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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 September 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 November 5, 2019, there were 27,133,459 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)
 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
182,898

 
$
113,596

Australian tax incentive receivable

 
174

Short-term investments
238,104

 
313,486

Prepaid expenses and other current assets
3,595

 
6,960

Total current assets
424,597

 
434,216

Property and equipment, net
1,695

 
1,445

Long-term investments
23,418

 
73,128

Other long-term assets
1,735

 
148

Restricted cash
60

 
60

Total assets
$
451,505

 
$
508,997

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
10,522

 
$
5,443

Accrued expenses
15,286

 
8,761

Notes payable, current portion
3,077

 
7,574

Other current liabilities
845

 
58

Total current liabilities
29,730

 
21,836

Other long-term liabilities
883

 
796

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

 

Common stock, $0.001 par value, 500,000 shares authorized, 27,098 shares and 26,922 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
27

 
27

Additional paid in capital
644,148

 
633,251

Accumulated other comprehensive income (loss)
480

 
(223
)
Accumulated deficit
(223,763
)
 
(146,690
)
Total stockholders’ equity
420,892

 
486,365

Total liabilities and stockholders’ equity
$
451,505

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Collaboration revenue
$

 
$
5,000

 
$
5,000

 
$
5,000

Operating expenses:
 
 
 
 
 
 
 
Research and development
29,931

 
17,883

 
77,912

 
40,276

General and administrative
3,814

 
4,004

 
12,262

 
11,783

Total operating expenses
33,745

 
21,887

 
90,174

 
52,059

Loss from operations
(33,745
)
 
(16,887
)
 
(85,174
)
 
(47,059
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest expense
(240
)
 
(400
)
 
(841
)
 
(1,287
)
Interest income
2,757

 
1,369

 
8,702

 
3,851

     Other income (expense), net
144

 
(40
)
 
110

 
(167
)
Total other income (expense), net
2,661

 
929

 
7,971

 
2,397

Loss before income taxes
(31,084
)
 
(15,958
)
 
(77,203
)
 
(44,662
)
Provision for income taxes
51

 

 
130

 

Net loss
(31,033
)
 
(15,958
)
 
(77,073
)
 
(44,662
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (loss) income on available for sale securities, net of tax of ($25), $0, $189 and $0, respectively
(94
)
 
136

 
703

 
(115
)
Comprehensive loss
$
(31,127
)
 
$
(15,822
)
 
$
(76,370
)
 
$
(44,777
)
Net loss per common share:
 
 
 
 
 
 
 
      Basic and diluted
$
(1.15
)
 
$
(0.66
)
 
$
(2.85
)
 
$
(1.86
)
Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
      Basic and diluted
27,058

 
24,146

 
27,022

 
23,961

 
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

Shares issued under employee stock plans
53

 


 
454

 


 


 
454

Stock-based compensation


 


 
3,144

 


 


 
3,144

Comprehensive loss, net


 


 


 
(94
)
 


 
(94
)
Net loss


 


 


 


 
(31,033
)
 
(31,033
)
Balance, September 30, 2019
27,098

 
$
27

 
$
644,148

 
$
480

 
$
(223,763
)
 
$
420,892


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

Shares issued for public offerings, net of underwriters' fees
2,530

 
3

 
227,473

 
 
 
 
 
227,476

Total offering costs
 
 
 
 
(157
)
 
 
 
 
 
(157
)
Shares issued under employee stock plans
190

 


 
669

 


 


 
669

Stock-based compensation


 


 
2,532

 


 


 
2,532

Comprehensive income, net


 


 


 
136

 


 
136

Net loss


 


 


 


 
(15,958
)
 
(15,958
)
Balance, September 30, 2018
26,749

 
$
27

 
$
629,887

 
$
(541
)
 
$
(129,696
)
 
$
499,677


See accompanying notes to unaudited consolidated financial statements.

4


ANAPTYSBIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended
September 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(77,073
)
 
$
(44,662
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
374

 
209

Stock-based compensation
9,654

 
7,340

Accretion/amortization of investments, net
(2,449
)
 
(555
)
Non-cash interest expense
503

 
481

Changes in operating assets and liabilities:
 
 
 
Receivable from collaborative partners

 
(5,000
)
Australian tax incentive receivable
174

 
1,428

Prepaid expenses and other assets
1,925

 
(1,403
)
Accounts payable and other liabilities
13,180

 
5,946

Net cash used in operating activities
(53,712
)
 
(36,216
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of investments
(175,049
)
 
(123,995
)
Sales and maturities of investments
303,146

 
148,551

Purchases of property and equipment
(701
)
 
(857
)
Net cash provided by investing activities
127,396

 
23,699

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from public offerings, net of underwriters' fees

 
227,476

Proceeds from issuance of common stock, upon the exercise of stock options
1,243

 
2,138

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

 
76

Payments on notes payable
(5,625
)
 
(5,000
)
Proceeds for offering costs, net

 
46

Net cash (used in) provided by financing activities
(4,382
)
 
224,736

Net increase in cash, cash equivalents, and restricted cash
69,302

 
212,219

Cash, cash equivalents and restricted cash, beginning of period
113,656

 
81,249

Cash, cash equivalents and restricted cash, end of period
$
182,958

 
$
293,468

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Interest paid
$
384

 
$
835

Non-cash investing and financing activities:
 
 
 
Amounts accrued for property and equipment
$
82

 
$
160

Amounts accrued for offering costs
$

 
$
241


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 nine months ended September 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
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Options to purchase common stock
2,467

 
2,402

 
2,451

 
2,514

Warrants to purchase common stock

 

 

 
3

Total
2,467

 
2,402

 
2,451

 
2,517



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


3. Balance Sheet Accounts and Supplemental Disclosures
Property and Equipment
Property and equipment consist of the following:
(in thousands)
September 30, 2019
 
December 31, 2018
Laboratory equipment
$
4,869

 
$
4,287

Office furniture and equipment
811

 
780

Leasehold improvements
575

 
575

Property and equipment, gross
6,255

 
5,642

Less: accumulated depreciation and amortization
(4,560
)
 
(4,197
)
Total property and equipment, net
$
1,695

 
$
1,445


 
Accrued Expenses
Accrued expenses consist of the following:
(in thousands)
September 30, 2019
 
December 31, 2018
Accrued compensation and related expenses
$
2,353

 
$
2,421

Accrued professional fees
593

 
442

Accrued research, development and manufacturing expenses
12,027

 
5,577

Other
313

 
321

Total accrued expenses
$
15,286

 
$
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 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.

8


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 September 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 nine months ended September 30, 2019, we recognized and collected one clinical milestone for $5.0 million. 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 September 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 $0 and $5.0 million in revenue under this agreement during the three and nine months ended September 30, 2019, respectively, and $5.0 million revenue during each of the three and nine months ended September 30, 2018.
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.

9


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 September 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 September 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 nine months ended September 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 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 September 30, 2019, there are 4 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 8.51% as of September 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

10


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 September 30, 2019, the carrying amount of the Term Loans was $3.1 million, which includes amortized final payment fees of $0.6 million and is classified as current liabilities as of September 30, 2019. The effective interest rate on the Term Loans at September 30, 2019 was 12.90%. As of September 30, 2019, future principal maturities of the Term Loans were $1.9 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 September 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 September 30, 2019
 
 
 
 
 
 
 
Money market funds(1)
$
180,355

 
$
180,355

 
$

 
$

Mutual funds(1)
7,092

 
7,092

 

 

U.S. Treasury securities(2)
88,821

 
88,821

 

 

Certificates of deposit(2)
5,440

 

 
5,440

 

Agency securities(2)
34,607

 

 
34,607

 

Commercial and corporate obligations(2)
132,654

 

 
132,654

 

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 or 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 September 30, 2019 and December 31, 2018 are presented below:
 
September 30, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Notes payable
$
3,077

 
$
3,225

 
$
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 September 30, 2019 are as follows:
(in thousands)
Amortized
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Total
Fair Value
Agency securities(1)
$
34,524

 
$
85

 
$
(2
)
 
$
34,607

Certificates of deposit(2)
5,386

 
54

 

 
5,440

Commercial and corporate obligations(3)
132,301

 
354

 
(1
)
 
132,654

U.S. Treasury securities(4)
88,587

 
240

 
(6
)
 
88,821

     Total available-for-sale investments
$
260,798

 
$
733

 
$
(9
)
 
$
261,522

(1) 
Of our outstanding agency securities, $29.6 million have maturity dates of less than one year and $5.0 million have a maturity date of between one to two years as of September 30, 2019.
(2) 
Of our outstanding certificates of deposit, $2.4 million have a maturity date of less than one year and $3.0 million have a maturity date of between one to two years as of September 30, 2019.
(3) 
Of our outstanding commercial and corporate obligations, $124.9 million have maturity dates of less than one year and $7.8 million have a maturity date of between one to two years as of September 30, 2019.
(4) 
Of our outstanding U.S. Treasury securities, $81.3 million have maturity dates of less than one year and $7.6 million have a maturity date of between one to two years as of September 30, 2019.
7. Stockholders’ Equity
Common Stock
Of the 500,000,000 shares of common stock authorized, 27,098,042 shares were issued and outstanding as of September 30, 2019. Common stock reserved for future issuance upon the exercise, issuance or conversion of the respective equity instruments at September 30, 2019 are as follows:
 
Issued and Outstanding:
 
Stock options
2,319,350

Shares Reserved For:
 
2017 Equity Incentive Plan
2,754,781

2017 Employee Stock Purchase Plan
725,132

Total
5,799,263


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 nine months ended September 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
584,868

 
$
67.33

 
 
 
 
Exercises
(176,220
)
 
$
7.05

 
 
 
 
Forfeitures and cancellations
(241,753
)
 
$
52.28

 
 
 
 
Outstanding at September 30, 2019
2,319,350

 
$
36.56

 
6.70
 
$
32,251

Exercisable at September 30, 2019
1,446,535

 
$
21.05

 
5.45
 
$
29,966


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:
 
Nine Months Ended
September 30,
 
2019
 
2018
Risk-free interest rate
2.5
%
 
2.6
%
Expected volatility
68.4
%
 
68.0
%
Expected dividend yield
%
 
%
Expected term (in years)
6.25

 
6.25

Weighted average grant date fair value per share
$
43.08

 
$
63.49


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.

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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
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Research and development
$
1,580

 
$
837

 
$
4,469

 
$
2,492

General and administrative
1,564

 
1,695

 
5,185

 
4,848

Total
$
3,144

 
$
2,532

 
$
9,654

 
$
7,340


 
At September 30, 2019, there was $30.9 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 2.70 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 nine months ended September 30, 2019, there were no eligible expenditures incurred in Australia, therefore no tax incentive receivable was recorded. For the three and nine months ended September 30, 2018, we recorded a less than $0.1 million and $0.1 million, respectively, 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 nine months ended September 30, 2019 and 2018, respectively, related to the tax incentive. As of September 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 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
 
September 30, 2019
Operating ROU assets
 
Other long-term assets
 
$
1,586

Operating lease liabilities
 
Other current liabilities
 
845

Operating lease liabilities
 
Other long-term liabilities
 
883


The following costs are included in our cash flow statement (in thousands):
Leases
 
Classification on the Cash Flow
 
Nine Months Ended
September 30, 2019
Operating lease cost
 
Operating
 
$
660

Cash paid for amounts included in the measurement of lease liabilities
 
Operating
 
698



15


At September 30, 2019, the future minimum annual obligations under non-cancellable operating lease commitments in excess of one year are as follows (in thousands):
Years Ending December 31,
 
2019
$
239

2020
968

2021
677

2022

2023

Thereafter

Total minimum payments required
1,884

Less imputed interest
(156
)
Total
$
1,728


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 (in thousands):
Years Ending December 31,
 
2019
$
937

2020
969

2021
726

2022

2023

Thereafter

Total minimum payments required
$
2,632




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11. Subsequent Event

On November 8, 2019, we announced topline data from our ATLAS trial, a Phase 2b randomized, double-blinded, placebo-controlled, multi-dose study in approximately 300 adult patients treated with etokimab in moderate-to-severe atopic dermatitis. Each of the etokimab dosing arms failed to meet the primary endpoint of the trial, which was demonstration of statistically greater improvement in the Eczema Area and Severity Index (EASI) relative placebo at week 16.


17


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,

18


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.

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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 nine months ended September 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, are designed to 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.
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, suggest that etokimab may provide meaningful differentiation in terms of patient convenience. We recently announced topline data from our ATLAS trial, a Phase 2b randomized, double-blinded, placebo-controlled, multi-dose study in approximately 300 adult patients treated with etokimab in moderate-to-severe atopic dermatitis. Each of the etokimab dosing arms failed to meet the primary endpoint of the trial, which was demonstration of statistically greater improvement in the Eczema Area and Severity Index (EASI) relative placebo at week 16. We will be receiving additional data and plan to provide a detailed update in the first quarter of 2020.
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. As a result of the topline data from our ATLAS trial, the Company has decided to postpone the initiation of its Phase 2b etokimab clinical trial in eosinophilic asthma, a multi-dose, randomized, double-blinded, placebo-controlled trial in 300-400 patients, until it has the opportunity to analyze the full data set from the ATLAS trial.
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 first quarter of 2020.
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 are conducting 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 an interim analysis, announced in September 2019, was conducted after the first two patients completed 16-weeks (Day 113) with ANB019 monotherapy. Both patients achieved the primary endpoint of disease improvement at Day 29 and Day 113 without requiring rescue therapy. Patients demonstrated rapid and sustained modified Japanese Dermatology Association (mJDA) improvement and complete clearance of skin pustules from Day 8 through Day 113. C-reactive protein, or CRP, levels decreased to nearly normal in both patients and genotypic testing of these two patients indicated that ANB019 may be broadly applicable to pustular disease patients without a requirement for genetic screening.

20


Enrollment is ongoing in GALLOP and we anticipate additional clinical data and a regulatory strategy update for the development of ANB019 in GPP during 2020. We are also conducting 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.
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 presented at the 2019 Federation of Clinical Immunological Societies (FOCIS) Annual Meeting in June 2019. 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 an Investigational New Drug Application, or IND, for ANB030 in the fourth quarter of 2019 and initiation of a Phase 1 healthy volunteer clinical trial in 2020.
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:
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13190206&doc=11
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 September 30, 2019, we have received $86.6 million in cash in non-dilutive funding from our collaborators.

21


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,

22


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 Nine Months Ended September 30, 2019 and 2018
Collaboration Revenue
We recognized $0 million and $5.0 million in collaboration revenue for the three and nine months ended September 30, 2019, respectively, 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 $5.0 million collaboration revenue for both the three and nine months ended September 30, 2018 related to a milestone for the initiation of a Phase 3 trial in a first indication for dostarlimab. 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 $29.9 million during the three months ended September 30, 2019 compared to $17.9 million during the three months ended September 30, 2018 for an increase of $12.0 million, primarily due to a $3.5 million increase in outside services for preclinical and manufacturing expenses, a $6.4 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 $0.6 million increase in professional fees.
Research and development expenses were $77.9 million during the nine months ended September 30, 2019 compared to $40.3 million during the nine months ended September 30, 2018 for an increase of $37.6 million, primarily due to a $14.8 million increase in outside services for preclinical and manufacturing expenses, a $16.1 million increase in clinical expenses, a $4.4 million increase in internal costs, including salaries and related expenses such as stock compensation expense and a $1.5 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:

23


 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
2019
 
2018
 
Increase/(Decrease)
 
2019
 
2018
 
Increase
External Costs
 
 
 
 
 
 
 
 
 
 
 
Etokimab
$
13,934

 
$
7,038

 
$
6,896

 
$
33,214

 
$
13,857

 
$
19,357

ANB019