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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
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: 001-37985
 
ANAPTYSBIO, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-3828755
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

10421 Pacific Center Court, Suite 200
San Diego, CA 92121
(Address of principal executive offices and zip code)
(858) 362-6295
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
ANAB
The Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes      No  
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
 
Accelerated Filer
 
 
 
 
 
Non-accelerated Filer
 
 
Smaller Reporting Company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
As of August 5, 2019, there were 27,047,596 shares of the Registrant’s Common Stock outstanding.
 



ANAPTYSBIO, INC.
TABLE OF CONTENTS
 
 
 
Page Number
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
ANAPTYSBIO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
146,552

 
$
113,596

Receivable from collaborative partners
5,000

 

Australian tax incentive receivable

 
174

Short-term investments
275,664

 
313,486

Prepaid expenses and other current assets
3,772

 
6,960

Total current assets
430,988

 
434,216

Property and equipment, net
1,481

 
1,445

Long-term investments
45,707

 
73,128

Other long-term assets
1,913

 
148

Restricted cash
60

 
60

Total assets
$
480,149

 
$
508,997

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
10,921

 
$
5,443

Accrued expenses
14,102

 
8,761

Notes payable, current portion
4,781

 
7,574

Other current liabilities
819

 
58

Total current liabilities
30,623

 
21,836

Other long-term liabilities
1,105

 
796

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 10,000 shares authorized and no shares, issued or outstanding at June 30, 2019 and December 31, 2018, respectively

 

Common stock, $0.001 par value, 500,000 shares authorized, 27,045 shares and 26,922 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
27

 
27

Additional paid in capital
640,550

 
633,251

Accumulated other comprehensive income (loss)
574

 
(223
)
Accumulated deficit
(192,730
)
 
(146,690
)
Total stockholders’ equity
448,421

 
486,365

Total liabilities and stockholders’ equity
$
480,149

 
$
508,997


 See accompanying notes to unaudited consolidated financial statements.

1


ANAPTYSBIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Collaboration revenue
$
5,000

 
$

 
$
5,000

 
$

Operating expenses:
 
 
 
 
 
 
 
Research and development
27,350

 
10,583

 
47,981

 
22,393

General and administrative
4,307

 
3,832

 
8,448

 
7,779

Total operating expenses
31,657

 
14,415

 
56,429

 
30,172

Loss from operations
(26,657
)
 
(14,415
)
 
(51,429
)
 
(30,172
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest expense
(281
)
 
(436
)
 
(601
)
 
(887
)
Interest income
2,957

 
1,297

 
5,945

 
2,482

     Other income (expense), net
(41
)
 
(64
)
 
(34
)
 
(127
)
Total other income (expense), net
2,635

 
797

 
5,310

 
1,468

Loss before income taxes
(24,022
)
 
(13,618
)
 
(46,119
)
 
(28,704
)
Provision for income taxes
60

 

 
79

 

Net loss
(23,962
)
 
(13,618
)
 
(46,040
)
 
(28,704
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized income (loss) on available for sale securities, net of tax of $99, $0, $214 and $0, respectively
370

 
124

 
797

 
(250
)
Comprehensive loss
$
(23,592
)
 
$
(13,494
)
 
$
(45,243
)
 
$
(28,954
)
Net loss per common share:
 
 
 
 
 
 
 
      Basic and diluted
$
(0.89
)
 
$
(0.57
)
 
$
(1.70
)
 
$
(1.20
)
Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
      Basic and diluted
27,026

 
23,932

 
27,004

 
23,867

 
See accompanying notes to unaudited consolidated financial statements.


2


ANAPTYSBIO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2018
26,922

 
$
27

 
$
633,251

 
$
(223
)
 
$
(146,690
)
 
$
486,365

Shares issued under employee stock plans
84

 
 
 
574

 
 
 
 
 
574

Stock-based compensation
 
 
 
 
2,867

 
 
 
 
 
2,867

Comprehensive income, net
 
 
 
 
 
 
427

 
 
 
427

Net loss
 
 
 
 
 
 
 
 
(22,078
)
 
(22,078
)
Balance, March 31, 2019
27,006

 
27

 
636,692

 
204

 
(168,768
)
 
468,155

Shares issued under employee stock plans
39

 


 
215

 


 


 
215

Stock-based compensation


 


 
3,643

 


 


 
3,643

Comprehensive income, net


 


 


 
370

 


 
370

Net loss


 


 


 


 
(23,962
)
 
(23,962
)
Balance, June 30, 2019
27,045

 
$
27

 
$
640,550

 
$
574

 
$
(192,730
)
 
$
448,421


See accompanying notes to unaudited consolidated financial statements.

3


ANAPTYSBIO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total
Stockholders’
Equity

Shares
 
Amount
 
 
 
 
Balance, December 31, 2017
23,791

 
$
24

 
$
393,017

 
$
(426
)
 
$
(85,034
)
 
$
307,581

Shares issued under employee stock plans
9

 


 
72

 


 


 
72

Warrants exercised
17

 


 
75

 


 


 
75

Stock-based compensation


 


 
2,260

 


 


 
2,260

Comprehensive loss, net


 


 


 
(375
)
 


 
(375
)
Net loss


 


 


 


 
(15,086
)
 
(15,086
)
Balance, March 31, 2018
23,817

 
24

 
395,424

 
(801
)
 
(100,120
)
 
294,527

Shares issued under employee stock plans
212

 


 
1,397

 


 


 
1,397

Warrants exercised


 


 
1

 


 


 
1

Stock-based compensation


 


 
2,548

 


 


 
2,548

Comprehensive income, net


 


 


 
124

 


 
124

Net loss


 


 


 


 
(13,618
)
 
(13,618
)
Balance, June 30, 2018
24,029

 
$
24

 
$
399,370

 
$
(677
)
 
$
(113,738
)
 
$
284,979


See accompanying notes to unaudited consolidated financial statements.

4


ANAPTYSBIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(46,040
)
 
$
(28,704
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
239

 
118

Stock-based compensation
6,510

 
4,808

Accretion/amortization of investments, net
(1,926
)
 
(255
)
Non-cash interest expense
332

 
317

Changes in operating assets and liabilities:
 
 
 
Receivable from collaborative partners
(5,000
)
 

Australian tax incentive receivable
174

 
1,449

Prepaid expenses and other assets
1,435

 
(1,186
)
Accounts payable and other liabilities
12,660

 
2,097

Net cash used in operating activities
(31,616
)
 
(21,356
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of investments
(132,313
)
 
(90,411
)
Sales and maturities of investments
200,267

 
90,031

Purchases of property and equipment
(421
)
 
(536
)
Net provided by (used in) investing activities
67,533

 
(916
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock, upon the exercise of stock options
789

 
1,469

Proceeds from issuance of common stock, upon the exercise of warrants

 
76

Payments on notes payable
(3,750
)
 
(3,125
)
Payments for offering costs, net

 
(280
)
Net cash used in financing activities
(2,961
)
 
(1,860
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
32,956

 
(24,132
)
Cash, cash equivalents and restricted cash, beginning of period
113,656

 
81,249

Cash, cash equivalents and restricted cash, end of period
$
146,612

 
$
57,117

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Interest paid
$
301

 
$
585

Non-cash investing and financing activities:
 
 
 
Amounts accrued for property and equipment
$
14

 
$
194


See accompanying notes to unaudited consolidated financial statements.

5


ANAPTYSBIO, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business
AnaptysBio, Inc. (“we,” “us,” “our,” or the “Company”) was incorporated in the state of Delaware in November 2005. We are a biotechnology company developing first-in-class antibody product candidates focused on unmet medical needs in inflammation. We develop our product candidates using our proprietary, antibody discovery technology platform, which is designed to replicate, in vitro, the natural process of antibody generation. We currently generate revenue from milestones achieved under our collaborative research and development arrangements.
Since our inception, we have devoted our primary effort to raising capital and research and development activities. Our financial support has been provided primarily from the sale of our common and preferred stock, as well as through funds received under our collaborative research and development agreements. Going forward, as we continue our expansion, we may seek additional financing and/or strategic investments. However, there can be no assurance that any additional financing or strategic investments will be available to us on acceptable terms, if at all. If events or circumstances occur such that we do not obtain additional funding, we will most likely be required to reduce our plans and/or certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives. Management believes its currently available resources will provide sufficient funds to enable the Company to meet its operating plans for at least the next twelve months. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been omitted. The accompanying unaudited consolidated financial statements include all known adjustments necessary for a fair presentation of the results of interim periods as required by U.S. GAAP. These adjustments consist primarily of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Also, certain reclassifications have been made to 2018 financial information to conform to the current year presentation of long-term liabilities on the Consolidated Balance Sheets. Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2018, included in our Annual Form 10-K.
Basis of Consolidation
The accompanying consolidated financial statements include us and our wholly-owned Australian subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. We operate in one reportable segment and our functional and reporting currency is the U.S. dollar.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We base our estimates and assumptions on historical experience when available and on various factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results could differ from these estimates under different assumptions or conditions.

6


Leases
Prior to January 1, 2019, we recorded our leases in accordance with Accounting Standard Codification (ASC) Topic 840, Leases, and all current leases were classified as operating leases. Rent expense was recognized on a straight-line basis over the terms of the leases and, accordingly, we recorded the cumulative difference between cash rent payments and the recognition of rent expense as a deferred rent liability. When an operating lease included lease incentives, such as a rent abatements or leasehold improvement allowances, or required fixed escalations of the minimum lease payments, the aggregate rental expense, including such incentives or increases, was recognized on a straight-line basis over the term of the lease.

Effective January 1, 2019, we adopted Accounting Standard Update (ASU) 2016-02, ASC 842, Leases, under which all outstanding leases continued to be classified as operating leases. Rent expense is recognized on a straight-line basis. When an operating lease includes rent abatements or requires fixed escalations of the minimum lease payments, the aggregate rental expense is recognized on a straight-line basis over the term of the lease. When an operating lease includes lease incentives such as leasehold improvement allowances, the lease incentive is included in the right-of-use, or “ROU”, asset. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the date of adoption of ASC 842, or the lease commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. We account for fixed lease components separately from non-lease components.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common equivalent shares outstanding for the period, as well as any dilutive effect from outstanding stock options and warrants using the treasury stock method. For each period presented, there is no difference in the number of shares used to calculate basic and diluted net loss per share.
The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Options to purchase common stock
2,525

 
2,542

 
2,443

 
2,572

Warrants to purchase common stock

 

 

 
4

Total
2,525

 
2,542

 
2,443

 
2,576



Accounting Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases (Topic 842), which requires that lessees recognize a right-of-use, or “ROU”, asset and a related lease liability on the balance sheet for all leases with a term longer than 12 months. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Targeted Improvements; and ASU 2019-01, Leases (Topic 842): Codification Improvements. ASU 2016-02 became effective for our annual reporting period beginning January 1, 2019, including interim periods thereafter. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (i) its effective date or (ii) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted this standard on January 1, 2019 and used the effective date as our date of initial application. Upon adoption, we elected the package of transition practical expedients, which allowed us to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. We also made an accounting policy election to not recognize leases with an initial term of 12 months or less within our consolidated balance sheets and to recognize those lease payments on a straight-line basis in our consolidated statements of operations over the lease term. Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of approximately $2.1 million and $2.3 million as of January 1, 2019, respectively related to our real estate leases. Adoption of this new standard did not have a material impact on our consolidated statements of operations or cash flows.

7


Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which changes the accounting treatment for recognizing the impairment of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also eliminates the other-than-temporary impairment model for available-for-sale (AFS) debt securities. Entities will begin to recognize credit losses on AFS debt securities as allowances rather than as reductions in the carrying value of the securities. Impairment that is not credit-related impairment will continue to be recognized in other comprehensive income and entities will no longer consider the length of time a security has been in an unrealized loss position when determining whether a credit loss exists. ASU 2016-13 becomes effective for annual and interim periods beginning after December 15, 2019; early adoption is permitted. We believe that the adoption of this standard will not have a material impact on our consolidated financial statements.
3. Balance Sheet Accounts and Supplemental Disclosures
Property and Equipment
Property and equipment consist of the following:
(in thousands)
June 30, 2019
 
December 31, 2018
Laboratory equipment
$
4,528

 
$
4,287

Office furniture and equipment
807

 
780

Leasehold improvements
575

 
575

Property and equipment, gross
5,910

 
5,642

Less: accumulated depreciation and amortization
(4,429
)
 
(4,197
)
Total property and equipment, net
$
1,481

 
$
1,445


 
Accrued Expenses
Accrued expenses consist of the following:
(in thousands)
June 30, 2019
 
December 31, 2018
Accrued compensation and related expenses
$
1,909

 
$
2,421

Accrued professional fees
496

 
442

Accrued research, development and manufacturing expenses
11,360

 
5,577

Other
337

 
321

Total accrued expenses
$
14,102

 
$
8,761


4. Collaborative Research and Development Agreements
TESARO Collaboration
In March 2014, we entered into a Collaboration and Exclusive License Agreement, or the TESARO Agreement, with TESARO, Inc. and TESARO Development, Inc., or collectively, TESARO, an oncology-focused biopharmaceutical company now a part of GlaxoSmithKline. Under the terms of the agreement, we agreed to perform certain discovery and early preclinical development of therapeutic antibodies with the goal of generating immunotherapy antibodies for subsequent preclinical, clinical, regulatory and commercial development to be performed by TESARO. Under the terms of the agreement, TESARO paid an upfront license fee of $17.0 million in March 2014 and agreed to provide funding to us for research and development services related to antibody discovery programs for three specific targets. In November 2014, we and TESARO entered into Amendment No. 1 to the Agreement to add an antibody discovery program against an undisclosed fourth target for an upfront license fee of $2.0 million.
For each development program, we are eligible to receive milestone payments of up to $18.0 million if certain preclinical and clinical trial events are achieved by TESARO, up to an additional $90.0 million if certain U.S. and European regulatory submissions and approvals in multiple indications are achieved, and up to an additional $165.0 million upon the achievement of specified levels of annual worldwide net sales. We will also be eligible to receive tiered single-digit royalties related to

8


worldwide net sales of products developed under the collaboration. Unless earlier terminated by either party upon specified circumstances, the agreement will terminate, with respect to each specific developed product, upon the latter of the 12th anniversary of the first commercial sale of the product or the expiration of the last to expire of any patent. Prior to the adoption of ASC 606, Revenue from Contracts with Customers, we determined that the upfront license fees and research funding under the agreement, as amended, should be accounted for as a single unit of accounting and that the upfront license fees should be deferred and recognized as revenue over the same period that the research and development services are performed. In December 2015, we determined that the research and development services would be extended through December 31, 2016. As a result, the period over which the unrecognized license fees and milestones were recognized was extended through December 31, 2016, and have since been recognized in full.
We assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, TESARO, is a customer. We identified the following material promises under the TESARO Agreement: (1) the licenses under certain patent rights relating to six discovery programs (four targets) and transfer of certain development and regulatory information, (2) R&D services and (3) Joint Steering Committee meetings. We considered the research and discovery capabilities of TESARO for these specific programs, TESARO’s inability to sub-license, and the fact that the discovery and optimization of these antibodies is proprietary and could not, at the time of the contract inception, be provided by other vendors, to conclude that the license does not have stand-alone functionality and is therefore not distinct. Additionally, we determined that the steering committee participation would not have been provided without the R&D services and license agreement. Based on these assessments, we identified all services to be interrelated, and therefore concluded that the promises should be combined into a single performance obligation at the inception of the arrangement.
As of June 30, 2019, the transaction price includes the upfront payment, research reimbursement revenue, and milestones earned to date, which are allocated in their entirety to the single performance obligation. Future potential milestones are generally not included as they are subject to revenue constraint. As part of the constraint evaluation, we considered numerous factors including the fact that the receipt of milestones is outside of our control and contingent upon success in future clinical trials, an outcome that is difficult to predict, and the licensees’ efforts. Any consideration related to sales-based milestones, including royalties, will be recognized when the related sales occur as they were determined to relate predominantly to the IP license granted to TESARO and therefore have also been excluded from the transaction price. We will re-evaluate the variable transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. During the three months ended June 30, 2019, we recognized one clinical milestone for $5.0 million which we expect to be achieved during the second half of 2019. This milestone was recognized upon the evaluation of recent actions, efforts, and public disclosures made by TESARO that led to the determination that a significant reversal of revenue would not be probable. No other future clinical or regulatory milestones have been included in the transaction price, as all other milestone amounts continued to be subject to the revenue constraint.
Milestones recognized through June 30, 2019 under the TESARO Agreement are as follows:
 
Anti-PD-1
(TSR042/Dostarlimab)
 
Anti-TIM-3
(TSR022)
 
Anti-LAG-3
(TSR033)
Milestone Event
Amount
Quarter Recognized
 
Amount
Quarter Recognized
 
Amount
Quarter Recognized
Initiated in vivo toxicology studies using good laboratory practices (GLPs)
$1.0M
Q2'15
 
$1.0M
Q4'15
 
$1.0M
Q3'16
IND clearance from the FDA
$4.0M
Q1'16
 
$4.0M
Q2'16
 
$4.0M
Q2'17
Phase 2 clinical trial initiation
$3.0M
Q2'17
 
$3.0M
Q4'17
 
Phase 3 clinical trial initiation - first indication
$5.0M
Q3'18
 
 
Phase 3 clinical trial initiation - second indication
$5.0M
Q2'19
 
 

Milestones achieved during the discovery period were recognized as revenue pro-rata through December 31, 2016. Milestones achieved during fiscal 2017 were recognized as revenue in the period earned, while milestones after December 31, 2017 are recognized upon determination that a significant reversal of revenue would not be probable. Cash is generally received within 30 days of milestone achievement.
We recognized $5.0 million in revenue under this agreement during the three and six months ended June 30, 2019 and no revenue during the three and six months ended June 30, 2018.

9


Antibody Generation Agreement with Celgene Corporation
In December 2011, we entered into a license and collaboration agreement with Celgene, or the Celgene Agreement, to develop therapeutic antibodies against multiple targets. We granted Celgene the option to obtain worldwide commercial rights to antibodies generated against each of the targets under the agreement, which option was triggered on a target-by-target basis by our delivery of antibodies meeting certain pre-specified parameters pertaining to each target under the agreement.
The agreement provided for an upfront payment of $6.0 million from Celgene, which we received in 2011 and recognized through 2014, milestone payments of up to $53.0 million per target, low single-digit royalties on net sales of antibodies against each target, and reimbursement of specified research and development costs.
We assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Celgene, is a customer. We identified the following material promises under the Celgene Agreement: (1) the licenses under certain patent rights relating to four targets and transfer of certain development and regulatory information, (2) R&D services, (3) a written report documenting findings and (4) Steering Committee meetings. We considered the research and discovery capabilities of Celgene, Celgene’s inability to sub-license the four targets, and the fact that the discovery and optimization of these antibodies is proprietary and could not, at the time of the contract inception, be provided by other vendors, to conclude that the license does not have stand-alone functionality and is therefore not distinct. Additionally, we determined that the report of findings and steering committee participation would not have been provided without the R&D services and license agreement. Based on these assessments, we identified all services to be interrelated, and therefore concluded that the promises should be combined into a single performance obligation at the inception the arrangement.
As of June 30, 2019, the transaction price includes the upfront payment, success fees, expense reimbursement, and milestones earned to date, which are allocated in their entirety to the single performance obligation. None of the future clinical or regulatory milestones have been included in the transaction price, as all milestone amounts were subject to the revenue constraint. As part of the constraint evaluation, we considered numerous factors, including the fact that the receipt of milestones is outside of our control and contingent upon success in future clinical trials and the licensees’ efforts. Any consideration related to sales-based milestones, including royalties, will be recognized when the related sales occur as they were determined to relate predominantly to the IP license granted to Celgene and therefore have also been excluded from the transaction price. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
Milestones achieved through June 30, 2019 under the Celgene Agreement are as follows:
 
Anti-PD-1
(CC-90006)
Milestone Event
Amount
Quarter Recognized
Completion of first in vivo toxicology studies using GLPs
$0.5M
Q2'16
Phase 1 clinical trial initiation
$1.0M
Q4'16

Revenue from future contingent milestone payments are recognized upon determination that a significant reversal of revenue would not be probable. Cash is generally received within 30 days of milestone achievement.
There was no revenue recognized under this agreement during the three and six months ended June 30, 2019 and 2018.
5. Notes Payable
On December 24, 2014, we entered into a Loan and Security Agreement, as amended from time to time, the Loan Agreement, with a bank and a financial institution whereby we may borrow up to $15.0 million in three separate draws of $5.0 million each. The Term A Loans, for an aggregate of $5.0 million, were drawn on December 24, 2014 with a fixed interest rate of 6.97%.
In January 2016, the Loan Agreement was amended to combine Term B Loans and Term C Loans for a total of $10.0 million available for draw through December 31, 2016 and delay the beginning of our Term A Loans’ principal repayments from February 1, 2016 until February 1, 2017. The Term B Loans and Term C Loans became available for draw on July 1, 2016. In December 2016, we further amended the Loan Agreement to (i) allow for the Term B Loans and Term C Loans to be

10


drawn on December 30, 2016, (ii) delay principal repayments of all Term Loans until February 1, 2018 and (iii) amend the interest rate for each Term Loan. The Term B Loans and the Term C Loans were drawn on December 30, 2016, and Term A, B and C Loans are now collectively referred to as the Term Loans. Principal repayments began in February 2018, and as of June 30, 2019, there are 7 monthly principal and interest payments remaining on the Term Loans, with final maturity in January 2020. The Term Loans bear interest equal to the greater of 3-month U.S. LIBOR plus 6.37% or 7.3%. The interest rate was 8.87% as of June 30, 2019.
The costs incurred to issue the Term Loans were deferred and are included in the discount to the carrying value of the Term Loans in the accompanying balance sheet. The Term Loans also include a final payment fee of $0.8 million due at the earlier of prepayment or the maturity date of the Term Loans. The deferred costs and the final payment fee are being amortized to interest expense over the expected term of the Term A Loans using the effective interest method.
As of June 30, 2019, the carrying amount of the Term Loans was $4.8 million, which includes amortized final payment fees of $0.4 million and is classified as current liabilities as of June 30, 2019. The effective interest rate on the Term Loans at June 30, 2019 was 13.27%. As of June 30, 2019, future principal maturities of the Term Loans were $3.8 million and $0.6 million during the remainder of 2019 and 2020, respectively.
The Term Loans are secured by a first priority interest in most of our assets, excluding intellectual property. As of June 30, 2019, we were in compliance with the covenants contained in the Loan Agreement.
6. Fair Value Measurements and Available for Sale Investments
Fair Value Measurements
Our financial instruments consist principally of cash, cash equivalents, restricted cash, short-term and long-term investments, receivables, accounts payable, and notes payable. Certain of our financial assets and liabilities have been recorded at fair value in the consolidated balance sheet in accordance with the accounting standards for fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 - Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.

11


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes our assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy:
 
Fair Value Measurements at End of Period Using:
(in thousands)
Fair
Value
 
Quoted Market
Prices for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
At June 30, 2019
 
 
 
 
 
 
 
Money market funds(1)
$
127,844

 
$
127,844

 
$

 
$

Mutual funds(1)
8,170

 
8,170

 

 

U.S. Treasury securities(2)
112,676

 
112,676

 

 

Certificates of deposit(2)
6,155

 

 
6,155

 

Agency securities(2)
61,684

 

 
61,684

 

Commercial and corporate obligations(1)(2)
145,907

 

 
145,907

 

At December 31, 2018
 
 
 
 
 
 
 
Money market funds(1)
$
87,213

 
$
87,213

 
$

 
$

Mutual funds(1)
7,967

 
7,967

 

 

U.S. Treasury securities(2)
164,245

 
164,245

 

 

Certificates of deposit(2)
4,784

 

 
4,784

 

 Agency securities(1)(2)
81,296

 

 
81,296

 

Commercial and corporate obligations(1)(2)
153,983

 

 
153,983

 


(1) 
Included in cash and cash equivalents, and restricted cash in the accompanying consolidated balance sheets.
(2) 
Included in short-term or long-term investments in the accompanying consolidated balance sheets depending on the respective maturity date.
The following methods and assumptions were used to estimate the fair value of our financial instruments for which it is practicable to estimate that value:
Marketable Securities. For fair values determined by Level 1 inputs, which utilize quoted prices in active markets for identical assets, the level of judgment required to estimate fair value is relatively low. For fair values determined by Level 2 inputs, which utilize quoted prices in less active markets for similar assets, the level of judgment required to estimate fair value is also considered relatively low.
Fair Value of Other Financial Instruments
The fair value of our other financial instruments estimated as of June 30, 2019 and December 31, 2018 are presented below:
 
June 30, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Notes payable
$
4,781

 
$
5,084

 
$
8,199

 
$
8,806


The following methods and assumptions were used to estimate the fair value of our notes payable:
Notes Payable—We use the income approach to value the aforementioned debt instrument. We use a present value calculation to discount principal and interest payments and the final maturity payment on these liabilities using a discounted cash flow model based on observable inputs. We discount these debt instruments based on what the current market rates would offer us as of the reporting date. Based on the assumptions used to value these liabilities at fair value, these debt instruments are categorized as Level 2 in the fair value hierarchy.
 The carrying amounts of certain of our financial instruments, including cash and cash equivalents, Australian tax incentive receivable, accounts payable, and accrued expenses approximate fair value due to their short-term nature.

12


Available for Sale Investments
We invest our excess cash in agency securities, debt instruments of financial institutions and corporations, commercial obligations, and U.S. Treasury securities, which we classify as available-for-sale investments. These investments are carried at fair value and are included in the tables above. The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in cash equivalents, short-term and long-term investments as of June 30, 2019 are as follows:
(in thousands)
Amortized
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Total
Fair Value
Agency securities(1)
$
61,558

 
$
133

 
$
(7
)
 
$
61,684

Certificates of deposit(2)
6,111

 
44

 

 
6,155

Commercial and corporate obligations(3)
145,548

 
366

 
(7
)
 
145,907

U.S. Treasury securities(4)
112,363

 
319

 
(6
)
 
112,676

     Total available-for-sale investments
$
325,580

 
$
862

 
$
(20
)
 
$
326,422

(1) 
Of our outstanding agency securities, $47.8 million have maturity dates of less than one year and $13.9 million have a maturity date of between one to two years as of June 30, 2019.
(2) 
Of our outstanding certificates of deposit, $1.0 million have a maturity date of less than one year and $5.2 million have a maturity date of between one to two years as of June 30, 2019.
(3) 
Of our outstanding commercial and corporate obligations, $131.9 million have maturity dates of less than one year and $14.0 million have a maturity date of between one to two years as of June 30, 2019.
(4) 
Of our outstanding U.S. Treasury securities $100.1 million have maturity dates of less than one year and $12.6 million have a maturity date of between one to two years as of June 30, 2019.
7. Stockholders’ Equity
Common Stock
Of the 500,000,000 shares of common stock authorized, 27,044,527 shares were issued and outstanding as of June 30, 2019. Common stock reserved for future issuance upon the exercise, issuance or conversion of the respective equity instruments at June 30, 2019 are as follows:
 
Issued and Outstanding:
 
Stock options
2,512,033

Shares Reserved For:
 
2017 Equity Incentive Plan
2,615,613

2017 Employee Stock Purchase Plan
725,132

Total
5,852,778


8. Equity Incentive Plans
2017 Equity Incentive Plan
On January 12, 2017, our board of directors and stockholders approved and adopted the 2017 Equity Incentive Plan, or the 2017 Plan. The 2017 Plan became effective upon the execution and delivery of the underwriting agreement for our initial public offering on January 26, 2017, and replaced our existing 2006 Equity Incentive Plan, or the 2006 Plan. Under the 2017 Plan, we may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then our employees, officers, directors or consultants. In addition, the number of shares of stock available for issuance under the 2017 Plan will be automatically increased each January 1, beginning on January 1, 2018, by 4% of the aggregate number of outstanding shares of our common stock as of the immediately preceding December 31 or such lesser number as determined by our board of directors. The 2017 Plan automatically increased by 1,076,877 shares as of January 1, 2019.

13


Employee Stock Purchase Plan
On January 12, 2017, our board of directors and stockholders approved and adopted the 2017 Employee Stock Purchase Plan or the ESPP. The ESPP became effective upon the execution and delivery of the underwriting agreement for our initial public offering on January 26, 2017. In addition, the number shares of stock available for issuance under the ESPP will be automatically increased each January 1, beginning on January 1, 2018, by 1% of the aggregate number of outstanding shares of our common stock as of the immediately preceding December 31 or such lesser number as determined by our board of directors. The ESPP automatically increased by 269,219 shares as of January 1, 2019.
Stock Options
Stock options granted to employees generally vest over a four-year period while stock options granted to directors vest over a one year period. Each have a maximum term of ten years from the date of grant, subject to earlier cancellation prior to vesting upon cessation of service to us. A summary of the activity related to stock option awards during the six months ended June 30, 2019 is as follows:
 
 
Shares
Subject to
Options
 
Weighted-Average
Exercise
Price per
Share
 
Weighted-Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value (in
thousands)
Outstanding at January 1, 2019
2,152,455

 
$
27.55

 

 


Granted
539,400

 
$
69.02

 
 
 
 
Exercises
(122,705
)
 
$
6.43

 
 
 
 
Forfeitures and cancellations
(57,117
)
 
$
69.45

 
 
 
 
Outstanding at June 30, 2019
2,512,033

 
$
36.53

 
7.27
 
$
70,414

Exercisable at June 30, 2019
1,398,990

 
$
19.46

 
6.06
 
$
57,308


Stock-Based Compensation Expense
The estimated fair values of stock option awards granted to employees were determined on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:
 
Six Months Ended
June 30,
 
2019
 
2018
Risk-free interest rate
2.5
%
 
2.6
%
Expected volatility
68.5
%
 
68.5
%
Expected dividend yield
%
 
%
Expected term (in years)
6.25

 
6.25

Weighted average grant date fair value per share
$
44.02

 
$
67.05


We determine the appropriate risk free interest rate, expected term for employee stock-based awards, contractual term for non-employee stock-based awards, and volatility assumptions. The weighted-average expected option term for employee and non-employee stock based awards reflects the application of the simplified method, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Estimated volatility incorporates historical volatility of our stock price as well as similar entities whose share prices are publicly available. The risk free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected or contractual term of the stock-based payment awards. The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future.

14


Total non-cash stock-based compensation expense for all stock awards that was recognized in the consolidated statements of operations and comprehensive loss is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Research and development
$
1,649

 
$
899

 
$
2,889

 
$
1,655

General and administrative
1,994

 
1,649

 
3,621

 
3,153

Total
$
3,643

 
$
2,548

 
$
6,510

 
$
4,808


 
At June 30, 2019, there was $37.7 million of unrecognized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted average vesting period of 2.69 years.
9. Australia Research and Development Tax Incentive
Our Australian subsidiary, which conducts core research and development activities on our behalf, is eligible to receive a 43.5% refundable tax incentive for qualified research and development activities during fiscal 2019 and fiscal 2018. For the three and six months ended June 30, 2019, there were no eligible expenditures incurred in Australia, therefore no tax incentive receivable was recorded. For the three and six months ended June 30, 2018, we recorded a less than $0.1 million reduction to research and development expenses in the consolidated statements of operations and comprehensive loss for eligible expenses. We received $0.2 million and $1.5 million in cash during the six months ended June 30, 2019 and 2018, respectively, related to the tax incentive. As of June 30, 2019, we had no remaining tax incentive receivable from the Australian government.
10. Commitments and Contingencies
Operating Leases
We have two non-cancellable office leases with remaining lease terms of approximately 2.25 years, each of which are classified as operating leases. Only one of our leases has remaining renewal options, which includes three options to renew for one additional year. The exercise of lease renewal options is at our sole discretion, which we currently do not anticipate exercising and as such were not recognized as part of our ROU asset and lease liabilities. Our lease payments are fixed, and we recognize lease expense for these leases on a straight-line basis over the lease term. Operating lease ROU assets and lease liabilities are recorded based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we used our incremental borrowing rate based on the information available at effective date of adoption in determining the present value of future payments. The weighted-average discount rate used was 8.59%.
Our balance sheet includes our ROU assets and lease liabilities as follows (in thousands):
Leases
 
Classification on the Balance Sheet
 
June 30, 2019
Operating ROU assets
 
Other long-term assets
 
$
1,764

Operating lease liabilities
 
Other current liabilities
 
819

Operating lease liabilities
 
Other long-term liabilities
 
1,105


The following costs are included in our cash flow statement (in thousands):
Leases
 
Classification on the Cash Flow
 
Six Months Ended
June 30, 2019
Operating lease cost
 
Operating
 
$
440

Cash paid for amounts included in the measurement of lease liabilities
 
Operating
 
463


At June 30, 2019, the future minimum annual obligations under non-cancellable operating lease commitments in excess of one year are as follows (in thousands):

15


Years Ending December 31,
 
2019
$
474

2020
968

2021
677

2022

2023

Thereafter

Total minimum payments required
2,119

Less imputed interest
(195
)
Total
$
1,924


As previously disclosed in our 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, future minimum annual obligations under non-cancellable operating lease commitments in excess of one year would have been as follows:
Years Ending December 31,
 
2019
$
937

2020
969

2021
726

2022

2023

Thereafter

Total minimum payments required
$
2,632




16


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (Quarterly Report) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and section 27A of the Securities Act of 1933, as amended (Securities Act). The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” and “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
The forward-looking statements in this report include, among other things, statements about:
the success, cost and timing of our product candidate development activities and ongoing and planned clinical trials;
our plans to develop and commercialize antibodies, including our lead product candidates etokimab for patients with severe allergic and atopic diseases and ANB019 for patients with generalized pustular psoriasis, or GPP, and palmoplantar pustulosis, or PPP;
the likelihood that the clinical data generated in any study we performed, are performing or plan to perform in a non-US jurisdiction will be subsequently accepted by the U.S. Food and Drug Administration, or FDA and/or by foreign regulatory authorities outside of the jurisdiction where the study was being performed;
the timing and ability of our collaborators to develop and commercialize our partnered product candidates;
the potential benefits and advantages of our product candidates and approaches versus those of our competitors;
our ability to execute on our strategy, including advancing our lead product candidates, identifying emerging opportunities in key therapeutic areas, continuing to expand our wholly-owned pipeline and retaining rights to strategic products in key commercial markets;
our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;
the timing of and our ability to obtain and maintain regulatory approvals for etokimab and ANB019 and our other product candidates;
our ability to develop our product candidates;
the rate and degree of market acceptance and clinical utility of any approved product candidates;
the size and growth potential of the markets for any approved product candidates, and our ability to serve those markets;
our commercialization, marketing and manufacturing capabilities and strategy;
our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;
regulatory developments in the United States, the United Kingdom, Australia and other foreign countries;
the success of competing therapies that are or may become available;
our ability to attract and retain key scientific or management personnel;
our use of the net proceeds from our public offerings;
our ability to identify additional products or product candidates with significant commercial potential that are consistent with our commercial objectives; and
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors,” and elsewhere in this Quarterly Report. Moreover, we operate in a competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors,

17


may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements to conform these statements to actual results or to changes in our expectations, except as required by law.
You should read this Quarterly Report with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
Unless the context indicates otherwise, as used in this Quarterly Report, the terms “AnaptysBio,” “company,” “we,” “us” and “our” refer to AnaptysBio, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted. AnaptysBio is our common law trademark. This Quarterly Report contains additional trade names, trademarks and service marks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

18


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 unaudited consolidated financial statements and related notes for the six months ended June 30, 2019, included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2018, included in the Company’s Form 10-K. This discussion and other sections of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included in Part II, Item 1A of this Quarterly Report. You should also carefully read “Special Note Regarding Forward-Looking Statements”.
Overview
We are a clinical stage biotechnology company developing first-in-class antibody product candidates focused on unmet medical needs in inflammation. We develop our product candidates to address emerging biological targets using our proprietary antibody discovery technology platform, which is based upon a breakthrough understanding of the natural process of antibody generation, known as somatic hypermutation, or SHM, and replicates this natural process of antibody generation in vitro. Our strategy is to advance the development and commercialization of our proprietary product candidates, and for certain programs, establish partnerships with leading biopharmaceutical companies where we retain certain development and commercialization rights in the United States. Our most advanced wholly-owned antibody programs, etokimab and ANB019, neutralize therapeutic targets that are genetically associated with severe inflammatory disorders in humans.
Etokimab, our anti-IL-33 antibody previously referred to as ANB020, inhibits the activity of the interleukin-33 cytokine, or IL-33, which we believe is broadly applicable to the treatment of atopic inflammatory disorders, such as moderate-to-severe atopic dermatitis, eosinophilic asthma, chronic rhinosinusitis with nasal polyps, or CRSwNP, and potentially other allergic conditions.
We completed a Phase 2a proof-of-concept trial of etokimab in 12 moderate-to-severe adult atopic dermatitis patients in late 2017 and believe the data from this trial, presented at the 2018 American Academy of Dermatology, or AAD, and 2018 European Academy of Allergy and Clinical Immunology, or EAACI, demonstrate proof-of-concept for etokimab in moderate-to-severe adult atopic dermatitis and suggest that etokimab may provide meaningful differentiation in terms of patient convenience. We are conducting a Phase 2b randomized, double-blinded, placebo-controlled, multi-dose study in approximately 300 adult patients with moderate-to-severe atopic dermatitis, also referred to as the ATLAS trial, to assess different dose levels and dosing frequencies of subcutaneously-administered etokimab with top-line data expected in the fourth quarter of 2019.
We recently completed a Phase 2a randomized, placebo-controlled, single dose study of etokimab in 25 severe adult eosinophilic asthma patients. We presented full data from this trial at the 2019 EAACI, which demonstrated that a single dose of etokimab resulted in rapid and sustained lung function improvement as measured using Forced Expiratory Volume in One Second, or FEV1, patient reported outcomes associated with asthma symptoms, as measured using the Asthma Control Questionnaire 5 and biomarker levels as measured using blood eosinophils. We believe this trial supports the continued development of etokimab in eosinophilic asthma and plan to initiate, in the fourth quarter of 2019, a multi-dose Phase 2b randomized, double-blinded, placebo-controlled trial in 300-400 eosinophilic asthma patients where key endpoints will include annualized exacerbation reduction. We may also conduct clinical studies in other severe asthma subsets in the future.
We are conducting a randomized, placebo-controlled Phase 2 trial of etokimab in approximately 100 adult patients with CRSwNP, also referred to as the ECLIPSE trial, which is a debilitating atopic disorder associated with elevated IL-33 pathway signaling. We anticipate interim top-line data from this trial to be available in the fourth quarter of 2019.
Our ANB019 antibody inhibits the interleukin-36 receptor, or IL-36R, and is being developed for the treatment of rare inflammatory diseases including generalized pustular psoriasis, or GPP, and palmoplantar pustulosis, or PPP. We completed a Phase 1 clinical trial in healthy volunteers, which was presented at EAACI 2018, where ANB019 was well-tolerated by all subjects, no dose-limiting toxicities were observed, and no serious adverse events were reported among any subjects in the trial. We have subsequently initiated an open-label, multi-dose, single-arm Phase 2 trial of ANB019 in up to 10 GPP patients, also referred to as the GALLOP trial, where interim top-line data are anticipated in mid-2019. We have also initiated a randomized, double-blind, placebo-controlled approximately 50-patient multi-dose trial of ANB019 in PPP, also referred to as the POPLAR trial, where top-line data are anticipated in the first half of 2020.

19


In addition to etokimab and ANB019, our wholly-owned pipeline includes novel anti-inflammatory checkpoint receptor modulator antibodies that we believe are applicable for treatment of certain autoimmune diseases. We recently announced our third wholly-owned program ANB030, an anti-PD-1 agonist antibody program, which was developed using our proprietary antibody discovery platform. Preclinical data for ANB030 was recently presented at the 2019 Federation of Clinical Immunological Societies (FOCIS) Annual Meeting. We plan to focus future clinical development of ANB030 upon certain human autoimmune diseases where PD-1 checkpoint receptor function may be under-represented. We anticipate filing of an Investigational New Drug Application, or IND, for ANB030 in the fourth quarter of 2019.
In addition to our wholly-owned antibody programs, multiple AnaptysBio-developed antibody programs have been advanced to preclinical and clinical milestones under our collaborations. Our collaborations include an immuno-oncology-focused collaboration with TESARO, Inc. and TESARO Development, Ltd., or collectively TESARO, now a part of GlaxoSmithKline, and an inflammation-focused collaboration with Celgene Corporation, or Celgene, as discussed in Part I—Note 4, Collaborative Research and Development Agreements, above.
The following table summarizes certain key information about our wholly-owned and partnered product candidates:
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Components of Operating Results
Collaboration Revenue
We have not generated any revenue from product sales. Our revenue has been derived from amortization of upfront payments, research and development funding and milestone payments under collaboration and license agreements with our collaborators. From inception through June 30, 2019, we have received $81.6 million in cash in non-dilutive funding from our collaborators.

20


Research and Development Expense
Research and development expenses consist of costs associated with our research and development activities, including drug discovery efforts, preclinical and clinical development of our programs, and manufacturing. Our research and development expenses include:
External research and development expenses incurred under arrangements with third-parties, such as Contract Research Organizations, or CROs, consultants, members of our scientific and therapeutic advisory boards, and Contract Manufacturing Organizations, or CMOs;
Employee-related expenses, including salaries, benefits, travel and stock-based compensation;
Facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory supplies; and
License and sub-license fees.
We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received.
We recognize the Australian Research and Development Tax Incentive, or the Tax Incentive, as a reduction of research and development expense. The amounts are determined on a cost reimbursement basis based on our eligible research and development expenditures and are non-refundable, provided that in order to qualify for the Australian benefits we must have revenue of less than AUD $20.0 million during the reimbursable period and cannot be controlled by income tax exempt entities. The Tax Incentive is recognized when there is reasonable assurance that the Tax Incentive will be received, the relevant expenditure has been incurred, and the amount can be reliably measured as discussed in Part I Item 1— Note 9. Australia Research and Development Tax Incentive above.
We are conducting research and development activities primarily on inflammation programs. We have a research and development team that conducts antibody discovery, characterization, translational studies, IND-enabling preclinical studies and clinical development. We conduct some of our early research and preclinical activities internally and plan to rely on third parties, such as CROs and CMOs, for the execution of certain of our research and development activities, such as in vivo toxicology and pharmacology studies, drug product manufacturing and clinical trials.
We have completed Phase 1 and 2a trials for etokimab and Phase 1 trials for ANB019 and have ongoing Phase 2 and 2b clinical trials as well. We expect our research and development expenses to be higher for the foreseeable future as we continue to advance our product candidates.
General and Administrative Expense
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation for our executive, finance, legal, business development, human resource and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services.
Interest Expense
Interest expense consists of floating interest payments and amortization of discounts on our outstanding notes payable relating to our Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank, as amended, which we refer to as the Loan Agreement.
Interest Income
Interest income consists primarily of interest earned on our short-term and long-term investments, and is recognized when earned.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets,

21


liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K filed with the SEC on February 28, 2019, other than to leases upon adoption of ASC Topic 842, as discussed below.
Leases
Prior to January 1, 2019, we recognized our leases in accordance with ASC 840, Leases, and all current leases were classified as operating leases. Rent expense was recognized on a straight-line basis over the terms of the leases and, accordingly, we recorded the cumulative difference between cash rent payments and the recognition of rent expense as a deferred rent liability. When an operating lease included lease incentives, such as a rent abatements or leasehold improvement allowances, or required fixed escalations of the minimum lease payments, the aggregate rental expense, including such incentives or increases, was recognized on a straight-line basis over the term of the lease.
Effective January 1, 2019, we adopted ASU 2016-02, ASC 842, Leases, under which all outstanding leases continued to be classified as operating leases. Rent expense is recognized on a straight-line basis. When an operating lease includes rent abatements or requires fixed escalations of the minimum lease payments, the aggregate rental expense is recognized on a straight-line basis over the term of the lease. When an operating lease includes lease incentives such as leasehold improvement allowances, the lease incentive is included in the right-of-use asset “ROU”. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. We account for fixed lease components separately from non-lease components.
Results of Operations - Comparison of the Three and Six Months Ended June 30, 2019 and 2018
Collaboration Revenue
We recognized $5.0 million in collaboration revenue for the three and six months ended June 30, 2019 related to a milestone for the initiation of a Phase 3 trial in a second indication for dostarlimab, the anti-PD-1 antagonist antibody partnered with TESARO, compared to no collaboration revenue for the three and six months ended June 30, 2018. We expect that any collaboration revenue we generate will continue to fluctuate from period to period as a result of the timing and amount of milestones from our existing collaborations.
Research and Development Expenses
Research and development expenses were $27.4 million during the three months ended June 30, 2019 compared to $10.6 million during the three months ended June 30, 2018 for an increase of $16.8 million, primarily due to a $9.3 million increase in outside services for preclinical and manufacturing expenses, a $4.9 million increase in clinical expenses, a $1.5 million increase in internal costs, including salaries and related expenses such as stock compensation expense, and a $0.7 million increase in professional fees.
Research and development expenses were $48.0 million during the six months ended June 30, 2019 compared to $22.4 million during the six months ended June 30, 2018 for an increase of $25.6 million, primarily due to a $10.7 million increase in outside services for preclinical and manufacturing expenses, a $9.8 million increase in clinical expenses, a $3.0 million increase in internal costs, including salaries and related expenses such as stock compensation expense and a $1.2 million increase in professional fees.
We do not track fully burdened research and development costs separately for each of our drug candidates. We review our research and development expenses by focusing on external development and internal development costs. External development expenses consist of costs associated with our external preclinical and clinical trials, including pharmaceutical development and manufacturing. Included in preclinical and other unallocated costs are external corporate overhead costs that are not specific to any one program. Internal costs consist of salaries and wages, share-based compensation and benefits, which are not tracked by product candidate as several of our departments support multiple product candidate research and development programs. The following table summarizes the external costs attributable to each program and internal costs:

22


 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
Increase
 
2019
 
2018
 
Increase
External Costs
 
 
 
 
 
 
 
 
 
 
 
Etokimab
$
11,667

 
$
3,660

 
$
8,007

 
$
19,163

 
$
6,659

 
$
12,504

ANB019
5,108

 
1,917

 
3,191

 
10,165

 
5,943

 
4,222

Preclinical and other unallocated costs
5,695

 
1,618

 
4,077

 
9,124

 
3,218

 
5,906

Total External Costs
22,470

 
7,195

 
15,275

 
38,452

 
15,820

 
22,632

Internal Costs
4,880

 
3,388

 
1,492

 
9,529

 
6,573

 
2,956

Total Costs
$
27,350

 
$
10,583

 
$
16,767

 
$
47,981

 
$
22,393

 
$
25,588

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and as we conduct additional clinical trials. 
General and Administrative Expenses
General and administrative expenses were $4.3 million during the three months ended June 30, 2019 compared to $3.8 million during the three months ended June 30, 2018 for an increase of $0.5 million, primarily due to a $0.6 million increase in personnel costs including stock compensation expense.
General and administrative expenses were $8.4 million during the six months ended June 30, 2019 compared to $7.8 million during the six months ended June 30, 2018 for an increase of $0.6 million, primarily due to a $1.2 million increase in personnel costs including stock compensation expense, partially offset by a $0.4 million decrease in professional fees.
We expect that our general and administrative expenses will increase for the foreseeable future as we incur additional costs associated with being a publicly traded company, including legal, auditing and filing fees, additional insurance premiums, investor relations expenses and general compliance and consulting expenses. We also expect our intellectual property related legal expenses, including those related to preparing, filing, prosecuting and maintaining patent applications, to increase as our intellectual property portfolio expands.
Interest Expense
Interest expense was $0.3 million and $0.6 million during the three and six months ended June 30, 2019, respectively, and represented an effective interest rate of approximately 13.27% as of June 30, 2019, on an outstanding principal balance of $4.4 million. Interest expense was $0.4 million and $0.9 million during the three and six months ended June 30, 2018, respectively, and represented an effective interest rate of 13.08% on an outstanding principal balance of $11.9 million.
Interest Income
Interest income was $3.0 million and $1.3 million during the three months ended June 30, 2019 and 2018, respectively, and was $5.9 million and $2.5 million during the six months ended June 30, 2019 and 2018, respectively, which primarily related to our short-term and long-term investments, the balance of which increased as a result of the investment of proceeds from our follow-on offering in September 2018.
Other Income (Expense), Net
Other income (expense), net was a loss of less than $0.1 million during each of the three months ended June 30, 2019 and 2018, and a loss of less than $0.1 million and $0.1 million during the six months ended June 30, 2019 and 2018, respectively, and primarily related to foreign exchange transactions through our Australian subsidiary and with our foreign CROs and CMOs.
Liquidity and Capital Resources
From our inception through June 30, 2019, we have received an aggregate of $718.3 million to fund our operations which included $617.6 million from the sale of equity securities, $81.6 million from our collaboration agreements and $19.1 million from venture debt. As of June 30, 2019, we had $467.9 million in cash, cash equivalents and investments.

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In addition to our existing cash, cash equivalents and investments, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain nonclinical, clinical, regulatory and sales-based events, and royalty payments under our collaboration agreements. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities and is uncertain at this time. Our rights to payments under our collaboration agreements are our only committed external source of funds.
We may seek to obtain additional financing in the future through equity or debt financings or through collaborations or partnerships with other companies. If we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially adversely affected.
Under our original Loan Agreement, as defined in Part I Item 1—Note 5. Notes Payable, we could borrow up to $15.0 million in three separate draws of $5.0 million each. In January 2016, we amended the Loan Agreement to combine Term B Loans and Term C Loans for a total of $10.0 million available for draw and delay the principal repayments for our Term A Loans from February 1, 2016 until February 1, 2017.
In December 2016, we further amended the Loan Agreement to (i) allow for the Term B Loans and Term C Loans to be drawn on December 30, 2016, (ii) delay principal repayments of all Term Loans until February 1, 2018 and (iii) amend the interest rate for each Term Loan. The Term B Loans and the Term C Loans were drawn on December 30, 2016; principal repayments began in February 2018. As of June 30, 2019, there are 7 equal monthly principal and interest payments remaining on the Term Loans, with final maturity in January 2020. The Term Loans bear interest equal to the greater of 3-month U.S. LIBOR plus 6.37% or 7.3%. The interest rate was 8.87% as of June 30, 2019.
Funding Requirements
Our primary uses of capital are, and we expect will continue to be, third-party clinical and preclinical research and development services, including manufacturing, laboratory and related supplies, compensation and related expenses, legal, patent and other regulatory expenses and general overhead costs. We have entered into agreements with certain vendors for the provision of services, including services related to commercial manufacturing, that we are unable to terminate for convenience. Under such agreements, we are contractually obligated to make certain minimum payments to the vendors, with the amounts to be based on the timing of the termination and the specific terms of the agreement.
Cash, cash equivalents and investments totaled $467.9 million as of June 30, 2019, compared to $500.2 million as of December 31, 2018. We believe that our existing cash, cash equivalents and investments will fund our current operating plan at least through the end of 2020. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2019 and 2018:
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
Net cash (used in) provided by:
 
 
 
Operating activities
$
(31,616
)
 
$
(21,356
)
Investing activities
67,533

 
(916
)
Financing activities
(2,961
)
 
(1,860
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
32,956

 
$
(24,132
)
Operating Activities
Net cash used in operating activities during the six months ended June 30, 2019 of $31.6 million was primarily due to our net loss of $46.0 million, adjusted for addbacks for non-cash expenses of $5.2 million which includes stock-based compensation and net increases in working capital of $9.3 million. Net cash used in operating activities during the six months ended June 30, 2018 of $21.4 million was primarily due to our net loss of $28.7 million, adjusted for non-cash expenses of $5.0 million which includes stock-based compensation and increases in working capital of $2.4 million.

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Investing Activities
Net cash provided by (used in) investing activities during the six months ended June 30, 2019 and 2018 primarily relates to the timing of our investment maturity, which was used to fund our operating expenses.
Financing Activities
The net cash used in financing activities during the six months ended June 30, 2019 of $3.0 million primarily related to principal payments of $3.8 million made on our Term Loans, offset by $0.8 million in proceeds from the issuance of common stock upon the exercise of stock options. The cash used in financing activities during the six months ended June 30, 2018 of $1.9 million was primarily related to principal payments of $3.1 million made on our Term Loans offset by proceeds of $1.5 million from the issuance of common stock upon the exercise of stock options.
Contractual Obligations
Operating Leases
We have two non-cancellable office leases with remaining lease terms of approximately 2.25 years, each of which are classified as operating leases. Only one of our leases has remaining renewal options, which includes three options to renew for one additional year. The exercise of lease renewal options is at our sole discretion, which we currently do not anticipate exercising and as such were not recognized as part of our ROU asset and lease liabilities. Our lease payments are fixed, and we recognize lease expense for these leases on a straight-line basis over the lease term. Operating lease ROU assets and lease liabilities are recorded based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we used our incremental borrowing rate based on the information available at effective date of adoption in determining the present value of future payments. The weighted-average discount rate used was 8.59%.
At June 30, 2019, the future minimum annual obligations under non-cancellable operating lease commitments are $0.5 million, $1.0 million, and $0.7 million, for the remainder of fiscal years ending 2019, 2020, and 2021, respectively.
Other Commitments and Contingencies
We have entered into agreements with certain vendors for the provision of goods and services, which includes manufacturing services with contract manufacturing organizations and development services with contract research organizations. These agreements may include certain provisions for purchase obligations and termination obligations that could require payments for the cancellation of committed purchase obligations or for early termination of the agreements. The amount of the cancellation or termination payments vary and are based on the timing of the cancellation or termination and the specific terms of the agreement.
Guarantees and Indemnifications
We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to certain of these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party for third-party claims in connection with our breach of the agreement, our negligence or willful misconduct in connection with the agreement, or any trade secret, copyright, patent or other intellectual property infringement claim with respect to our technology. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in the future, but have not yet been made.
We indemnify our officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving in such capacity, as permitted under Delaware law, in accordance with our certificate of incorporation and bylaws, and pursuant to agreements providing for indemnification entered into with our officers and directors. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.
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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2019, there have been no material changes surrounding our market risk, including interest rate risk, inflation risk, and foreign currency exchange risk from the discussion provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Fiscal 2018 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. As of June 30, 2019, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at a reasonable assurance level.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in the opinion of management, would have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm, and other factors.