Foghorn Therapeutics Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The unaudited statements reflect the company’s pre-IPO position; subsequent financing events are noted below. Foghorn is a development-stage biotechnology company focused on medicines targeting the chromatin regulatory system. Its lead candidates, FHD-286 and FHD-609, were in preclinical development, with no products approved for sale.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Collaboration revenue | $0.179 million | None | $0.179 million | None |
| Research and development expense | $16.113 million | $11.292 million | $41.244 million | $30.842 million |
| General and administrative expense | $2.555 million | $1.808 million | $6.687 million | $5.056 million |
| Net loss | $18.367 million | $13.092 million | $48.042 million | $35.836 million |
| Net loss per share | $3.12 | $3.05 | $8.76 | $8.96 |
- Margins: Not meaningful as the company had no product sales and only nominal collaboration revenue.
- Cash and liquidity: Cash and cash equivalents were $74.620 million at September 30, 2020; including restricted cash, cash, cash equivalents and restricted cash totaled $76.894 million. Operating cash use for the nine months was $20.631 million.
- Cash flows: Investing activities used $8.694 million, mainly for new-facility leasehold improvements. Financing activities provided $88.964 million, primarily from Series B preferred stock proceeds.
- Debt and leases: Comerica debt principal was $14.5 million at September 30, 2020. Operating lease liabilities were $56.096 million, with $82.893 million of future minimum payments before imputed interest and estimated lease incentives. Total liabilities were $99.346 million.
- Accumulated deficit: $142.178 million at quarter-end.
Material changes versus comparable periods
- Q3 operating expenses increased $5.568 million year over year; nine-month expenses rose $12.033 million. Management attributed the increase largely to higher preclinical and manufacturing costs, increased R&D and administrative headcount, and costs of the new Cambridge facility.
- Net loss increased $5.275 million in Q3 and $12.206 million for the nine-month period versus 2019.
- In July 2020, Foghorn entered a research collaboration and license agreement with Merck, received a nonrefundable $15 million upfront payment, and began recognizing it as revenue over the research term. At September 30, $14.8 million remained deferred. Eligible future payments include up to $245 million in research, development and regulatory milestones, up to $165 million in sales milestones per approved product, and tiered royalties; timing and receipt are uncertain.
- Series B preferred stock sales generated $89.9 million net proceeds in the first nine months of 2020. Following quarter-end, the October IPO generated $108.0 million net proceeds, and the underwriters’ partial option exercise in November generated a further $14.2 million net.
Outlook, commentary and risks
- Management expected significant expenses and operating losses for the foreseeable future. It estimated IPO proceeds and existing cash would fund operating expenses, capital expenditures and debt service into the third quarter of 2022; this estimate depends on assumptions that may prove incorrect. The filing also states that IPO proceeds and cash were expected to cover at least 12 months of requirements.
- Foghorn planned to file an IND for FHD-286 in Q4 2020 and for FHD-609 in the first half of 2021. These were plans, not assurances of filing, clearance or clinical success.
- In November 2020, the company borrowed $20 million under a new Oxford term loan, with an additional $5 million available, and used part of the proceeds to repay the Comerica loan. The Oxford loan carries a floating rate with an 8% floor, a 5% final payment fee, and principal payments scheduled to begin in December 2023. It is secured by company assets other than intellectual property and includes covenants.
- Key risks include clinical and regulatory uncertainty, the need for further financing, reliance on third-party research and manufacturing providers, protection of intellectual property, competition, and potential COVID-19 disruption to research, preclinical studies and future trials. The company reported no significant operational impact from COVID-19 to date but said future effects were uncertain.
- Foghorn reported no material litigation and no material changes to the risk factors in its registration statement. Management concluded disclosure controls were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether FHD-286 and FHD-609 met the stated IND timing plans and advanced successfully into clinical development.
- Actual cash burn and runway relative to management’s third-quarter 2022 estimate, including the effect of clinical-trial spending, facility commitments and Oxford debt service.
- Merck collaboration research progress, revenue recognition estimates, and whether any milestone or royalty payments become achievable.
- Current debt balance, effective borrowing cost, covenant compliance and any further financing needs or dilution.
- How COVID-19, third-party vendor capacity and other development risks affect research and clinical timelines.