PROTHENA CORP PUBLIC LTD CO (PRTA) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Form 10-K contains forward-looking statements which may cause our actual results to differ materially from expectations, plans and anticipated results discussed in forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, the risks and uncertainties set forth in the “Summary of Risks Affecting Our Business” at the beginning of this Form 10-K, Item 1A “Risk Factors” of this Form 10-K, and in our other filings with the SEC.

This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements presented in Item 8 of this Form 10-K.

Overview

Prothena is a late-stage clinical biotechnology company with expertise in protein dysregulation and a pipeline of investigational therapeutics with the potential to change the course of devastating neurodegenerative and rare peripheral amyloid diseases.

Fueled by our deep scientific expertise built over decades of research, we are advancing a pipeline of therapeutic candidates for a number of indications and novel targets for which our ability to integrate scientific insights around neurological dysfunction and the biology of misfolded proteins can be leveraged. Our wholly-owned programs include birtamimab for the potential treatment of AL amyloidosis, a portfolio of programs for the potential treatment of Alzheimer’s disease including PRX012, which targets Amyloid beta (Aβ), and PRX123, a novel dual Aβ-tau vaccine. Our partnered programs include prasinezumab, in collaboration with Roche for the potential treatment of Parkinson’s disease and other related synucleinopathies, and programs that target tau (PRX005), TDP-43, and an undisclosed target (PRX019) in collaboration with BMS for the potential treatment of Alzheimer’s disease, ALS, and other neurodegenerative diseases. We are also entitled to certain potential milestone payments pursuant to our share purchase agreement with Novo Nordisk pertaining to our ATTR amyloidosis business.

We were formed on September 26, 2012, under the laws of Ireland and re-registered as an Irish public limited company on October 25, 2012. Our ordinary shares began trading on The Nasdaq Global Market under the symbol “PRTA” on December 21, 2012, and currently trade on The Nasdaq Global Select Market.

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Critical Accounting Policies and Estimates

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 the accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We believe the following policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Our collaboration revenue includes revenue recognized for milestone payments and reimbursements under our License Agreement with Roche as well as revenue recognized under our Collaboration Agreement with BMS. Our license and intellectual property revenue includes revenue from Novo Nordisk for the sale of intellectual property and related rights to the Company’s ATTR amyloidosis business and pipeline and milestones payments.

Revenue is recognized only when we satisfy an identified performance obligation by transferring a promised good or service to a customer.

Contracts with Multiple Performance Obligations

Our License Agreement with Roche and our Collaboration Agreement with BMS contain multiple performance obligations. We account for the individual performance obligations separately if they are distinct. Factors considered in the determination of whether the license performance obligations are distinct included, among other things, the research and development capabilities of each of Roche and BMS and their respective sublicense rights, and for the remaining performance obligations the fact that they are not proprietary and can be and have been provided by other vendors. The transaction price is allocated to the separate performance obligation on a relative standalone selling price basis.

Milestone Revenue

We generally classify each of our milestones into one of three categories: (i) clinical milestones; (ii) regulatory and development milestones; and (iii) commercial milestones. Clinical milestones are typically achieved when a product candidate advances into or completes a defined phase of clinical research. For example, a milestone payment may be due to us upon the initiation of a clinical trial for a new indication. Regulatory and development milestones are typically achieved upon acceptance of the submission for marketing approval of a product candidate or upon approval to market the product candidate by the FDA or other regulatory authorities. For example, a milestone payment may be due to us upon submission for marketing approval of a product candidate by the FDA. Commercial milestones are typically achieved when an approved product reaches certain defined levels of net royalty sales by the licensee of a specified amount within a specified period.

At the inception of each arrangement that includes developmental, regulatory or commercial milestone payments, we evaluate whether achieving the milestones is considered probable and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by Prothena) is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators or where attainment of the specified event is dependent on the development activities of a third party, are not considered probable of being achieved until those approvals are received or the specified event occurs. In general, we consider such milestone payments as variable consideration with constraint and therefore we recognize the revenue from such milestone payments as collaboration revenue at point in time when we can conclude it is probable that a significant revenue reversal will not occur in future periods.

Research and Development

We expense R&D costs as incurred. R&D expenses include, but are not limited to, salary and benefits, share-based compensation, clinical trial activities, drug development and manufacturing prior to FDA approval and third-party service fees, including clinical research organizations, investigative sites and contract manufacturing organizations. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to us by our vendors on their actual costs incurred. We recognize costs for contract manufacturing based on evaluation of the progress to completion of specific tasks. The objective of our accrual policy is to match the recording of the expenses in our Consolidated Financial Statements to the actual services we have received and efforts expended. As such, expense accruals related to clinical trials and contract manufacturing are recognized based on our estimate of the degree of completion of the events specified in the specific clinical

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study or trial contract or drug development and manufacturing contract, respectively. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in our Consolidated Financial Statements as prepaid or accrued research and development. Amounts due may be fixed fee, fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.

The information contained in Note 2 to the Consolidated Financial Statements under the heading “Recent Accounting Pronouncements” is hereby incorporated by reference into this Part II, Item 7.

Results of Operations

Comparison of Years Ended December 31, 2022, 2021 and 2020

Revenue

Total revenue was $53.9 million, $200.6 million, and $0.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Collaboration revenue includes revenue recognized under our Collaboration Agreement with BMS. For the year ended December 31, 2022, collaboration revenue recognized from BMS was $13.9 million for US Development Services related to the Tau/PRX005 program. For the year ended December 31, 2021, collaboration revenue recognized from BMS was $79.7 million of the total transaction consideration of $104.9 million for the PRX005 US License and US Development Services, see Note 7, “Significant Agreements” to the Consolidated Financial Statements regarding the Collaboration Agreement with BMS for more information.

Collaboration revenue also includes milestone payments and reimbursements under our License Agreement with Roche. For the year ended December 31, 2021, collaboration revenue from Roche included a $60.0 million clinical milestone recognized upon first patient dosed in the global Phase 2b for prasinezumab PADOVA study. For the years ended December 31, 2021 and 2020, collaboration revenue also included reimbursements under our License Agreement with Roche. See Note 7, “Significant Agreements” to the Consolidated Financial Statements regarding the Roche License Agreement for more information.

License and intellectual property revenue for the year ended December 31, 2022 included $40.0 million in milestone payment from Novo Nordisk related to the continued advancement of NNC6019 (formerly PRX004) in a Phase 2 clinical study for the treatment of ATTR cardiomyopathy. For the year ended December 31, 2021, License and intellectual property revenue included $60.7 million in revenue from the sale of intellectual property and related rights to the Company’s ATTR amyloidosis business and pipeline to Novo Nordisk. See Note 7, “Significant Agreements” to the Consolidated Financial Statements regarding the Novo Nordisk Share Purchase Agreement for more information. For the years ended December 31, 2022, 2021 and 2020, license revenue also included license fees recognized under a License Agreement entered into on March 1, 2020, between the Company's wholly owned subsidiary, Prothena Biosciences Limited, and F. Hoffmann-La Roche Ltd. See Note 7, “Significant Agreements” to the Consolidated Financial Statements regarding the Roche License Agreement for more information.

Assuming no significant change in our business, we expect our 2023 revenue to decline over the prior year as our 2022 revenue was primarily comprised of nonrecurring intellectual property revenue.

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Operating Expenses

Total operating expenses consist of R&D expenses, general and administrative (“G&A”) expenses. Our operating expenses were $185.5 million, $128.6 million and $113.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Our research activities are aimed at developing new drug products. Our development activities involve the translation of our research into potential new drugs. Our R&D expenses primarily consist of personnel costs and related expenses, including share-based compensation and external costs associated with clinical activities and drug development related to our drug programs, including birtamimab, prasinezumab, PRX004 (through July 8, 2021), PRX005, PRX012, PRX123 and preclinical activities related to our discovery programs. Through May 28, 2021, pursuant to our License Agreement with Roche, we made payments to Roche for our share of the development expenses incurred by Roche related to the prasinezumab program, which is included in our R&D expenses. On May 28, 2021, we announced the exercise of our rights under the terms of the ongoing worldwide collaboration with Roche to receive potential U.S. commercial sales milestones and tiered royalties in lieu of a U.S. profit and loss share for prasinezumab in Parkinson’s disease.

Our G&A expenses primarily consist of personnel costs and related expenses, including share-based compensation and professional service expenses.

Research and Development Expenses

Our R&D expense increased by $53.3 million, or 65%, for the year ended December 31, 2022, compared to the prior year. The increase for year ended December 31, 2022, was primarily due to higher manufacturing expenses primary related to the birtamimab, PRX019, PRX012, and PRX123 programs, higher personnel expenses, higher clinical trial expenses primarily related to the PRX012 and birtamimab programs and higher R&D consulting and other expenses; offset in part by lower collaboration expenses related to the prasinezumab program with Roche as a result of the cost share opt-out exercised in May 202l and lower manufacturing expense related to the NNC6019 program.

For the year ended December 31, 2021, our R&D expense increased by $7.4 million, or 10%, compared to the prior year. The increase for year ended December 31, 2021, was primarily due to higher personnel expenses, higher clinical trial expenses primarily related to the birtamimab and PRX005 programs (offset in part by lower PRX004 clinical trial expense) and higher R&D consulting expenses; offset in part by lower collaboration expenses related to the prasinezumab program with Roche as a result of the cost share opt-out exercised in May 202l and lower manufacturing expenses primary related to the PRX005 and birtamimab programs.

The following table sets forth the R&D expenses for our major programs (specifically, any program with successful first dosing in a Phase 1 clinical trial, which were birtamimab, prasinezumab, PRX003, NNC6019, PRX005, PRX012 and other R&D expenses for the years ended December 31, 2022, 2021 and 2020, and the cumulative amounts to date (in thousands):

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(1)Cumulative R&D costs to date for birtamimab include the costs incurred from the date when the program was separately tracked in preclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount.

(2)Cumulative R&D costs to date for prasinezumab and related antibodies include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. Through May 28, 2021, Prasinezumab costs include payments to Roche for our share of the development expenses incurred by Roche related to prasinezumab programs. For the years ended December 31, 2022, 2021 and 2020, respectively, nil, $0.2 million and $0.6 million of reimbursements from Roche for development services were recorded as part of collaboration revenue.

(3)Cumulative R&D costs to date for PRX003 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. Based on the Phase 1b multiple ascending dose study results announced in September 2017, we announced that we will not advance PRX003 into mid-stage clinical development for psoriasis or psoriatic arthritis as previously planned.

(4)Cumulative R&D costs to date for NNC6019 (PRX004) include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. On July 8, 2021, we sold shares of one of our wholly-owned subsidiaries to Novo Nordisk. In connection with the transaction, Novo Nordisk acquired our ATTR amyloidosis business, including the clinical stage antibody NNC6019 (PRX004). Expenses incurred in 2022 relate to certain close out activities and transition services provided to Novo Nordisk.

(5)Cumulative R&D costs to date for PRX005 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount.

(6)Cumulative R&D costs to date for PRX012 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount.

(7)Other R&D is comprised of preclinical development and discovery programs that have not progressed to first patient dosing in a Phase 1 clinical trial.

We expect our R&D expenses to increase in 2023 over the prior year, primarily due to anticipated higher personnel costs including share-based compensation and anticipated increase in spending for clinical trials and manufacturing related to our active clinical trials.

General and Administrative Expenses

Our G&A expenses increased by $3.6 million, or 8%, for the year ended December 31, 2022, compared to the prior year. The increase for the year ended December 31, 2022, compared to the prior year, was primarily due to higher personnel expense, and higher consulting expense; offset in part by lower legal fees and lower expense for our director and officer insurance premium.

For the year ended December 31, 2021, our G&A expenses increased by $7.6 million, or 20%, compared to the prior year. The increase for the year ended December 31, 2021, compared to the prior year, was primarily due to higher personnel expense, higher legal expenses, higher expense for our director and officer insurance premium and higher consulting expense.

We expect our G&A expenses to increase in 2023 compared to the prior year, primarily related to anticipated higher personnel costs including share-based compensation.

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Other Income (Expense)

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Interest income increased by $6.3 million, or 15,017%, for the year ended December 31, 2022, compared to the prior year, primarily due to higher interest income from our cash and money market accounts resulting from higher interest rates.

Interest income, decreased by $1.3 million, or 97%, for the year ended December 31, 2021, compared to the prior year, primarily due to lower interest income from our cash and money market accounts resulting from lower interest rates.

Other income (expense), net for the years ended December 31, 2022, 2021 and 2020, was primarily foreign exchange gains (losses) from transactions with vendors denominated in Euros.

Provision for (benefit from) Income Taxes

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The provision for (benefit from) income taxes were $(8.7) million, $4.9 million and $(0.3) million for the years ended December 31, 2022, 2021 and 2020, respectively. The benefit from income taxes increased by $13.6 million for the year ended December 31, 2022, compared to the same period in the prior year primarily due to an increase in deferred tax asset (DTA) of $10.5 million related to Section 174 R&D Capitalization requirements, which became effective in 2022.

Whereas, for the year ended December 31, 2021, the provision for income taxes increased by $5.2 million, compared to the same period of the prior year, primarily due to a decrease in deferred tax asset related to our February 12, 2021 option exchange program and a change in our share-based compensation 162(m) limitations associated with the increase in the number of covered employees under the American Rescue Plan Act.

The tax provisions for all periods presented primarily reflect U.S. federal taxes associated with recurring profits attributable to intercompany services that our U.S. subsidiary performs for the Company. No tax benefit has been recorded related to tax losses recognized in Ireland and any deferred tax assets for those losses are offset by a valuation allowance.

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Liquidity and Capital Resources

Overview

Working capital was $669.0 million as of December 31, 2022, an increase of $117.6 million from working capital of $551.4 million as of December 31, 2021. This increase in working capital during the year ended December 31, 2022, was primarily attributable to a higher cash and cash equivalents balance resulting from net proceeds of approximately $172.6 million from our public offering in December 2022, $51.0 million from our December 2021 Distribution Agreement, $40.0 million development milestone payment from Novo Nordisk, and proceeds from stock option exercises of approximately $17.8 million, partially offset by cash use of $185.5 million for operating expenses (adjusted to exclude non-cash charges).

As of December 31, 2022, we had $710.4 million in cash and cash equivalents. Although we believe, based on our current business plans, that our existing cash and cash equivalents will be sufficient to meet our obligations for at least the next twelve months, we anticipate that we will require additional capital in the future in order to continue the research and development of our drug candidates. Additionally, in order to develop and obtain regulatory approval for our potential products we will need to raise substantial additional funds. We expect to raise any such additional funds through public or private equity or debt financings, collaborative agreements with corporate partners, or other arrangements, including pursuant to the December 2021 Distribution Agreement (See Note 8, “Shareholders’ Equity” to the Consolidated Financial Statements for more information). We cannot assume that such additional financings will be available on acceptable terms, if at all, and such financings may only be available on terms dilutive to our shareholders.

In managing our liquidity needs in Ireland, we do not rely on unrepatriated earnings as a source of funds. As of December 31, 2022, $204.2 million of our outstanding cash and cash equivalents related to U.S. operations are considered permanently reinvested. We do not intend to repatriate these funds. However, if these funds were repatriated back to Ireland, we would incur a withholding tax from the dividend distribution.

The adequacy of our cash resources depends on many assumptions, including assumptions with respect to our expenses. These assumptions may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates. Our future capital requirements will depend on numerous factors, including, without limitation, the timing of initiation, progress, results and costs of our clinical trials; the results of our research and nonclinical studies; the costs of clinical manufacturing and of establishing commercial manufacturing arrangements; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; the costs and timing of capital asset purchases; our ability to establish research collaborations, strategic collaborations, licensing or other arrangements; the costs to satisfy our obligations under current and potential future collaborations; the costs of any in-licensing transactions; and the timing, receipt, and amount of revenues or royalties, if any, from any approved drug candidates.

Our cash and cash equivalents may also be potentially supplemented in the future by proceeds from our collaboration partners and milestone payments from Novo Nordisk. Pursuant to the Collaboration Agreement with Roche, we are eligible to receive payments for commercial and regulatory milestones and royalties on net sales of Collaboration Products. See Note 7, “Significant Agreements” to our Consolidated Financial Statements regarding the Roche License Agreement for more information. Pursuant to the Collaboration Agreement with BMS (formerly Celgene), we are eligible to receive payments for commercial and regulatory milestones and royalties on net sales of Collaboration Products. See Note 7, “Significant Agreements” to our Consolidated Financial Statements regarding the Collaboration Agreement with BMS for more information. Pursuant to the share purchase agreement with Novo Nordisk, we are eligible to receive development and sales milestone payments. See Note 7, “Significant Agreements” to our Consolidated Financial Statements regarding the Novo Nordisk Share Purchase Agreement for more information.

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Cash Flows for the Years Ended December 31, 2022, 2021 and 2020

The following table summarizes, for the periods indicated, selected items in our Consolidated Statements of Cash Flows (in thousands):

Cash Used in Operating Activities

Net cash used in operating activities was $108.8 million for the year ended December 31, 2022, primarily due to the use of $185.5 million for operating expense (adjusted to exclude non-cash charges of approximately $26.9 million) and partially offset by a $40.0 million development milestone payment from Novo Nordisk.

Net cash provided by operating activities was $92.6 million for the year ended December 31, 2021, primarily due to the option exercise fee of $80.0 million from BMS, milestone payment of $60.0 million from Roche and upfront payment of $60.0 million from Novo Nordisk offset in part by the use of $128.6 million for operating expense (adjusted to exclude non-cash charges of approximately $36.0 million).

Net cash used in operating activities was $80.4 million for the year ended December 31, 2020, primarily due to use of $113.6 million for operating expense (adjusted to exclude non-cash charges of approximately $27.3 million).

Cash Used in Investing Activities

Net cash used in investing activities was $0.5 million, $0.6 million and $0.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. Net cash used in investing activities for the years ended December 31, 2022, 2021 and 2020 was primarily related to purchases of property and equipment.

Cash Provided by Financing Activities

Net cash provided by financing activities was $241.5 million for the year ended December 31, 2022, primarily from net proceeds from issuances of ordinary shares pursuant to the December 2022 public offering of $172.6 million, net proceeds from issuances of ordinary shares pursuant to the December 2021 Distribution Agreement of $51.0 million, and proceeds from issuances of ordinary shares upon exercises of stock options of $17.8 million.

Net cash provided by financing activities was $190.3 million for the year ended December 31, 2021, primarily from net proceeds from issuance of ordinary shares pursuant to our May 2021 Distribution Agreement (as discussed below) of $96.7 million, net proceeds from issuance of ordinary shares in public offering of $78.0 million, and proceeds from issuances of ordinary shares upon exercises of stock options of $15.5 million.

Net cash provided by financing activities was $0.2 million and for the year ended December 31, 2020, which was proceeds from issuances of ordinary shares upon exercises of stock options.

Off-Balance Sheet Arrangements

At December 31, 2022, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

Our contractual obligations as of December 31, 2022, consisted of minimum cash payments under operating leases of $21.3 million, purchase obligations of $11.5 million (of which $5.6 million is included in accrued current liabilities), and contractual obligations under license agreements of $0.4 million (of which $29 thousand is included in accrued current

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liabilities). Purchase obligations consist of non-cancelable purchase commitments to suppliers. Operating leases represent our future minimum rental commitments under our non-cancelable operating leases. For additional information regarding the timing for our contractual obligations See Note 6, “Commitments and Contingencies” to our Consolidated Financial Statements.

In March 2016, we entered into a noncancelable operating sublease to lease 128,751 square feet of office and laboratory space in South San Francisco, California. We are obligated to make lease payments totaling approximately $39.2 million over the lease term. Of this obligation, approximately $6.5 million remains outstanding as of December 31, 2022. We sub-sublease approximately 46,641 square feet of the office and laboratory in South San Francisco, California to Assembly Biosciences, Inc. See Note 6, “Commitments and Contingencies” to our Consolidated Financial Statements for additional information regarding sub-sublease rental income.

In June 2021, we entered into a lease agreement for office space in Dublin, Ireland, which commenced in August 2021 and had a term of one year. This lease has an automatic renewal clause, pursuant to which the agreement will be extended automatically for successive periods equal to the current term, unless cancelled by us. In May 2022, we renewed the lease for another one year term starting August 2022.

In October 2022, we entered into a noncancelable operating sublease to lease approximately 31,157 square feet of office and laboratory space in Brisbane, California. We are obligated to make lease payments totaling approximately $14.9 million over the lease term, which expires on September 30, 2028, unless terminated earlier. Of this obligation, approximately $14.7 million remains outstanding as of December 31, 2022.

As of the filing date, the term of the sublease has not commenced as we did not have the right to use or control physical access to the facility, and therefore no accounting relating to the sublease has been recorded in the Balance Sheet as of December 31, 2022. We expect to have the right to use or control the access to the facility in the second half of 2023.

The following is a summary of our contractual obligations as of December 31, 2022 (in thousands):

(1) See Note 6, “Commitments and Contingencies” to our Consolidated Financial Statements.

In addition to the contractual obligations above, we also expect to have future material cash requirements related to our clinical trials, discovery and pre-clinical programs, human capital and intellectual property. Assuming no significant change in our business, we expect the full year 2023 net cash used in operating and investing activities to be approximately $213 million to $229 million.