Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________  
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to                      
Commission File Number 001-36310
_____________________  
CONCERT PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-4839882
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
65 Hayden Avenue, Suite 3000N
Lexington, Massachusetts
(Address of principal executive offices)
02421
(Zip Code)
(781) 860-0045
(Registrant’s telephone number, including area code)  

(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, par value $0.001 per share
CNCE
Nasdaq Global Market
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   ý     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   ý     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.



Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
x
 
 
 
 
 
 
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   ý
The number of shares outstanding of the registrant’s common stock as of April 24, 2020: 29,653,295



TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 

3



REFERENCES TO CONCERT
Throughout this Quarterly Report on Form 10-Q, “Concert,” “the Company,” “we,” “us” and “our,” except where the context requires otherwise, refer to Concert Pharmaceuticals, Inc. and its consolidated subsidiary, and “our board of directors” refers to the board of directors of Concert Pharmaceuticals, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward‑looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, projected costs, prospects, plans and objectives of management, are forward‑looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain these identifying words.
The forward‑looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
ongoing and planned clinical trials for our product candidates, whether conducted by us or by our collaborators, including the timing of initiation and completion of these trials and of the anticipated results;
our plans to identify, develop and commercialize novel small molecule drugs based on our knowledge of deuterium chemistry;
our plans to enter into collaborations for the development and commercialization of product candidates;
our expected benefits from our current and any future collaboration, development or license arrangements;
our ability to receive research and development funding and achieve anticipated milestones under our collaborations;
our expectations regarding any future milestone payments we may receive as part of our asset purchase agreement with Vertex Pharmaceuticals, Inc. with respect to VX-561 and payments from our other collaboration and license arrangements;
the timing of and our ability to obtain and maintain marketing approvals for our product candidates;
the rate and degree of market acceptance and clinical utilization of our products;
our commercialization, marketing and manufacturing capabilities and strategy;
our intellectual property position and strategy;
the outcome of our inter partes review proceeding regarding U.S. Patent No. 9,249,149 covering CTP-543;
our freedom to operate with respect to third-party patents;
our expectations regarding our DCE Platform ® and the potential advantages of our product candidates;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
risks associated with the COVID-19 pandemic, which may adversely impact our business, clinical trials and supply chain;
developments relating to our competitors and our industry; and
the impact of government laws and regulations.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments that we may make.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different

4


from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

5


PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share and per share data)
 
March 31,
 
December 31,
 
2020
 
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
46,079

 
$
53,043

Investments, available for sale
113,515

 
53,395

Marketable equity securities
2,986

 
5,375

Interest receivable
428

 
260

Deferred offering costs

 
143

Accounts receivable
1

 
72

Income taxes receivable, current
2,358

 

Prepaid expenses and other current assets
4,028

 
4,567

Total current assets
169,395

 
116,855

Property and equipment, net
7,457

 
7,753

Restricted cash
1,157

 
1,157

Other assets
82

 
96

Income taxes receivable

 
2,358

Operating lease right-of-use assets, long-term
9,184

 
9,252

Total assets
$
187,275

 
$
137,471

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,444

 
$
881

Accrued expenses and other liabilities
4,261

 
8,336

Income taxes payable

 

Deferred revenue, current portion
7,783

 
7,783

Lease liability, current portion
783

 
268

Total current liabilities
14,271

 
17,268

Deferred revenue, net of current portion
2,750

 
2,750

Lease liability, net of current portion
15,775

 
15,996

Total liabilities
32,796

 
36,014

Commitments (Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019

 

Common stock, $0.001 par value per share; 100,000,000 shares authorized; 29,852,196 and 24,065,676 shares issued and 29,651,595 and 23,865,075 shares outstanding as of March 31, 2020 and December 31, 2019, respectively
29

 
24

Additional paid-in capital
369,116

 
296,145

Accumulated other comprehensive gain (loss)
492

 
(31
)
Accumulated deficit
(215,158
)
 
(194,681
)
Total stockholders’ equity
154,479

 
101,457

Total liabilities and stockholders’ equity
$
187,275

 
$
137,471

See accompanying notes.

6


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(Amounts in thousands, except per share data)
 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
 
 
 
License and research and development revenue
$
7

 
$
1,005

Operating expenses:
 
 
 
Research and development
13,986

 
15,790

General and administrative
4,672

 
5,609

Total operating expenses
18,658

 
21,399

Loss from operations
(18,651
)
 
(20,394
)
Investment income
563

 
867

Unrealized loss on marketable equity securities
(2,389
)
 
(2,299
)
Net loss
$
(20,477
)
 
$
(21,826
)
Other comprehensive income:
 
 
 
Unrealized gain on investments, available for sale
523

 
97

Comprehensive loss
$
(19,954
)
 
$
(21,729
)
 
 
 
 
Net loss per share applicable to common stockholders - basic and diluted
$
(0.70
)
 
$
(0.93
)
 
 
 
 
Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted
29,110

 
23,508

See accompanying notes.

7


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
 
Three Months Ended March 31, 2020
 
 
Common Stock
 
Additional paid-in capital
 
Accumulated other comprehensive income
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Issued
 
In Treasury
 
Amount
 
 
 
(in thousands)
Balance at December 31, 2019
 
24,066

 
200

 
$
24

 
$
296,145

 
$
(31
)
 
$
(194,681
)
 
$
101,457

Exercise of stock options
 
51

 

 

 
435

 

 

 
435

Unrealized gain on short-term investments
 

 

 

 

 
523

 

 
523

Stock-based compensation expense
 

 

 

 
2,477

 

 

 
2,477

Sale of common stock and pre-funded warrants, net of underwriters' discount and costs
 
5,735

 

 
5

 
70,059

 

 

 
70,064

Net loss
 

 

 

 

 

 
(20,477
)
 
(20,477
)
Balance at March 31, 2020
 
29,852

 
200

 
$
29

 
$
369,116

 
$
492

 
$
(215,158
)
 
$
154,479


 
 
Three Months Ended March 31, 2019
 
 
Common Stock
 
Additional paid-in capital
 
Accumulated other comprehensive income
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Issued
 
In Treasury
 
Amount
 
 
 
(in thousands)
Balance at December 31, 2018
 
23,519

 
81

 
$
23

 
$
284,369

 
$
(137
)
 
$
(116,515
)
 
$
167,740

Exercise of stock options
 
154

 
47

 

 
805

 

 

 
805

Release of restricted stock units
 
202

 
61

 

 
(741
)
 

 

 
(741
)
Unrealized gain on short-term investments
 

 

 

 

 
97

 

 
97

Stock-based compensation expense
 

 

 

 
2,929

 

 

 
2,929

Exercise of stock warrants
 
71

 

 

 
1,000

 

 

 
1,000

Offering expenses incurred
 

 

 

 
(206
)
 

 

 
(206
)
Net loss
 

 

 

 

 

 
(21,826
)
 
(21,826
)
Balance at March 31, 2019
 
23,946

 
189

 
$
23

 
$
288,156

 
$
(40
)
 
$
(138,341
)
 
$
149,798


See accompanying notes.

8


CONCERT PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Three Months Ended 
 March 31,
 
2020
 
2019
Operating activities
 
 
 
Net loss
$
(20,477
)
 
$
(21,826
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
408

 
444

Stock-based compensation expense
2,477

 
2,929

Accretion of premiums and discounts on investments
(80
)
 
(294
)
Unrealized loss on marketable equity securities
2,389

 
2,299

Loss on disposal of asset

 
4

Non-cash lease expense
68

 
49

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
71

 
4

Interest receivable
(168
)
 
174

Prepaid expenses and other current assets
539

 
381

Contract asset

 
16,000

Other assets
14

 
(23
)
Accounts payable
563

 
479

Accrued expenses and other liabilities
(3,932
)
 
(1,388
)
Income taxes receivable

 
(36
)
Income taxes payable

 
(390
)
Operating lease liability
294

 
(144
)
Net cash used in operating activities
(17,834
)
 
(1,338
)
Investing activities
 
 
 
Purchases of property and equipment
(112
)
 
(315
)
Purchases of investments
(93,417
)
 
(13,331
)
Maturities of investments
33,900

 
55,721

Net cash (used in) provided by investing activities
(59,629
)
 
42,075

Financing activities
 
 
 
Proceeds from exercises of stock options
435

 
805

Proceeds from exercise of warrants

 
1,000

Proceeds from common stock and pre-funded warrants sold, net of underwriters' discount and costs
70,064

 
(50
)
Net cash provided by financing activities
70,499

 
1,755

Net (decrease) increase in cash and cash equivalents and restricted cash
(6,964
)
 
42,492

Cash, cash equivalents and restricted cash at beginning of period
54,200

 
18,927

Cash, cash equivalents and restricted cash at end of period
$
47,236

 
$
61,419

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$

 
$
425

Purchases of property and equipment unpaid at period end
$

 
$
16

Public offering costs unpaid at period end
$

 
$
156

Cash paid included in measurement of lease liabilities
$
244

 
$
694

Pre-funded stock warrants issued
$
16,736

 
$


See accompanying notes.

9

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1. Nature of Business

Concert Pharmaceuticals, Inc., or the Company, was incorporated on April 12, 2006 as a Delaware corporation and has its operations based in Lexington, Massachusetts. The Company is a clinical stage biopharmaceutical company that is applying its extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. The Company’s approach typically starts with previously studied compounds, including approved drugs, that the Company believes may be improved with deuterium substitution. The Company’s pipeline includes multiple clinical stage candidates targeting autoimmune and central nervous system, or CNS, disorders, and a number of preclinical compounds that it is currently assessing.
The Company had cash and cash equivalents and investments of $159.6 million as of March 31, 2020 . The Company believes that its cash and cash equivalents and investments as of March 31, 2020 will be sufficient to allow the Company to fund its current operating plan for at least the next twelve months from the date of issuance of the financial statements. The Company may pursue additional cash resources through public or private financings, by establishing collaborations with or licensing its technology to other companies and through other arrangements.
Since its inception, the Company has generated an accumulated deficit of $215.2 million through March 31, 2020 . The Company's operating results may fluctuate significantly from year to year, depending on the timing and magnitude of clinical trial and other development activities under its current development programs. Substantially all of the Company's net losses have resulted from costs incurred in connection with its research and development programs and from general and administrative costs associated with its operations. The Company expects to continue to incur significant expenses and increasing operating losses for at least the next several years.

The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain additional financing to fund the future development of its pipeline, the need to obtain marketing approval for its product candidates, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products.

Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.

2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the condensed consolidated financial statements have been included. Interim results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020 or any other future period.
The accompanying condensed consolidated financial statements reflect the accounts of the Company and its subsidiaries. All intercompany transactions between the Company and its subsidiaries have been eliminated. Management has determined that the Company operates in one segment: the development of pharmaceutical products on its own behalf or in collaboration with others. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission, or SEC, on February 27, 2020.
Use of Estimates and Summary of Significant Accounting Policies

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities and the Company's ability to continue as a going concern. In preparing the consolidated financial statements, management used estimates in the following areas, among others: revenue recognition; prepaid and accrued research and development expenses; stock-based compensation expense; and the evaluation of the existence of conditions and events that raise substantial doubt regarding the Company’s ability to continue as a going concern. Actual results could differ from those estimates.

10

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


During the three months ended March 31, 2020 , there have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40):   Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract . This standard aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for internal-use software. The new guidance also prescribes the balance sheet, income statement and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company adopted this new standard effective January 1, 2020, on a prospective basis, and it did not have a material effect on the consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This standard includes removal of certain exceptions to the general principles of Accounting Standards Codification, or ASC, 740, Income Taxes , and simplification in several other areas. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods, and early adoption is permitted. The Company adopted this new standard effective January 1, 2020, and it did not have a material effect on the consolidated financial statements and related disclosures. For a detailed discussion of the adoption of ASU 2019-12, refer to Note 7.
Pending Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses . This standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. As a smaller reporting company, ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-13 will have on its financial statements and related disclosures.

3. Fair Value Measurements

The Company has certain financial assets and liabilities that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements:

Level 1—quoted prices for identical instruments in active markets;
Level 2—quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value as of March 31, 2020 and December 31, 2019 and indicate the level within the fair value hierarchy where each measurement is classified. The carrying amounts reflected in the condensed consolidated balance sheets for cash, prepaid expenses and other current assets, restricted cash, accounts payable and accrued expenses approximate their fair value due to their short-term nature.

11

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2020
 
 
 
Cash equivalents:
 
 
 
Money market funds
$
31,821

 
$

 
$

 
$
31,821

U.S. Treasury obligations
7,998

 

 

 
7,998

Investments, available for sale:
 
 

U.S. Treasury obligations
36,868

 

 

 
36,868

Government agency securities
22,530

 
54,117

 

 
76,647

Marketable equity securities:
 
 
 
Corporate equity securities (Note 8)
2,986

 

 

 
2,986

Total
$
102,203

 
$
54,117

 
$

 
$
156,320


 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2019
 
 
 
Cash equivalents:
 
 
 
Money market funds
$
40,782

 
$

 
$

 
$
40,782

Government agency securities

 
2,000

 

 
2,000

Investments, available for sale:
 
 
 
U.S. Treasury obligations
34,499

 

 

 
34,499

Government agency securities
10,997

 
7,899

 

 
18,896

Marketable equity securities:
 
 
 
Corporate equity securities (Note 8)
5,375

 

 

 
5,375

Total
$
91,653

 
$
9,899

 
$

 
$
101,552



4. Cash, Cash Equivalents, Investments and Marketable Equity Securities
Cash equivalents include all highly liquid investments maturing within 90 days from the date of purchase. Investments consist of securities with original maturities greater than 90 days when purchased. The Company classifies these investments as available-for-sale and records them at fair value in the accompanying consolidated balance sheets. Unrealized gains or losses from equity securities are included in net income. Unrealized gains or losses from other investments, including debt securities, are included in accumulated other comprehensive income (loss). Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.

12

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Cash, cash equivalents, available for sale investments and marketable equity securities included the following as of March 31, 2020 and December 31, 2019:
 
 
Average Maturity
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
March 31, 2020
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
$
6,260

 
$

 
$

 
$
6,260

Money market funds
 
 
 
31,821

 

 

 
31,821

U.S. Treasury obligations
 
30 days
 
7,998

 

 

 
7,998

Cash and cash equivalents
 
 
 
$
46,079

 
$

 
$

 
$
46,079

 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
173 days
 
36,586

 
282

 

 
36,868

Government agency securities
 
130 days
 
76,360

 
287

 

 
76,647

Investments, available for sale
 
 
 
$
112,946

 
$
569

 
$

 
$
113,515

 
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
 
 
Acquisition Value
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Marketable equity securities (Note 8)
 
 
 
$
10,451

 
$

 
$
(7,465
)
 
$
2,986


 
 
Average Maturity
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
$
10,261

 
$

 
$

 
$
10,261

Money market funds
 
 
 
40,782

 

 

 
40,782

Government agency securities
 
8 days
 
2,000

 

 

 
2,000

Cash and cash equivalents
 
 
 
$
53,043

 
$

 
$

 
$
53,043

 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
108 days
 
$
34,475

 
$
24

 
$

 
$
34,499

Government agency securities
 
74 days
 
18,874

 
22

 

 
18,896

Investments, available for sale
 
 
 
$
53,349

 
$
46

 
$

 
$
53,395

 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
Acquisition Value
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Marketable equity securities (Note 8)
 
 
 
$
10,451

 
$

 
$
(5,076
)
 
$
5,375

Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The Company classifies all investments as current assets, as these assets are readily available for use in current operations. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During 2020 and 2019, there were no realized gains or losses on sales of investments, and no investments were adjusted other than for temporary declines in fair value.

5. Restricted Cash
Restricted cash as of March 31, 2020 and 2019 was held as collateral for stand-by letters of credit issued by the Company to its landlord in connection with the current lease for its principal facilities located at 65 Hayden Avenue, Lexington, Massachusetts. For additional information regarding the Company's lease, refer to Note 11. Cash, cash equivalents and restricted cash consisted of the following as of March 31, 2020 and 2019:


13

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
March 31,
2020
 
March 31,
2019
Cash and cash equivalents
$
46,079

 
$
60,262

Restricted cash
1,157

 
1,157

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
$
47,236

 
$
61,419


6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of March 31, 2020 and December 31, 2019:
 
March 31,
2020
 
December 31,
2019
Accrued professional fees and other
$
342

 
$
862

Employee compensation and benefits
812

 
3,222

Research and development expenses
3,107

 
4,252

 
$
4,261

 
$
8,336



7. Income Taxes

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company’s ability to use its operating loss carryforwards and tax credits to offset future taxable income is subject to restrictions under Sections 382 and 383 of the U.S. Internal Revenue Code. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code. Such changes would limit the Company’s use of its operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist.

The Company records a provision or benefit for income taxes on ordinary pre-tax income or loss based on its estimated effective tax rate for the year. As of March 31, 2020 , the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2020 and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit for the three months ended March 31, 2020 .

The Company adopted ASU 2019-12 , Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , effective January 1, 2020. Under ASU 2019-12, the Company, having a full valuation and a loss in continuing operations, will no longer include the impacts of items in other comprehensive income in determining intra-period allocation of tax expense for continuing operations. Under ASU 2019-12, the Company can apply this change to intra-period tax allocation on a prospective basis. For the three months ended March 31, 2020, the Company applied the tax allocation rules of ASU 2019-12 to the $523 thousand of unrealized gains on available for sale investments recognized in other comprehensive income, which did not have a material impact on the consolidated financial statements or related disclosures.

8. Revenue

The Company's revenue is generated through collaborative licensing agreements, patent assignments and sales of intellectual property. The Company generates its revenue through one segment. The revenue recognized under each of the Company's arrangements during the current and prior periods is described below.

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers , which is also referred to as ASC 606, using the modified retrospective approach. For detailed information regarding the adoption of ASC 606, the impact on its consolidated financial statements and its collaboration arrangements, see Note 2 and Note 12 to the consolidated financial statements appearing in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 28, 2019.

14

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Contract Assets
In February 2019, the Company received $16.0 million that had previously been held in escrow for indemnification purposes related to the asset purchase by Vertex Pharmaceuticals, Inc., or Vertex. The Company did no t have a contract asset as of March 31, 2020 or December 31, 2019.
Contract Liabilities
As of March 31, 2020 and December 31, 2019, the Company had $10.6 million in contract liabilities related to unsatisfied performance obligations as well as variable consideration paid in advance but currently constrained from recognition.
The contract liabilities consist of the following deferred revenue:
 
$7.8 million related to the Company's collaboration with Celgene Corporation, $1.4 million of which is attributable to the CTP-730 program and is currently expected to be recognized as revenue in the next twelve months as the Company satisfies its remaining research and development activities pursuant to mutually agreed upon development plans, and $6.4 million of which is attributable to two additional license programs that the Company will not recognize as revenue unless the rights to those programs are exercised, or in the second quarter of 2020 at such time that the rights lapse; and
$2.8 million related to a payment received from GlaxoSmithKline that the Company will not recognize as revenue until all repayment obligations lapse.
Revenue Arrangements
Vertex

On March 3, 2017, the Company and Vertex entered into an Asset Purchase Agreement, or the Vertex Agreement, pursuant to which, subject to the satisfaction or waiver of the conditions therein, the Company sold and assigned to Vertex CTP-656, a deuterated analog of ivacaftor, now known as VX-561, and other cystic fibrosis assets of the Company. On July 25, 2017, or the Vertex Closing Date, the transaction contemplated by the Vertex Agreement closed and Vertex paid the Company  $160 million  in cash consideration. In addition, Vertex has agreed to pay the Company an aggregate of up to $90 million upon the achievement of certain milestone events.

As of December 31, 2018, the Vertex indemnification variable consideration represented a contract asset to be released from escrow  18 months  following the Vertex Closing Date and was classified as a current asset in the accompanying consolidated balance sheet. In February 2019, the  $16.0 million  that had previously been held in escrow was released to the Company. Additionally, the variable consideration related to the regulatory milestone payments are fully constrained due to the uncertainty associated with the achievement of the respective milestones. Accordingly, no contract asset was recorded as of March 31, 2020 or December 31, 2019.

Processa

On October 4, 2017, the Company entered into an Option and License Agreement, or the Option, with Promet Therapeutics, LLC, or Promet, pursuant to which the Company granted Promet an option to obtain an exclusive license to CTP-499, a deuterated analog of 1-(S)-5-hydroxyhexyl-3,7-dimethylxanthine, or HDX, an active metabolite of pentoxifylline, provided certain conditions were met. On October 5, 2017, Promet closed an asset purchase agreement with Heatwurx, Inc., a public company, creating Processa Pharmaceuticals, Inc., or Processa.

On March 21, 2018, the Company entered into an Amendment to the Option, or the Amendment, and a Securities Purchase Agreement, with both Promet and Processa. Pursuant to the Amendment, the Company granted Promet, who then assigned to Processa, an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize CTP-499, now known as PCS-499. Upon transfer of the license and as consideration for the license, the Company received 2,090,301 shares of common stock of Processa. In December 2019, Processa implemented a reverse stock split, and the Company now owns 298,615 shares of common stock of Processa.

The Company is also eligible to receive royalties on worldwide net sales.

The Amendment contained one performance obligation: an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize CTP-499. The Company determined that the transaction price was $10.5 million , which was

15

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


based on the fair value of the non-cash consideration received on March 19, 2018, which consisted of 2,090,301 shares of publicly traded common stock of Processa. The transaction price of $10.5 million was allocated to the single performance obligation. The performance obligation was considered satisfied at contract inception, as the exclusive license transferred control to the customer at this point in time. Accordingly, revenue of $10.5 million was recognized during the first quarter of 2018.

Subsequent changes to the fair value of the underlying securities are recognized as unrealized gains or losses on marketable equity securities within the condensed consolidated statements of operations and comprehensive loss.
The Amendment contains consideration that is variable based on royalties upon the customer's commercial success with the licensed product. The consideration related to royalty payments is considered variable consideration that is fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Processa and the Company has a present right to payment.

For both the three months ended March 31, 2020 and 2019, the Company recognized $1 thousand related to intellectual property cost reimbursements.

Cipla

The Company entered into a License Agreement, or the Cipla Agreement, with Cipla Technologies LLC, or Cipla, on January 16, 2019, or the Cipla Closing Date, pursuant to which the Company granted Cipla an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize CTP-354, a novel GABA A  receptor subtype-selective modulator. As consideration for the license, the Company received an upfront payment of $1.0 million .
The Cipla Agreement also provides Cipla the option to purchase the Company’s existing inventory of CTP-354 held as of the Cipla Closing Date, valued in the aggregate at $0.3 million . Additionally, upon the achievement of certain milestone events, Cipla has agreed to pay the Company an aggregate of up to $57.0 million . The first milestone payment the Company may be entitled to receive is $3.0 million when the first investigational new drug application, or IND, for the first CTP-354 product goes into effect.
Furthermore, the Company is eligible to receive royalties on worldwide net sales of future product sales at defined percentages ranging from the mid-single to high-single digits.
The Cipla Agreement contained one performance obligation: an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize CTP-354, referred to as the Transfer of License Performance Obligation. The Company concluded that the option to purchase existing inventory did not provide Cipla a material right, and as such, was treated as a separate contract. The transaction price was determined to be $1.0 million based on the upfront consideration received as of the Cipla Closing Date.
As of the Cipla Closing Date, the Transfer of License Performance Obligation was satisfied, as the control of CTP-354 transferred to Cipla, the customer. As a result, the full transaction price was recognized as revenue on the Cipla Closing Date. The sale of existing inventory is recognized as goods are transferred to the customer.
The arrangement with Cipla contains consideration that is variable based on the customer’s achievement of certain development and regulatory milestones in addition to royalties upon the customer’s commercial success with the licensed product. The next milestone payment the Company may be entitled to receive of $3.0 million related to the first IND for the first CTP-354 product going into effect is considered variable consideration that is fully constrained due to the uncertainty associated with the achievement of the development milestone. The consideration related to royalties is also variable consideration that is fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Cipla and the Company has a present right to payment.
The Company did not recognize revenue related to the Cipla Agreement for the three months ended March 31, 2020 . The Company recognized $1.0 million in revenue associated with the Transfer of License Performance Obligation for the three months ended March 31, 2019 .


9. Stock-Based Compensation
The Company’s equity incentive plans provide for the issuance of a variety of stock-based awards, including incentive stock options, nonstatutory stock options and awards of stock, to directors, officers and employees of the Company, as well as

16

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


consultants and advisors to the Company. As of March 31, 2020 , the Company has granted awards in the form of stock options and restricted stock units, or RSUs. The stock options generally have been granted with an exercise price equal to the closing market price of the Company's common stock on the date of grant, a vesting period of one, three or four years , and an expiration date no later than ten years from the date of grant.
Effective January 1, 2020, an additional 954,603 shares were added to the Company’s 2014 Stock Incentive Plan, or the 2014 Plan, for future issuance pursuant to the terms of the 2014 Plan. As of March 31, 2020 , there were 1,243,137 shares of common stock available for future awards under the 2014 Plan.
Total stock-based compensation expense related to all stock-based options and awards recognized in the condensed consolidated statements of operations and comprehensive loss consisted of:

 
Three Months Ended March 31,
 
2020
 
2019
Research and development
$
1,255

 
$
1,475

General and administrative
1,222

 
1,454

Total stock-based compensation expense
$
2,477

 
$
2,929


Stock Options

Stock options are valued using the Black-Scholes-Merton option valuation model, and compensation cost is recognized based on such fair value over the period of vesting. The weighted-average fair value of options granted in the three months ended March 31, 2020 and 2019 reflect the following weighted-average assumptions:
 
Three Months Ended March 31,
 
2020
 
2019
Expected volatility
68.19
%
 
77.16
%
Expected term
6.0 years

 
6.0 years

Risk-free interest rate
1.47
%
 
2.27
%
Expected dividend yield
%
 
%
For the three months ended March 31, 2019, expected volatility was estimated using a weighted average of the Company's historical volatility of its common stock and the historical volatility of the common stock of a group of similar companies that were publicly traded. For the three months ended March 31, 2020 , expected volatility was estimated using solely the historical volatility of the Company's common stock because the Company had accumulated sufficient historical pricing data.

The following table provides certain information related to the Company's outstanding stock options:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands, except per share data)
Weighted-average fair value of options granted, per option
$
6.67

 
$
9.45

Aggregate grant date fair value of options vested during the period
$
2,184

 
$
2,442

Total cash received from exercises of stock options
$
435

 
$
805

Total intrinsic value of stock options exercised
$
93

 
$
879


17

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following is a summary of stock option activity for the three months ended March 31, 2020 :
 
Number of
Option Shares
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
 
 
 
(in years)
 
(in thousands)
Outstanding at December 31, 2019
4,112,609

 
$
15.01

 
 
 
 
      Granted
615,050

 
$
10.87

 
 
 
 
      Exercised
(51,237
)
 
$
8.48

 
 
 
 
      Forfeited or expired
(42,937
)
 
$
19.57

 
 
 
 
Outstanding at March 31, 2020
4,633,485

 
$
14.49

 
7.14
 
$
886

Exercisable at March 31, 2020
2,718,386

 
$
14.26

 
5.98
 
$
886

Vested and expected to vest at March 31, 2020 (1)
4,452,847

 
$
14.52

 
7.06
 
$
886


(1)  
Represents the number of vested stock option shares as of March 31, 2020 , plus the number of unvested stock option shares that the Company estimated as of March 31, 2020 would vest, based on the unvested stock option shares as of March 31, 2020 and an estimated forfeiture rate of 7% .

As of March 31, 2020 , there was $17.0 million of unrecognized compensation cost related to stock options that are expected to vest. The stock option costs are expected to be recognized over a weighted-average remaining vesting period of 2.7 years .

Restricted Stock Units

On August 15, 2019, or the 2019 RSU grant date, the Company granted 0.4 million RSUs, or the 2019 RSUs, to certain executives and employees. All of the 2019 RSUs are service-based and vest ratably over two years . On the first anniversary of the 2019 RSU grant date, 35 % of the 2019 RSUs will vest. The remainder of the 2019 RSUs will vest on the second anniversary of the 2019 RSU grant date.

On February 14, 2020, or the 2020 RSU grant date, the Company granted 0.4 million RSUs, or the 2020 RSUs, to certain executives and employees. All of the 2020 RSUs are service-based and vest ratably over three years, with one third of the 2020 RSUs vesting on each anniversary of the 2020 RSU grant date through February 14, 2023.

RSUs are not included in issued and outstanding common stock until the shares have vested and settled. As of March 31, 2020 , none of the 2019 RSUs or 2020 RSUs had vested. The fair value of an RSU is measured based on the market price of the underlying common stock as of the date of grant.
The following is a summary of RSU activity for the three months ended March 31, 2020 :

 
Number of
RSUs
 
Weighted-
Average
Grant Date Fair Value
 
 
 
 
Outstanding at December 31, 2019
393,629

 
$
10.27

      Granted
409,295

 
$
10.87

      Released

 
$

      Forfeited
(4,168
)
 
$
10.27

Outstanding at March 31, 2020
798,756

 
$
10.58


As of March 31, 2020 , there was $7.4 million of unrecognized compensation cost related to RSUs that are expected to vest. The RSU costs are expected to be recognized over a weighted-average remaining vesting period of 2.2 years .


18

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


10. Loss Per Share
Basic net loss per common share is calculated by dividing net loss allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of stock options and RSUs as common stock equivalents. The weighted-average common shares outstanding as of March 31, 2020 includes pre-funded warrants to purchase up to an aggregate of 1.8 million shares of common stock that were issued in connection with the January 2020 public offering, as discussed in Note 13. For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation if their effect would be anti-dilutive. As such, basic and diluted net loss per share applicable to common stockholders are the same for periods with a net loss.
The following table illustrates the determination of loss per share for each period presented.
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands, except per share amounts)
Numerator:
 
 
 
Net loss applicable to common stockholders - basic and diluted
$
(20,477
)
 
$
(21,826
)
 
 
 
 
Denominator:
 
 
 
Weighted-average shares outstanding - basic and diluted
29,110

 
23,508

 
 
 
 
Net loss per share applicable to common stockholders - basic and diluted
$
(0.70
)
 
$
(0.93
)
 
 
 
 
Anti-dilutive potential common stock equivalents excluded from the calculation of net loss per share:
 
 
 
Stock options
156

 
448

Restricted stock units
55

 
187

Warrants
61

 
95



11. Lease

The Company currently has a lease, or the Lease, for approximately 56,000 square feet of office and laboratory space located at 65 Hayden Avenue, Lexington, Massachusetts, or the Premises. The Lease is classified as an operating lease. The lease term extends ten years following January 1, 2019. The Company is entitled to two five -year options to extend the Lease. The Lease provides for annual base rent of approximately $2.8 million in the first year following January 1, 2019, which increases on a yearly basis by 3.0% (subject to an abatement of base rent of approximately $0.5 million at the beginning of the second year of the lease term). There are no variable payments, exercise purchase options, penalties, fees or residual value guarantees under the Lease. The Company is also obligated to pay the landlord for certain costs, taxes and operating expenses related to the Premises, subject to certain exclusions.
The Company recorded a liability for the Lease of $16.9 million on January 1, 2019. This lease liability is amortized over the remaining lease term in an amount equal to the difference between the cash rent paid and the monthly interest calculated on the remaining lease liability. As of March 31, 2020 , the Company had a current lease liability of $0.8 million and a non-current lease liability of $15.8 million recorded in its condensed consolidated balance sheets.
On January 1, 2019, the Company recorded a right-of-use asset in the amount of $9.5 million , which represents the lease liability of $16.9 million , adjusted for previously accrued rent of $2.9 million and previously recorded unamortized lease incentives in the amount of $4.5 million . The right-of-use asset is amortized over the remaining lease term in an amount equal to the difference between the calculated straight-line expense of the total lease payments less the monthly interest calculated on the remaining lease liability. As of March 31, 2020 , the Company had a long-term lease asset of $9.2 million recorded in its condensed consolidated balance sheets.

19

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The Company recognizes lease expense, calculated as the remaining cost of the Lease allocated over the remaining lease term, on a straight-line basis. Lease expense is presented as part of continuing operations in the condensed consolidated statements of operations and comprehensive loss. For the three months ended March 31, 2020 , the Company recognized $0.6 million in lease expense.
The three months ended March 31, 2020 included two months of rent abatement according to the terms of the Lease, and the Company paid $0.2 million in rent. As a payment arising from an operating lease, the $0.2 million is classified within operating activities in the condensed consolidated statements of cash flows.
For the three months ended March 31, 2020 and 2019, the weighted-average remaining lease term was 8.75 years and 9.75 years, respectively, and the weighted-average discount rate was 13.08% .


12. Open Market Sale Agreement

On March 1, 2019, the Company entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.001 per share, having an aggregate offering price of up to $50.0 million , referred to as Placement Shares, through Jefferies as its sales agent. The Company will pay Jefferies a commission equal to 3.0% of the gross sales proceeds of any Placement Shares sold through Jefferies under the ATM Agreement, and also has provided Jefferies with customary indemnification and contribution rights. In addition, the Company has agreed to reimburse certain legal expenses and fees by Jefferies in connection with the offering up to a maximum of $50 thousand, in addition to certain ongoing disbursements of Jefferies' counsel. In 2019, the Company sold 36,167 shares of its common stock in accordance with the ATM Agreement for net proceeds of $0.4 million , after payment of cash commissions of 3.0% of the gross proceeds to Jefferies. Additionally, in 2019, the Company incurred approximately $0.3 million related to legal, accounting and other fees in connection with the ATM Agreement. The Company has not sold any shares of common stock under the ATM Agreement in 2020.


13. Sale of Common Stock and Pre-Funded Warrants
In January 2020, the Company closed an underwritten public offering of 5,735,283 shares of its common stock to the public at $9.92 per share, which included the full exercise of the underwriters' option to purchase 982,863 additional shares of common stock. In addition, and in lieu of common stock, the Company sold to a certain existing investor pre-funded warrants to purchase up to an aggregate of 1,800,000 shares of common stock at a purchase price of  $9.919  per pre-funded warrant, which represents the per share public offering price for the common stock less the  $0.001  per share exercise price for each pre-funded warrant. The aggregate net proceeds to the Company from this offering were approximately  $70.1 million , after deducting underwriting discounts and commissions and other offering expenses payable by the Company.
The pre-funded warrants are exercisable at any time by either (i) payment in full in immediately available funds for the number of shares of common stock purchased upon such exercise or (ii) a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the pre-funded warrant. A holder will not be entitled to exercise any portion of any pre-funded warrant if the holder’s ownership of the Company’s common stock would exceed  19.99% following such exercise.
In the event of certain fundamental transactions, the holders of the pre-funded warrants will be entitled to receive upon exercise of the pre-funded warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the pre-funded warrants immediately prior to such fundamental transaction without regard to any limitations on exercise contained in the pre-funded warrants.
The pre-funded warrants were classified as a component of permanent stockholders’ equity within additional paid-in capital and were recorded at the issuance date using a relative fair value allocation method. The pre-funded warrants are equity classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, permit the holders to receive a fixed number of shares of common stock upon exercise, are indexed to the Company’s common stock and meet the equity classification criteria. In addition, such pre-funded warrants do not provide any guarantee of value or return. The Company valued the pre-funded warrants at issuance, concluding that their sales price approximated their fair value, and allocated net proceeds from the sale proportionately to the common stock and pre-funded warrants, of which $16.7 million was allocated to the pre-funded warrants and recorded as a component of additional paid-in capital.


20

CONCERT PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




21



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. You should read the "Risk Factors" section in Part II, Item 1A. of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW
We are a clinical stage biopharmaceutical company that is applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. Selective incorporation of deuterium into known molecules has the potential, on a case-by-case basis, to provide better pharmacokinetic or metabolic properties, thereby enhancing their clinical safety, tolerability or efficacy. Our approach typically starts with previously studied compounds, including approved drugs, that we believe may be improved with deuterium substitution. Our technology provides the opportunity to develop products that may compete with the non-deuterated drug in existing markets or to leverage its known activity to expand into new indications and may enable compounds not otherwise well-suited for human drug development to be clinically developed. Our deuterated chemical entity platform, or DCE Platform®, has broad potential across numerous therapeutic areas. Our pipeline includes multiple clinical stage candidates targeting autoimmune and CNS disorders, and a number of preclinical compounds that we are currently assessing.
pipelinedecember2019a06.jpg

CTP-543
CTP-543 Opportunity
CTP-543 is an oral selective inhibitor of Janus kinases JAK1 and JAK2 that we are developing for the treatment of moderate-to-severe alopecia areata. Alopecia areata is a serious, chronic autoimmune disease affecting approximately 700,000 Americans at any given time that results in partial or complete loss of hair on the scalp and/or body. CTP-543 was discovered by applying our deuterium chemistry technology to modify ruxolitinib, a Janus kinase, or JAK, inhibitor, which is commercially available under the name Jakafi® in the United States for the treatment of certain blood disorders and for graft versus host disease. The FDA has granted Fast Track designation for CTP-543 for the treatment of alopecia areata.
Clinical Development of CTP-543
We have completed two Phase 2 trials of CTP-543 for the treatment of moderate-to-severe alopecia areata. In September 2019, we announced topline results from a Phase 2 double-blind, randomized, dose-ranging trial to evaluate three sequential doses of CTP-543 (4, 8 and 12 mg twice-daily) and a placebo control in 149 patients with moderate-to-severe alopecia areata. Patients treated with either 8 mg twice-daily or 12 mg twice-daily of CTP-543 met the primary efficacy endpoint with statistically

22


significant differences (p

In December 2019, we announced that we completed an open label Phase 2 trial evaluating 8 mg twice-daily compared to 16 mg once-daily dosing of CTP-543 in 57 patients with moderate-to-severe alopecia areata. Results in the 8 mg twice-daily arm were consistent with the previously-reported 8 mg twice-daily results from our Phase 2 dose-ranging trial of CTP-543. The trial measured the relative change in SALT score between baseline and 24 weeks. Treatment was generally well tolerated in both arms of the study. All but one of the patients who completed this trial elected to continue in an ongoing open label long-term extension study. Based on the results observed, the twice-daily regimen is preferred, and we intend to utilize it in our clinical development program for CTP-543 going forward. A second open label Phase 2 trial evaluating 12 mg twice-daily compared to 24 mg once-daily dosing of CTP-543 in patients with moderate-to-severe alopecia areata is ongoing.

As of April 2019, all patients who complete efficacy and safety studies with CTP-543 are eligible to enroll into an open label long-term extension study.

We conducted an end of Phase 2 meeting with the FDA in March 2020 and announced our plans to advance CTP-543 into Phase 3 evaluation, which we expect to initiate in the fourth quarter of 2020. The planned Phase 3 program for CTP-543 will include two randomized, double-blind, placebo-controlled clinical trials in adults at sites in the United States, Canada and Europe. The Phase 3 program will evaluate the percentage of patients receiving 8 mg twice-daily, 12 mg twice-daily or placebo twice-daily that achieve a SALT score of 20 or less after 24 weeks of dosing in patients with moderate-to-severe alopecia areata.
CTP-692
CTP-692 Opportunity
CTP-692 is a selective deuterated analog of the endogenous amino acid D -serine that we are developing for the adjunctive treatment of schizophrenia. Based on published nonclinical and clinical effects of D -serine, we believe that CTP-692 has the potential to help restore NMDA receptor activity in key areas of the brain to improve clinical outcomes in patients with schizophrenia. Clinical studies have shown that levels of D -serine measured in the plasma and CSF of patients with schizophrenia are significantly lower than healthy controls, on a population basis. Genome-wide association studies demonstrate that genetic changes that alter glutamatergic transmission, including by reducing NMDA neurotransmission and by reducing D -serine exposure, substantially increase the likelihood of becoming schizophrenic. Academic studies have demonstrated that oral dosing of D -serine can result in dose-dependent improvement in positive, negative and cognitive symptoms in patients with schizophrenia when added to D2-modulating antipsychotics. However, nonclinical studies have demonstrated that D -serine can cause nephrotoxicity in rats. In addition, in some patients who received high doses of D -serine, clinical findings suggesting renal impairment were observed. As a result, the clinical development of D -serine has historically been limited.
In nonclinical studies in rats, when administered at doses where D -serine resulted in causing significantly increased blood levels of serum creatinine and blood urea nitrogen, indicating renal toxicity, CTP-692 did not cause changes in blood levels of those markers, suggesting that CTP-692 could have reduced toxicity and a larger therapeutic window. In these studies, administration of CTP-692 also resulted in greater exposure than similar doses of D -serine. It therefore may be better-suited for development as a human therapeutic agent. CTP-692 will initially be developed as an adjunctive therapy along with standard antipsychotic medicines in patients with schizophrenia.
Clinical Development of CTP-692
The Phase 1 program was designed to assess CTP-692’s safety, tolerability and pharmacokinetics in healthy volunteers. The Phase 1 program included three studies: a crossover comparison of CTP-692 versus D -serine, a single-ascending dose study that

23


also assessed the effect of food on the pharmacokinetics of CTP-692, and a multiple-ascending dose trial assessing CTP-692 dosed orally over seven days.
In the crossover study, a single dose of CTP-692 was found to result in greater plasma exposure than did the same amount of D -serine. In the single- and multiple-ascending dose trials, CTP-692 was evaluated across doses ranging from 0.5 to 4 grams compared to placebo in a total of 72 volunteers. CTP-692 demonstrated a favorable safety, tolerability and pharmacokinetic profile with no serious adverse events reported. Importantly, key blood and urine markers of kidney function did not indicate any signs of renal impairment.
In December 2019, we initiated a double-blind, randomized, placebo-controlled Phase 2 trial to evaluate the safety and efficacy of CTP-692 as an adjunctive treatment for schizophrenia. Approximately 300 adult patients who are stable on an antipsychotic medication will be randomized to receive 1, 2 or 4 grams of CTP-692 or placebo once-daily. The primary outcome measure is the change in the Positive and Negative Syndrome Scale (PANSS) total score at 12 weeks compared to baseline. We currently expect to complete enrollment of this clinical trial by year-end 2020.

Preclinical Pipeline

We are currently assessing a number of preclinical assets as potential development candidates.
COLLABORATION PRODUCT CANDIDATES
In addition to our wholly owned development programs, we have entered into collaborative arrangements with companies to develop deuterium-modified versions of their marketed products. Our partners are currently responsible for all development and future commercialization activities under these arrangements. In each of these collaborations, the deuterium-modified compound was independently discovered by us. For example, on February 24, 2012, we entered into a development and license agreement with Avanir Pharmaceuticals, Inc., or Avanir, a subsidiary of Otsuka Pharmaceuticals Co., Ltd. for the worldwide rights to develop, manufacture and commercialize AVP-786. AVP-786 is a combination of deudextromethorphan and an ultra-low dose of quinidine being investigated for the treatment of neurologic and psychiatric disorders. In 2019, Avanir completed two Phase 3 trials evaluating AVP-786 for the treatment of agitation associated with dementia of the Alzheimer’s type. The second of the Phase 3 trials did not meet its primary or key secondary endpoints; however, following additional data analysis, Avanir decided to continue developing AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type. A global Phase 3 trial and open label long-term extension study for Alzheimer’s agitation are ongoing. Additionally, Avanir is conducting a Phase 2/3 trial evaluating AVP-786 for the treatment of negative symptoms of schizophrenia.
ASSET PURCHASE AGREEMENT WITH VERTEX PHARMACEUTICALS FOR CTP-656
In July 2017, we completed the sale of worldwide development and commercialization rights to CTP-656 and other assets related to the treatment of cystic fibrosis to Vertex. CTP-656, now known as VX-561, is an investigational cystic fibrosis transmembrane conductance regulator, or CFTR, potentiator that has the potential to be used as part of future once-daily combination regimens of CFTR modulators that treat the underlying cause of cystic fibrosis. We received $160 million in cash upon closing, and if VX-561 is approved as part of a combination regimen to treat cystic fibrosis, we are eligible to receive up to $90 million in the form of two additional milestones based on marketing approval in the United States and agreement for reimbursement in the first of the United Kingdom, Germany or France.
COVID-19 PANDEMIC
In March 2020, the World Health Organization declared the outbreak of a novel strain of virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), which causes coronavirus disease 2019, or COVID-19, as a pandemic, which continues to spread throughout the United States and worldwide. We could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic or other public health crisis, such as the COVID-19 pandemic, including but not limited to potential delays in our clinical trials. The ultimate extent of the impact of any epidemic, pandemic or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations may be affected by the COVID-19 pandemic, but we are monitoring the situation closely.


24


FINANCIAL OPERATIONS OVERVIEW
Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts, including activities to develop our DCE Platform and our core capabilities in deuterium chemistry, identify potential product candidates, undertake nonclinical studies and clinical trials, manufacture clinical trial material in compliance with current good manufacturing practices, or cGMPs, provide general and administrative support for these operations and establish our intellectual property. We have generated an accumulated deficit of $215.2 million since inception through March 31, 2020 and will require substantial additional capital to fund our research and development. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, an asset sale and other arrangements.

Our operating results may fluctuate significantly from year to year, depending on the timing and magnitude of cash payments received pursuant to collaboration and licensing arrangements and other agreements and the timing and magnitude of clinical trial and other development activities under our current development programs. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities as we continue research and development efforts and develop and conduct additional nonclinical studies and clinical trials with respect to our product candidates.
We do not expect to generate revenue from product sales unless and until we, or our collaborators, obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain, or believe that we are likely to obtain, marketing approval for any product candidates for which we retain commercialization rights, and intend to commercialize a product, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We expect to seek to fund our operations through a combination of equity offerings, debt financings, collaboration and licensing arrangements and other sources for at least the next several years. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would force us to delay, limit, reduce or terminate our research and development programs and could have a material adverse effect on our financial condition and our ability to develop our products. We will need to generate significant revenues to achieve sustained profitability, and we may never do so.
Revenue

We have not generated any revenue from the sales of products. All of our revenue to date has been generated through collaboration, license and research arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates, a patent assignment agreement and an asset sale. On January 1, 2018, we adopted ASC 606 using the modified retrospective approach. For detailed information regarding the adoption of ASC 606 and the impact on our consolidated financial statements, see Note 2 and Note 12 to the consolidated financial statements appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 28, 2019.
The terms of these agreements may include one or more of the following types of payments: non-refundable license fees, payments for research and development activities, payments based upon the achievement of specified milestones, payment of license exercise or option fees relating to product candidates and royalties on any net product sales. To date, we have received non-refundable upfront payments, several milestone payments, payments for research and development services provided to our collaborators, a change in control payment pursuant to a patent assignment agreement and a payment for the sale of an asset. However, we have not yet earned any license exercise or option fees, sales-based milestone payments or royalty revenue as a result of product sales.
In the future, we will seek to generate revenue from a combination of product sales and milestone payments and royalties on product sales in connection with our current collaborations, our asset sale with Vertex or other collaborations we may enter into.

25


Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
 
employee-related expenses, including salary, benefits, travel and stock-based compensation expense;
expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;
the cost of acquiring, developing and manufacturing clinical trial materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies;
platform-related lab expenses, which includes costs related to synthesis, analysis and  in vitro  and  in vivo  characterization of deuterated compounds to support the selection and progression of potential product candidates;
expenses related to consultants and advisors; and
costs associated with nonclinical activities and regulatory operations.
Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.
A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis. These external costs include fees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs. We do not track our internal research and development expenses on a program-by-program basis, as they are deployed across multiple projects under development.
The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and completion costs of the current or future clinical trials of any of our product candidates or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
 
the scope and rate of progress of our ongoing as well as any additional clinical trials and other research and development activities;
successful enrollment in and completion of clinical trials, including on account of the COVID-19 pandemic and its impact on clinical trial sites;
conduct of and results from ongoing as well as any additional clinical trials and research and development activities;
significant and changing government regulation;
the terms and timing and receipt of any marketing approvals;
the performance of our collaborators;
our ability to manufacture any of our product candidates that we are developing or may develop in the future; and
the expense and success of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including potential claims that we infringe other parties' intellectual property.
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 cost 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 or other research and development activities beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials and the manufacturing that is typically required for those later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress, but we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined

26


with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, business development and human resource functions. Other general and administrative expenses include facility-related costs, depreciation and other expenses not allocated to research and development expense and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents. In both 2020 and 2019, we incurred expenses for intellectual property matters related to CTP-543.
We anticipate that our general and administrative expenses will increase in the future as our pipeline grows and matures. Additionally, if and when we believe that a marketing approval of the first product candidate that we intend to commercialize on our own appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales, marketing and distribution of our product candidates.
Investment income
Investment income consists of interest income earned on cash equivalents and investments. The amount of investment income earned in any particular period may vary primarily as a result of the amount of cash equivalents and investments held during the period and the types of securities included in our portfolio during the period. Our current investment policy is to maintain a diversified investment portfolio of U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
Unrealized loss on marketable equity securities
Unrealized loss on marketable equity securities consists of changes in the fair value of shares of common stock of Processa held by us, as discussed further in Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Income taxes
We record a provision or benefit for income taxes on pre-tax income or loss based on our estimated effective tax rate for the year. As of March 31, 2020 , we forecasted an ordinary pre-tax loss for the year ended December 31, 2020 and, since we maintain a full valuation allowance on our deferred tax assets, we did not record an income tax benefit for the three months ended March 31, 2020 .
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements.

There have been no material changes to our critical accounting policies as detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 27, 2020.

PENDING AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
For detailed information regarding recently issued accounting pronouncements and the actual and expected impact on our condensed consolidated financial statements, see Note 2 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS
Discussion of the three months ended March 31, 2020
The following table summarizes our results of operations for the three months ended March 31, 2020.

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Three Months Ended March 31,
(in thousands)
2020
Revenue:
 
License and research and development revenue
$
7

Operating expenses:
 
Research and development
13,986

General and administrative
4,672

Total operating expenses
18,658

Loss from operations
(18,651
)
Investment income
563

Unrealized loss on marketable equity securities
(2,389
)
Net loss
$
(20,477
)

License and research and development revenue

Total revenue was $7 thousand for the three months ended March 31, 2020. The revenue recognized for the three months ended March 31, 2020 was from intellectual property cost reimbursements.
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2020, with our external research expenses separately classified by program and our internal research expenses separately classified by category.

 
 
Three Months Ended March 31,
(in thousands)
 
2020
CTP-543 external costs
 
$
2,930

CTP-692 external costs
 
4,308

External expenses for other programs
 
344

Employee and contractor-related expenses
 
5,056

Facility and other expenses
 
1,348

Total research and development expenses
 
$
13,986

Research and development expenses were $14.0 million for the three months ended March 31, 2020. CTP-543 expenses primarily related to clinical development, including the ongoing Phase 2 dose regimen clinical trial. CTP-543 expenses decreased by $1.0 million compared to the three months ended March 31, 2019 primarily due to the completion of the Phase 2 dose-ranging clinical trial in the third quarter of 2019. CTP-692 expenses were primarily attributable to the ongoing Phase 2 dose-ranging clinical trial. External expenses for other programs consisted of costs incurred to develop our research pipeline. External expenses for other programs decreased by $1.0 million compared to the three months ended March 31, 2019 primarily due to the payment made during the first quarter of 2019 to the non-profit organization Fast Forward related to the Cipla Agreement, as discussed further in Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Employee-related expenses consisted primarily of cash compensation and non-cash stock-based compensation expenses. Facility-related expenses consisted primarily of rent and maintenance of our premises.
General and administrative expenses
The following table summarizes our general and administrative expenses for the three months ended March 31, 2020.


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Three Months Ended March 31,
(in thousands)
 
2020
Employee salaries and benefits
 
$
2,709

External professional service and legal expenses
 
888

Facility, technology and other expenses
 
1,000

Depreciation and amortization
 
75

Total general and administrative expenses
 
$
4,672

General and administrative expenses decreased by $0.9 million compared to the three months ended March 31, 2019 primarily due to a decrease in legal expenses.
Investment income

Investment income was $0.6 million for the three months ended March 31, 2020, and consisted of interest income earned on cash equivalents and investments.
Unrealized loss on marketable equity securities
Unrealized loss on marketable equity securities was $2.4 million for the three months ended March 31, 2020 and consisted of changes in the fair value of shares of common stock of Processa held by us, as discussed further in Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.


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Discussion of the three months ended March 31, 2019
The following table summarizes our results of operations for the three months ended March 31, 2019.
 
Three Months Ended March 31,
(in thousands)
2019
Revenue:
 
License and research and development revenue
$
1,005

Operating expenses:
 
Research and development
15,790

General and administrative
5,609

Total operating expenses
21,399

Loss from operations
(20,394
)
Investment income
867

Unrealized loss on marketable equity securities
(2,299
)
Net loss
$
(21,826
)

License and research and development revenue

Total revenue was $1.0 million for the three months ended March 31, 2019. The revenue recognized for the three months ended March 31, 2019 was primarily related to the Cipla Agreement, as discussed further in Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2019, with our external research expenses separately classified by program and our internal research expenses separately classified by category.
 
 
Three Months Ended March 31,
(in thousands)
 
2019
CTP-543 external costs
 
$
3,934

CTP-692 external costs
 
4,031

External expenses for other programs
 
1,358

Employee and contractor-related expenses
 
5,069

Facility and other expenses
 
1,398

Total research and development expenses
 
$
15,790

Research and development expenses were $15.8 million for the three months ended March 31, 2019. CTP-543 expenses primarily related to clinical development, including multiple Phase 2 clinical trials. CTP-692 expenses were primarily attributable to the Phase 1 clinical trials and manufacturing costs to support the continued advancement of the program. External expenses for other programs consisted of costs incurred to develop our research pipeline. Employee-related expenses consisted primarily of cash compensation and non-cash stock-based compensation expenses. Facility-related expenses consisted primarily of rent and maintenance of our premises.
General and administrative expenses
The following table summarizes our general and administrative expenses for the three months ended March 31, 2019.


30


 
 
Three Months Ended March 31,
(in thousands)
 
2019
Employee salaries and benefits
 
$
3,001

External professional service and legal expenses
 
1,611

Facility, technology and other expenses
 
916

Depreciation and amortization
 
81

Total general and administrative expenses
 
$
5,609

Investment income

Investment income was $0.9 million for the three months ended March 31, 2019 and consisted of interest income earned on cash equivalents and investments.
Unrealized loss on marketable equity securities
Unrealized loss on marketable equity securities was $2.3 million for the three months ended March 31, 2019 and consisted of changes in the fair value of shares of common stock of Processa held by us, as discussed further in Note 8 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.


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LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of March 31, 2020 , we had an accumulated deficit of $215.2 million . We generated net income for the fiscal year ended December 31, 2015 due to a one-time payment from Auspex Pharmaceuticals, Inc., or Auspex, under a change in control provision described in our patent assignment agreement and again for the fiscal year ended December 31, 2017 from the closing of our sale of CTP-656 to Vertex, but we anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, additional collaborations and licensing arrangements, and other sources.
We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing and funding from collaborations, patent assignments and an asset sale. In February 2014, we completed our initial public offering whereby we sold 6,649,690 shares of common stock at a price to the public of $14.00 per share, raising aggregate net proceeds of $83.1 million. In March 2015, we sold 3,300,000 shares of common stock through an underwritten public offering at a price to the public of $15.15 per share, raising aggregate net proceeds of $46.7 million. In January 2020, we sold 5,735,283 shares of common stock through an underwritten public offering at a price to the public of $9.92 per share. At the same time, we sold to a certain existing investor pre-funded warrants to purchase up to an aggregate of 1,800,000 shares of common stock at a purchase price of $9.919 per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.001 per share exercise price for each pre-funded warrant. The aggregate net proceeds from the January 2020 offering was $70.1 million.
In June 2015, we received proceeds of $50.2 million in connection with the change in control payment from Auspex, relating to Teva Pharmaceutical Industries Ltd.’s acquisition of Auspex.
In July 2017, the asset purchase contemplated by the Vertex Agreement was completed, and Vertex paid us $160 million in cash consideration.

As a result of the COVID-19 pandemic, enrollment of new patients in our clinical trials has slowed and the timelines to complete our clinical trials may be delayed. Our assessment of our liquidity and capital resources includes an estimate of the financial impacts of these changes.
As of March 31, 2020 , we had cash and cash equivalents and investments of $159.6 million . Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Net cash (used in) provided by:
 
 
 
Operating activities
$
(17,834
)
 
$
(1,338
)
Investing activities
(59,629
)
 
42,075

Financing activities
70,499

 
1,755

Net (decrease) increase in cash and cash equivalents and restricted cash
$
(6,964
)
 
$
42,492

Operating activities.  The cash used for operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities. During the three months ended March 31, 2020 , our operating activities used cash of $17.8 million as compared to cash used by operating activities of $1.3 million during the three months ended March 31, 2019. Cash used in operating activities during both the three months ended March 31, 2020 and 2019 was primarily driven by our development activities associated with CTP-543 and CTP-692, our wholly owned development programs.

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Investing activities.  Net cash provided by investing activities consisted of proceeds from the maturity of investments, purchases of investments and purchases of fixed assets. Net cash provided by maturities of investments for the three months ended March 31, 2020 and 2019 was $33.9 million and $55.7 million , respectively. Net cash used in purchases of investments for the three months ended March 31, 2020 and 2019 was $93.4 million and $13.3 million , respectively. Purchases of fixed assets for the three months ended March 31, 2020 and 2019 were $0.1 million and $0.3 million , respectively. The increase in the purchases of investments during the three months ended March 31, 2020 is primarily due to the management of funds received from the January 2020 public offering of common stock and pre-funded warrants, as discussed further in Note 13 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Financing activities. During the three months ended March 31, 2020 and 2019, our financing activities provided cash of $70.5 million and $1.8 million , respectively. The cash provided by financing activities during the three months ended March 31, 2020 was primarily attributable to the proceeds from the January 2020 public offering of common stock and pre-funded warrants. Additionally, the Company received proceeds of $0.4 million and $0.8 million from the exercise of stock options during the three months ended March 31, 2020 and 2019, respectively.

Operating capital requirements

We do not anticipate commercializing any of our product candidates for several years. Although we generated net income for the fiscal years ended December 31, 2017 and 2015 due to one-time payments from Vertex and Auspex, respectively, we anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek marketing approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights. We are subject to all of the risks incident in the development of new drug products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, as well as additional risks stemming from the unproven nature of deuterated drugs.

Based on our current expectations, including with respect to our development plans, we believe that our existing cash and cash equivalents and investments as of March 31, 2020 will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2021 . However, we will require additional capital for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.

To date, we have not generated any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we, or our collaborators, obtain marketing approval of and commercialize one of our current or future product candidates. Because our product candidates are in various stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete development and commercialization of our product candidates or whether or when we will achieve profitability.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and additional collaborations, strategic alliances and licensing arrangements, and other arrangements. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, we do not have any additional committed external sources of funds. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional funds 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 product candidates that we would otherwise prefer to develop and market ourselves. If we raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the issuance of securities with rights senior to those of our common stock. We may become subject to covenants under any future indebtedness that could limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, which could adversely impact our ability to conduct our business.

Our expectation with respect to the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including those discussed in the “Risk Factors” section of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. Our current investment policy is to maintain a diversified investment portfolio in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities. Our cash is deposited in and invested through highly rated financial institutions in North America. As of March 31, 2020 and December 31, 2019, we had  $159.6 million and $106.4 million  of cash, cash equivalents and investments, respectively. The fair value of cash equivalents and short-term investments is subject to change as a result of potential changes in market interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of these investments, an immediate 100 basis point change in interest rates at levels as of March 31, 2020 would not have a material effect on the fair market value of our cash equivalents and short-term investments.

We contract with suppliers of raw materials and contract manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollars and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the three months ended March 31, 2020 .

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Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020 , the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

35


PART II. OTHER INFORMATION
 
Item 1A.
Risk Factors.
Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Quarterly Report on Form 10-Q and other filings with the SEC, press releases, communications with investors and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
RISKS RELATED TO THE COVID-19 PANDEMIC

Our business may be adversely affected by the ongoing COVID-19 pandemic.
Our business could be adversely affected by health epidemics in regions where we have concentrations of clinical trial sites or other business activities and could cause significant disruption in the operations of clinical research organizations and contract manufacturers upon whom we rely. For example, the COVID-19 pandemic has grown to affect most regions of the world.

As a result of the COVID-19 pandemic, we may experience disruptions that could severely impact our business, clinical trials and supply chain, including:

We believe that the COVID-19 pandemic has had, and will continue to have, an impact on our clinical trials, including our Phase 2 clinical trial of CTP-692 for schizophrenia and our open label long-term extension study of CTP-543 for alopecia areata. Due to changes to study site operations, in some cases, these impacts include the potential need for remote assessments and delivery of study medication directly to patients. In addition, enrollment of new patients in our clinical trials has slowed as a result of state and local restrictions. Some patients may choose to withdraw from our studies or we may choose to, or be required to, pause enrollment or patient dosing in order to preserve health resources and protect trial participants. As a result, the timelines to complete our clinical trials may be delayed. For example, due to delays in enrollment in our Phase 2 clinical trial of CTP-692 for schizophrenia as a result of the COVID-19 pandemic, we now expect to complete enrollment of this clinical trial by year-end 2020.
We believe that the COVID-19 pandemic may also have an impact on the clinical trials of our collaborators. For instance, AVP-786 is being developed under a collaboration with Avanir. Screening and enrollment in ongoing AVP-786 clinical trials has been paused until restrictions associated with the COVID-19 pandemic have been lifted. As a result, our collaborators' timelines to complete clinical trials may be delayed.
We currently rely on third parties to, among other things, manufacture raw materials, manufacture our product candidates for our clinical trials, ship our product candidates to study sites, perform quality testing and supply other goods and services to run our business. If any such third party in our supply chain is adversely impacted by restrictions resulting from the COVID-19 pandemic, including staffing shortages, production slowdowns or disruptions in delivery systems, our supply chain may be disrupted, limiting our ability to manufacture our product candidates for our clinical trials and conduct our research and development operations.
We have closed our offices and requested that most of our personnel work remotely, and restricted on-site staff to only those personnel and contractors who must perform essential activities on-site. Our increased reliance on personnel working from home may negatively impact productivity or disrupt, delay or otherwise adversely impact our business. In addition, this could increase our cyber security risk, create data accessibility concerns and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, ethics committees, manufacturing sites, research or clinical trial sites and other important agencies and contractors. General protective measures put into place at various governmental levels, including quarantines, travel restrictions and business shutdowns, may also negatively affect our operations.
Our employees and contractors conducting research activities may not be able to access our laboratory for an extended period of time due to the closure of our offices. As a result, this could delay our timelines for various research activities.
Health regulatory agencies globally may experience disruptions in their operations as a result of the COVID-19 pandemic. The FDA and comparable foreign regulatory agencies may have slower response times or be under-resourced. It is unknown how long these disruptions could continue, were they to occur. Any elongation or de-prioritization of our clinical trials or delay in regulatory review resulting from such disruptions could materially affect the development and study of our product candidates.

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The trading prices for our common stock and the stock of other biopharmaceutical companies have been highly volatile as a result of the COVID-19 pandemic. As a result, we may face difficulties raising capital through sales of our common stock or such sales may be on unfavorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the COVID-19 pandemic could materially and adversely affect our business and the value of our common stock.
The COVID-19 pandemic continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic on our business operations is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and the actions taken to contain or address its impact in the short and long term, among others. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, our research programs, healthcare systems or the global economy. We will continue to monitor the situation closely.
RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL

We have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability.
As of March 31, 2020, we had an accumulated deficit of $215.2 million. We have not generated any revenues from product sales and have financed our operations to date primarily through the public offering of our common stock, private placements of our preferred stock, debt financings and funding from collaborations or other agreements. We have not completed development of any product candidate and have devoted substantially all of our financial resources and efforts to research and development, including nonclinical studies and our clinical development programs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.
We anticipate that our expenses will increase substantially if and as we:
 
continue to develop and conduct nonclinical studies and clinical trials with respect to our product candidates;
seek to identify additional product candidates;
in-license or acquire additional product candidates;
seek marketing approvals for our product candidates that successfully complete clinical trials;
establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval;
require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;
maintain, expand and protect our intellectual property portfolio;
incur delays to the initiation or completion of our clinical trials due to the COVID-19 pandemic;
incur any disruptions or delays to the supply of our product candidates due to the COVID-19 pandemic;
hire additional personnel;
add equipment and physical infrastructure to support our research and development; and
continue to implement the infrastructure necessary to support our product development and help us comply with our obligations as a public company.
Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or one of our collaborators is, able to successfully commercialize one or more of our product candidates. Doing so will require success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or our collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. We, and our collaborators, may never succeed in these activities and, even if we do, or one of our collaborators does, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our Company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our Company could cause our stockholders to lose all or part of their investments in us.

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We have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.
We began operations in April 2006. Our operations to date have been limited to financing and staffing our Company, developing our technology and product candidates and establishing collaborations. We have not yet demonstrated an ability to successfully conduct an international multi-center clinical trial, conduct a large-scale pivotal clinical trial, obtain marketing approvals, manufacture product on a commercial scale or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
Developing pharmaceutical products, including conducting nonclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and nonclinical development efforts for and seek marketing approval for our product candidates, or if we in-license or acquire product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of one of our collaborators. In particular, the costs that we may be required to incur for the manufacture of any product candidate that receives marketing approval may be substantial. Manufacturing a drug at commercial scale may require specialized facilities, processes and materials. Furthermore, we will continue to incur costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.
In any event, our existing cash and cash equivalents and investments will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through a combination of equity offerings, debt financings, collaboration and licensing arrangements and other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. Our failure to raise capital when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
We believe that our cash and cash equivalents and investments as of March 31, 2020 will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2021. Our estimate as to how long we expect our cash and cash equivalents and investments to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. Our future funding requirements, both short-term and long-term, will depend on many factors, including:  

the progress, timing, costs and results of clinical trials of, and research and nonclinical development efforts for, our product candidates and potential product candidates, including current and future clinical trials, including on account of the COVID-19 pandemic and its impact on our clinical trial sites;
our current collaboration agreements and achievement of milestones under these agreements;
our ability to enter into and the terms and timing of any additional collaborations, licensing, product acquisition or other arrangements that we may establish;
the number of product candidates that we pursue and their development requirements;
the outcome, timing and costs of seeking marketing approvals;
our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;
potential litigation costs; and
the costs of operating as a public company.

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Raising additional capital may cause dilution to our stockholders or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration and licensing arrangements and other sources. We do not have any committed external source of funds, other than potential milestone payments under the Vertex Agreement and potential milestone payments and royalties under our existing license agreements, each of which is subject to the achievement of development, regulatory and/or sales-based milestones with respect to our product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our stockholders may be materially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.
If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds 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 product candidates that we would otherwise prefer to develop and market ourselves.

Any future indebtedness could adversely affect our ability to operate our business.

We could in the future incur indebtedness containing financial obligations and restrictive covenants, which could have significant adverse consequences, including:

requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;
increasing our vulnerability to adverse changes in general economic, industry and market conditions;
subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

Any financial obligations or restrictive covenants could negatively impact our ability to conduct our business.
RISKS RELATED TO THE DISCOVERY, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad or definable population of patients, the occurrence of severe or medically or commercially unacceptable adverse events, fraudulent conduct by clinical investigators, failure to comply with protocols, applicable regulatory requirements or other determinations made by the FDA, or any comparable foreign regulatory authority that a drug product is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials, we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case.
In addition to the risk of failure inherent in drug development, certain of the deuterated compounds that we, and our collaborators, are developing and may develop in the future may be particularly susceptible to failure to the extent they are

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based on compounds that others have previously studied or tested, but did not progress in development due to safety, tolerability or efficacy concerns or otherwise. Deuteration of these compounds may not be sufficient to overcome the problems experienced with the corresponding non-deuterated compound.
We may not be able to continue further clinical development of our wholly owned development programs, including CTP-543 and CTP-692. If we are unable to develop, obtain marketing approval for or commercialize our wholly owned development programs, ourselves or through a collaboration, or experience significant delays in doing so, our business could be materially harmed.
We currently have no products approved for sale. The success of our wholly owned development programs will depend on several factors, including:  

in the case of CTP-543, our ability to treat moderate-to-severe alopecia areata with acceptable safety and efficacy;
in the case of CTP-692, our ability to treat schizophrenia, in patients concurrently receiving antipsychotic medication, with acceptable safety and efficacy;
successful and timely completion of clinical trials, including the impact of the COVID-19 pandemic on the initiation or completion of our clinical trials and the supply of our product candidates;
receipt of marketing approvals from applicable regulatory authorities;
the performance of our future collaborators, if any, for our programs;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
establishment of supply arrangements with third-party raw materials suppliers and manufacturers;
our ability to manufacture or arrange for the manufacture of our active pharmaceutical ingredients and drug products
with sufficient quality, quantity and reproducibility to support clinical trials and potential future commercialization;
establishment of arrangements with third-party manufacturers to obtain finished drug products that are appropriately packaged for sale;
obtaining and maintaining patent, trade secret protection, regulatory exclusivity and freedom to operate, both in the United States and internationally;
amount of commercial sales, if and when approved;
a continued acceptable safety profile of our programs following any marketing approval; and
agreement by third-party payors to reimburse patients for the costs of treatment with our products, and the terms of such reimbursement.

If we are unable to successfully develop, receive marketing approval for and commercialize our wholly owned development programs, or experience delays as a result of any of these factors or otherwise, our business could be materially harmed.
If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or our collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.
We, or our collaborators, must complete nonclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans in order to obtain marketing approval from regulatory authorities for the sale of our product candidates. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. Further, the outcome of nonclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks.
Any inability to successfully complete nonclinical and clinical development could result in additional costs to us, or our collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if (1) we, or our collaborators, are required to conduct additional or larger clinical trials or other testing of our product candidates beyond the trials and testing that we, or they, contemplate, (2) we, or our collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (3) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (4) there are unacceptable safety concerns associated with our product candidates, we, or our collaborators, in addition to incurring additional costs, may:
 
be delayed in obtaining marketing approval for our product candidates;
not obtain marketing approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;

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obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;
be subject to additional post-marketing testing or other requirements; or
be required to remove the product from the market after obtaining marketing approval.

For instance, AVP-786 is being developed under a collaboration with Avanir. In 2019, Avanir completed two Phase 3 trials evaluating AVP-786 for the treatment of agitation associated with dementia of the Alzheimer’s type. The second of the Phase 3 trials did not meet its primary or key secondary endpoints; however, following additional data analysis, Avanir decided to continue developing AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type in their ongoing global Phase 3 trial and open label long-term extension study. Additionally, Avanir is conducting a Phase 2/3 trial evaluating AVP-786 for the treatment of negative symptoms of schizophrenia. However, given the results of Avanir’s second Phase 3 trial of AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type, there is no guarantee that any future trials of AVP-786 will meet their primary or key secondary endpoints.

Even if we, or our collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.
If we, or our collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.
We, or our collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval of our product candidates, including:
 
toxicity or serious adverse effects may be observed in our nonclinical studies causing us to delay or abandon clinical trials;
clinical trials of our product candidates may produce unfavorable or inconclusive results;
unexpectedly high placebo response rates;
rater variability in the assessment of clinical endpoints;
we, or our collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials and or develop and or validate new clinical endpoints for our clinical trials, or abandon product development programs;
the number of patients required for clinical trials of our product candidates may be larger than we, or our collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or our collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or our collaborators, anticipate;
our third-party contractors, or those of our collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of our collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or our collaborators in a timely manner or at all;
criminal or unauthorized misuse of computer systems may result in disruption to our, or our partners' or vendors', clinical trials, nonclinical activities or manufacturing, or may compromise data from our, or our partners' or vendors', clinical or nonclinical studies;
regulators or institutional review boards may not authorize us, our collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
we, or our collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients or the sites from the clinical trial, increase the needed enrollment size for the clinical trial, extend the clinical trial’s duration or cause spurious results;
investigators may provide inaccurate or false data, resulting in spurious clinical results, an inadequate data set or regulators’ unwillingness to approve a product;
regulators, institutional review boards or data monitoring committees may require that we, or our collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;
the FDA or comparable foreign regulatory authorities may disagree with our, or our collaborators’, clinical trial design or our or their interpretation of data from nonclinical studies and clinical trials;

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the FDA or comparable foreign regulatory authorities may change their requirements for approvability for a given product or for an indication after we have initiated work based on their previous guidance;
the COVID-19 pandemic may impact the FDA's ability to continue its normal operations;
the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;
we, or our manufacturing vendors, may not produce, or may not consistently produce material, that meets necessary specifications for commercialization;
the FDA or comparable foreign regulatory authorities may determine that our, or our manufacturing vendors, manufacturing or quality control processes fail to meet their specifications or guidelines; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.
Product development costs for us, or our collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We, and our collaborators, do not know whether any nonclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant nonclinical or clinical trial delays also could shorten any periods during which we, or our collaborators, may have the exclusive right to commercialize our product candidates or allow our competitors, or the competitors of our collaborators, to bring products to market before we, or our collaborators, do and impair our ability, or the ability of our collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that cause, or lead to, clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

Additionally, timely enrollment, conduct, progress and completion of clinical trials are reliant on clinical trial sites, which may be adversely affected by global health matters, including, among other things pandemics. For example, some of our clinical trial sites have been impacted by the COVID-19 pandemic. As the COVID-19 pandemic continues to evolve, the conduct of our clinical trials may be adversely affected, despite efforts to mitigate this impact.
If we, or our collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our, or their, receipt of necessary marketing approvals could be delayed or prevented.
We, or our collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities, such as the European Medicines Agency. Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including:
 
the size and nature of the patient population;
the severity of the disease under investigation;
the availability or interest of clinical sites to enroll patients into our trials;
the willingness or availability of patients to participate in our clinical trials, including due to the COVID-19 pandemic;