C4 Therapeutics, Inc. — Q3 2020 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. C4 Therapeutics is an early-stage biopharmaceutical company developing targeted protein degraders using its TORPEDO platform. All product candidates remained in preclinical development; the company had no product sales or approved products. Collaboration revenue came from Roche, Biogen and Calico.
Financial performance and position
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Collaboration revenue | $8.4 | $5.4 | $24.9 | $13.2 |
| Research and development | $23.9 | $12.9 | $58.0 | $32.0 |
| General and administrative | $2.9 | $2.4 | $8.5 | $6.1 |
| Total operating expenses | $26.8 | $15.4 | $66.5 | $38.1 |
| Operating loss | $(18.3) | $(10.0) | $(41.5) | $(25.0) |
| Net loss | $(21.8) | $(10.1) | $(44.5) | $(24.1) |
| Net loss attributable to common stockholders | $(27.0) | $(12.3) | $(54.9) | $(30.6) |
| Basic and diluted loss per share | $(17.55) | $(8.93) | $(36.76) | $(22.59) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(45.7) | $65.9 |
- Revenue and operating trend: Revenue increased 57% year over year in Q3 and 89% for the nine-month period, but operating expenses rose faster. R&D expense increased 85% for Q3 and 81% for the nine months, principally from greater chemistry and biology effort, preclinical work, personnel and consulting.
- Revenue sources: Nine-month revenue was $7.4 million from Roche, $6.8 million from Biogen and $10.7 million from Calico. The filing reports no product-sales revenue or royalties.
- Other expense and tax: Q3 included a $3.1 million noncash loss from revaluing the Perceptive warrant liability. The company recorded a $0.5 million income-tax benefit for the nine months, principally related to an expected CARES Act carryback refund.
- Cash flow: Nine-month operating cash use was $45.7 million. Investing cash use was $136.3 million, primarily for purchases of short-term investments; financing cash inflow was $154.9 million, mainly from Series B preferred stock and term-loan proceeds. The prior-year operating cash inflow of $65.9 million primarily reflected collection of Roche and Biogen upfront payments, so it is not directly comparable to recurring operating cash generation.
- Liquidity and obligations at September 30: Cash and cash equivalents were $63.4 million and short-term investments were $136.0 million, totaling $199.4 million. Current assets were $208.9 million and current liabilities $40.0 million. The balance sheet reported $9.9 million of long-term debt and $5.5 million of warrant liability; debt principal outstanding was $12.5 million. Operating lease liabilities totaled $13.1 million, with undiscounted future lease payments of $18.9 million.
Material changes and significant events
- Year-over-year losses widened as R&D spending expanded to advance programs and prepare for clinical development. Nine-month net loss increased from $24.1 million to $44.5 million.
- In June and July 2020, the company raised $150.0 million gross, or $145.5 million net, through Series B preferred stock. It also drew $12.5 million under a Perceptive term loan, with a further $7.5 million available subject to milestones. The loan bears a variable rate reported as 11.25%, has interest-only payments through December 2022, matures September 2024 and includes a $5.0 million prepayment fee and restrictive covenants.
- On October 6, 2020, after the reporting date, the company completed its IPO: 11.04 million shares at $19.00 per share, generating $191.1 million net proceeds. Preferred stock converted into common stock upon closing. Management stated that cash, investments and IPO proceeds were expected to fund operations for at least 12 months; elsewhere in the risk factors, using cash and investments of approximately $385 million as of October 31 plus collaboration payments, management estimated funding through the second quarter of 2023. These are forward-looking estimates, not guarantees.
- A one-for-8.4335 reverse stock split took effect September 25, 2020. Comparative share and per-share amounts were adjusted retrospectively.
- In November 2020, the company and Roche mutually terminated the collaboration for the EGFR target. Rights to inhibition-related work reverted to Roche, while rights to degradation-related work reverted to C4 Therapeutics.
Outlook, risks and controls
- Management expected to initiate a first-in-human Phase 1/2 trial for CFT7455 in the first half of 2021 and for CFT8634 by year-end 2021. The filing also described planned IND timing as Q4 2020 for CFT7455 and the second half of 2021 for CFT8634.
- The company expected expenses and operating losses to rise as it advances candidates, expands research, hires staff, increases manufacturing activity and operates as a public company. It will require substantial additional financing to develop candidates through approval; adequate future funding may not be available.
- COVID-19 had caused laboratory and CRO interruptions, including temporary closure of an India-based CRO and increased risk of delays from a China-based manufacturer. The company reported mitigation efforts but could not determine the pandemic’s full effect on timelines or costs.
- Key risks include the unproven targeted-protein-degradation approach; preclinical and clinical failure, safety or enrollment issues; reliance on third-party manufacturers and CROs; collaboration-partner decisions and milestone uncertainty; competition, intellectual-property protection and regulatory approval. All candidates were preclinical and had not been tested in humans.
- Disclosure controls were deemed ineffective as of September 30 because of a previously identified material weakness in segregation of duties over journal entries. Remediation steps were underway but had not yet been validated as effective. Management stated that the financial statements fairly presented the reported periods.
- The company reported no material legal proceedings. It stated that it had no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether CFT7455 and CFT8634 meet stated IND and trial-start timelines, and how COVID-19 or manufacturing and enrollment constraints affect them.
- Whether the stated cash runway assumptions hold as R&D spending increases, and whether future financing or collaboration payments will be needed.
- The availability and conditions for drawing the remaining $7.5 million of Perceptive debt, including covenants, collateral, cash requirements and prepayment terms.
- Progress in remediating and validating controls following the material weakness and ineffective disclosure controls.
- How the Roche EGFR rights reversion and ongoing Roche, Biogen and Calico collaborations affect development plans, revenue recognition and potential milestone or royalty receipts.
- The effect of IPO-related share issuance, preferred-stock conversion, equity awards and the Perceptive warrant on dilution and common-stockholder interests.