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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020


☐	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: 001-38653

Principia Biopharma Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	26-3487603
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
220 East Grand Avenue South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (650) 416-7700

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, 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)		Name of each exchange on which registered
Common Stock, Par Value $0.0001 Per Share	PRNB		The Nasdaq Global Select Market

As of July 31, 2020, the registrant had 33,208,537 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	Mine Safety Disclosures	73
Item 5.	Other Information	73
Item 6.	Exhibits	74
Signatures		75

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. 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, 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	170,486		$	39,537
Short-term marketable securities		146,047			276,043
Prepaid expenses and other current assets		52,889			4,165
Total current assets		369,422			319,745
Property and equipment, net		9,002			9,687
Operating lease right-of-use asset		6,483			—
Restricted cash		567			567
Long-term marketable securities		—			52,257
Other long-term assets		480			480
Total assets	$	385,954		$	382,736
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,240		$	1,850
Deferred rent, current portion		—			1,181
Operating lease liability, current portion		1,896			—
Accrued research and development liabilities		12,744			5,791
Accrued other liabilities		936			602
Accrued compensation		4,897			6,715
Total current liabilities		21,713			16,139
Long-term deferred rent		—			7,619
Long-term operating lease liability		12,801			—
Commitments and contingencies (Note 7)
Stockholders' equity
Common stock, $0.0001 par value, 500,000,000 shares authorized at June 30, 2020 and December 31, 2019; 33,161,289 and 32,950,836 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		3			3
Additional paid-in capital		558,538			544,709
Accumulated other comprehensive income		331			9
Accumulated deficit		(207,432	)		(185,743	)
Total stockholders' equity		351,440			358,978
Total liabilities and stockholders’ equity	$	385,954		$	382,736

See accompanying notes.

PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2020		2019			2020			2019
Revenue	$	50,000	$	30,000		$	50,000		$	35,160
Operating expenses:
Research and development		30,888		18,718			57,630			34,241
General and administrative		9,231		5,233			16,600			9,740
Total operating expenses		40,119		23,951			74,230			43,981
Income (loss) from operations		9,881		6,049			(24,230	)		(8,821	)
Other income (expense), net		199		(42	)		199			(41	)
Interest income		730		1,108			2,342			2,290
Net income (loss)	$	10,810	$	7,115		$	(21,689	)	$	(6,572	)
Net income (loss) per share
Basic	$	0.33	$	0.30		$	(0.66	)	$	(0.28	)
Diluted	$	0.31	$	0.28		$	(0.66	)	$	(0.28	)
Weighted-average shares used to calculate net income (loss) per share
Basic		33,087,340		23,927,172			33,040,547			23,896,788
Diluted		35,311,938		25,792,101			33,040,547			23,896,788

See accompanying notes.

PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020			2019
Net income (loss)	$	10,810	$	7,115	$	(21,689	)	$	(6,572	)
Other comprehensive income:
Net unrealized gain on available-for-sale securities		266		90		322			239
Comprehensive income (loss)	$	11,076	$	7,205	$	(21,367	)	$	(6,333	)

See accompanying notes.

PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

	Common Stock				Additional		Accumulated Other					Total
	Number of Shares		$0.0001 Par Value		Paid-In Capital		Comprehensive Income		Accumulated Deficit			Stockholders' Equity
Balance at December 31, 2019		32,950,836	$	3	$	544,709	$	9	$	(185,743	)	$	358,978
Stock-based compensation expense		—		—		4,389		—		—			4,389
Exercise of stock options and vesting of early exercise shares		75,989		—		524		—		—			524
Unrealized gain on available-for-sale securities		—		—		—		56		—			56
Net loss		—		—		—		—		(32,499	)		(32,499	)
Balance at March 31, 2020		33,026,825	$	3	$	549,622	$	65	$	(218,242	)	$	331,448
Stock-based compensation expense		—		—		6,947		—		—			6,947
Exercise of stock options and vesting of early exercise shares		102,605		—		1,181		—		—			1,181
Issuance of shares under the Employee Stock Purchase Plan		31,859		—		788		—		—			788
Unrealized gain on available-for-sale securities		—		—		—		266		—			266
Net income		—		—		—		—		10,810			10,810
Balance at June 30, 2020		33,161,289	$	3	$	558,538	$	331	$	(207,432	)	$	351,440

	Common Stock				Additional		Accumulated Other						Total
	Number of Shares		$0.0001 Par Value		Paid-In Capital		Comprehensive Income (Loss)			Accumulated Deficit			Stockholders' Equity
Balance at December 31, 2018		23,865,451	$	2	$	302,393	$	(128	)	$	(132,407	)	$	169,860
Stock-based compensation expense		—		—		2,205		—			—			2,205
Exercise of stock options and vesting of early exercise shares		1,230		—		7		—			—			7
Unrealized gain on available-for-sale securities		—		—		—		149			—			149
Cumulative-effect adjustment from adoption of ASC 606 accounting standard on revenue recognition		—		—		—		—			456			456
Net loss		—		—		—		—			(13,687	)		(13,687	)
Balance at March 31, 2019		23,866,681	$	2	$	304,605	$	21		$	(145,638	)	$	158,990
Stock-based compensation expense		—		—		3,476		—			—			3,476
Exercise of stock options and vesting of early exercise shares		20,057		—		135		—			—			135
Issuance of common stock upon exercise of warrants		20,860		—		—		—			—			—
Issuance of shares under the Employee Stock Purchase Plan		58,820		—		872		—			—			872
Unrealized gain on available-for-sale securities		—		—		—		90			—			90
Net income		—		—		—		—			7,115			7,115
Balance at June 30, 2019		23,966,418	$	2	$	309,088	$	111		$	(138,523	)	$	170,678

See accompanying notes.

PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2020			2019
Operating activities:
Net loss	$	(21,689	)	$	(6,572	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on marketable securities		(433	)		(962	)
Realized gain on sales of marketable securities		(199	)		—
Depreciation		1,010			835
Stock-based compensation		11,336			5,681
Deferred rent		—			220
Non-cash lease expense		272			—
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(48,724	)		1,608
Deferred revenue		—			(5,160	)
Accounts payable		(610	)		(52	)
Accrued liabilities		5,469			1,918
Lease liability		(858	)		—
Net cash used in operating activities		(54,426	)		(2,484	)
Investing activities:
Purchases of property and equipment		(325	)		(1,913	)
Maturities of marketable securities		169,033			103,535
Sales of marketable securities		101,876			—
Purchases of marketable securities		(87,702	)		(93,650	)
Net cash provided by investing activities		182,882			7,972
Financing activities:
Proceeds from issuances of common stock upon exercise of options and participation in employee stock purchase plan		2,493			1,014
Net cash provided by financing activities		2,493			1,014
Net increase in cash, cash equivalents and restricted cash		130,949			6,502
Cash, cash equivalents and restricted cash at beginning of period		40,104			35,138
Cash, cash equivalents and restricted cash, at end of period	$	171,053		$	41,640
Supplemental disclosures of cash flow information
Non cash tenant improvement allowance used for leasehold improvements	$	—		$	8,324
Purchases of property and equipment accrued but not yet paid	$	—		$	172

See accompanying notes.

PRINCIPIA BIOPHARMA INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

Description of Business

We, Principia Biopharma Inc. (“Principia”), are a late-stage biopharmaceutical company dedicated to bringing transformative therapies to patients with significant unmet medical needs in immune mediated diseases. We were incorporated on October 6, 2008, began operations in February 2011, and are headquartered in South San Francisco, California.

2. Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of Principia and our wholly-owned Australian subsidiary. All intercompany accounts, transactions and balances have been eliminated. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”).

These interim condensed consolidated financial statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal and recurring nature that are necessary for the fair presentation of our financial position and results of operations for the periods presented. The condensed consolidated balance sheets as of December 31, 2019 included herein were derived from audited consolidated financial statements as of that date. This quarterly report should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 10, 2020 (“2019 Annual Report”).

Use of Estimates

The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Significant estimates include amounts to determine the fair value of common stock-based awards, warrants, and other issuances, embedded derivatives, accruals for research and development costs and uncertain tax positions, and the estimated periods of performance used in the determination of collaboration revenues. We base our estimates on historical experience and on various other market specific and relevant assumptions that our management believes to be reasonable under the circumstances. Actual results could differ materially from our estimates.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. Our cash and cash equivalents are maintained with a limited number of financial institutions in the United States. Cash amounts on deposit have exceeded and will continue to exceed federally insured limits. We have not experienced any losses on our cash deposits. Additionally, we have established guidelines regarding the diversification of our investments in approved instruments, their credit quality ratings and maturities. The guidelines are designed to preserve principal balances and provide liquidity. Cash, cash equivalents and marketable securities totaled $316.5 million and $367.8 million at June 30, 2020 and December 31, 2019, respectively.

We are subject to a number of risks similar to other biopharmaceutical companies with development and pre-commercial operations, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical studies or clinical trials or delays in the progress of such trials, our reliance on third parties or partners to conduct our clinical trials, the need to obtain regulatory and marketing approvals for our drug candidates or to rely on partners to do so, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of our drug candidates, delays or problems in the supply of our drug candidates, loss of single source suppliers or failure to comply with manufacturing regulations, identifying other drug candidates, product development and the inherent uncertainty of clinical success, our right to develop and commercialize our drug candidates pursuant to the terms and conditions of the licenses granted to us, protection of proprietary technology, the ability to make or collect milestone, royalty or other payments due, or due to us, under any license or collaboration

agreements, and the need to secure and maintain adequate manufacturing arrangements with third parties. If we do not successfully commercialize or partner any of our drug candidates, we will be unable to generate product revenue or achieve profitability.

Cash and Cash Equivalents

We consider all highly liquid financial instruments with original maturities of 90 days or less at the date of purchase to be cash equivalents. Cash equivalents are stated at fair value.

Marketable Securities

We carry marketable securities consisting primarily of money market funds, U.S. Treasury securities and obligations of government-sponsored enterprises and corporate bonds and commercial paper. Marketable securities with maturities greater than 90 days at the time of purchase and that mature less than one year from the consolidated balance sheet date are classified as short-term. Marketable securities with a maturity date greater than one year at each balance sheet date are classified as long-term. All of our marketable securities are considered available-for-sale and carried at estimated fair values on the condensed consolidated balance sheets. Unrealized gains or losses, when such losses are not deemed to be credit-related, are excluded from net income and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity on the condensed consolidated balance sheets. Credit-related losses, if any, are recognized in earnings and limited to the difference between the security's fair value and its amortized cost basis. Realized gains and losses from sales of marketable securities are included in other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest earned on marketable securities is included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts and such amortization and accretion are included as a component of interest income.

Restricted Cash

As of June 30, 2020 and December 31, 2019, we had $0.6 million in long-term restricted cash for a lease security deposit. This amount is separated from cash and cash equivalents on the condensed consolidated balance sheets.

Segments

We have one operating segment. Our chief operating decision maker, our President and Chief Executive Officer, manages our operations on a consolidated basis in assessing performance and allocating resources.

Leases

We enter into operating lease agreements for our laboratory and office facilities. Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), or ASC 842, using a modified retrospective approach. Under this approach, we recorded an operating lease right-of-use (“ROU”) asset and lease liability of approximately $6.8 million and $15.6 million, respectively, and eliminated the previously recorded deferred rent of $8.8 million in our condensed consolidated balance sheet as of the adoption date. There was no impact to accumulated deficit upon adoption.

We determine whether an arrangement is or contains a lease at inception. For operating leases, we recognize a ROU asset and operating lease liability in our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. We recognize ROU assets and lease liabilities at lease commencement based on the present value of lease payments due over the lease term, and adjust ROU assets for any lease prepayments made or lease incentives received. In determining the present value of lease payments, we use the rate implicit in the lease, if known, or we use an estimated incremental borrowing rate based on the information available at the lease commencement date.

We recognize lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception.

Revenue Recognition

Effective January 1, 2019, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASC 606, using the modified retrospective approach. Under this approach, we recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date. Under ASC 606, an entity recognizes revenue when its customer obtains

control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods and services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We have entered into licensing and collaboration agreements that are within the scope of ASC 606. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under such licensing and collaboration agreements, we perform the five-step model under ASC 606. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.

Licenses of Intellectual Property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promised goods or services, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or that of our licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received or the underlying activity has been completed. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue in the period of adjustment.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in stockholders’ equity (deficit) of a business enterprise during a period, resulting from transactions from non-owner sources, and consists primarily of unrealized gains or losses related to our available-for-sale marketable securities, which are carried at estimated fair values on the consolidated balance sheets.

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing our net income (loss) by the weighted-average number of shares of common stock outstanding for the period.

Diluted net income (loss) per share includes the effect of potentially dilutive securities, which include outstanding warrants and stock options if the effect of their inclusion would be dilutive. In periods of net loss, diluted net loss per share is the same as basic net loss per share as the inclusion of potentially dilutive securities in the calculation would be anti-dilutive.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently

issued standards that are not yet effective will not have a material impact on our condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), we meet the definition of an emerging growth company, and have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. We will remain an emerging growth company until December 31, 2020.

Recently Adopted Accounting Standards or Updates

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, permitting another transition method for ASC 842, which allows companies to reflect any transition impact as a cumulative-effect adjustment to its opening retained earnings at the adoption date, without adjusting any comparative information presented in the financial statements. We adopted ASC 842 on January 1, 2020 using a modified retrospective approach and elected the transition method described above. As a result, our condensed consolidated financial statements for the period beginning January 1, 2020 are presented under the new leases standard, while prior comparative periods are reported consistent with prior accounting standards. We elected the package of practical expedients upon transition to carryforward our prior conclusions regarding contracts containing leases and lease classifications. We also elected, as ongoing accounting policies, not to apply the requirements of ASC 842 to short-term leases (generally those with initial terms of 12 months or less) and to combine the accounting for lease and non-lease components. Upon adoption, we recorded an operating lease ROU asset and lease liability related to our corporate headquarters lease and eliminated the previously recorded deferred rent in our condensed consolidated balance sheet. There was no impact to accumulated deficit upon adoption. See Note 7, Commitments and Contingencies, for additional information.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. Specifically, the ASU requires companies to recognize an allowance for credit losses on available-for-sale debt securities that are impaired as a result of credit-related factors and replaces the prior other-than-temporary impairment model. We adopted this ASU effective January 1, 2020 and the adoption did not have a material impact on our condensed consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation–Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. We adopted this ASU effective January 1, 2020 and the adoption did not have a material impact on our condensed consolidated financial statements and related disclosures. Our share-based payments related to nonemployees are insignificant.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds disclosure requirements for fair value measurements. We adopted this ASU effective January 1, 2020 and the adoption did not have a material impact on our condensed consolidated financial statements and related disclosures.

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. We determine fair value using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

Level 1 inputs include quoted prices in active markets for identical assets or liabilities.

Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 inputs include unobservable inputs that are supported by little or no market activity and are significant to the fair value of the underlying asset or liability. Such inputs reflect our best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires our management to make judgments and consider factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 were as follows (in thousands):

	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents
Money market funds	$	167,679	$	—	$	—	$	167,679
Short-term marketable securities
Corporate commercial paper		—		20,239		—		20,239
Corporate debt securities		—		66,742		—		66,742
Government‑sponsored enterprise securities		—		9,106		—		9,106
U.S. Treasury securities		—		49,960		—		49,960
Total	$	167,679	$	146,047	$	—	$	313,726

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents
Money market funds	$	17,664	$	—	$	—	$	17,664
Corporate commercial paper		—		6,983		—		6,983
Corporate debt securities		—		10,204		—		10,204
Short-term marketable securities
Corporate commercial paper		—		95,088		—		95,088
Corporate debt securities		—		154,690		—		154,690
Government‑sponsored enterprise securities		—		26,265		—		26,265
Long-term marketable securities
Corporate debt securities		—		14,202		—		14,202
Government‑sponsored enterprise securities		—		38,055		—		38,055
Total	$	17,664	$	345,487	$	—	$	363,151

The carrying amounts of accounts payable and accrued liabilities approximate their fair values due to their short-term maturities. Our Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly. There were no transfers of assets or liabilities between the fair value measurement levels during the six months ended June 30, 2020 and 2019.

4. Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following as of June 30, 2020 and December 31, 2019 (in thousands):

	June 30, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Cash equivalents
Money market funds	$	167,679	$	—	$	—		$	167,679
Total cash equivalents		167,679		—		—			167,679
Short-term marketable securities
Corporate commercial paper		20,171		68		—			20,239
Corporate debt securities		66,468		274		—			66,742
Government‑sponsored enterprise securities		9,027		79		—			9,106
U.S. Treasury securities		49,960		1		(1	)		49,960
Total short-term marketable securities		145,626		422		(1	)		146,047
Total	$	313,305	$	422	$	(1	)	$	313,726

	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Cash equivalents
Money market funds	$	17,664	$	—	$	—		$	17,664
Corporate commercial paper		6,982		1		—			6,983
Corporate debt securities		10,205		—		(1	)		10,204
Total cash equivalents		34,851		1		(1	)		34,851
Short-term marketable securities
Corporate commercial paper		95,061		36		(9	)		95,088
Corporate debt securities		154,678		54		(42	)		154,690
Government‑sponsored enterprise securities		26,231		34		—			26,265
Total short-term marketable securities		275,970		124		(51	)		276,043
Long-term marketable securities
Corporate debt securities		14,194		8		—			14,202
Government‑sponsored enterprise securities		38,037		18		—			38,055
Total long-term marketable securities		52,231		26		—			52,257
Total	$	363,052	$	151	$	(52	)	$	363,151

All our marketable securities are considered available-for-sale. In April 2020, we decided to sell certain of our short-term and long-term marketable securities and received approximately $101.9 million in gross proceeds, realizing a net gain of $0.2 million. As of June 30, 2020, the aggregate fair value of marketable securities that were in unrealized loss positions was approximately $22.5 million and included one investment position with unrealized losses that were immaterial. We had aggregate net unrealized gains of approximately $0.4 million and $0.1 million at June 30, 2020 and December 31, 2019, respectively, with respect to our entire marketable securities portfolio.

As of June 30, 2020, we did not have the intent, and management had not made any decisions, to sell our investments that were in an unrealized loss position and it is not more likely than not that we will be required to sell these investments before recovery of their amortized cost basis. We anticipate that we will recover the entire amortized cost basis of such securities and have determined that a credit loss did not exist as of June 30, 2020. At June 30, 2020, all our marketable securities were classified as short-term with remaining contractual maturities of less than one year. In July 2020, we decided to sell certain of our short-term marketable securities and received approximately $17.0 million in gross proceeds, realizing a net gain of $45,000.

5. Balance Sheet Components

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the amounts shown in the condensed consolidated statements of cash flows (in thousands):

	June 30, 2020		December 31, 2019		June 30, 2019		December 31, 2018
Cash and cash equivalents	$	170,486	$	39,537	$	41,073	$	34,489
Restricted cash, current		—		—		—		82
Restricted cash, non-current		567		567		567		567
Total	$	171,053	$	40,104	$	41,640	$	35,138

Property and equipment as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	June 30, 2020			December 31, 2019
Laboratory equipment	$	2,313		$	2,007
Computer equipment		297			289
Furniture and fixtures		1,560			1,549
Leasehold improvements		8,324			8,324
		12,494			12,169
Less accumulated depreciation and amortization		(3,492	)		(2,482	)
Total	$	9,002		$	9,687

Prepaid expenses and other current assets as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	June 30, 2020		December 31, 2019
Collaboration receivable from Sanofi	$	50,000	$	—
Other accounts receivable		492		1,272
Prepaid expenses		2,397		2,893
Total	$	52,889	$	4,165

The collaboration receivable from Sanofi relates to a $50.0 million clinical development milestone that was achieved in June 2020. See Note 6, License and Collaboration Agreements, for additional information.

6. License and Collaboration Agreements

Sanofi

In November 2017, we entered into a strategic collaboration agreement with Sanofi, or the Sanofi Agreement, for an exclusive license to PRN2246/SAR442168 and backup molecules for development in multiple sclerosis (“MS”) and other central nervous system (“CNS”) diseases. Under the Sanofi Agreement, we have completed the Phase 1 trials and Sanofi is taking on all further development activities. We and Sanofi each have been responsible for certain early development costs, and Sanofi is responsible for all further development and commercialization costs, subject to our Phase 3 option described below.

Sanofi has an exclusive license for PRN2246/SAR442168 and its backups for the CNS field, which includes indications of the CNS, retina and ophthalmic nerve. We have agreed not to develop other Bruton Tyrosine Kinase (“BTK”) inhibitors within the CNS field, and Sanofi has agreed not to develop PRN2246/SAR442168 or its backups for any indications outside the CNS field. In the event we cease all development and commercialization of our other BTK inhibitors or unilaterally decide to offer Sanofi a field expansion, Sanofi could expand its field upon a field expansion payment to us as well as potential milestone payments and royalties within the expanded field.

In December 2017, we received a $40.0 million upfront payment from Sanofi. In May 2018, we amended the Sanofi Agreement to include additional activities under the early development plan and to modify the definition of one of the milestone payments. Pursuant to the amendment, we received a $10.0 million payment in July 2018 for the completion of a major part of the Phase 1 trial. In August 2018, we received a $5.0 million payment for the successful completion of preclinical toxicology studies. In November 2018, we received $10.0 million in additional payments from Sanofi for successful development activities of PRN2246/SAR442168 related to the early development plan. In June 2019, we received a $30.0 million milestone payment from

Sanofi for the initiation of the Phase 2b clinical trial of PRN2246/SAR442168. In June 2020, we achieved a $50.0 million clinical development milestone upon dosing of the first patient in Sanofi’s Phase 3 clinical trial of PRN2246/SAR442168 in relapsing MS and recognized $50.0 million of revenue. Payment of this milestone was received in August 2020.

Under the amended Sanofi Agreement, we may receive development, regulatory and commercial milestone payments of up to an aggregate of $765.0 million, as well as royalties up to the mid-teens. We have an option to fund a portion of Phase 3 development costs in return for, at our option, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in royalties up to the high-teens. The additional royalty option would only be available if we develop rilzabrutinib for major enumerated indications overseen by the Division of Pulmonary, Allergy and Rheumatology Products of the U.S. Food and Drug Administration (the “FDA”) or if we experience a change in control involving certain Sanofi competitors. Royalties are subject to specified reductions and are payable, on a product-by-product and country-by-country basis until the later of the date that all of our patent rights that claim a composition of matter of such product expire in such country, the date of expiration of regulatory exclusivity for such product in such country, or the date that is ten years from the first commercial sale of such product in such country.

We identified the following performance obligations under the Sanofi Agreement: (i) granting a license of rights to PRN2246/SAR442168, (ii) transferring of technology (know-how) related to PRN2246/SAR442168, and (iii) providing research and development services related to our responsibilities under the early development plan. We concluded that the delivered license is not distinct at inception of the arrangement due to our proprietary expertise with respect to the licensed compound and related developmental participation under the agreement, which is required for Sanofi to fully realize the value from the delivered license. Therefore, we combined these performance obligations as one unit of accounting and recognized the $40.0 million upfront payment and an aggregate of $25.0 million in milestone payments over the performance period under the Sanofi Agreement, which ended in December 2018.

On January 1, 2019, we adopted ASC 606 using the modified retrospective approach. Upon adoption, we concluded that there was no adjustment necessary to revenue recognized through December 31, 2018 under ASC 606 for the Sanofi Agreement as all deliverables under ASC 605 and all performance obligations under ASC 606 had been completed as of December 31, 2018. The transaction price under ASC 606 was determined to be $65.0 million, which included the $40.0 million upfront payment we received from Sanofi in December 2017 and an aggregate of $25.0 million in milestone payments received in 2018. All potential future milestones and other payments were considered constrained at the inception of the Sanofi Agreement since we could not conclude it is probable that a significant reversal in the amount recognized will not occur. Upon adoption of ASC 606, we also determined that variable considerations related to certain milestones not previously recognized were constrained because they were not probable, due to the inherent uncertainty related to the achievement of these milestones. In May 2019, we achieved a clinical development milestone upon Sanofi’s initiation of its Phase 2b clinical trial of PRN2246/SAR442168 and Sanofi was obligated to make a $30.0 million milestone payment to us. As the amount due for the clinical development milestone was no longer constrained, we increased the transaction price under ASC 606 by $30.0 million from inception through June 30, 2019. As of June 30, 2019, we fully recognized the $30.0 million milestone payment to us as revenue as all performance obligations had been satisfied in previous periods.

In June 2020, we achieved a clinical development milestone upon dosing of the first patient in Sanofi’s Phase 3 clinical trial of PRN2246/SAR442168 in relapsing MS and Sanofi was obligated to make a $50.0 million milestone payment to us. As the amount due for the clinical development milestone was no longer constrained, we increased the transaction price under ASC 606 by $50.0 million from inception through June 30, 2020. As of June 30, 2020, we fully recognized the $50.0 million milestone payment to us as revenue as all performance obligations had been satisfied in previous periods. We will re-evaluate the transaction price in each reporting period relating to potential future milestones as uncertain circumstances are resolved or other changes in events occur.

For the three and six months ended June 30, 2020, we recognized $50.0 million in revenue related to the Sanofi Agreement and recorded a corresponding collaboration receivable included within prepaid expenses and other current assets on our condensed consolidated balance sheet as of June 30, 2020. Payment from Sanofi was received in August 2020. For the three and six months ended June 30, 2019, we recognized $30.0 million in revenue related to the Sanofi Agreement. There was no deferred revenue related to the Sanofi Agreement at June 30, 2020 and December 31, 2019.

AbbVie

In June 2017, we entered into a collaboration agreement with AbbVie, or the AbbVie Agreement, to research and develop oral immunoproteasome inhibitors and received an upfront payment of $15.0 million. Prior to the adoption of ASC 606, we concluded under ASC 605 that the $15.0 million received related to a combined unit of accounting and was required to be recognized as revenue ratably over the performance period, which was estimated to continue through the fourth quarter of 2019. On January 1, 2019, we adopted ASC 606 using the modified retrospective approach. Upon adoption, the fixed, non-refundable and non-creditable upfront payment of $15.0 million received in 2017 was determined to be the transaction price. Revenue was recognized based on a measurement of progress toward the completion of the performance obligation of providing research services for two years, subject to an extension for up to six months. Based on this methodology, we concluded that under ASC 606, approximately $9.8 million in

revenue should be recognized through December 31, 2018, as compared to $9.4 million under ASC 605. We recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date.

In March 2019, we and AbbVie agreed to conclude the collaboration and as of the date of termination, there were no further financial obligations between us. We recognized the remaining balance of the transaction price of $5.2 million in revenue during the three months ended March 31, 2019, upon termination of the AbbVie Agreement. No revenue was recognized from the AbbVie Agreement in subsequent periods as the agreement had been terminated.

University of California License Agreements

In November 2009 and September 2011, we entered into license agreements with the Regents of the University of California, or the Regents, which were subsequently amended and restated at various dates (the “UC Agreements”). Under the UC Agreements, the Regents have granted to us exclusive, worldwide licenses, with the right to grant sublicenses, under the Regents’ patent rights in certain patent applications to make, use, sell, offer for sale, and import products and services and practice methods covered by such patent applications in all fields of use.

We have paid the Regents license fees of $40,000 in total under the UC Agreements and are required to pay annual license maintenance fees totaling $40,000 prior to launching any licensed product. We may be obligated to make one-time regulatory and development milestone payments under the UC Agreements for future drug candidates and are obligated to pay tiered royalty payments in the low single digits on net sales of the licensed products. Additionally, we are obligated to pay the Regents payments on non-royalty licensing revenue we receive from our sub-licensees for products covered by UC patents. Pursuant to the UC Agreements, we also made IPO milestone payments to the Regents totaling approximately $140,000 in October 2018.

Under the UC Agreements, we are required to diligently proceed with the development, manufacture, regulatory approval, and sale of licensed products which include obligations to meet certain development-stage milestones within specified periods of time and to market the resulting licensed products in sufficient quantity to meet market demand. We have the right and option to extend the date by which we must meet any milestone in one year extensions by paying an extension fee for second and subsequent extension, provided we can demonstrate we made diligent efforts to meet the milestone.

7. Commitments and Contingencies

Leases

Our corporate headquarters are located in South San Francisco, California. In April 2018, we signed a lease (the “Lease Agreement”) for approximately 47,500 square feet of office, research and development and laboratory space with occupancy commencing on February 1, 2019 for a seven-year period with an option to extend for another seven-year period subject to certain conditions. Pursuant to the Lease Agreement, we provided a letter of credit to the landlord for $0.6 million which was recorded as long-term restricted cash at June 30, 2020 and December 31, 2019. The Lease Agreement allows for a landlord-provided tenant improvement allowance of up to $7.1 million to be applied to the cost of construction of tenant improvements to the new leased premises. The Lease Agreement also provides, and we have utilized, an additional tenant improvement allowance of up to $1.2 million to be applied to the costs of tenant improvements. We utilized the aggregate amount of allowances available to us and have recorded $8.3 million of tenant improvement costs as leasehold improvements in our condensed consolidated balance sheets, with a corresponding lease incentive obligation which was classified as deferred rent as of December 31, 2019.

On January 1, 2020, we adopted ASC 842 and recorded an operating lease ROU asset and lease liability in our condensed consolidated balance sheet related to the Lease Agreement. Upon adoption, we recorded an operating lease ROU asset of $6.8 million, an operating lease liability of $15.6 million, and eliminated our existing deferred rent balance of $8.8 million. There was no impact to accumulated deficit upon adoption.

We recognize ROU assets and lease liabilities based on the present value of lease payments due over the lease term, and adjust ROU assets for any lease prepayments made or lease incentives received. In determining the present value of remaining lease payments for our corporate headquarters lease, we used an estimated incremental borrowing rate based on the information available at the adoption date. As of June 30, 2020, the remaining lease term related to the Lease Agreement was 5.6 years, through January 2026, and the incremental borrowing rate used to determine the present value of remaining lease payments was 9%. Cash paid for amounts included in the measurement of our lease liability for the six months ended June 30, 2020 was $1.5 million and was included in net cash used in operating activities in our condensed consolidated statements of cash flows.

We recorded rent expense of $0.7 million and $1.3 million for the three and six months ended June 30, 2020, respectively. We recorded rent expense of $0.7 million and $1.4 million for the three and six months ended June 30, 2019, respectively. We

recognize lease expense on a straight-line basis over the lease term. Where leases contain escalation clauses, rent abatements, and/or concessions such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. We amortize leasehold improvements over the shorter of their estimated useful life or the term of the lease. We do not assume renewals in our determination of the lease term unless the renewals are deemed by management to be reasonably assured at lease inception. We have determined that our lease related to the Lease Agreement commenced on August 1, 2018, when we had right to use or control physical access to the new leased premises.

The following table reconciles future lease payments for the periods presented to our operating lease liability as of June 30, 2020 (in thousands):

Year ended December 31,
2020 (remaining 6 months)	$	1,550
2021		3,193
2022		3,296
2023		3,403
2024		3,514
2025 and beyond		3,934
Total lease payments		18,890
Present value adjustment		(4,193	)
Operating lease liability at June 30, 2020	$	14,697

Indemnifications

We are required to recognize a liability for the fair value of any obligations we assume upon the issuance of a guarantee. We have certain agreements with licensors, licensees, collaborators and service providers that contain indemnification provisions. In such provisions, we typically agree to indemnify the licensor, licensee collaborator or service provider against certain types of third party claims. The maximum amount of the indemnifications is usually not limited. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for expenses related to indemnifications for any periods presented.

We indemnify each of our officers and directors, as well as certain employees, for certain events or occurrences, subject to certain limitations, while the officer, director or employee is or was serving at our request in such capacity, as permitted under Delaware law and in accordance with our certificate of incorporation, our bylaws and certain indemnification agreements between us and each of our directors, officers and applicable employees. The term of the indemnification period lasts as long as an officer, a director or applicable employee may be subject to any proceeding arising out of acts or omissions of such officer, director or applicable employee in such capacity. The maximum amount of potential future indemnification is unlimited; however, we currently hold director and officer liability insurance. This insurance allows the transfer of risk associated with our exposure and may enable us to recover a portion of any future amounts paid with regards to our officers and directors. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations for any period presented.

8. Stock-Based Compensation

The following table summarizes our stock option activity under our stock plans and related information:

	Options Outstanding			Weighted- Average Exercise Price
Balance at December 31, 2019		3,887,780		$	18.38
Options granted		1,498,120		$	66.42
Options forfeited		(26,201	)	$	39.70
Options exercised		(173,633	)	$	9.57
Balance at June 30, 2020		5,186,066		$	32.45
Vested and expected to vest		5,186,066		$	32.45
Exercisable as of June 30, 2020		2,523,720		$	12.20

At June 30, 2020 and December 31, 2019, 18,770 shares and 25,081 shares, respectively, related to the early exercise of stock options, were subject to repurchase by us at the original exercise price in the event the optionee’s employment is terminated either voluntarily or involuntarily. We classify cash received from the exercise of unvested options as a short-term liability. These liabilities were approximately $0.1 million and $0.2 million as of June 30, 2020 and December 31, 2019, respectively, and were included in accrued liabilities on the condensed consolidated balance sheets. Amounts from such liabilities are reclassified into common stock and additional paid-in capital as the shares vest, which is generally over 48 months.

The following table summarizes total stock-based compensation expense related to our 2018 Equity Incentive Plan, 2008 Equity Incentive Plan and 2018 Employee Stock Purchase Plan (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Research and development	$	3,850	$	1,776	$	6,193	$	2,926
General and administrative		3,097		1,700		5,143		2,755
Total	$	6,947	$	3,476	$	11,336	$	5,681

As of June 30, 2020, there was approximately $83.1 million of unamortized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted-average period of approximately 3.2 years. The weighted-average remaining contractual term of options outstanding at June 30, 2020 was 8.0 years.

9. Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing our net income (loss) by the weighted-average number of shares of common stock outstanding for the period. In periods in which we have net income, diluted net income per share is calculated using the weighted-average number of shares of common stock outstanding and other dilutive securities. In periods of net loss, diluted net loss per share is the same as basic net loss per share as the inclusion of potentially dilutive securities in the calculation would be anti-dilutive.

The following table presents a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations and the calculation of basic and diluted net income (loss) per share (in thousands, except share and per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
Numerator:
Net income (loss)	$	10,810	$	7,115	$	(21,689	)	$	(6,572	)
Denominator:
Weighted-average common shares outstanding, basic		33,087,340		23,927,172		33,040,547			23,896,788
Effect of dilutive shares		2,224,598		1,864,929		—			—
Weighted-average shares outstanding used in per share calculation, diluted		35,311,938		25,792,101		33,040,547			23,896,788
Net income (loss) per share, basic	$	0.33	$	0.30	$	(0.66	)	$	(0.28	)
Net income (loss) per share, diluted	$	0.31	$	0.28	$	(0.66	)	$	(0.28	)

The following outstanding shares of common stock equivalents were excluded in the computation of diluted net income (loss) per share, because their effect would have been antidilutive for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Employee stock purchase plan		8,919		11,326		34,966		43,745
Warrants to purchase common stock		11,933		48,406		81,966		168,046
Common stock options issued and outstanding		3,041,438		2,390,056		5,186,066		4,124,358
Early exercised common stock subject to future vesting		18,770		29,460		18,770		29,460
Total		3,081,060		2,479,248		5,321,768		4,365,609

10. Income Taxes

We did not record a provision for income taxes for the three months ended June 30, 2020 and 2019, because all of our taxable income will be fully offset by net operating losses generated in prior years. In addition, the deferred tax assets continue to be subject to a full valuation allowance.

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 condensed consolidated financial statements and the notes thereto included in Part I, Item 1, of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 10, 2020.

Overview

We are a late-stage biopharmaceutical company dedicated to bringing transformative therapies to patients with significant unmet medical needs in immune mediated diseases. Our proprietary Tailored Covalency^® platform enables us to design and develop reversible covalent and irreversible covalent, small molecule inhibitors with potencies and selectivities that we believe will rival those of injectable biologics, but with the convenience of an oral or topical treatment. We retain full, worldwide rights to rilzabrutinib, PRN473 Topical, PRN1371 and our oral immunoproteasome inhibitor program, and have established an ongoing collaboration with Sanofi for PRN2246/SAR442168.

Since commencing operations in 2011, we have devoted substantially all our resources to identifying and developing our drug candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these operations. Our clinical pipeline programs include rilzabrutinib for the treatment of pemphigus (pemphigus vulgaris (PV) and pemphigus foliaceus (PF)); rilzabrutinib for the treatment of immune thrombocytopenia (ITP); rilzabrutinib for the treatment of IgG4-Related Disease (RD); PRN473 Topical, a reversible covalent Bruton Tyrosine Kinase (BTK) inhibitor being developed for immune mediated diseases that could benefit from localized application to the skin; and PRN2246/SAR442168, an irreversible BTK inhibitor which crosses the blood-brain barrier, for the treatment of multiple sclerosis (MS) and other central nervous system (CNS) diseases. In January 2020, we announced suspension of clinical development efforts for PRN1371, an inhibitor of Fibroblast Growth Factor Receptor designed for the treatment of solid tumors, to focus our portfolio on immune mediated diseases.

•

We are conducting a global Phase 3 pivotal clinical trial of rilzabrutinib in pemphigus, evaluating rilzabrutinib in PV patients and a smaller number of PF patients. We anticipate Phase 3 data in the second half of 2021. In December 2019, we announced control of disease activity and complete response rates from our Phase 2 Part B trial. Positive data from the full data set of the Phase 2 Part B trial was presented at the American Academy of Dermatology meeting in June 2020.

In parallel, we are evaluating rilzabrutinib in a Phase 1/2 clinical trial in ITP and presented positive interim data from this trial at the 61st ASH Annual Meeting in December 2019. We presented positive data on durability of response from our ongoing Phase 1/2 trial at the 25^th Congress of the European Hematology Association in June 2020 and the International Society on Thrombosis and Haemostasis Congress in July 2020. We anticipate initiating a Phase 1/2 Part B clinical trial of rilzabrutinib in ITP. Additionally, we anticipate initiating a pivotal Phase 3 trial of rilzabrutinib in ITP by the end of 2020, assuming no future COVID-19 related impact.

In January 2020, we announced an expansion in the development of rilzabrutinib into IgG4-RD, an immune mediated disease of chronic inflammation and fibrosis that, if left untreated, can lead to severe morbidity including organ dysfunction and organ failure. We anticipate initiating a Phase 2 clinical trial for rilzabrutinib in IgG4-RD in the second half of 2020.

Beyond pemphigus, ITP, and IgG4-RD, we believe there are numerous immune mediated diseases for which rilzabrutinib may have therapeutic benefit. We anticipate commercializing rilzabrutinib, if approved, by developing our own sales organization targeting dermatologists, hematologists, and rheumatologists at specialized centers in the United States.

•

In November 2017, we entered an exclusive licensing agreement with Sanofi. We believe that this collaboration maximizes the potential of PRN2246/SAR442168 to address target indications affecting larger populations of patients with CNS diseases. We have completed our development efforts under the early development plan and Sanofi is responsible for further clinical development of this compound for the treatment of patients suffering from MS. In April 2020, Sanofi announced data from its Phase 2b clinical trial in relapsing MS. Specifically, Sanofi announced that PRN2246/SAR442168 achieved both its primary and secondary endpoints, significantly reduced disease activity associated with MS as measured by MRI and was well tolerated in the Phase 2b trial with no new safety findings. In April 2020, Sanofi also announced that it anticipated initiating four Phase 3 clinical trials in relapsing and progressive forms of MS in the middle of 2020. In June 2020, the first patient in Sanofi’s Phase 3 clinical trial in relapsing MS was dosed, which triggered a milestone payment of $50.0 million that was paid to us in August 2020. We hold an option to fund a portion of Phase 3 development costs in return for, at our discretion, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in rates up to the high-teens.

•

In January 2020, we announced an expansion of our BTK franchise with PRN473 Topical, which is being developed for immune mediated diseases that could benefit from localized application to the skin. In March 2020, we initiated a Phase 1 clinical trial of PRN473 Topical, which is anticipated to be completed in 2020. We have also initiated an open-label, placebo-controlled Phase 1 trial to evaluate the pharmacologic activity on skin reactions induced by challenge agents. PRN473 Topical is our third BTK inhibitor in the clinic, joining rilzabrutinib and PRN2246/SAR442168.

•

We are expanding our wholly owned pipeline by continuing to innovate and discover differentiated oral or topical small molecules with the potential to be best-in-class, and we intend to keep our programs at the forefront of covalent inhibitor drug discovery by investing in new technologies that will broaden the target space of our Tailored Covalency platform. In addition, we plan to explore the new biology discovered with our oral immunoproteasome inhibitors and to select the optimal development path for these highly differentiated assets. We have selected a candidate molecule, for our immunoproteasome program, to move forward into the preclinical development phase.

•

As we have done with our collaboration with Sanofi, we plan to selectively use collaborations and partnerships as strategic tools to maximize the value of our drug candidates, particularly in indications with large target patient populations.

Since inception and through June 30, 2020, we have financed our operations primarily with proceeds totaling $541.0 million from our initial public offering (“IPO”) and a subsequent equity offering in October 2019, private placements of our convertible preferred stock and convertible notes and with payments totaling $110.0 million from license and research collaborations. We received a $30.0 million milestone payment in 2019 and milestone payments totaling $25.0 million in 2018 from our collaboration agreement with Sanofi. In 2017, we received non-refundable upfront payments of $40.0 million and $15.0 million from our collaboration agreements with Sanofi and AbbVie, respectively.

As of June 30, 2020, we held cash, cash equivalents and marketable securities totaling $316.5 million. We do not have any products for sale and have not generated any product revenue since our inception. To date, all our revenue has been generated from payments received from our agreements with Sanofi and AbbVie. We have incurred significant operating losses since the commencement of our operations. As of June 30, 2020, we have an accumulated deficit of $207.4 million. We expect to continue to incur significant expenses as we advance our drug candidates and expand our pipeline through clinical development, the regulatory approval process and, if successful, commercial launch activities. If we elect to exercise our option to fund a portion of Phase 3 development under the Sanofi Agreement, we will be required to share in certain development costs. Furthermore, we expect to incur additional costs associated with operating as a public company. Based on our planned operations, we believe our cash, cash equivalents and marketable securities at June 30, 2020 are sufficient to fund our operations for at least the next 12 months from the issuance date of these financial statements.

COVID-19 Business Update

With the global spread of the ongoing COVID-19 pandemic, in the first quarter of 2020, we established a cross-functional task force and implemented certain measures across our business designed to address and mitigate the impact of the effects of the COVID-19 pandemic on our employees, clinical trial participants, clinical investigators, third-party vendors, partners and our business. In addition, we continue to engage with our Board of Directors to monitor the impact of the effects of the COVID-19 pandemic on our business and to assess our related risks and mitigation efforts. Given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the evolving effects of the pandemic, our business, financial condition, results of operations and growth prospects could be materially adversely affected. We continue to closely monitor the COVID-19 situation as we evolve our response strategy. We began responding to the risks and uncertainties relating to the COVID-19 pandemic at the end of January 2020. In mid-March 2020, our workforce transitioned to working remotely, with the exception of a small number of employees who performed essential activities at our office in South San Francisco, California using practices that are outlined in a social distancing protocol required by local order. We are currently allowing a limited number of employees to return to the office in a phased approach that is principles-based and in compliance with state and local orders applicable to our office location, with a focus on employee safety and optimal work environment. At this time, we plan for the majority of our employees to continue to work remotely.

Supply Chain

We are working closely with our third-party manufacturers, distributors and other partners, to manage our supply chain activities and mitigate potential disruptions to our drug candidate supplies as a result of the COVID-19 pandemic. At this point we expect to have adequate global supply of clinical trial material to meet the needs of our current clinical trials. However, if the evolving effects of the COVID-19 pandemic persist for an extended period of time or become more severe and further impact essential distribution systems and delivery services, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our drug candidates, which would adversely impact our ability to complete our clinical trials and advance our drug candidates through regulatory approval.

Clinical Development

With respect to clinical development, we have implemented telemedicine approaches to maintain clinical trial participation, investigator safety and trial continuity, and to collect participant data and preserve data integrity of our trials. The effects of the

COVID-19 pandemic have caused slowdowns in clinical trial enrollment and a re-allocation of healthcare resources. In this regard, as announced in May, the initiation of our planned Phase 2 clinical trial of rilzabrutinib in IgG4-RD has been delayed from the first half of 2020 to the second half of 2020 due to the prioritization of healthcare resources for COVID-19 patients at our clinical trial sites. As the COVID-19 pandemic continues to evolve, we could see an impact on our ability to maintain participant enrollment in several additional or all of our trials due to, for example, increased COVID-19 positivity or infection rates, or other related health complications. We could also see an impact on the ability to supply sufficient drug candidate for our trials, report trial results, or interact with regulators, ethics committees or other important agencies due to limitations in regulatory authority employee resources or otherwise. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. If the evolving effects of the COVID-19 pandemic become more severe, we could experience significant disruptions to other clinical development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects.

Research and Development Pipeline

Our research and development pipeline depends on our ability to continue to identify compounds that may be viable product candidates for future clinical development. The effects of the COVID-19 pandemic may materially impact or delay these research and development activities. We currently have a small number of research and development employees working in our facility to perform critical tasks related to the supply of drug candidates for our clinical trials. As we phase in an eventual return to our usual operations, we expect that more employees will return to laboratories to resume research efforts. However, the effects of the COVID-19 pandemic continue to rapidly evolve and even if our employees more broadly return to laboratories to resume research efforts, we may be subsequently forced to, or subsequently determine that we should, resume a more restrictive remote work model, whether as a result of spikes or surges in COVID-19 positivity or infection rates or otherwise. We cannot know what the impact of limiting the number of employees in our labs will be, but we anticipate that such limitations may result in delays in our earlier stage research programs.

Regulatory Activities

With respect to regulatory activities, it is possible that we could experience delays in the timing of our interactions with FDA or other regulatory authorities due to, for example, inability to conduct planned physical inspections related to regulatory approval, the diversion of efforts and attention to approval of other therapeutics or other activities related to COVID-19, or absenteeism by governmental employees, which could delay approval decisions and otherwise delay or limit our ability to make planned regulatory submissions or obtain new product approvals. In addition, while we have followed regulatory guidance regarding changes made to the conduct of our ongoing clinical trials, particularly related to changes in our collection of patient data, it is possible that those changes could in the future impact the timing of, or our ability to, obtain new product approvals.

Corporate Development

With our strong cash balance, including the proceeds of our 2018 initial public offering, 2019 subsequent equity offering, and upfront and milestone payments received pursuant to our licensing agreements, we anticipate having sufficient liquidity to make planned investments in our business this year in support of our long-term growth strategy. We believe that our cash, cash equivalents and marketable securities as of June 30, 2020 will fund our current planned operations for at least the next 12 months. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, as well as other collaborations, strategic alliances and licensing arrangements, or other arrangements. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists or becomes more severe, we could experience an inability to access additional capital, which could in the future negatively affect our operations.

Other Financial and Corporate Impacts

While we expect the effects of the COVID-19 pandemic may adversely affect our business operations and financial results, the extent of the impact on our clinical development and regulatory efforts, and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration and severity of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, Europe, China and other countries, and the effectiveness of actions taken globally to contain and treat the disease. For example, if remote work policies for certain portions of our business, or that of our business partners, are extended longer than we currently expect, we may need to reassess our priorities for the remainder of the year.

In addition, while we continue to maintain our efforts to protect data and ensure appropriate cybersecurity, our temporary transition to a remote workforce model may increase the risk of cybersecurity incidents or other data breaches. We cannot be certain that our cybersecurity and data privacy efforts will be unaffected by the effects of the COVID-19 pandemic.

Sanofi Agreement

In November 2017, we entered into a strategic collaboration agreement with Sanofi, or the Sanofi Agreement, for an exclusive license to PRN2246/SAR442168 and backup molecules for development in MS and other CNS diseases. Under the Sanofi Agreement, we completed the Phase 1 trials and Sanofi is responsible for all further development activities. We and Sanofi are each responsible for certain early development costs, and Sanofi is responsible for all further development and commercialization costs, subject to our Phase 3 option described below.

Sanofi has an exclusive license for PRN2246/SAR442168 and its backups for the CNS field, which includes indications of the central nervous system, retina and ophthalmic nerve. We have agreed not to develop other BTK inhibitors within the CNS field, and Sanofi has agreed not to develop PRN2246/SAR442168 or its backups for any indications outside the CNS field. In the event we cease all development and commercialization of our other BTK inhibitors or unilaterally decide to offer Sanofi a field expansion, Sanofi could expand its field upon a field expansion payment to us, as well as potential milestone payments and royalties within the expanded field.

Under the amended Sanofi Agreement, we may receive development, regulatory and commercial milestone payments of up to an aggregate of $765.0 million, as well as royalties up to the mid-teens. We have an option to fund a portion of Phase 3 development costs in return for, at our option, either a profit and loss sharing arrangement within the United States, or an additional worldwide royalty that would result in royalties up to the high-teens. Only the additional royalty option would be available if we develop rilzabrutinib for major enumerated indications overseen by the FDA’s Division of Pulmonary, Allergy and Rheumatology Products or if we experience a change in control involving certain Sanofi competitors. Royalties are subject to specified reductions and are payable, on a product-by-product and country-by-country basis until the later of the date that all of our patent rights that claim a composition of matter of such product expire in such country, the date of expiration of regulatory exclusivity for such product in such country, or the date that is ten years from the first commercial sale of such product in such country.

AbbVie Agreement

In June 2017, we entered into a collaboration agreement with AbbVie, or the AbbVie Agreement, to research and develop oral immunoproteasome inhibitors and received an upfront payment of $15.0 million. In March 2019, we announced a mutual agreement with AbbVie to end our collaboration and to reacquire rights to the program following an assessment by AbbVie that there was no longer a strategic fit of our highly selective oral immunoproteasome inhibitors’ biologic profiles relative to AbbVie’s desired disease areas of focus. We and AbbVie agreed to conclude the collaboration effective March 2019. There are no further financial obligations between AbbVie and us.

University of California License Agreements

Components of Operating Results

Revenue

To date, all our revenue has been generated from payments pursuant to our collaboration arrangements with Sanofi and AbbVie.

In connection with the Sanofi Agreement, we received a $40.0 million non-refundable upfront payment in December 2017, additional milestone payments totaling $25.0 million in 2018 for successful development activities under the early development plan, and a $30.0 million clinical development milestone payment in 2019 for the initiation of Sanofi’s Phase 2b clinical trial of PRN2246/SAR442168. In June 2020, Sanofi dosed the first patient in its Phase 3 clinical trial of PRN2246/SAR442168 in relapsing MS, which triggered a milestone payment of $50.0 million that was paid to us in August 2020. We identified the following performance obligations under our Sanofi Agreement: (i) granting a license of rights to PRN2246/SAR442168, (ii) transferring of technology (know-how) related to PRN2246/SAR442168, and (iii) performance of research and development services related to our responsibilities under the early development plan. We concluded that the delivered license was not distinct at the inception of the arrangement due to our proprietary expertise with respect to the licensed compound and related developmental participation under the agreement, which was required for Sanofi to fully realize the value from the delivered license. Therefore, we combined these performance obligations as one unit of accounting and recognized the $40.0 million upfront payment and the aggregate of $25.0 million in milestone payments ratably over the performance period, which ended as of December 31, 2018.

On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective approach. Upon adoption, we concluded that there was no adjustment necessary to revenue recognized through December 31, 2018 under ASC 606 for the Sanofi Agreement as all deliverables under ASC 605 and all performance obligations under ASC 606 had been completed as of December 31, 2018. In June 2019, we received a $30.0 million milestone payment from Sanofi for achieving a clinical development milestone and recognized the full payment as revenue. In June 2020, we achieved a $50.0 million clinical development milestone upon dosing of the first patient in Sanofi’s Phase 3 clinical trial of PRN2246/SAR442168 in relapsing MS and recognized the full amount as revenue. For the three and six months ended June 30, 2020, we recognized $50.0 million in revenue from the Sanofi Agreement. For the three and six months ended June 30, 2019, we recognized $30.0 million in revenue from the Sanofi Agreement. There was no deferred revenue related to the Sanofi Agreement at June 30, 2020 and December 31, 2019.

In connection with the AbbVie Agreement, we received a $15.0 million non-refundable upfront payment in June 2017. Prior to the adoption of ASC 606, we concluded under ASC 605 that the $15.0 million received related to a combined unit of accounting and was required to be recognized as revenue ratably over the performance period, which was estimated to continue through the fourth quarter of 2019. On January 1, 2019, we adopted ASC 606 using the modified retrospective approach. Upon adoption, the fixed, non-refundable and non-creditable upfront payment of $15.0 million received in 2017 was determined to be the transaction price. Revenue was recognized based on a measurement of progress toward the completion of the performance obligation of providing research services for two years, subject to an extension for up to six months. Based on this methodology, we concluded that under ASC 606, approximately $9.8 million in revenue should be recognized through December 31, 2018, as compared to $9.4 million under ASC 605. We recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date. In March 2019, we and AbbVie agreed to end our collaboration. Therefore, we recognized the remaining balance of the transaction price of $5.2 million in revenue during the three months ended March 31, 2019, upon termination of the AbbVie Agreement. No revenue was recognized from the AbbVie Agreement in subsequent periods as the agreement had been terminated.

Operating Expenses

We classify our operating expenses into two categories: research and development and general and administrative.

Research and Development

Our research and development expenses account for a significant portion of our operating expenses and relate to expenses incurred in connection with research and development activities, including the preclinical and clinical development of our drug candidates. These expenses primarily consist of preclinical and clinical expenses; payroll and personnel expenses, including stock-based compensation, for our research and development employees; consulting costs, laboratory supplies and facilities costs. We expense both internal and external research and development costs as they are incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as an expense as the related services are performed.

Our external research and development expenses consist primarily of:

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expenses incurred with contract research organizations, investigative clinical trial sites and other vendors involved in conducting our clinical trials;

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expenses incurred with contract manufacturing organizations for process development, scale up, as well as manufacturing of drug substance and drug candidates;

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expenses incurred with third party vendors for performing preclinical testing on our behalf; and

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consulting fees and certain laboratory supply costs related to the execution of preclinical studies and clinical trials.

With respect to internal costs, several of our departments support multiple clinical programs, and we do not allocate those costs by clinical program. Internal research and development expenses consist primarily of personnel related costs, facilities and infrastructure costs, certain laboratory supplies and non-capitalized equipment used for internal research and development activities.

We expect our research and development expenses to increase over the next several years as we continue to execute on our business strategy, advance our current programs and expand our research and development efforts, and pursue regulatory approvals of any of our drug candidates that successfully complete clinical trials.

General and Administrative

General and administrative expenses consist primarily of payroll and personnel related expenses, including stock-based compensation, for our personnel in finance, legal, human resources, business and corporate development and other administrative functions, professional consulting fees for legal and accounting services, costs related to our intellectual property and other allocated costs, such as facility expenses not otherwise allocated to research and development, and infrastructure costs.

We expect our general and administrative expenses to increase as a result of operating as a public company. Additional expenses include those related to compliance with the rules and regulations of the SEC and the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services.

Other Income (Expense), Net

Other income (expense), net, consists primarily of realized gains and losses from sales of marketable securities.

Interest Income

Interest income is primarily related to interest earned on our marketable securities.

Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (dollars in thousands):

	Three Months Ended June 30,				Change
	2020		2019		$		%
Revenue	$	50,000	$	30,000	$	20,000		67	%
Operating expenses:
Research and development		30,888		18,718		12,170		65	%
General and administrative		9,231		5,233		3,998		76	%
Total operating expenses		40,119		23,951		16,168		68	%
Income from operations		9,881		6,049		3,832		63	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Principia Biopharma Inc. 10-Q