Zentalis Pharmaceuticals, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. The company is a clinical-stage oncology drug developer and reported no product revenue.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $24.7 million | $10.7 million | $55.4 million | $26.5 million |
| General and administrative expense | $10.1 million | $1.8 million | $23.2 million | $5.4 million |
| Net loss | $34.7 million | $12.6 million | $78.2 million | $31.8 million |
| Net loss attributable to Zentalis | $34.6 million | $12.3 million | $77.5 million | $31.2 million |
| Net loss per common share | $0.91 | Not applicable to 2019 share structure | $3.21 | Not applicable to 2019 share structure |
Profitability and operating margins are not meaningful because the company had no revenue. At September 30, 2020, total assets were $393.2 million, including $92.6 million of cash and cash equivalents and $274.9 million of available-for-sale marketable securities. Total liabilities were $27.4 million; the company reported no indebtedness. Accumulated deficit was $160.5 million.
Net cash used in operating activities for the first nine months was $59.5 million, compared with $26.0 million in 2019. Investing activities used $275.2 million, principally reflecting investment of excess cash in marketable securities. Financing activities provided $361.0 million, including proceeds from the April IPO, August follow-on offering, preferred-unit issuance and noncontrolling-interest contributions. Cash, cash equivalents and restricted cash totaled $93.9 million at period end.
Material changes versus prior periods
- Q3 operating expenses rose $22.2 million year over year; R&D increased $13.9 million and G&A increased $8.3 million. For the first nine months, operating expenses rose $46.6 million.
- Management attributed higher R&D expense to advancing clinical programs, preclinical work, manufacturing and study materials, as well as increased headcount and facilities costs.
- G&A growth reflected headcount and public-company costs, including professional services and insurance. Share-based compensation was $7.2 million in Q3 and $15.3 million for the nine months, compared with $0.2 million and $0.4 million, respectively, in 2019.
- The company raised substantial equity capital through its IPO and follow-on offering. Convertible preferred units converted into common stock in connection with the IPO.
Outlook, commentary and risks
- Management said period-end cash, cash equivalents and marketable securities were expected to fund operating expenses and capital requirements into 2023, while cautioning that assumptions may be imprecise and available capital could be used sooner. The company expects significant ongoing losses and says additional capital will be needed to complete development plans.
- Pipeline plans included initiating ZN-c5 Phase 2 monotherapy and palbociclib-combination portions in the first half of 2021; a ZN-c5/abemaciclib Phase 1b trial in the second half of 2020; and additional ZN-c5 trials in 2021, subject in part to FDA feedback. Initial Phase 1 results for ZN-c3 and ZN-e4 were expected in 2021; ZN-d5 Phase 1 was planned for the first half of 2021.
- COVID-19 had caused or contributed to trial-site initiation and enrollment delays, supply-chain difficulties, added costs and delays to laboratory and research-stage work. Further effects on development timelines and financing were uncertain.
- Key risks include clinical and regulatory failure or delays, dependence on ZN-c5 and other early-stage candidates, competition, reliance on third-party manufacturers and CROs, intellectual-property and licensing risks, and the need for additional capital. The company noted that some manufacturing takes place in China.
- The company disclosed an uncommenced office and laboratory lease with approximately $86.5 million in minimum payments, expected to begin in Q4 2021 for a 10.7-year term. Existing operating lease liabilities were $1.9 million. No material legal proceedings were reported; management concluded there was no substantial doubt about going concern within one year after issuance.
- Management reported disclosure controls were effective at the reasonable-assurance level as of September 30, 2020, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether clinical enrollment, trial starts and data readouts for ZN-c5, ZN-c3, ZN-d5 and ZN-e4 remain on the stated timelines, particularly given COVID-19 disruptions.
- Whether the stated cash runway into 2023 remains supportable as R&D spending increases and what assumptions underpin that estimate.
- The timing, obligations and practical impact of the $86.5 million uncommenced lease, along with any changes to lease commitments.
- The future funding needs and potential dilution if additional equity or other financing is required.
- Clinical, regulatory and commercial progress under the Zentera and other collaboration and licensing arrangements, including regional rights and associated milestone or royalty terms.