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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 March 31, 2022

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 001-38792

 

Alector, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

82-2933343

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

131 Oyster Point Blvd, Suite 600

South San Francisco, California

 

94080

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: 415-231-5660

 

 

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

ALEC

The Nasdaq Stock Market LLC

(The Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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.

 

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 Exchange Act). Yes ☐ No

As of April 29, 2022, the registrant had 82,326,922 shares of common stock, $0.0001 par value per share, outstanding.

 


 

Alector, Inc.

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 6.

Exhibits

71

 

Signatures

72

 

 

 

 

 

 

i


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy, product candidates, planned preclinical studies and clinical trials, results of clinical trials, research and development costs, regulatory approvals, timing, and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that are in some cases beyond our control and may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements about:

our plans relating to the development and manufacturing of our product candidates and research programs, including additional indications that we may pursue;
the ability of our clinical trials to demonstrate safety and efficacy of our product candidates, and other positive results;
the timing and focus of our future clinical trials, and the reporting of data from those trials;
our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;
the expected potential benefits of strategic collaborations with third parties and our ability to attract collaborators with development, regulatory and commercialization expertise;
our estimates of the number of patients in the United States who suffer from the diseases we are targeting and the number of patients that will enroll in our clinical trials;
the size of the market opportunity for our product candidates in each of the diseases we are targeting;
our ability to expand our product candidates into additional indications and patient populations;
the success of competing therapies that are or may become available;
the beneficial characteristics, safety, efficacy, and therapeutic effects of our product candidates;
the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug designation, for our product candidates for various diseases;
our ability to obtain and maintain regulatory approval of our product candidates;
existing regulations and regulatory developments in the United States and other jurisdictions;
our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;
our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;
the need to hire additional personnel and our ability to attract and retain such personnel; especially in light of a very competitive compensation environment;
the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing;
our financial performance, including potential volatility in our stock price;
the impact of the coronavirus (COVID-19) pandemic, including recent and new variants, on our business;
the effects of a rising rate of inflation; and

ii


 

the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements.

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties, and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this Quarterly Report on Form 10-Q, whether as a result of any new information, future events, or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (https://investors.alector.com), Securities and Exchange Commission (SEC) filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our stockholders and public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Alector, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

454,620

 

 

$

329,152

 

Marketable securities

 

 

413,951

 

 

 

406,099

 

Receivable from collaboration partner

 

 

12,819

 

 

 

7,391

 

Prepaid expenses and other current assets

 

 

9,536

 

 

 

7,071

 

Total current assets

 

 

890,926

 

 

 

749,713

 

Property and equipment, net

 

 

26,228

 

 

 

27,330

 

Operating lease right-of-use assets

 

 

29,899

 

 

 

30,569

 

Restricted cash

 

 

1,472

 

 

 

1,472

 

Other assets

 

 

5,932

 

 

 

5,574

 

Total assets

 

$

954,457

 

 

$

814,658

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

6,752

 

 

$

4,749

 

Accrued clinical supply costs

 

 

12,618

 

 

 

8,748

 

Accrued liabilities

 

 

20,042

 

 

 

27,460

 

Deferred revenue, current portion

 

 

95,611

 

 

 

90,803

 

Operating lease liabilities, current portion

 

 

7,855

 

 

 

7,795

 

Total current liabilities

 

 

142,878

 

 

 

139,555

 

Deferred revenue, long-term portion

 

 

505,133

 

 

 

334,415

 

Operating lease liabilities, long-term portion

 

 

38,751

 

 

 

39,806

 

Other long-term liabilities

 

 

158

 

 

 

158

 

Total liabilities

 

 

686,920

 

 

 

513,934

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized; 82,324,677 and
   
81,986,192 shares issued and outstanding as of March 31, 2022 and
   December 31, 2021

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

762,458

 

 

 

748,036

 

Accumulated other comprehensive loss

 

 

(3,935

)

 

 

(943

)

Accumulated deficit

 

 

(490,994

)

 

 

(446,377

)

Total stockholders' equity

 

 

267,537

 

 

 

300,724

 

Total liabilities and stockholders' equity

 

$

954,457

 

 

$

814,658

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


 

Alector, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Collaboration revenue

 

$

24,474

 

 

$

4,110

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

53,043

 

 

 

45,733

 

General and administrative

 

 

15,554

 

 

 

11,012

 

Total operating expenses

 

 

68,597

 

 

 

56,745

 

Loss from operations

 

 

(44,123

)

 

 

(52,635

)

Other income, net

 

 

264

 

 

 

464

 

Loss before income taxes

 

 

(43,859

)

 

 

(52,171

)

Income tax expense

 

 

758

 

 

 

 

Net loss

 

 

(44,617

)

 

 

(52,171

)

Unrealized loss on marketable securities

 

 

(2,992

)

 

 

(204

)

Comprehensive loss

 

$

(47,609

)

 

$

(52,375

)

Net loss per share, basic and diluted

 

$

(0.54

)

 

$

(0.66

)

Shares used in computing net loss per share, basic and diluted

 

 

82,102,191

 

 

 

79,386,836

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

Alector, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

 

 

Common Stock

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Accumulated
Deficit

 

 

Total
Stockholders’
Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2021

 

 

81,986,192

 

 

$

8

 

 

$

748,036

 

 

$

(943

)

 

$

(446,377

)

 

$

300,724

 

Exercise of stock options

 

 

234,117

 

 

 

 

 

 

2,483

 

 

 

 

 

 

 

 

 

2,483

 

Vesting of restricted stock units

 

 

104,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

11,939

 

 

 

 

 

 

 

 

 

11,939

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(2,992

)

 

 

 

 

 

(2,992

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,617

)

 

 

(44,617

)

Balance — March 31, 2022

 

 

82,324,677

 

 

$

8

 

 

$

762,458

 

 

$

(3,935

)

 

$

(490,994

)

 

$

267,537

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


 

Alector, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

 

 

Common Stock

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Accumulated
Deficit

 

 

Total
Stockholders’
Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2020

 

 

79,316,261

 

 

$

8

 

 

$

676,956

 

 

$

614

 

 

$

(410,048

)

 

$

267,530

 

Exercise of stock options

 

 

415,386

 

 

 

 

 

 

3,874

 

 

 

 

 

 

 

 

 

3,874

 

Stock-based compensation

 

 

 

 

 

 

 

 

8,800

 

 

 

 

 

 

 

 

 

8,800

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(204

)

 

 

 

 

 

(204

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,171

)

 

 

(52,171

)

Balance — March 31, 2021

 

 

79,731,647

 

 

$

8

 

 

$

689,630

 

 

$

410

 

 

$

(462,219

)

 

$

227,829

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Alector, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(44,617

)

 

$

(52,171

)

Adjustments to reconcile net loss to net cash used in operating
   activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,589

 

 

 

1,541

 

Stock-based compensation

 

 

11,939

 

 

 

8,800

 

Amortization of premiums and accretion of discounts on marketable securities

 

 

570

 

 

 

594

 

Amortization of right-of-use assets

 

 

670

 

 

 

461

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivable from collaboration partner

 

 

(5,428

)

 

 

 

Prepaid expenses and other current assets

 

 

(2,465

)

 

 

(3,790

)

Other assets

 

 

(358

)

 

 

25

 

Accounts payable

 

 

2,043

 

 

 

2,592

 

Accrued liabilities and accrued clinical supply costs

 

 

(3,383

)

 

 

(5,500

)

Deferred revenue

 

 

175,526

 

 

 

(4,110

)

Lease liabilities

 

 

(995

)

 

 

(821

)

Other long-term liabilities

 

 

 

 

 

(314

)

Net cash provided by (used in) operating activities

 

 

135,091

 

 

 

(52,693

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(692

)

 

 

(947

)

Purchase of marketable securities

 

 

(30,114

)

 

 

 

Maturities of marketable securities

 

 

18,700

 

 

 

110,500

 

Net cash provided by (used in) investing activities

 

 

(12,106

)

 

 

109,553

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from the exercise of options to purchase common stock

 

 

2,483

 

 

 

3,874

 

Net cash provided by financing activities

 

 

2,483

 

 

 

3,874

 

Net increase in cash, cash equivalents, and restricted cash

 

 

125,468

 

 

 

60,734

 

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

 

 

330,624

 

 

 

51,441

 

Cash, cash equivalents, and restricted cash at end of period

 

$

456,092

 

 

$

112,175

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Property and equipment purchases included in accounts
   payable and accrued liabilities

 

$

499

 

 

$

628

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

Alector, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. The Company and Liquidity

Alector, Inc. (Alector or the Company) is a Delaware corporation headquartered in South San Francisco, California. Alector is a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of neurodegeneration.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP) as defined by the Financial Accounting Standards Board (FASB). In the opinion of management, these unaudited condensed consolidated financial statements include all normal, recurring adjustments that are necessary to present fairly the results of the interim periods presented. The condensed consolidated financial statements include the accounts of Alector, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2021, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 24, 2022.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. The Company evaluates its estimates, including those related to revenue recognition, manufacturing accruals, clinical accruals, fair value of assets and liabilities, income taxes uncertainties, stock-based compensation, and related assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and short-term marketable securities. Cash and cash equivalents are deposited in checking and sweep accounts at financial institutions. Such deposits may, at times, exceed federally insured limits.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value.

Restricted cash as of March 31, 2022 relates to a letter of credit established for a lease entered into in June 2018.

6


 

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 same amounts shown in the condensed consolidated statements of cash flows:

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

454,620

 

 

$

110,703

 

Restricted cash

 

 

1,472

 

 

 

1,472

 

Total cash, cash equivalents, and restricted cash

 

$

456,092

 

 

$

112,175

 

Marketable Securities

All marketable securities have been classified as “available-for-sale” and are carried at fair value, based upon quoted market prices. The Company considers its available-for-sale portfolio as available for use in current operations. Accordingly, the Company may classify certain investments as short-term marketable securities, even though the stated maturity date may be one year or more beyond the current balance sheet date. For available-for-sale debt securities, unrealized gains, net of any related tax effects, are excluded from earnings and are included in other comprehensive income and reported as a separate component of stockholders’ equity until realized. The Company assesses available-for-sale debt securities on a quarterly basis to see if any unrealized loss is due to credit-related factors. Factors considered in determining whether an impairment is credit-related include the extent to which the investment’s fair value is less than its cost basis, declines in published credit ratings, changes in interest rates, and any other adverse factors related to the security. If it is determined that a credit-related impairment exists, the Company will measure the credit loss based on a discounted cash flows model. Credit-related impairments on available-for-sale debt securities are recognized as an allowance for credit losses with a corresponding adjustment to other income, net in the Company’s consolidated statement of operations. The unrealized loss position that is not credit-related is recorded, net of any related tax effects, in other comprehensive income until realized. There were no credit-related losses recognized for the periods presented.

The cost of securities sold is based on the specific-identification method. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. In accordance with our investment policy, management invests in money market funds, U.S. treasury securities, and corporate bonds. The Company has not experienced any losses on its deposits of cash, cash equivalents, and marketable securities.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, marketable securities, receivable from collaboration partner, current and noncurrent prepaid expenses, accounts payable, and accrued liabilities. The Company’s financial instruments approximate fair value due to their relatively short maturities.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

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 significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

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Revenue Recognition

The Company recognizes revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under arrangements, the Company 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 the performance obligation. If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling price (SSP). The relative SSP for each deliverable is estimated using external sourced evidence if it is available. If external sourced evidence is not available, we use our best estimate of the SSP for the deliverable.

The Company recognizes collaboration revenue at a point in time if control of the promised good or service has been transferred to the customer. The Company recognizes collaboration revenue over time by measuring the progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue over the research and development period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. The Company re-evaluates the estimate of expected costs to satisfy the performance obligation each reporting period.

Stock-based Compensation

Stock-based compensation is measured on the grant date based on the fair value of the awards. The fair value of options to purchase common stock is measured using the Black-Scholes option-pricing model. Stock-based compensation associated with restricted stock units (RSUs) is based on the fair value of the Company's common stock on the grant date, which equals the closing price of the Company's common stock on the grant date. The Company recognizes expense over the vesting period of the awards. Expense for options and RSUs that vest based only on a service condition is recognized on a straight-line basis.

In 2021, the Company began granting RSUs with market conditions to certain executives. The fair value of RSUs with market conditions is estimated using a Monte Carlo simulation model. Assumptions and estimates utilized in the model include the stock price on grant date, risk-free interest rate, dividend yield, expected stock volatility, and estimated period to achieve the market condition. The expense is recognized based on continued employment of the participants, regardless of achievement of the market condition. Expense related to the RSUs with market conditions is recognized using the accelerated attribution method.

The Company accounts for forfeitures as they occur for all awards.

 

Comprehensive Loss

Comprehensive Loss includes net loss and certain changes in stockholders’ equity that are the result of transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive loss was net unrealized loss on marketable securities.

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3. Fair Value Measurements

The following tables summarize the Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:

 

 

 

March 31, 2022

 

 

 

Fair Value
Hierarchy

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair Market
Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

359,789

 

 

$

 

 

$

 

 

$

359,789

 

U.S. government treasury securities

 

Level 1

 

 

417,885

 

 

 

 

 

 

(3,934

)

 

 

413,951

 

Total cash equivalents and marketable
   securities

 

 

 

$

777,674

 

 

$

 

 

$

(3,934

)

 

$

773,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

Fair Value
Hierarchy

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair Market
Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

218,451

 

 

$

 

 

$

 

 

$

218,451

 

U.S. government treasury securities

 

Level 1

 

 

407,041

 

 

 

8

 

 

 

(950

)

 

 

406,099

 

Total cash equivalents and marketable
   securities

 

 

 

$

625,492

 

 

$

8

 

 

$

(950

)

 

$

624,550

 

 

The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models for which all significant inputs are observable. The Company classifies marketable securities available to fund current operations as current assets. As of March 31, 2022, the remaining contractual maturities of $649.5 million of investments were less than one year and $124.2 million of investments were after one year through two years. The Company does not intend to sell the investments that are currently in an unrealized loss position, and it is highly unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. As of March 31, 2022, the Company considered any unrealized losses on our marketable securities to be driven by factors other than credit risk.

4. Collaboration Agreements

GSK

On July 1, 2021, the Company entered into a Collaboration and License Agreement with Glaxo Wellcome UK Limited, a subsidiary of GlaxoSmithKline plc (GSK), pursuant to which the Company and GSK will collaborate on the global development and commercialization of progranulin-elevating monoclonal antibodies, including AL001 (latozinemab) and AL101 (GSK Agreement). The GSK Agreement was made effective on August 17, 2021.

Under the terms of the GSK Agreement, the Company received $700 million in upfront payments, of which $500 million was received in August 2021 and $200 million was received in January 2022. In addition, based on the development and commercialization plan for latozinemab and AL101, the Company may be eligible to receive up to an additional $1.5 billion in clinical development, regulatory, and commercial launch-related milestone payments. In the United States, the Company and GSK will equally share profits and losses from commercialization of latozinemab and AL101. Outside of the United States, the Company will be eligible for double-digit tiered royalties.

The Company and GSK will jointly develop latozinemab and AL101. The Company will lead the global clinical development of latozinemab and AL101, other than with respect to Phase 3 clinical trials for Alzheimer’s disease and Parkinson’s disease and other non-orphan indications, which will be led by GSK. The Company and GSK will share development costs 60% by GSK and 40% by the Company, except that the Company will solely bear the development costs of the initial Phase 2 clinical trials under the development plan, and the parties will share manufacturing development costs equally.

In the United States, the Company and GSK will be jointly responsible for commercialization of latozinemab and AL101, with the Company leading the commercialization for orphan indications and GSK leading the commercialization for Alzheimer’s disease and Parkinson’s disease and other non-orphan indications. Outside of the United States, GSK will be solely responsible for commercialization of latozinemab and AL101 for all indications. The Company may opt out of the sharing of development costs and of profit and losses from commercialization in the United States on a product-by-product basis. In such case, the Company will no longer conduct development or

9


 

commercialization of that product and the Company will receive tiered royalties on net sales in the United States instead of a share of profits or losses. GSK may terminate the agreement at any time with 180 days' notice, but the Company does not need to repay any portion of the payments received.

The Company concluded that the GSK Agreement is within the scope of ASC 808, Collaborative Arrangements, as both parties are active participants in the activities and are exposed to significant risks and rewards dependent on the success of the commercialization of latozinemab and AL101. Certain elements are required to be accounted for under ASC 606, Revenue From Contracts With Customers, where the counterparty is a customer for a good or service that is a distinct unit of account.

The Company concluded that the GSK Agreement contained the following units of account: (i) license and know-how for frontotemporal dementia due to a progranulin gene mutation (FTD-GRN) in Phase 3 clinical development, (ii) research and development activities, including license rights and know-how, relating to products in Phase 2 or earlier stages of development, and (iii) research and development services under the co-development plan to be accounted for outside of ASC 606, including all products that move into Phase 3 clinical development. The Company determined that the distinct performance obligations under ASC 606 consisted of: (i) license and know-how to latozinemab FTD-GRN, which is currently in Phase 3 clinical development and (ii) the research and development activities, including license rights and know-how, relating to products in Phase 2 or earlier stages of development.

The transaction price at inception included fixed consideration consisting of the upfront payments of $700 million. All potential future milestones and other payments were considered constrained at the inception of the GSK Agreement since the Company could not conclude it was probable that a significant reversal in the amount of revenue recognized would not occur.

The respective standalone value for each of the performance obligations was allocated to the transaction price. The estimated SSP of each performance obligation was determined using discounted cash flows from the expected commercialization of latozinemab and AL101 and estimated research and development costs to be incurred by the Company in the initial Phase 2 clinical trials. The estimate of SSP for each performance obligation reflects management's assumptions, which may include forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. For the license for FTD-GRN, the Company determined that GSK could benefit from the license at the time the license was granted and therefore, the related performance obligation was satisfied at a point in time. For the product candidates in Phase 2 or earlier stages of development, the Company determined that GSK could not benefit from the licenses without the corresponding development services that the Company has committed to perform due the earlier stage of development for these licenses. The Company will perform research and development activities through the end of the initial Phase 2 clinical trials. Revenue will be recognized over time as the research and development activities are performed. The Company will measure progress based on actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligations.

The research and development activities for products in Phase 3 clinical development were determined to be within the scope of ASC 808. Both parties will be active participants in the development, manufacturing, and commercialization of the product and are exposed to significant risks and rewards that are dependent on the commercial success of the products. The Company and GSK participate in profit and loss sharing for each program commensurate with each party's cost-sharing responsibilities during research and development. ASC 808 does not provide recognition and measurement guidance. As such, the Company determined that ASC 730, Research and Development, was appropriate to analogize to based on the nature of the cost-sharing provision of the agreement. The Company has concluded that payments to or reimbursements from GSK related to these services will be accounted for as an increase to or reduction of research and development expenses, respectively.

Collaboration revenue under the GSK Agreement during the three months ended March 31, 2022 was $21.2 million, all of which was included in deferred revenue at the beginning of the period. No revenue was recognized during the three months ended March 31, 2021 as the GSK Agreement was not yet effective. The deferred revenue related to the GSK Agreement was $486.7 million as of March 31, 2022. The deferred revenue is expected to be recognized over the research and development period of the programs through the completion of initial Phase 2 clinical trials.

Costs associated with co-development activities performed under the agreement are included in research and development expenses in the condensed consolidated statements of operations, with any reimbursement of costs by GSK reflected as a reduction of such expenses. For the three months ended March 31, 2022, the Company recognized a reduction of research and development expense of $5.4 million under the GSK Agreement. No reimbursement of research and development expense was recognized during the three months ended March 31, 2021 as the GSK Agreement was not yet effective.

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AbbVie

The Company entered into an agreement in October 2017 with AbbVie Biotechnology, Ltd. (AbbVie) to co-develop antibodies to two program targets in preclinical development (AbbVie Agreement). Under the terms of the AbbVie Agreement, AbbVie made $205 million in upfront payments, of which $5 million and $200 million were received by the Company in October 2017 and January 2018, respectively. The Company will perform research and development services for the two programs through the end of Phase 2 clinical trials. After completion of the Phase 2 clinical trial for each program, AbbVie will then have the exclusive right to exercise an option under the license and collaboration agreement with the Company for that program for $250 million. If AbbVie exercises its option for a program, AbbVie will take over the development of the product candidates for such program and costs will be split between the parties. The Company will also share in profits and losses upon commercialization of any products from such program. However, following AbbVie’s exercise of its option for a program, the Company may opt out of sharing in development costs and profits or losses for that program and instead receive tiered royalties. Additionally, under the terms of the AbbVie Agreement, the Company will be eligible to earn up to an additional $242.8 million in milestone payments per program related to the initiation of certain clinical studies and regulatory approval for up to three indications per program. The Company assessed its collaboration agreement with AbbVie in the context of the delivery of the research and development services.

Collaboration revenue under the Company’s collaboration agreement with AbbVie during the three months ended March 31, 2022 and 2021 was $3.3 million and $4.1 million, respectively, the entire amount of which was included in deferred revenue at the beginning of the period. The deferred revenue related to the AbbVie Agreement was $114.1 million and $128.2 million as of March 31, 2022 and 2021, respectively. The deferred revenue is expected to be recognized over the research and development period of the programs through the completion of Phase 2 clinical trials. The Company has had changes to the overall expected costs to satisfy the performance obligations from period to period for the AbbVie Agreement. For the three months ended March 31, 2022, the Company had a 2% increase in the forecast of the total expected costs. As a result of the cumulative catch up for the change in estimate, revenue was reduced by approximately $1.8 million compared to if the expected costs had remained the same.

Innovent

The Company entered into an agreement in March 2020 with Innovent Biologics (Innovent) to license, develop, and commercialize AL008 in China (Innovent Agreement). AL008 is the Company’s novel antibody targeting the CD47-SIRP-alpha pathway, a potent survival pathway co-opted by tumors to evade the innate immune system. Under the terms of the Innovent Agreement, Innovent may pay the Company up to $11.5 million in development milestones, $112.5 million in sales milestones, and future royalties on sales. The Company retains the rights to develop and commercialize AL008 outside of China. The Company has determined there is one performance obligation for the delivery of the license and will recognize revenue when it is probable that there will not be significant reversal of cumulative revenue. Development and sales milestones under the Innovent Agreement have not been included in the transaction price, as all these amounts were fully constrained as of March 31, 2022. As of March 31, 2022, no revenue has been recognized and no payments have been received under the Innovent Agreement.

5. Stock-based Compensation

The Company recognized stock-based compensation as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Research and development

 

$

6,626

 

 

$

4,363

 

General and administrative

 

 

5,313

 

 

 

4,437

 

Total stock-based compensation

 

$

11,939

 

 

$

8,800

 

2019 Equity Incentive Plan and 2022 Inducement Plan

On January 1, 2022, the Company added 4,099,309 shares to the shares reserved for issuance under the 2019 Equity Incentive Plan (2019 Plan). As of March 31, 2022, the Company had reserved 22,451,254 shares of common stock for issuance under the 2019 Plan, of which 7,829,077 shares were available for issuance of future awards. On January 1, 2022, the Company adopted the 2022 Inducement Plan (Inducement Plan) and reserved 1,630,000 shares for issuance

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under the Inducement Plan for the grant of equity-based awards to individuals who were not previously employees or non-employee directors of the Company. As of March 31, 2022, 762,000 shares were available for issuance of future awards under the Inducement Plan.

Option activity is shown below:

 

 

 

Number of
Options

 

 

Weighted
Average
Exercise
Price Per
Share

 

 

Weighted
Average
Remaining
Contractual
Term

 

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding as of December 31, 2021

 

 

11,644,070

 

 

$

16.41

 

 

 

 

 

 

 

Granted

 

 

1,575,780

 

 

 

17.27

 

 

 

 

 

 

 

Exercised

 

 

(234,117

)

 

 

10.61

 

 

 

 

 

 

 

Forfeited

 

 

(460,926

)

 

 

18.38

 

 

 

 

 

 

 

Outstanding as of March 31, 2022

 

 

12,524,807

 

 

$

16.55

 

 

$

8.3

 

 

$

19,371

 

Exercisable as of March 31, 2022

 

 

5,152,851

 

 

$

14.95

 

 

$

7.5

 

 

$

12,167

 

Vested and expected to vest as of March 31,
   2022

 

 

12,524,807

 

 

$

16.55

 

 

$

8.3

 

 

$

19,371

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money. As of March 31, 2022, total unrecognized stock-based compensation related to unvested stock options was $84.3 million, which the Company expects to recognize over a remaining weighted-average period of 2.7 years.

Restricted Stock Activity

Activity for the restricted stock awards and RSUs is shown below. In May 2021, the Company began to issue RSUs with market conditions to certain executives, which are included in the table below. The RSUs with market conditions are earned based on stock price performance and continued service by the employee.

 

 

 

Number of
Shares

 

 

Weighted
Average
Grant
Date Fair
Value per
Share

 

Unvested restricted stock units as of December 31, 2021

 

 

1,373,874

 

 

$

18.35

 

Granted

 

 

118,000

 

 

 

19.14

 

Vested

 

 

(104,368

)

 

 

19.67

 

Forfeited

 

 

(52,136

)

 

 

20.31

 

Unvested restricted stock units as of
   March 31, 2022

 

 

1,335,370

 

 

$

18.24

 

 

As of March 31, 2022, total unrecognized stock-based compensation related to unvested restricted stock awards and restricted stock units was $21.3 million, which the Company expects to recognize over a remaining weighted-average period of 2.1 years.

2019 Employee Stock Purchase Plan

The 2019 Employee Stock Purchase Plan (2019 ESPP) enables eligible employees of the Company to purchase shares of common stock at a discount. As of March 31, 2022, the Company has reserved for issuance 2,979,129 shares of common stock pursuant to the 2019 ESPP. Each offering period is approximately six months long. 2019 ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the first trading day of the offering period or (2) the fair market value of the common stock on the purchase date.

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6. Income Taxes

For the three months ended March 31, 2022 and 2021, the Company's effective tax rate was (1.1)% and zero, respectively. Section 174 of the Internal Revenue Code requires capitalization of research and development expenses to then be amortized over five years for U.S. based research and 15 years for research conducted outside of the U.S., which limits the amount of research and development expenses that can be used to offset income in the current year. The difference between the effective tax rate as of March 31, 2022 and 2021, respectively, and the U.S. federal statutory rate of 21% was primarily due to the anticipatory recognition of a certain amount of current year income tax as a result of this capitalization effective this year.

7. Related Party Transactions

In 2014, the Company entered into a collaboration agreement with Adimab, LLC (Adimab) under which the Company is developing antibodies discovered by Adimab in its latozinemab and AL101 programs and is developing antibodies optimized by Adimab in its AL002 and AL003 programs (2014 Adimab Agreement). In August 2019, the Company signed a collaboration agreement with Adimab for research and development of additional antibodies (2019 Adimab Agreement). In December 2021, the Company signed another collaboration agreement with Adimab for antibody engineering research programs (2021 Adimab Agreement). The Chief Executive Officer of Adimab is a Co-founder and Chairperson of the board of directors of Alector. For the three months ended March 31, 2022, the Company incurred expenses of $0.1 million. For the three months ended March 31, 2021, the Company incurred expenses of $1.0 million for milestone payments for progress of programs through clinical trials. The Company had $0.1 million and zero accrued liabilities due to Adimab as of March 31, 2022 and 2021. Under the 2014 Adimab Agreement, the Company will owe up to $3.5 million in milestone payments per program to Adimab for its product candidates and will also owe low- to mid- single-digit royalty payments for commercial sales of such product candidates. Under the 2019 and 2021 Adimab Agreements, the Company will owe certain milestone payments and low single-digit royalty payments for commercial sales of covered product candidates.

8. Net Loss Per Share

The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Restricted stock subject to future vesting

 

 

1,335,370

 

 

 

100,881

 

Options to purchase common stock

 

 

12,524,807

 

 

 

12,634,433

 

Shares committed under 2019 ESPP

 

 

70,406

 

 

 

86,677

 

Total

 

 

13,930,583

 

 

 

12,821,991

 

 

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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 condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors” included elsewhere in this report.

Overview

We are a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of neurodegeneration. Immuno-neurology targets immune dysfunction as a root cause of multiple pathologies that are drivers of degenerative brain disorders. We are developing therapies designed to counteract these pathologies simultaneously by restoring healthy immune function to the brain. Supporting our scientific approach, our research and drug discovery platform enables us to advance a broad portfolio