Item 1A. Risk Factors.
Our business faces significant risks and uncertainties. If any of the following risks, or other risks not presently known to us or that we currently believe to not be material, are realized, our business, financial condition and results of operations could be materially and adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment. Based upon the topline results from the Phase 2 clinical trial of pomotrelvir (formerly known as PBI-0451), we have decided to suspend further clinical development of pomotrelvir, winddown our research and development activities, and reduce headcount by approximately 89% through a reduction in our workforce, and our Board of the Directors (Board) has initiated a review of a range of strategic alternatives that may include, but is not limited to, an acquisition, merger, business combination, or other transaction, including an acquisition via merger, license or otherwise, of products or additional product candidates. There can be no assurance that this review process will result in us pursuing a transaction or that any transaction, if pursued, will be completed on attractive terms or at all. In the event that we were to resume research and development activities and ultimately commercialize any therapeutic products, many of the risks we describe in Part I, Item 1A “Risk Factors” of our 2022 Form 10-K will apply to our future operations. We have included supplemental risks to those described in the 2022 Form 10-K in this Quarterly Report on Form 10-Q describing the additional risks we face in light of our current winddown activities and our efforts to identify and evaluate a range of strategic alternatives. You should carefully review and consider the full discussion of our risk factors below, together with all other information in this Quarterly Report on Form 10-Q, including our unaudited condensed financial statements and notes thereto, and in our other filings with the SEC, including those identified under the caption “Risk Factors” in Part I, Item 1A of our 2022 Form 10-K. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
Risks Related to Strategic Alternative Process and Potential Strategic Transaction
We may not be successful in identifying and implementing any strategic business combination or other transaction and any strategic transaction that we may consummate in the future could have negative consequences.
On March 31, 2023, we decided to suspend further clinical development of pomotrelvir and to winddown our research and development programs. In connection with this decision, our Board approved a reduction in our workforce designed to substantially reduce our operating expenses while we undertake a comprehensive assessment of strategic alternatives to maximize stockholder value. These strategic alternatives may include, but are not limited to, an acquisition, merger, business combination, or other transaction, including an acquisition via merger, license or otherwise, of products or additional product candidates. There can be no assurance that this review process will result in us pursuing a transaction or that any transaction, if pursued, will be completed on attractive terms or at all. The process of evaluating these strategic alternatives may be time-consuming and complex, and we may incur significant costs related to this evaluation, such as for financial advisors, as well as legal and accounting fees and expenses and other related charges. We may also incur additional unanticipated expenses in connection with this process. A considerable portion of these costs will be incurred regardless of whether any such course of action is implemented or any transaction is pursued or completed. Any such expenses will decrease the remaining cash available for use in our business and may diminish or delay any future distributions to our stockholders.
In addition, any strategic business combination or other transactions that we may consummate in the future could have a variety of negative consequences, and we may implement a course of action or consummate a transaction that yields unexpected results that adversely affect our business and decrease the remaining cash available for use in our business or the execution of our strategic plan. There can be no assurances that any particular course of action, business arrangement or transaction, or series of transactions, will be pursued, successfully consummated, lead to increased stockholder value, or achieve its anticipated results. Any failure of such potential transaction to achieve its anticipated results could significantly impair our ability to enter into any future strategic transactions and may significantly diminish or delay any future distributions to our stockholders.
We may not realize any additional value in a strategic transaction.
Our market capitalization is currently below the value of our cash, cash equivalents and short-term investments. Potential counterparties in a strategic transaction involving us may place minimal or no value on our assets, including pomotrelvir and our next generation compounds. Further, the development and any potential commercialization of our product candidates will require substantial additional cash to fund the costs associated with conducting the necessary preclinical and clinical testing and obtaining regulatory approval.
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Consequently, any potential counterparty in a strategic transaction involving us may choose not to spend additional resources and continue development of our product candidates and may attribute little or no value, in such a transaction, to those product candidates.
If we are successful in completing a strategic transaction, we may be exposed to other operational and financial risks.
Although there can be no assurance that a strategic transaction will result from the process we have undertaken to identify and evaluate strategic alternatives, the negotiation and consummation of any such transaction will require significant time on the part of our management, and the diversion of management’s attention may disrupt our orderly operation. The negotiation and consummation of any such transaction may also require more time or greater cash resources than we anticipate and expose us to other operational and financial risks, including:
•increased near-term and long-term expenditures;
•exposure to unknown liabilities;
•higher than expected acquisition or integration costs;
•incurrence of substantial debt or dilutive issuances of equity securities to fund future operations;
•write-downs of assets or incurrence of non-recurring, impairment or other charges;
•increased amortization expenses;
•difficulty and cost in combining the operations and personnel of any acquired business with our operations and personnel;
•impairment of relationships with key suppliers or customers of any acquired business due to changes in management and ownership;
•inability to retain key employees of the Company or those of any acquired business; and
•possibility of future litigation.
Any of the foregoing risks could have a material adverse effect on our business, financial condition and prospects.
If a strategic transaction is not consummated, our Board may decide to pursue a dissolution and liquidation. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
There can be no assurance that a strategic transaction will be completed. If a strategic transaction is not completed, our Board may decide to pursue a dissolution and liquidation. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision, as the amount of cash available for distribution will decline over time as we continue to fund our operations. In addition, if our Board were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations and the timing of any such resolution would be uncertain. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation. If a dissolution and liquidation were pursued, our Board, in consultation with our advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up.
Our ability to consummate a strategic transaction depends on our ability to retain our employees required to consummate such transaction.
In April 2023, we significantly reduced our workforce in order to conserve our capital resources and align our workforce with our operational needs. Additional work force reductions are expected to continue to occur throughout the second quarter of 2023 as our research and development programs related to pomotrelvir and our next generation compounds are wound down. Our cash conservation activities may yield unintended consequences, such as attrition beyond our planned reduction in workforce and reduced employee morale, which may cause remaining employees to seek alternative employment. Our ability to successfully complete a strategic transaction depends in large part on our ability to retain certain of our remaining personnel required to consummate such a transaction, the loss of whose services may adversely impact our ability to consummate such a transaction. If we are unable to successfully retain our remaining personnel, we are at risk of a disruption to our exploration and consummation of a strategic alternative as well as business operations.
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Our decision to suspend development of pomotrelvir, winddown our research and development activities, and the related reduction in our workforce may not result in anticipated savings, could result in total costs and expenses that are greater than expected and could disrupt our business.
In early April 2023, we announced the suspension of the clinical development of pomotrelvir, the winddown of our research and development activities, and a reduction in our workforce that is expected to be completed in the second quarter of 2023, which is estimated to be approximately 89% of our workforce. We may not realize, in full or in part, the anticipated benefits and savings from the winddown of our research and development activities due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize expected cost savings, our operating results and financial condition would be adversely affected. Furthermore, the reduction in our workforce could yield unanticipated consequences, such as increased difficulties in implementing our business strategy, including retention of our remaining employees. Employee litigation related to the headcount reduction could be costly and prevent management from fully concentrating on the business.
Due to our limited resources, we may not be able to effectively manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our operations, risks that we may not be able to comply with legal and regulatory requirements, and loss of employees and reduced productivity among remaining employees.
The impact and results of our ongoing strategic process are uncertain and may not be successful.
Over the past several years, we have focused our strategic efforts on maximizing stockholder value through strategic transactions, such as the Business Combination. In connection with the Business Combination, certain investors purchased an aggregate of $75.0 million of our common stock in the PIPE Investment. Together with Old Pardes’ cash resources and funding of the PIPE Investment, we received net proceeds from the Business Combination of approximately $257.5 million. We may continue to focus our efforts on creating value from pomotrelvir or other product candidates for our stockholders through a sale or other transaction involving the program and pursuing potential strategic options for our Company as a whole.
Our Board remains dedicated to diligently deliberating upon and making informed decisions that the directors believe are in the best interests of the Company and our stockholders. There can be no assurance, however, that the Company’s current strategic direction, or the Board’s evaluation of strategic alternatives, will result in any initiatives, agreements, transactions or plans that will further enhance stockholder value.
In addition, given the substantial restructuring of our operations, it may be difficult to evaluate our current business and future prospects on the basis of historical operating performance.
Our executive officers, directors and principal stockholders, if they choose to act together, or Dr. Tananbaum and his affiliates acting together, will have the ability to significantly influence all matters submitted to stockholders for approval.
As of May 1, 2023, Dr. Tananbaum, a member of our Board, and his affiliates (together, the “Foresite Group”) collectively owned approximately 27.2% of our outstanding shares of common stock and, as a result, have the ability to significantly influence all matters submitted to our stockholders for approval, including the approval of any significant transaction. Further, on April 21, 2023, the Foresite Group filed an amended Schedule 13D with the SEC disclosing that it had submitted a non-binding expression of interest letter to the Board setting forth an intent to explore and evaluate a potential acquisition of all of the shares of outstanding common stock of the Company not currently owned by the Foresite Group in a going private transaction. Additionally, as of May 1, 2023, our executive officers, directors and their affiliates (including Dr. Tananbaum), in the aggregate, owned approximately 40.6% of our outstanding shares of common stock and, as a result, when acting together have the ability to significantly influence all matters submitted to our Board or stockholders for approval, including the appointment of our management, the election and removal of directors and approval of any significant transaction, as well as our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.
We may become involved in securities class action litigation that could divert management’s attention and harm our business, and insurance coverage may not be sufficient to cover all costs and damages.
In the past, securities class action litigation has often followed certain significant business transactions, such as the sale of a company or announcement of any other strategic transaction, or the announcement of negative events, such as negative results from clinical trials. These events may also result in investigations by the SEC. We may be exposed to such litigation or investigation even if no wrongdoing has occurred. Litigation and investigations are usually expensive and divert management’s attention and resources, which could adversely affect our business and cash resources and our ability to consummate a potential strategic transaction or the ultimate value our stockholders receive in any such transaction.
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Risks Related to our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception and may incur losses for the foreseeable future and may never achieve profitability.
To date, we have devoted almost all of our financial resources to research and development, including preclinical and clinical development activities. While we recently made the decision to suspend development of pomotrelvir and winddown our research and development activities, and are not currently developing any product candidates, in order to become and remain profitable we would need to succeed in developing, and eventually commercializing, a product or products that generate significant revenue. The ability to achieve this success would require us to be effective in a range of challenging activities, including completing preclinical testing and clinical trials of any future product candidates we may develop, obtaining regulatory approval for these future product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We may never undertake or succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will ever achieve profitability.
For the year ended December 31, 2022 and the three months ended March 31, 2023, we reported a net loss of $96.6 million and $17.8 million, respectively. As of March 31, 2023, we had an accumulated deficit of $166.0 million. Depending on the outcome of our exploration of strategic alternatives, we may continue to incur significant losses for the foreseeable future, and we expect these losses would continue as we complete the winddown of our research and development activities and continue operations as a public company. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
If we decide to pursue any future product development efforts, we will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or any commercialization efforts.
Although we are not currently developing any product candidates, if we decide in the future to pursue any product development efforts, we expect that we would incur significant research and development expenses and would need substantial additional funding. If we are unable to raise capital when needed or on attractive terms, or at all, we would be forced to delay, reduce or eliminate any such future research and development programs or commercialization efforts and/or we could be forced to revise or abandon our business strategy.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and even if we decide to resume preclinical and clinical development we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, even if approved, any product candidates we may develop in the future may not achieve commercial success. Commercial revenues, if any, will not be derived unless and until we can achieve sales of products, which we would not anticipate for several years, if at all. If we decide to pursue any product development efforts in the future, we will need to obtain substantial additional funding in connection with our continuing operations.
In January 2023, we entered into a sales agreement (Sales Agreement), with SVB Securities, LLC, as sales agent, providing for the offering, issuance and sale by us of up to an aggregate of $50.0 million of our common stock from time to time in “at-the-market” offerings under a shelf registration statement on Form S-3. As of March 31, 2023, we have not issued and sold any shares of common stock under the Sales Agreement. The extent to which we utilize the Sales Agreement as a source of funding will depend on a number of factors, including the prevailing market price of our common stock, general market conditions and the extent to which we are able to secure funds from other sources. Accordingly, we may not be able to sell shares under the Sales Agreement at prices or amounts that we deem acceptable, and there can be no assurance that we will sell any common stock pursuant to the Sales Agreement.
As of March 31, 2023 we had cash, cash equivalents and short-term investments of $172.2 million. Our future capital requirements will depend on many factors, including:
•whether we realize the anticipated cost savings in connection with our ongoing workforce reduction, anticipated to be completed in the second quarter of 2023;
•our ability to consummate a strategic transaction and the nature and type of such transaction;
•the time and cost necessary to close out our research and development programs;
•if we decide to pursue any future product development efforts, our ability to bring any future product candidates through preclinical and clinical development, and the timing and scope of these research and development activities;
•the costs of obtaining clinical and commercial supplies of any future product candidates we may develop;
•our ability to successfully commercialize any future product candidates we may develop;
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•the manufacturing, selling and marketing costs associated with any future product candidates we may develop, including the cost and timing of establishing our sales and marketing capabilities;
•the amount and timing of sales and other revenues from any future product candidates we may develop, including the sales price and the availability of coverage and adequate third-party reimbursement;
•the time and cost necessary to respond to technological and market developments;
•the extent to which we may acquire or in-license future product candidates and technologies;
•the impact of the COVID-19 pandemic and our response to it;
•general conditions in the global economy and financial markets, including relating to changes in gross domestic product growth, volatility and disruptions in the capital and credit markets, rising interest rates, increasing effects of inflation, global supply-chain disruptions, the tightening of the global labor market or turmoil in the global banking sector;
•the costs of maintaining, expanding and protecting our intellectual property portfolio; and
•the costs associated with operating as a public company and maintaining compliance with exchange listing and SEC requirements.
We may seek additional financing to achieve our business objectives. The U.S. capital markets have experienced and continue to experience extreme volatility and disruption and adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital when market conditions are favorable, or for strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis or on terms acceptable to us, we may be required to delay, limit, reduce or terminate any preclinical studies, clinical trials or other activities for any product candidates under development at such time, or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize any future product candidates.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of the sale of one or more of our product candidates or other assets, equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights as common stockholders. Debt financing and preferred equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making capital expenditures or declaring dividends.
If we raise additional funds through the sale of one or more of our product candidates or other assets, collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed or on terms acceptable to us, we may be required to delay, limit, reduce or terminate any product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
We commenced activities in 2020 and our operations to date have been limited to organizing and staffing the Company, business planning, raising capital, developing our technology, and undertaking preclinical studies and clinical trials of our product candidates. We have not yet demonstrated the ability to successfully develop any product candidate, obtain regulatory approvals, manufacture a commercial-scale product or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing products.
We expect our financial condition and operating results to fluctuate significantly from quarter-to-quarter and year-to-year due to a variety of factors, many of which are beyond our control. Our decision at the end of March 2023 to terminate development of pomotrelvir and to winddown our research and development activities, and the related workforce reduction, are likely to further increase the variability of our operating results in the coming quarters as compared to prior quarters. Accordingly, our stockholders should not rely upon the results of any prior quarterly or annual periods as indications of future operating performance.
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Our ability to use our net operating losses (NOLs), and research and development tax credit carryforwards to offset future taxable income may be subject to certain limitations.
We have a history of cumulative losses and anticipate that we will continue to incur significant losses in the foreseeable future; thus, we do not know whether or when we will generate taxable income necessary to utilize our NOLs or research and development tax credit carryforwards. At December 31, 2022, we had federal and state NOLs carryforwards of approximately $65.8 million and $2.6
million, respectively. At December 31, 2022, we had federal and state research and development tax credits of $1.3 million and $0.6 million, respectively.
In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), and corresponding provisions of state law, a corporation that undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three year period, is subject to limitations on its ability to utilize its pre-change NOLs and research and development tax credit carryforwards to offset future taxable income. We have not completed an ownership change analysis pursuant to Section 382 of the Code. If ownership changes within the meaning of Section 382 of the Code have occurred, the NOL and research and development carry-forwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated. Further, deferred tax assets associated with such tax attributes could be significantly reduced or eliminated upon realization of an ownership change within the meaning of Section 382 of the Code. We have not conducted a study to assess whether any such ownership changes have occurred. We may have experienced such ownership changes in the past, including as a result of the Business Combination in December 2021, and may experience such ownership changes in the future as a result of subsequent changes in our stock ownership (which may be outside our control). As a result, if, and to the extent that, we earn net taxable income, our ability to use our pre-change NOLs and research and development tax credit carryforwards to offset such taxable income may be subject to limitations.
There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise become unavailable to offset future income tax liabilities. Additionally, state NOLs generated in one state cannot be used to offset income generated in another state. For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.