","","$","6,380","","","$","(6,225)","","","$","12,605"]]
[[/GREPCENT_TABLE]]

Change in Fair Value of Related Party Short-Term Investment

For all periods presented, the change in fair value of related party short-term investment for each of the periods presented is a result of Beam’s stock price movement from the start of each respective year to the end of each respective year.

Other Income (Expense), Net

For all periods presented, the amount of other income, net, net primarily consists of interest income from short-term investments.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we commence the clinical development of our programs and continue our platform development and early-stage research activities. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all.

To date, we have funded our operations primarily with proceeds from sales of preferred stock and public offerings of our common stock. As of December 31, 2023, we had cash and cash equivalents, short-term investments, and related party short-term investments of $121.7 million, excluding our restricted cash, or $135.2 million, including restricted cash.

In November 2023, we entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) under which we may, from time to time, issue and sell shares of our common stock having aggregate sales proceeds of up to $300.0 million, in a series of one or more at-the-market equity offerings (the “2023 ATM Program”). Jefferies is not required to sell any specific share amounts but acts as our sales agent, using commercially reasonable efforts consistent with its normal trading and sales practices. We will pay Jefferies a commission equal to 3.0% of the aggregate gross proceeds we receive from each sale of our shares of common stock. Pursuant to the Sales Agreement, any shares will be sold pursuant to our shelf registration statement on Form S-3 (File No. 333-275321) filed with the SEC on November 3, 2023, including the base prospectus contained therein, as declared effective by the SEC on November 13, 2023. Our common stock will be sold at prevailing market prices at the time of the sale, and as a result, prices may vary. As of December 31, 2023, we have not sold any shares of common stock under the 2023 ATM program.

In February 2024, we issued and sold 22,560,001 shares of our common stock, including 3,360,000 shares pursuant to the exercise of the underwriters’ option to purchase additional shares, at a price to the public of $6.25 per share. Further, in lieu of common stock to certain investors, we sold pre-funded warrants to purchase 3,200,005 shares of common stock at a public offering price of $6.24999 per pre-funded warrant, which represents the per share public offering price of each share of common stock less the $0.00001 per share exercise price for each pre-funded warrant. As a result of the offering, we received approximately $150.9 million in net proceeds, after deducting underwriting discounts, commissions and estimated offering costs of $10.1 million.

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Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(in thousands)","","2023","","2022"],["Net change in cash, cash equivalents, and restricted cash"],["Net cash used in operating activities","","$","(165,412)","","","$","(131,827)"],["Net cash provided by (used in) investing activities","","18,711","","","(47,096)"],["Net cash provided by (used in) investing activities","","655","","","181,494"],["Net change in cash, cash equivalents, and restricted cash","","$","(146,046)","","","$","2,571"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was driven primarily by the following uses of cash:

•$198.1 million net loss;

•$12.3 million change in lease liabilities; and

•$9.5 million change in prepaid and other current assets.

These were offset by:

•$30.1 million of non-cash amounts included in net loss, which consisted primarily of stock-based compensation expense, non-cash lease expense, depreciation and amortization expense, and change in fair value of short-term investment — related party;

•$13.5 million change in accrued settlement payment — related party;

•$9.1 million change in accounts payable; and

•$1.8 million change in accrued expenses and other assets.

Net cash used in operating activities for the year ended December 31, 2022 was driven primarily by the following uses of cash:

•$121.8 million net loss;

•$25.9 million change in accrued expenses and other current liabilities;

•$10.2 million change in lease liabilities; and

•$1.7 million change in prepaid and other current assets.

These were offset by:

•$25.4 million of non-cash amounts included in net loss, which primarily consisted of change in non-cash lease expense, fair value of short-term investment — related party, and stock-based compensation expense; and

•$2.5 million change in accounts payable.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2023 was driven primarily by the following:

•$27.6 million of maturities of short-term investments, net of purchases; offset by

•$8.7 million of purchases of property and equipment.

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Net cash used in investing activities for the year ended December 31, 2022 was driven primarily by the following:

•$30.3 million of purchases of short-term investments, net of maturities; and

•$16.1 million of purchases of property and equipment.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 was driven primarily by the following:

•$185.3 million of net proceeds from the sale of our common stock in our IPO; offset by

•$4.0 million payment of deferred offering costs.

Funding Requirements

To date, we have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete preclinical and clinical development of, receive regulatory approval for, and commercialize a product candidate and we do not know when, or if at all, that will occur. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and studies and initiate clinical trials. In addition, if we obtain regulatory approval for any product candidates, we expect to incur significant expenses related to product sales, marketing, and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Further, we have incurred, and expect to continue to incur, costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on the factors set out above. For more information, see “Risk Factors—Risks Related To Our Financial Position and Need for Additional Capital.”

We believe our existing cash, cash equivalents, and investments will be sufficient to fund our operating expenses and capital expenditure requirements into the third quarter of 2025. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to:

•continue our current research development activities;

•identify product candidates;

•initiate preclinical testing and clinical trials for our future product candidates we identify;

•develop, maintain, expand and protect our intellectual property portfolio;

•further develop our Prime Editing platform; and

•hire additional research, clinical and scientific personnel.

If we receive regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize ourselves.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of private and public equity offerings, debt financings, additional collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, or distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, any 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, reduce or eliminate our product development or future

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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

Leases

As of December 31, 2023, we have future remaining operating lease payments of $14.6 million relating to leases we have recognized on our consolidated balance sheet. In addition, we have one lease that has been entered into but has not yet commenced, as of December 31, 2023, for which we expect to pay approximately $208.7 million over the 10 year lease term. Refer to Note 10, Leases, to our consolidated financial statements appearing within this Annual Report on Form 10-K for more information on our lease obligations.

Under our license and collaboration agreements, we are potentially obligated to pay certain milestones, royalty fees, licensing maintenance fees, and reimbursement of patent maintenance costs. These amounts are contingent upon the occurrence of future events and the timing and likelihood of such potential obligations are not known with certainty.

Critical Accounting Policies and Significant Judgments 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 accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses incurred during the reporting periods. 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 recorded revenues and expenses that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates.

While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements appearing within this Annual Report on Form 10-K, 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.

Stock-Based Compensation Expense

Subsequent to our IPO, we measure stock-based awards granted to employees, directors, and non-employees based on their fair value on the date of the grant using the Black-Scholes option-pricing model for stock options. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the respective award, using the straight-line method. We account for forfeitures of stock-based awards as they occur.

The Black-Scholes option pricing model used to determine the fair value of our stock options includes various assumptions, including the expected term of the award, the expected volatility, and the expected risk-free interest rate, expected dividend payments, and the fair value of the common stock underlying the stock-based award.

We consider the expected volatility to be a critical accounting estimate. As we do not have sufficient trading history, we use the average historical volatility of a representative group of publicly traded biopharmaceutical companies to calculate the expected volatility for use in the Black-Scholes option pricing model. This assumption reflects our best estimate; but determining a representative peer group involves subjective considerations. As a result, if a different peer group is used to estimate volatility, the resulting volatility could have a material impact on our stock-based compensation expense.

Determination of the Fair Value of Our Common Stock Issued Prior to Our IPO

Prior to our IPO in October 2022, there was no public market for our common stock. As a result, prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each option

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grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of grant.

Prepaid and Accrued Research and Development Expenses

As part of preparing our consolidated financial statements, we are required to estimate research and development expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. These estimates of the expenses incurred are based on facts and circumstances known to us at that time. 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 could have a significant impact on reported amounts.

If the payments made exceed the expenses incurred, the excess amount is reflected as prepaid expenses and other current assets. If the expenses incurred exceed payments made, the difference is reflected as accrued expenses and other current liabilities.

Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other current assets. The capitalized amounts are expensed as the related goods are delivered or services are performed.

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, Summary of Significant Accounting Policies, to our consolidated financial statements appearing within this Annual Report on Form 10-K.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. As a result of this election, our consolidated financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.