UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2023
or
For the transition period from ___________________ to ___________________
Commission File Number: 001-39263
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(212 ) 433-3791
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $0.001 par value per share | ||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 8, 2023, the registrant had 59,477,824 shares of common stock, $0.001 par value per share, outstanding.
Table of Contents
| Page | ||||||||
| PART I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “design,” “support” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:
•our competitive position, including estimates and other information relating to our competitors and their products and product candidates, and our industry;
•our expectations, projections and estimates regarding our capital requirements, need for additional capital, financing our future cash needs, costs, expenses, revenues, capital resources, cash flows, financial performance, profitability, tax obligations, liquidity, growth, contractual obligations, the period of time our cash resources will fund our current operating plan, our internal control over financial reporting and disclosure controls and procedures;
•the ability of our clinical trials to demonstrate safety and efficacy of our product candidates, and other positive results;
•U.S. and global economic issues, global supply chain issues and increased inflation and interest rates;
•the timing and focus of our ongoing and future preclinical studies and clinical trials, including the reporting of data from those studies and trials and the timing thereof and the timing of initiation of enrollment in our clinical trials;
•our estimates of the number of patients that we will enroll in our clinical trials;
•the beneficial characteristics, safety, efficacy and therapeutic effects of our product candidates;
•our plans relating to disclosing a monotherapy dose for our product candidates, dose optimization activities and the timing thereof;
•our and our collaborators' strategy, plans and expectations with respect to the development, manufacturing, supply, approval and commercialization of our product candidates and the timing thereof;
•the designs of our studies and the type of information and data expected from our studies and the expected benefits thereof;
•our ability to obtain and maintain any marketing authorizations and our ability to complete post-marketing requirements with respect thereto;
•the timing and amounts of payments from or to our collaborators and licensees, and the anticipated arrangements and benefits under our collaboration and license agreements, including with respect to milestones and royalties;
•our pipeline, including its potential, and our related research and development activities;
•our plans relating to our Cyclin E1 patient enrichment strategy and the timing of milestones related thereto;
•our plans relating to the further development of our product candidates, including program timelines, potential paths to registration, and additional indications we may pursue;
•our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms and processes on a timely basis, or at all, with third-party payors for our product candidates, if approved;
•our plans, including the costs thereof, of development of any diagnostic tools;
•our plans to evaluate additional strategic opportunities to maximize the value of our pipeline;
•our plans to advance our ongoing research on protein degrader programs;
•our plans to advance IND-enabling studies for our product candidates, including our BCL-xL protein degrader product candidate;
•our plans to develop our product candidates in combination with other therapies;
•our existing collaborations and our ability to obtain, and negotiate favorable terms of, any collaboration, licensing or other arrangements that may be necessary or desirable to develop, manufacture or commercialize our product candidates;
•our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;
•timing and likelihood of success of our research, development and commercialization efforts;
ii
•timing of expected milestones and the announcement thereof;
•the size of the market opportunity for our product candidates, including our estimates of the number of patients who suffer from the diseases we are targeting;
•our expectations regarding the approval and use of our product candidates as first, second or subsequent lines of therapy or in combination with other drugs;
•the timing or likelihood of regulatory filings and approvals, including our expectation to seek an accelerated approval pathway and special designations for our product candidates for various diseases;
•our ability to obtain and maintain regulatory approval of our product candidates;
•existing regulations and regulatory developments in the United States, the European Union and other jurisdictions;
•our intellectual property position, including obtaining and maintaining patents, and the timing, outcome and impact of administrative, regulatory, legal and other proceedings relating to our patents and other proprietary and intellectual property rights, and the timing and resolution thereof;
•our facilities, lease commitments, and future availability of facilities;
•accounting standards and estimates, their impact, and their expected timing of completion;
•cybersecurity and information security;
•expected ongoing reliance on third parties, including with respect to the development, manufacturing, supply and commercialization of our product candidates;
•insurance coverage;
•estimated periods of performance of key contracts;
•the need to hire additional personnel and our ability to attract and retain personnel, and our ability to provide competitive compensation and benefits; and
•the impact of the COVID-19 pandemic on our business.
The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, assumptions and other important factors, including those described under “Summary Risk Factors” below and in the sections in this Quarterly Report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, they may turn out to be inaccurate and you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results, financial condition, performance or achievements could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
ZENTALIS® and its associated logo are trademarks of Zentalis. All other trademarks, trade names and service marks appearing in this Quarterly Report are the property of their respective owners. All website addresses given in this Quarterly Report are for information only and are not intended to be an active link or to incorporate any website information into this document.
iii
SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:
•We have a limited operating history and have no products approved for commercial sale, which may make it difficult for you to evaluate our current business and predict our future success and viability.
•We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.
•We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts.
•We are substantially dependent on the success of our lead product candidates, azenosertib (ZN-c3) and/or ZN-d5, which are currently in clinical trials. If we are unable to complete development of, obtain approval for and commercialize these product candidates in a timely manner, our business will be harmed.
•The clinical trials of our product candidates may not demonstrate safety and efficacy to the satisfaction of the U.S. Food and Drug Administration, or FDA, or other comparable ex-U.S. regulatory authorities or otherwise produce positive results.
•If we are unable to successfully develop diagnostic tools for biomarkers that enable patient selection, or experience significant delays in doing so, we may not realize the full commercial potential of our product candidates.
•We are developing our product candidates in combination with other therapies, which exposes us to additional risks.
•The regulatory approval processes of the FDA and other comparable ex-U.S. regulatory authorities are lengthy, time consuming and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, we will be unable to generate product revenue and our business will be substantially harmed.
•We face significant competition. and if our competitors develop and market technologies or products more rapidly than we do or that are more effective, safer or less expensive than the product candidates we develop, our commercial opportunities will be negatively impacted.
•Our success depends on our ability to protect our intellectual property and our proprietary platform. If we are unable to adequately protect our intellectual property and our proprietary platform, or to obtain and maintain issued patents which are sufficient to protect our product candidates, then others could compete against us more directly, which would negatively impact our business.
•Our existing collaborations are important to our business and future licenses may also be important to us and, if we are unable to maintain any of these collaborations, or if these arrangements are not successful, our business could be adversely affected.
•We rely, and expect to continue to rely, on third parties, including independent clinical investigators and CROs, to conduct certain aspects of our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, comply with applicable regulatory requirements or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
•Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Claims by third parties that we infringe their proprietary rights may result in liability for damages or prevent or delay our developmental and commercialization efforts.
•The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, then we may not be able to sustain or grow our business.
•The COVID-19 pandemic has adversely impacted, and may continue to adversely impact, our business, including our preclinical studies and clinical trials.
•Unfavorable U.S., global, political or economic conditions could adversely affect our business, financial condition or results of operations.
iv
PART I—FINANCIAL INFORMATION
3
Item 1. Financial Statements.
Zentalis Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts and par value)
| March 31, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities, available-for-sale | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Goodwill | |||||||||||
| Investment in Zentera Therapeutics | |||||||||||
| Restricted cash | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Deferred tax liability | |||||||||||
| Long-term lease liability | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| EQUITY | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
4
Zentalis Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Operating Expenses | ||||||||||||||
| Research and development | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||
| Total operating expenses | ||||||||||||||
| Operating loss | ( | ( | ||||||||||||
| Other Income (Expense) | ||||||||||||||
| Investment and other income, net | ||||||||||||||
| Net loss before income taxes | ( | ( | ||||||||||||
| Income tax expense | ||||||||||||||
| Loss on equity method investment | ||||||||||||||
| Net loss | ( | ( | ||||||||||||
| Net loss attributable to noncontrolling interests | ( | ( | ||||||||||||
| Net loss attributable to Zentalis | $ | ( | $ | ( | ||||||||||
| Net loss per common share outstanding, basic and diluted | $ | ( | $ | ( | ||||||||||
| Common shares used in computing net loss per share, basic and diluted | ||||||||||||||
See notes to condensed consolidated financial statements.
5
Zentalis Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | ( | $ | ( | ||||
| Other comprehensive income (loss): | ||||||||
| Unrealized gain (loss) on marketable securities | ( | |||||||
| Total comprehensive loss | ( | ( | ||||||
| Comprehensive loss attributable to noncontrolling interests | ( | ( | ||||||
| Comprehensive loss attributable to Zentalis | $ | ( | $ | ( | ||||
See notes to condensed consolidated financial statements.
6
Zentalis Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities: | |||||||||||
| Consolidated net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Operating lease right-of-use asset and fixed asset impairment | |||||||||||
| Share-based compensation | |||||||||||
| (Accretion of discounts)/amortization of premiums on marketable securities, net | ( | ||||||||||
| Loss on equity method investment | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Operating lease right-of-use assets and liabilities, net | |||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing Activities: | |||||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Proceeds from maturities of marketable securities | |||||||||||
| Purchases of property and equipment | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| Financing Activities: | |||||||||||
| Proceeds from issuance of common stock under equity incentive plans | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
| Accrued capital expenditures | $ | $ | |||||||||
7
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Statements of Cash Flows for the periods presented:
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statement of Cash Flows | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
8
Zentalis Pharmaceuticals, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Common | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with restricted stock unit vesting | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock awards | ( | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net loss attributable to Zentalis | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Common | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with restricted stock unit vesting | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of options, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Cancellation of restricted stock awards | ( | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net loss attributable to Zentalis | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Organization
Zentalis Pharmaceuticals, Inc. (“Zentalis”, “We” or the “Company”) is a clinical-stage biopharmaceutical company focused on discovering and developing small molecule therapeutics targeting fundamental biological pathways of cancer. The Company is developing a focused pipeline of potentially best-in-class oncology candidates. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. All of the Company’s tangible assets are held in the United States.
Liquidity
2. Interim Unaudited Financial Statements
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements but do not include all disclosures required by U.S. GAAP. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operation for the periods presented, with such adjustments consisting only of normal recurring adjustments. Certain reclassifications have been made to the prior period condensed consolidated balance sheet to conform to the current period presentation.
The accompanying interim unaudited condensed consolidated financial statements include our wholly-owned subsidiaries and variable interest entity (“VIE”), for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are VIEs, and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE.
We will continuously assess whether we are the primary beneficiary of a VIE, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of such VIE. During the
10
periods presented, we have not provided any other material financial or other support to our VIEs that we were not contractually required to provide.
The equity method is used to account for investments in which we have the ability to exercise significant influence, but not control, over the investee. Such investments are recorded on the balance sheet, and the share of net income or losses of equity investments is recognized on a one quarter lag in investment and other income (expense), net.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.
Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates.
Significant Accounting Policies
During the three months ended March 31, 2023, there have been no changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
3. Significant Transactions
Zentera Therapeutics
In May 2020, we became a majority common shareholder of Zentera Therapeutics, a Shanghai-based clinical-stage biopharmaceutical company focused on developing cancer therapeutics (“Zentera”), concurrent with its Series A convertible preferred stock offering. The financial position and results of operations of Zentera were included in our consolidated financial statements from the date of the initial investment as a result of our control of the entity and our determination that we were the primary beneficiary of Zentera. In July 2021, Zentera completed a Series B convertible preferred stock offering which diluted our investment to a position of less than majority owned. Upon review of the facts and circumstances, together with the authoritative accounting literature, we determined that while Zentera is a VIE, consolidation of Zentera is no longer appropriate. After the July 2021 Series B convertible preferred offering in which we did not participate, our review concluded that we ceased to be the primary beneficiary of Zentera as our equity ownership was reduced and changes were made to the corporate governance of Zentera. As a result, we no longer individually have the ability to direct the activities that most significantly impact Zentera's economic performance.
Beginning in July 2021, the financial position and results of operations of Zentera were no longer included in our consolidated financial statements. During the period of deconsolidation we measured the fair value of our retained investment in Zentera using the backsolve method with consideration for a lack of marketability. An equity method investment of $18.9 million is recorded on our balance sheet at March 31, 2023. This amount represents our maximum exposure to loss as a result of our involvement with Zentera. A deferred tax liability of $4.0 million representing the tax impact of the unrealized gain on deconsolidation is recorded on our balance sheet at March 31, 2023. A gain of $51.6 million, measured as the difference between the fair value of our retained noncontrolling interest together with the carrying amount of the Zentera noncontrolling interest, and the carrying amount of Zentera’s assets and liabilities was recognized during the year ended December 31, 2021. The difference between the carrying amount of our investment in Zentera and our portion of the Zentera net assets was $5.5 million as of
11
March 31, 2023. This difference is accounted for in our equity method investment analogous to in-process research and development.
In May 2020, each of our subsidiaries Zeno Alpha, Inc., K-Group Alpha, Inc., and K-Group Beta, Inc. entered into a collaboration and royalty-bearing license agreement with Zentera, which we refer to as the “Zentera Sublicenses,” pursuant to which we collaborate with Zentera on the development and commercialization of ZN-c5, ZN-d5 and azenosertib, respectively, collectively referred to as the “Collaboration Products,” respectively, in the People’s Republic of China, Macau, Hong Kong and Taiwan, which is referred to as the “Zentera Collaboration Territory.” Under each Zentera Sublicense, Zentera will lead development, and upon regulatory approval, the commercialization, of the Collaboration Products in the Zentera Collaboration Territory.
Under the terms of the Zentera Sublicenses, Zentera is generally responsible for the costs of developing the Collaboration Products in the Zentera Collaboration Territory, and we are generally responsible for the costs of developing the Collaboration Products outside the Zentera Collaboration Territory, provided that Zentera will reimburse us for a portion of the costs for global data management, pharmacovigilance, safety database management, and chemistry, manufacturing and controls activities with respect to each Collaboration Product. Prior to the deconsolidation of Zentera in July 2021, these costs were eliminated in consolidation. For the three months ended March 31, 2023 and 2022 the amounts incurred under this arrangement totaled $2.2 million and $2.1 million, respectively, and are presented as contra-research and development expense in the unaudited condensed consolidated statement of operations. A corresponding receivable is recorded within prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet. We have not provided material financial or other support to Zentera during the periods ended March 31, 2023 and 2022 that was not contractually required.
4. Business Combinations
Kalyra Pharmaceuticals, Inc.
On December 21, 2017, we acquired $4.5 million of Kalyra Pharmaceuticals, Inc.’s (“Kalyra”) Series B Preferred Stock representing a 25 % equity interest in Kalyra for purposes of entering the analgesics therapeutic research space. The acquisition price was paid entirely in cash.
In accordance with the authoritative guidance, we concluded that Kalyra is a business consisting of inputs, employees, intellectual property and processes capable of producing outputs. Additionally, we have concluded that Kalyra is a VIE, we are the primary beneficiary and have the power to direct the activities that most significantly affect Kalyra’s economic performance through common management and our board representation. Prior to December 21, 2017, the Company and Kalyra transacted for the delivery of research and development services and support. The financial position and results of operations of Kalyra have been included in our consolidated financial statements from the date of the initial investment.
Pursuant with authoritative guidance, we have recorded the identifiable assets, liabilities and noncontrolling interests in the VIE at their fair value upon initial consolidation. The identified goodwill is comprised of the workforce and expected synergies from combining the entities. Total assets and liabilities of Kalyra as of March 31, 2023 and December 31, 2022 are immaterial. The liabilities recognized as a result of consolidating Kalyra do not represent additional claims on our general assets. Pursuant to the authoritative guidance, the equity interest in Kalyra not owned by Zentalis is reported as a noncontrolling interest on our condensed consolidated balance sheets.
The following is a reconciliation of equity (net assets) attributable to the noncontrolling interest (in thousands):
| March 31, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| Noncontrolling interest at beginning of period | $ | $ | |||||||||
| Net loss attributable to noncontrolling interest | ( | ( | |||||||||
| Noncontrolling interest at end of period | $ | $ | |||||||||
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5. Fair Value Measurement
Available-for-sale marketable securities consisted of the following (in thousands):
| March 31, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Commercial paper | $ | $ | $ | ( | $ | ||||||||||||||||||
| Corporate Debt Securities | ( | ||||||||||||||||||||||
| US Government Agencies | ( | ||||||||||||||||||||||
| US Treasury | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Commercial paper | $ | $ | $ | ( | $ | ||||||||||||||||||
| Corporate Debt securities | ( | ||||||||||||||||||||||
| US Government Agencies | ( | ||||||||||||||||||||||
| US Treasury securities | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
As of March 31, 2023, fifty of our available-for-sale debt securities with a fair market value of $268.0 million were in a gross unrealized loss position of $0.6 million. Of those, forty-seven have been in a gross unrealized loss position of $0.5 million for less than one year and three have been in a gross unrealized loss position of $0.1 million for more than one year. When evaluating an investment for impairment, we review factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that we would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. Based on our review of these marketable securities, we believe none of the unrealized loss is as a result of a credit loss as of March 31, 2023, because we do not intend to sell these securities, and it is not more-likely-than-not that we will be required to sell these securities before the recovery of their amortized cost basis.
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| March 31, 2023 | December 31, 2022 | ||||||||||
| Estimated Fair Value | |||||||||||
| Due within one year | $ | $ | |||||||||
| $ | $ | ||||||||||
The following table summarizes, by major security type, our cash equivalents and available-for-sale marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Total estimated fair value | Level 1 | Level 2 | Total estimated fair value | ||||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||
| Total cash equivalents: | |||||||||||||||||||||||||||||||||||
| Available-for-sale marketable securities: | |||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||
| Corporate Debt Securities | |||||||||||||||||||||||||||||||||||
| US Government Agencies | |||||||||||||||||||||||||||||||||||
| US Treasury securities | |||||||||||||||||||||||||||||||||||
| Total available-for-sale marketable securities: | |||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2023. We had no instruments that were classified within Level 3 as of March 31, 2023 or December 31, 2022.
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6. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| Prepaid insurance | $ | $ | |||||||||
| Prepaid software licenses and maintenance | |||||||||||
| Foreign R&D credit refund | |||||||||||
| Prepaid research and development expenses | |||||||||||
| Interest receivable | |||||||||||
| Zentera receivable | |||||||||||
| Other prepaid expenses | |||||||||||
| Total prepaid expenses and other assets | |||||||||||
| Less long-term portion | |||||||||||
| Total prepaid expenses and other assets, current | $ | $ | |||||||||
7. Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| Lab equipment | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Office equipment and furniture | |||||||||||
| Computer equipment | |||||||||||
| Construction in progress | |||||||||||
| Subtotal | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
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8. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| Accrued research and development expenses | $ | $ | |||||||||
| Accrued employee expenses | |||||||||||
| Accrued legal expenses | |||||||||||
| Accrued general and administrative expenses | |||||||||||
| Lease liability | |||||||||||
| Taxes payable | |||||||||||
| Total accrued expenses | |||||||||||
| Less long-term portion | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
9. Stockholders’ Equity
Share-based Compensation
In April 2020, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the 2020 Incentive Award Plan (the “2020 Plan”), which allows for grants to selected employees, consultants and non-employee members of the Board of Directors. We currently grant stock options and restricted stock units (“RSUs”), under the 2020 Plan. Awards may be made under the 2020 Plan covering up to the sum of (1) 5,600,000 shares of common stock; plus (2) any shares forfeited from the unvested restricted shares of our common stock issued upon conversion of unvested Class B common units (up to 1,250,000 shares); plus (3) an annual increase on the first day of each fiscal year beginning with the fiscal year ending December 31, 2021 and continuing to, and including, the fiscal year ending December 31, 2030, equal to the lesser of (a) 5 % of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by our Board of Directors.
At March 31, 2023, 9,975,086 shares were subject to outstanding awards under the 2020 Plan and 1,350,490 shares were available for future grants of share-based awards under the 2020 Plan.
In July 2022, the Company’s Board of Directors approved the Zentalis Pharmaceuticals, Inc. 2022 Employment Inducement Incentive Award Plan (the “2022 Inducement Plan”), which is used exclusively for the grant of equity awards to new employees as an inducement material to the employees’ entering into employment with the
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Company. The Board of Directors has initially reserved 1,500,000 shares of the Company’s common stock for issuance pursuant to awards granted under the 2022 Inducement Plan.
At March 31, 2023, 1,485,975 shares were subject to outstanding awards under the 2022 Inducement Plan and 14,025 shares were available for future grants of share-based awards under the 2022 Inducement Plan.
Total share-based compensation expense related to share based awards was comprised of the following (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Research and development expense | $ | $ | |||||||||
| General and administrative expense | |||||||||||
| Total share-based compensation expense | $ | $ | |||||||||
Share-based compensation expense by type of share-based award (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Stock Options | $ | $ | |||||||||
| Employee Stock Purchase Plan | |||||||||||
| RSAs and RSUs | |||||||||||
| $ | $ | ||||||||||
The exercise price of stock options granted is equal to the closing price of the Company’s common stock on the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company estimates expected volatility based on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company uses the “simplified method” for estimating the expected term of employee options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has not issued any dividends and does not expect to issue dividends over the life of the options. As a result, the Company has estimated the dividend yield to be zero . The fair value of the stock options granted during the three months ended March 31, 2023 and March 31, 2022 was determined with the following assumptions:
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| March 31, 2023 | March 31, 2022 | ||||||||||
| Expected volatility | |||||||||||
| Average expected term (in years) | |||||||||||
| Risk-free interest rate | |||||||||||
| Expected dividend yield | % | % | |||||||||
Employee Stock Purchase Plan
In April 2020, the Company’s Board of Directors adopted, and the Company’s stockholders approved the Zentalis Pharmaceuticals, Inc. 2020 Employee Stock Purchase Plan (the “ESPP”), which was subsequently amended and restated effective March 15, 2021. The maximum aggregate number of shares of the Company’s common stock available for issuance under the ESPP at March 31, 2023 was 1,929,891 . Under the terms of the ESPP, the Company’s employees may elect to have up to 20 % of their compensation, up to a maximum value of $25,000 per calendar year, withheld to purchase shares of the Company’s common stock for a purchase price equal to 85 % of the lower of the fair market value per share (at closing) of the Company’s common stock on (i) the first trading day of a six-month offering period, or (ii) the applicable purchase date, defined as the last trading day of the six-month offering period. The weighted average assumptions used to estimate the fair value of stock purchase rights under the ESPP during the period ended March 31, 2023 are as follows:
| Ended March 31, 2023 | |||||||||||
| ESPP | |||||||||||
| Volatility | % | ||||||||||
| Expected term (years) | |||||||||||
| Risk free rate | % | ||||||||||
| Expected dividend yield | |||||||||||
Compensation Expense Summary
Total unrecognized estimated compensation cost by type of award and the weighted average requisite service period over which such expense is expected to be recognized (in thousands, unless otherwise noted):
| March 31, 2023 | |||||||||||
| Unrecognized Expense | Remaining Weighted-Average Recognition Period (years) | ||||||||||
| Stock options | $ | ||||||||||
| RSAs | |||||||||||
| RSUs | |||||||||||
| ESPP | $ | ||||||||||
During the three months ended March 31, 2023, we issued zero shares of common stock in connection with the exercises of stock options. For the three months ended March 31, 2023, 41.1 thousand shares of common stock
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10. Commitments and Contingencies
Legal Contingencies
From time to time, we may be involved in various disputes, including lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. Any of these claims could subject us to costly legal expenses. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements. While we do generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, or our policy limits may be inadequate to fully satisfy any damage awards or settlement. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We are currently not a party to any legal proceedings that require a loss liability to be recorded.
Leases
Our commitments include payments related to operating leases. Approximate annual future minimum operating lease payments as of March 31, 2023 are as follows (in thousands):
| Year | Operating Leases | |||||||
| 2023 (remaining) | $ | |||||||
2024 | ||||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
Thereafter | ||||||||
| Total minimum lease payments: | ||||||||
Less: imputed interest | ( | |||||||
Total operating lease liabilities | ||||||||
Less: current portion | ( | |||||||
Lease liability, net of current portion | $ | |||||||
The weighted-average remaining lease term of our operating leases is approximately 9.5 years.
On March 6, 2023, we entered into a sublease agreement pursuant to which we will sublease the office space located at 1359 Broadway, Suites 1710 and 1800 in New York, New York to a subtenant. As a result of certain triggering events, we performed an interim impairment test by comparing the carrying value of the long-lived asset group to its estimated fair value, which was determined based on the income approach using a discounted cash flow model. Estimates and assumptions used in the model included projected cash flows and a discount rate. As a result,
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11. Net Loss Per Common Share
Basic and diluted net loss per common share were calculated as follows (in thousands except per share amounts):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to Zentalis | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average number of common shares outstanding, basic and diluted | |||||||||||
| Net loss per common share | $ | ( | $ | ( | |||||||
Our potential and dilutive securities, which include outstanding stock options, unvested RSAs and unvested RSUs have been excluded from the computation of diluted net loss per common share as the effect would be anti-dilutive.
The following common stock equivalents have been excluded from the calculations of diluted net loss per common share because their inclusion would be antidilutive (in thousands).
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Outstanding stock options | |||||||||||
| Unvested RSAs | |||||||||||
| Unvested RSUs | |||||||||||
12. Related Party Disclosures
Tempus
Kimberly Blackwell, M.D., our Chief Executive Officer and a member of our Board of Directors, was previously employed by Tempus Labs, Inc. ("Tempus") and now serves as an advisor of Tempus. The Company entered into a Master Services Agreement with Tempus in December 2020 to provide data licensing and research services. There were $0.4 million and immaterial fees incurred for services performed by Tempus for the three months ended March 31, 2023 and 2022, respectively.
Zentera
Kevin D. Bunker, Ph.D., our Chief Scientific Officer, serves as a member of the Board of Directors of Zentera. Accordingly, the Company identifies Zentera as a related party.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and operating results should be read together with our interim unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements that involve significant risks and uncertainties. As a result of many important factors, such as those set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. For convenience of presentation some of the numbers have been rounded in the text below.
Overview
We are a clinical-stage biopharmaceutical company focused on discovering and developing small molecule therapeutics targeting fundamental biological pathways of cancers. We are developing a focused pipeline of potentially best-in-class oncology candidates. Our product candidates are:
•Azenosertib (ZN-c3), a potentially first-in-class WEE1 inhibitor for advanced solid tumors and hematological malignancies;
•ZN-d5, a B-cell lymphoma 2, or BCL-2, inhibitor for hematological malignancies and related disorders; and
•A heterobifunctional degrader of BCL-xL, a member of the anti-apoptotic BCL-2 proteins, for solid tumors and hematological malignancies.
We are currently evaluating azenosertib and ZN-d5 in multiple ongoing clinical trials and conducting studies to enable an Investigational New Drug, or IND, application for our BCL-xL product candidate. We also continue to use our extensive drug discovery experience and capabilities across cancer biology and medicinal chemistry, which we refer to as our Integrated Discovery Engine, to advance our ongoing research on protein degraders of undisclosed targets. We believe our product candidates are differentiated from current programs targeting similar pathways and, if approved, have the potential to significantly impact clinical outcomes of patients with cancer.
Our Pipeline
We are developing a focused pipeline of oncology product candidates with the potential to address significant unmet medical need for cancer patients. Two of our product candidates are currently in multiple ongoing clinical trials: azenosertib, an inhibitor of WEE1, a protein tyrosine kinase, and ZN-d5, a selective inhibitor of BCL-2. To date, azenosertib has been well tolerated and has demonstrated monotherapy anti-tumor activity across multiple tumor types in clinical trials. In addition, ZN-d5 has been well tolerated in clinical trials to date. We have also declared a development candidate for our BCL-xL degrader program, for which we are conducting IND-enabling studies.
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We currently exclusively in-license worldwide development and commercialization rights to azenosertib, ZN-d5, and our BCL-xL product candidate. We out-licensed azenosertib and ZN-d5 development and commercialization rights in select Asian countries, including China, to our joint venture, Zentera Therapeutics, or Zentera. As of March 31, 2023, we held a 40.3% equity interest in Zentera. For more information about our joint venture with Zentera, see below under “License Agreements and Strategic Collaborations” and Note 3 to our interim unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
The following table summarizes our product candidate pipeline:
Our Development Programs
Azenosertib (WEE1 Inhibitor)
Azenosertib is a potentially best-in-class and first-in-class oral, small molecule WEE1 inhibitor. As illustrated in the figure below, the inhibition of WEE1, a DNA damage response kinase, drives cancer cells into mitosis without being able to repair damaged DNA, resulting in cell death and thereby preventing tumor growth and potentially causing tumor regression. Currently, there are no WEE1 inhibitors approved by the U.S. Food and Drug Administration, or FDA. We have designed azenosertib to have advantages over other investigational therapies targeting WEE1, including superior selectivity and pharmacokinetic, or PK, properties. Azenosertib is currently being evaluated in the clinic for advanced solid tumors and hematological malignancies in the following three therapeutic settings of high unmet medical need:
•as a monotherapy,
•in combination with traditional chemotherapy and DNA damaging agents, and
•in combination with molecularly targeted agents.
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Two key components of our azenosertib clinical development strategy are our dose optimization activities and our pursuit of Cyclin E1 as a patient enrichment strategy.
Azenosertib is being evaluated in multiple current or planned clinical trials, including the following:
•Monotherapy - Phase 2 Clinical Trial in Cyclin E1 Driven High-Grade Serous Ovarian Cancer, Fallopian Tube, or Primary Peritoneal Cancer (HGSOC) (ZN-c3-005). We are evaluating azenosertib as a monotherapy in a Phase 2 clinical trial in patients with Cyclin E1 driven HGSOC. Our Cyclin E1 enrichment strategy is supported by preclinical data that showed that high Cyclin E1 protein expression sensitized cancer cells to the anti-tumor effects of azenosertib as well as preliminary retrospective clinical data that Cyclin E1 protein levels may be associated with clinical benefit from WEE1 inhibition. In addition, in April 2023, we announced preclinical data at the 2023 American Association for Cancer Research, or AACR, Annual Meeting that demonstrated that azenosertib drove cancer cell death in Cyclin E1-high tumor cells in vitro and substantially inhibited growth of Cyclin E1-high, patient derived, in vivo tumor models.
•Monotherapy - Phase 2 Clinical Trial in Recurrent or Persistent Uterine Serous Carcinoma (USC) (ZN-c3-004). Azenosertib is currently being evaluated as a monotherapy in a Phase 2 clinical trial in adult women with USC. As of a September 14, 2022 data cutoff, a total of 43 patients were enrolled and dosed. Azenosertib was well tolerated. The most common treatment related adverse events, or AEs, were nausea (60.5% all grades/9.3% grade 3 or higher), fatigue (46.5% all grades/9.3% grade 3 or higher), diarrhea (37.2% all grades/7.0% grade 3 or higher) and vomiting (32.6% all grades/7.0% grade 3 or higher). We anticipate that we will disclose the monotherapy dose for azenosertib in the first half of 2023, and we plan to update the timeline of this USC study thereafter. The FDA granted Fast Track designation in November 2021 to azenosertib in patients with advanced or metastatic USC who have received at least one prior platinum-based chemotherapy regimen for management of advanced or metastatic disease. We believe that the study design in this patient population has the potential to support registration in the United States.
•Combination - Phase 1/2 Clinical Trial of Azenosertib and PARPi in Platinum-Resistant Ovarian Cancer (ZN-c3-006). We are evaluating azenosertib in combination with GSK's PARP inhibitor, niraparib (ZEJULA®), in a Phase 1/2 clinical trial in platinum-resistant ovarian cancer patients who have failed PARP inhibitor, or PARPi, maintenance treatment as part of a clinical collaboration with GSK. This study is currently enrolling two cohorts — one with concurrent dosing of the two drugs, and one with azenosertib and niraparib administered on a dose escalating, alternating schedule of one week of azenosertib followed by one week of niraparib. This clinical study is supported by preclinical data that showed that combining azenosertib and niraparib resulted in synergistic cell killing in ovarian in vivo models.
•Combination - Phase 1b Clinical Trial of Azenosertib and Chemotherapy in Platinum-Resistant Ovarian, Peritoneal or Fallopian Tube Cancer (ZN-c3-002). Azenosertib is currently being evaluated in combination with each of paclitaxel, carboplatin, pegylated liposomal doxorubicin (PLD) and gemcitabine in four separate cohorts in a Phase 1b clinical trial in patients with platinum-resistant ovarian, peritoneal or fallopian tube cancer. We provided a preliminary efficacy and safety update at the 2022 AACR Annual Meeting in April 2022, highlighting that azenosertib in combination with chemotherapy demonstrated strong anti-tumor activity in a heavily pretreated population and was well tolerated. As of the January 28, 2022 data cutoff, there were 43 evaluable patients for efficacy, with an ORR of 30.2% across all evaluable chemotherapy cohorts (paclitaxel, carboplatin and PLD). In the paclitaxel cohort, there were 8 evaluable patients and an ORR of 62.5%; in the carboplatin cohort, there were 11 evaluable patients and an ORR of 45.5%; and in the PLD cohort, there were 24 evaluable patients and an ORR of 12.5%. As of the January 28, 2022 data cutoff, there were 56 evaluable patients for safety. The most common treatment related AEs were nausea (48.2% all grades/5.4% grade 3 or higher), neutropenia (41.1% all grades/32.1% grade 3 or higher), thrombocytopenia (37.5% all grades/17.9% grade 3 or higher), vomiting (30.4% all grades/7.1% grade 3 or higher) and anemia (26.8 all grades/7.1% grade 3 or higher). In April 2023, we announced that we are scheduled to present positive clinical data from this trial at the American Society of Clinical Oncology Meeting on June 5, 2023.
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•Monotherapy - Phase 1 Dose Optimization Clinical Trial in Solid Tumors (ZN-c3-001). We are currently evaluating azenosertib as a monotherapy in a Phase 1 dose optimization clinical trial for the treatment of solid tumors. We announced preliminary efficacy data from this trial with a data cutoff of May 15, 2021 from 34 patients, where we showed five confirmed partial responses, or cPRs, to azenosertib in monotherapy across several tumor types, including ovarian cancer (-69% cPR), colorectal cancer (-51% cPR), NSCLC (-49% cPR), and USC (-49% cPR) and (-43% cPR). We announced preliminary safety data from this trial at the 2022 AACR Annual Meeting in April 2022. As of a January 21, 2022 data cutoff, there were 32 patients evaluated for safety and azenosertib was well tolerated. The most common treatment related AEs were nausea (71.9% all grades/3.1% grade 3 or higher), fatigue (53.1% all grades/18.8% grade 3 or higher), diarrhea (46.9% all grades/6.3% grade 3 or higher) and vomiting (46.9% all grades/0% grade 3 or higher). We also announced preliminary efficacy data from the Phase 1 monotherapy expansion cohort in USC from this trial at the 2022 AACR Annual Meeting. As of a January 21, 2022 data cutoff, there were 11 evaluable patients in the USC cohort, with 27.3% demonstrating an objective response rate, or ORR, and 90.9% demonstrating a disease control rate, or DCR.
•Combination - Phase 1/2 Clinical Trial of Azenosertib and Chemotherapy in Relapsed or Refractory Osteosarcoma (ZN-c3-003). Azenosertib is currently being evaluated in combination with gemcitabine, in a Phase 1/2 clinical trial in adult and pediatric patients with R/R osteosarcoma. We reported initial results from this trial at the 2022 Connective Tissue Oncology Society, or CTOS, Annual Meeting in November 2022. As of a October 24, 2022 data cutoff, there were 12 patients evaluable for efficacy, with approximately 33% of patients demonstrating event-free survival, or EFS, at 18 weeks (compared to approximately 12% at 18 weeks for this indication historically). As of the October 24, 2022 data cutoff, there were 17 patients evaluable for safety. Azenosertib demonstrated a manageable safety profile with 82.4% experiencing treatment related AEs of which 52.9% were grade 3 or higher. The most common treatment related AEs were platelet count decreased/thrombocytopenia (47.1% all grades/35.3% grade 3 or higher), fatigue (29.4% all grades/5.9% grade 3 or higher), nausea (29.4% all grades/0% grade 3 or higher) and rash (29.4% all grades/5.9% grade 3 or higher). We received orphan drug designation and rare pediatric disease designation from the FDA for azenosertib in osteosarcoma.
•Combination - Phase 1/2 Clinical Trial of Azenosertib with Encorafenib and Cetuximab (BEACON Regimen) in BRAF V600E Mutant Metastatic Colorectal Cancer (mCRC) (ZN-c3-016). We are collaborating with Pfizer to evaluate azenosertib in combination with encorafenib and cetuximab, an FDA-approved standard of care known as the BEACON regimen, in patients with BRAF V600E mutant mCRC in a Phase 1/2 clinical trial. In preclinical studies, WEE1 inhibition has shown synergy with many targeted agents in mutationally driven cancers, and the addition of azenosertib to the BEACON regimen enhanced anti-tumor activity in a cell-line-derived xenograft model. We initiated enrollment in this clinical trial in the first quarter of 2023.
•Combination - Phase 1/2 Clinical Trial of Azenosertib and Chemotherapy in Pancreatic Cancer. We have also agreed to support the Dana Farber-sponsored Phase 1/2 clinical trial evaluating azenosertib and chemotherapy, gemcitabine, in platinum-resistant pancreatic cancer patients.
ZN-d5 (BCL-2 Inhibitor)
ZN-d5 is a potentially best-in-class, selective, oral small molecule inhibitor of BCL-2. BCL-2 is a protein that plays a critical role in the regulation of cell death, known as apoptosis. The overexpression of BCL-2 is frequently detected in numerous cancer types, which prevents apoptosis of cancer cells. Utilizing our medicinal chemistry expertise, we have designed ZN-d5 to have best-in-class potency, selectivity and PK properties. ZN-d5 is currently being evaluated in the clinic in patients with hematological malignancies in both the monotherapy and combination settings.
ZN-d5 is being evaluated in the following monotherapy and combination clinical trials:
•Monotherapy - Phase 1/2 Clinical Trial in Relapsed or Refractory Light Chain Amyloidosis (R/R AL Amyloidosis) (ZN-d5-003). ZN-d5 is being evaluated as a monotherapy in a Phase 1/2 clinical trial in R/R AL amyloidosis. BCL-2 inhibition has demonstrated clinical activity in R/R AL amyloidosis; however,
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there are currently no FDA-approved BCL-2 inhibitors for the treatment of R/R AL amyloidosis. This Phase 1/2 study in patients with R/R AL amyloidosis consists of a dose escalation phase to establish the monotherapy dose in this setting, and an expansion phase to further assess the safety and efficacy of ZN-d5 in this population. The study is expected to enroll up to approximately 140 patients.
•Monotherapy - Phase 1 Clinical Trial in Non-Hodgkin Lymphoma (NHL) (ZN-d5-001). We are evaluating ZN-d5 as a monotherapy in a Phase 1 dose escalation clinical trial in patients with NHL. As of the database cutoff date of November 3, 2021, 23 patients with NHL were evaluable for safety. At our R&D Day in December 2021, we reported preliminary interim data from the NHL patients in this study. As of the November 3, 2021 database cutoff date, ZN-d5 was well tolerated, with 73.9% of the NHL patients having experienced AEs (30.4% grade 3 or higher), not all of which were related ZN-d5. Anemia (21.7% all grades/8.7% grade 3 or higher), diarrhea (13.0% all grades/4.3% grade 3 or higher), and nausea and vomiting (8.7% each all grades/0% grade 3 or higher) comprise the most commonly experienced AEs. Investigator-reported responses using the Lugano 2014 classification among 11 patients with diffuse large B-cell lymphoma included a complete response, an unconfirmed PR, and two subjects with stable disease, as of the database cutoff date of November 3, 2021.
•Combination - Phase 1/2 Clinical Trial of ZN-d5 and Azenosertib in Relapsed or Refractory Acute Myeloid Leukemia (R/R AML) (ZN-d5-004C). ZN-d5 is being evaluated in combination with azenosertib in a Phase 1/2 dose escalation clinical trial in patients with R/R AML. The Phase 1 portion of this trial will escalate the doses of both drugs to identify the dose for the combination, which will be assessed in Phase 2 expansion cohort(s). This study is expected to enroll up to approximately 100 patients. This clinical trial is supported by preclinical models that showed that the combination of ZN-d5 with azenosertib yielded a significant enhancement of activity in several indications, including R/R AML, as compared to activity shown with either of these product candidates as a single agent. Preclinical models also showed that the combination of ZN-d5 with azenosertib was well tolerated in mice. We believe we are the only company to have both a WEE1 inhibitor and a BCL-2 inhibitor in clinical development.
BCL-xL Heterobifunctional Degrader
In November 2022, we announced that we identified a BCL-xL protein degrader candidate and initiated IND-enabling studies. We are developing a BCL-xL heterobifunctional degrader based on non-functional or dysfunctional E3 ubiquitin ligase complex in platelets, allowing for the potential mitigation of dose-limiting thrombocytopenia historically associated with BCL-xL inhibitors.
Liquidity Overview
Since our inception, our operations have been limited to organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and performing research and development of our product pipeline. We do not have any products approved for commercial sale and have not generated any revenues from product sales. We will not generate revenue from product sales unless and until we successfully complete clinical development, obtain regulatory approval for and commercialize one or more of our product candidates. We will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy.
Since inception, we have incurred significant operating losses. Our net losses were $237.1 million for the year ended December 31, 2022, and $63.3 million and $59.2 million for the three months ended March 31, 2023 and March 31, 2022, respectively. We had an accumulated deficit of $659.6 million as of March 31, 2023. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We had cash, cash equivalents and marketable securities of $392.5 million as of March 31, 2023. We believe that our existing cash, cash equivalents and marketable securities as of March 31, 2023 will be sufficient to fund our operating expenses and capital expenditure requirements into the second quarter of 2025. We have based these estimates on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect.
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Impact of COVID-19 Pandemic and Global Macroeconomic Environment
We continue to monitor how the COVID-19 pandemic is affecting our employees, business, preclinical studies and clinical trials. At this time, there is continuing uncertainty relating to the trajectory of the COVID-19 pandemic and impact of related responses. The impact of COVID-19 on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence. See “Risk Factors—The COVID-19 pandemic has adversely impacted and we expect will continue to adversely impact our business, including our preclinical studies and clinical trials.” in Part II, Item 1A. of this Quarterly Report on Form 10-Q. Further, the global economy, including credit and financial markets, has recently experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, rising interest and inflation rates, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. All of these factors could impact our liquidity and future funding requirements, including but not limited to, our ability to raise additional capital when needed on acceptable terms, if at all. The duration of this economic slowdown is uncertain and the impact on our business is difficult to predict. See “Risk Factors—Unfavorable U.S., global, political or economic conditions could adversely affect our business, financial condition or results of operations.” in Part II, Item 1A. of this Quarterly Report on Form 10-Q.
License Agreements and Strategic Collaborations
Recurium IP Holdings, LLC License Agreement
In December 2014, our wholly owned subsidiary, Zeno Pharmaceuticals, Inc., entered into the Recurium Agreement with Recurium IP, which was subsequently amended, under which Zeno Pharmaceuticals, Inc. was granted an exclusive worldwide license to certain intellectual property rights owned or controlled by Recurium IP to develop and commercialize pharmaceutical products for the treatment or prevention of disease, other than for providing pain relief. Following certain corporate restructuring disclosed elsewhere in this Annual Report on 10-K, our wholly owned subsidiary, ZMI, became the Zentalis contracting party to the Recurium Agreement. The intellectual property rights exclusively licensed by ZMI under the Recurium Agreement include certain intellectual property covering azenosertib, ZN-d5 and our BCL-xL product candidate. ZMI has the right to sublicense its rights under the Recurium Agreement, subject to certain conditions. ZMI is required to use commercially reasonable efforts to develop and commercialize at least one product that comprises or contains a compound modulating one of ten specific biological targets and to execute certain development activities.
Under the terms of the Recurium Agreement, ZMI is obligated to make development and regulatory milestone payments, pay royalties on net sales, and make certain sublicensing payments with respect to products that comprise or contain a compound modulating one of ten specific biological targets, including azenosertib, ZN-d5, our BCL-xL product candidate and two licensed products for which we discontinued clinical development in 2022, ZN-c5 and ZN-e4. ZMI is obligated to make development and regulatory milestone payments for each such licensed product of up to $44.5 million. In addition, ZMI is obligated to make milestone payments up to $150,000 for certain licensed products used in animals. ZMI is also obligated to pay royalties on sales of such licensed products at a mid- to high-single digit percentage. In addition, if ZMI chooses to sublicense or assign to any third parties its rights under certain patents exclusively in-licensed under the Recurium Agreement, ZMI must pay to Recurium IP 20% of certain sublicensing income received in connection with such transaction.
The Recurium Agreement will expire on the later of December 21, 2032 and, on a country-by-country basis, on the date of expiration of the last-to-expire royalty term for all licensed products in such country, unless earlier terminated by either party for cause or a bankruptcy event.
Pfizer Development Agreement
In April 2022, we entered into a development agreement with Pfizer to collaborate to advance the clinical development of azenosertib. We did not grant Pfizer any economic ownership or control of azenosertib or the rest of our pipeline. In October 2022, we announced our first clinical development collaboration with Pfizer to initiate a
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Phase 1/2 dose escalation study of azenosertib, in combination with encorafenib and cetuximab (an FDA-approved standard of care known as the BEACON regimen) in patients with BRAF V600E-mutant mCRC.
GlaxoSmithKline Clinical Trial Collaboration and Supply Agreement
In April 2021, we entered into a clinical trial collaboration and supply agreement with GSK under which we are evaluating the combination of azenosertib and niraparib, GSK’s poly (ADP-ribose) polymerase (PARP) inhibitor, in patients with platinum-resistant ovarian cancer. Pursuant to this agreement, we are responsible for the conduct and cost of the relevant studies, under the supervision of a joint development committee made up of our representatives and representatives of GSK that meets quarterly. GSK is supplying niraparib for use in the collaboration, at no cost to us. We are required to provide to GSK clinical data and other reports upon completion of the study.
This agreement does not grant any right of first negotiation to participate in future clinical trials, and neither party granted the other any additional right or ability to evaluate their respective compounds in any other clinical studies, either as monotherapy or in combination with any other product or compound, in any therapeutic area.
The agreement with GSK will expire upon completion of all obligations of the parties thereunder or upon termination by either party. We and GSK each have the right to terminate the agreement for material breach by the other party. In addition, the agreement may be terminated by either party due to safety considerations or if either party decides to discontinue development of its own compound for medical, scientific, legal or other reasons or if a regulatory authority takes any action preventing that party from supplying its compound for the study or in the event the other party is subject to specified bankruptcy, insolvency or similar circumstances. GSK also has the right to terminate this agreement if it notifies us in writing that it reasonably and in good faith believes that niraparib is being used in an unsafe manner, and we fail to incorporate changes to address such issue, and the issue is unable to be resolved following elevation to appropriate parties.
Zentera Therapeutics
In May 2020, each of our wholly owned subsidiaries Zeno Alpha, Inc., K-Group Alpha, Inc. and K-Group Beta, Inc. entered into a collaboration and license agreement with our joint venture, Zentera, which we refer to as the “Zentera Sublicenses”, pursuant to which we collaborate with Zentera on the development and commercialization of ZN-c5, ZN-d5 and azenosertib, respectively, whether alone or in a licensed product, which we collectively refer to as the "Collaboration Products", in each case for the treatment or prevention of disease, other than for pain, which is referred to as the "Zentera Field", in the People’s Republic of China, Macau, Hong Kong and Taiwan, which is referred to as the “Zentera Collaboration Territory”. As disclosed in August 2022, we have discontinued clinical development of ZN-c5. Under each Zentera Sublicense, Zentera will lead development, and upon regulatory approval, the commercialization, of the Collaboration Products in the Zentera Collaboration Territory. On May 19, 2020, Zentera issued an aggregate of 60.2% of its issued shares of common stock to Zeno Alpha, Inc., K-Group Alpha, Inc., K-Group Beta, Inc., Zeno Management, Inc. and Zeno Beta, Inc. In July 2021, Zentera entered into a Series B Preference Shares Purchase Agreement, pursuant to which it raised $75.0 million in gross proceeds. As of March 31, 2023, we hold a 40.3% equity interest in Zentera. Kevin D. Bunker, Ph.D., our Chief Scientific Officer, serves as a member of the Board of Directors of Zentera.
Under each Zentera Sublicense, we granted Zentera an exclusive, royalty-bearing license under certain of our technology, including technology licensed from Recurium IP under the Recurium Agreement, to develop and commercialize the Collaboration Products in the Zentera Field in the Zentera Collaboration Territory, subject to certain rights that we retain, and upon a successful manufacturing transfer, a non-exclusive license under certain of our manufacturing technology to manufacture Collaboration Products in the Zentera Field in the Zentera Collaboration Territory. Zentera has the right to sublicense its rights under the Zentera Sublicenses subject to certain conditions.
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Under the terms of the Zentera Sublicenses, Zentera is generally responsible for the costs of developing the Collaboration Products in the Zentera Collaboration Territory, and we are generally responsible for the costs of developing the Collaboration Products outside the Zentera Collaboration Territory, provided that Zentera will reimburse us for a portion of its costs for global data management, pharmacovigilance, safety database management, and chemistry, manufacturing and controls activities with respect to each Collaboration Product. Under the Zentera Sublicenses, we will be eligible to receive future development and regulatory milestones of up to $4.45 million per Collaboration Product. Zentera will pay us royalties on net sales of Collaboration Products in the Zentera Collaboration Territory at a mid- to high-single digit percentage, subject to certain reductions. In addition, if Zentera or its affiliate chooses to sublicense or assign to any third parties its rights under the Zentera Sublicenses with respect to any Collaboration Product, Zentera must pay to us 20% of certain sublicensing income received by Zentera or its affiliates in connection with such transaction.
Zentera’s royalty obligations will expire on a Collaboration Product-by-Collaboration Product and region-by-region basis upon the later of the date on which such product is no longer covered by a valid claim of a licensed patent and the 15th anniversary of the first commercial sale of such product in such region.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue, and we do not expect to generate any revenue in the foreseeable future from product sales. We have generated, and may in the future generate, revenue from payments received under our collaboration agreements, which includes payments of upfront fees, license fees, milestone-based payments and reimbursements for research and development efforts.
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, and include:
•salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
•expenses incurred under agreements with third parties, including contract research organizations, or CROs, and other third parties that conduct research, preclinical activities and clinical trials on our behalf as well as contract manufacturing organizations, or CMOs, that manufacture drug material for use in our preclinical studies and clinical trials;
•costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
•the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;
•license payments made for intellectual property used in research and development activities; and
•allocated expenses for rent and maintenance of facilities and other operating costs.
We expense research and development costs as incurred. Reimbursed research and development costs under government grants and certain collaborative arrangements are recorded as a reduction to research and development expenses and are recognized in the period in which the related costs are incurred.
We track external development costs by product candidate or development program, but we do not allocate personnel costs, general license payments made under our licensing arrangements or other internal costs to specific
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development programs or product candidates. These costs are included in unallocated research and development expenses in the table below.
The following table summarizes our research and development expenses by product candidate or development program:
| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Azenosertib | $ | 12,903 | $ | 12,604 | ||||||||||
| ZN-d5 | 5,374 | 5,043 | ||||||||||||
| ZN-c51 | 1,280 | 3,045 | ||||||||||||
ZN-e41 | 92 | 389 | ||||||||||||
| Unallocated research and development expenses | 28,935 | 25,031 | ||||||||||||
| Total research and development expenses | $ | 48,584 | $ | 46,112 | ||||||||||
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have a higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase substantially for the foreseeable future and will comprise a larger percentage of our total expenses as we complete our ongoing clinical trials, initiate new clinical trials, continue to discover and develop additional product candidates and prepare regulatory filings for any product candidates that successfully complete clinical development.
The successful development of our product candidates is highly uncertain. At this time, we cannot determine with certainty the duration and costs of our existing and future clinical trials of our product candidates or any other product candidate we may develop or if, when, or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any product candidate. The duration, costs and timing of clinical trials and development of our product candidates and any other product candidate we may develop in the future will depend on a variety of factors, including:
•per patient trial costs;
•the number of patients who enroll in each trial;
•the number of trials required for approval;
•the number of sites included in the trials;
•the countries in which the trials are conducted;
•the length of time required to enroll eligible patients;
•the drop-out or discontinuation rates of patients;
•any delays in clinical trials as a result of the COVID-19 pandemic;
•potential additional safety monitoring requested by regulatory agencies;
1 As disclosed previously, in August 2022, we announced that we were discontinuing the clinical development of ZN-c5 and ZN-e4.
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•the duration of patient participation in the trials and follow-up;
•the phase of development of the product candidate;
•the efficacy and safety profile of the product candidate.
•uncertainties in clinical trial design and patient enrollment rates;
•the actual probability of success for our product candidates, including the safety and efficacy, early clinical data, competition, manufacturing capability and commercial viability;
•significant and changing government regulation and regulatory guidance;
•the timing and receipt of any marketing approvals;
•the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
•our ability to attract and retain skilled personnel.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support research and development activities relating to our clinical stage programs, and any other product candidate we may develop. We also expect to incur increased expenses associated with being a public company, particularly now that we are no longer an emerging growth company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements; director and officer insurance costs; and investor and public relations costs.
Interest Income
Interest income consists of interest earned on cash, cash equivalents and available-for-sale marketable securities.
Income Taxes
Since our inception, we and our corporate subsidiaries have generated cumulative federal, state and foreign net operating loss in certain jurisdictions for which we have not recorded any net tax benefit due to uncertainty around utilizing these tax attributes within their respective carryforward periods.
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Results of Operations
Comparison of Three Months Ended March 31, 2023 to Three Months Ended March 31, 2022
The following table summarizes our results of operations for the periods indicated, together with the changes in those items in dollars:
| Three Months Ended March 31, | Increase (Decrease) | |||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Research and development | $ | 48,584 | $ | 46,112 | $ | 2,472 | ||||||||||||||||||||
| General and administrative | 16,369 | 11,767 | 4,602 | |||||||||||||||||||||||
| Total operating expenses | 64,953 | 57,879 | 7,074 | |||||||||||||||||||||||
| Loss from operations | (64,953) | (57,879) | (7,074) | |||||||||||||||||||||||
| Investment and other income, net | 4,109 | 426 | 3,683 | |||||||||||||||||||||||
| Net loss before income taxes | (60,844) | (57,453) | (3,391) | |||||||||||||||||||||||
| Income tax expense (benefit) | 108 | 33 | 75 | |||||||||||||||||||||||
| Loss on equity method investment | 2,310 | 1,751 | 559 | |||||||||||||||||||||||
| Net loss | (63,262) | (59,237) | (4,025) | |||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (43) | (160) | 117 | |||||||||||||||||||||||
| Net loss attributable to Zentalis | $ | (63,219) | $ | (59,077) | $ | (4,142) | ||||||||||||||||||||
Research and Development Expenses
Research and development, or R&D, expenses for the three months ended March 31, 2023 were $48.6 million, compared to $46.1 million for the three months ended March 31, 2022. The increase of $2.5 million was primarily due to a $3.2 million increase in overhead allocations driven by an operating lease impairment charge, and an increase of $1.9 million in personnel costs. These increases were partially offset by a $1.8 million decrease in clinical trial-related costs and $0.8 million in decreased collaboration costs.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2023 were $16.4 million, compared to $11.8 million during the three months ended March 31, 2022. This increase of $4.6 million was primarily attributable to a $5.0 million operating lease impairment charge and a $3.0 million increase in personnel costs, of which $2.7 million was non-cash stock-based compensation. These increases were partially offset by $3.1 million related to the allocation of overhead expenditures, and net reductions in outside services and supplies of $0.3 million.
Investment and Other Income, Net
Investment and other income, net was $4.1 million for the three months ended March 31, 2023, compared to $0.4 million for the three months ended March 31, 2022. The increase of $3.7 million was primarily driven by returns on an increase of invested cash and marketable securities.
Liquidity and Capital Resources
Since our inception, our operations have been limited to organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and performing research and development of our
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product pipeline. We do not have any products approved for commercial sale and have not generated any revenues from product sales and we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and clinical development of our research programs and product candidates. We expect that our research and development and general and administrative costs will increase in connection with conducting additional preclinical studies and clinical trials for our current and future research programs and product candidates, contracting with CMOs to support preclinical studies and clinical trials, expanding our intellectual property portfolio, and providing general and administrative support for our operations.
As a result, we will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we plan to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing uncertainty related to the evolving COVID-19 pandemic, the conflict in Ukraine, ongoing global supply chain issues and increased inflation and interest rates. The COVID-19 pandemic and related global events have resulted in an economic downturn that could adversely affect our operations, our ability to conduct our clinical trials, our ability to raise additional funds through public offerings and the volatility of our stock price and trading in our stock. Even after the effects of the COVID-19 pandemic have subsided, we expect we will continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay our pursuit of potential in-licenses or acquisitions.
Because of the numerous risks and uncertainties associated with developing and commercializing therapeutics, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the sale of equity securities. From inception through March 31, 2023, we raised a total of $975.9 million in gross proceeds from the sale of our common stock and Series A, B and C convertible preferred units. As of March 31, 2023, we had cash, cash equivalents, and marketable securities of $392.5 million, and an accumulated deficit of $659.6 million. We maintain the majority of our cash and cash equivalents in accounts with major financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position. We had no indebtedness as of March 31, 2023.
ATM Program
In May 2021, we entered into a sales agreement, or the Sales Agreement, with SVB Leerink LLC, or SVB Leerink, as sales agent, pursuant to which we may, from time to time, issue and sell common stock with an aggregate value of up to $200.0 million in “at-the-market” offerings, or the ATM, under our Registration Statement on Form S-3 (File No. 333-255769) filed with the U.S. Securities and Exchange Commission, or the SEC, on May 4, 2021. Sales of common stock, if any, pursuant to the Sales Agreement, may be made in sales deemed to be an “at the market offering” as defined in Rule 415(a) of the Securities Act of 1933, as amended, or the Securities Act, including sales made directly through The Nasdaq Global Market or any other existing trading market for our common stock. During the quarter ended March 31, 2023, we did not sell any shares of common stock under the Sales Agreement. As of March 31, 2023, there was $140.3 million of common stock remaining available for sale under the Sales Agreement.
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Cash Flows
The following table summarizes our sources and uses of cash for the period presented:
| Three Months Ended March 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Net cash used in operating activities | $ | (49,283) | $ | (50,196) | |||||||||||||
| Net cash provided by investing activities | 42,121 | 19,796 | |||||||||||||||
| Net cash provided by financing activities | 373 | 1,258 | |||||||||||||||
| Net decrease in cash and cash equivalents | $ | (6,789) | $ | (29,142) | |||||||||||||
Operating Activities
We have incurred losses since inception. Net cash used in operating activities for the three months ended March 31, 2023 was $49.3 million, consisting primarily of our net loss of $63.3 million as we incurred expenses associated with research and development activities for our product candidates and incurred general and administrative expenses, and offset by non-cash adjustments of $18.0 million and changes in operating assets and liabilities of $4.0 million.
Investing Activities
Net cash provided by investing activities for the three months ended March 31, 2023 of $42.1 million was attributable to the proceeds from maturities of marketable securities of $106.0 million, offset by net investment of excess cash of $63.9 million.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2023 of $0.4 million was provided from the issuance of common stock under equity incentive plans.
Funding Requirements
Our operating expenses increased in 2022 and are expected to increase substantially in the future in connection with our ongoing activities.
Specifically, our expenses will increase as we:
•advance the clinical development of azenosertib and ZN-d5 for the treatment of oncology indications;
•pursue the preclinical and clinical development of other current and future research programs and product candidates and, if applicable, diagnostics tools for biomarkers associated with our product candidates and future product candidates;
•in-license or acquire the rights to other products, product candidates or technologies;
•maintain, expand and protect our intellectual property portfolio;
•hire additional personnel, including in research, manufacturing and regulatory and clinical development, as well as management personnel;
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•seek regulatory approval for any product candidates and, if needed, diagnostic tools for biomarkers associated with such product candidates, that successfully complete clinical development; and
•expand our operational, financial and management systems and increase personnel, including personnel to support our operations as a public company.
We believe that our existing cash, cash equivalents and marketable securities as of March 31, 2023 will be sufficient to fund our operating expenses and capital expenditure requirements into the second quarter of 2025. We have based these estimates on assumptions that may prove to be imprecise, 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 drugs, it is difficult to estimate with certainty the amount of our working capital requirements. Our future funding requirements will depend on many factors, including:
•the progress, costs and results of our clinical trials for our programs for azenosertib and ZN-d5;
•the progress, costs and results of additional research and preclinical studies in other research programs we initiate in the future and, if needed, of diagnostic tools for biomarkers associated with our product candidates and future product candidates;
•the costs and timing of process development and manufacturing scale-up activities associated with our product candidates and other programs as we advance them through preclinical and clinical development;
•our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements;
•the extent to which we in-license or acquire rights to other products, product candidates or technologies;
•the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims; and
•our ability to attract and retain skilled personnel.
In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q, as the pandemic continues to evolve globally. See “Impact of COVID-19 Pandemic” and “Risk Factors—The COVID-19 pandemic has adversely impacted and we expect will continue to adversely impact our business, including our preclinical studies and clinical trials”.
Further, our operating results may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.
Until such time as we can generate significant revenue from product sales, if ever, we plan to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions
We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may 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
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covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaboration agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, 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 when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates from our disclosure reported in “Critical Accounting Estimates” in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Off-Balance Sheet Arrangements