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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 March 31, 2021 
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: 001-38853
NGM BIOPHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware26-1679911
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
333 Oyster Point Boulevard
South San Francisco, CA
94080
(Address of principal executive offices)(Zip Code)
(650) 243-5555
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class of Securities RegisteredTrading
 Symbol
Name of Each Exchange on which Securities are Registered
Common Stock, par value $0.001 per shareNGMThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 FilerAccelerated filer
Non-accelerated filerSmaller 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 May 3, 2021, the registrant had 77,018,206 shares of common stock, $0.001 par value per share, outstanding.



Table of Contents
Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

i


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
NGM BIOPHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
March 31,
2021
December 31,
2020*
Assets
Current assets:
Cash and cash equivalents$148,113 $147,017 
Short-term marketable securities264,543 148,139 
Related party receivable from collaboration325 333 
Related party contract asset4,600 6,100 
Prepaid expenses and other current assets8,268 6,837 
Total current assets425,849 308,426 
Property and equipment, net13,733 14,526 
Restricted cash1,499 1,499 
Other non-current assets4,460 4,592 
Total assets$445,541 $329,043 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$7,535 $9,663 
Accrued liabilities29,763 29,945 
Deferred rent, current3,011 2,975 
Total current liabilities40,309 42,583 
Deferred rent, non-current5,655 6,417 
Total liabilities45,964 49,000 
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding as of March 31, 2021 and December 31, 2020, respectively
  
Common stock, $0.001 par value; 400,000,000 shares authorized; 76,913,578 and 70,585,364 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
77 71 
Additional paid-in capital725,693 578,599 
Accumulated other comprehensive income (loss)(18)4 
Accumulated deficit(326,175)(298,631)
Total stockholders' equity399,577 280,043 
Total liabilities and stockholders' equity$445,541 $329,043 
See accompanying notes to unaudited condensed consolidated financial statements.
*The condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited financial statements as of that date.
1


NGM BIOPHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)

Three Months Ended
March 31,
20212020
Related party revenue$21,575 $24,364 
Operating expenses:
Research and development40,699 38,439 
General and administrative8,721 6,595 
Total operating expenses49,420 45,034 
Loss from operations(27,845)(20,670)
Interest income, net114 1,175 
Other income, net187 380 
Net loss$(27,544)$(19,115)
Net loss per share, basic and diluted$(0.36)$(0.28)
Weighted average shares used to compute net loss per share, basic and diluted
76,034,145 67,396,229 
See accompanying notes to unaudited condensed consolidated financial statements.
2


NGM BIOPHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
20212020
Net loss$(27,544)$(19,115)
Other comprehensive loss, net of tax:
Net unrealized loss on available-for-sale marketable securities(22)(80)
Total comprehensive loss$(27,566)$(19,195)
See accompanying notes to unaudited condensed consolidated financial statements.
3


NGM BIOPHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)




Common StockAdditional
Paid-In Capital
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders' Equity
SharesAmount
Balance at December 31, 202070,583 $71 $578,599 $4 $(298,631)$280,043 
Issuance of common stock under offering, net of issuance costs5,324 5 134,565 134,570 
Issuance of common stock upon exercise of stock options1,001 1 5,906 — — 5,907 
Vesting of common stock from early exercises5 — 41 — — 41 
Stock-based compensation expense— — 6,582 — — 6,582 
Changes in unrealized loss on available-for-sale securities— — — (22)— (22)
Net loss— — — — (27,544)(27,544)
Balance at March 31, 202176,913 $77 $725,693 $(18)$(326,175)$399,577 



Common StockAdditional
Paid-In Capital
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders' Equity
SharesAmount
Balance at December 31, 201966,886 $67 $526,771 $25 $(196,144)$330,719 
Issuance of common stock upon exercise of stock options984 1 3,590 — — 3,591 
Vesting of common stock from early exercises21 — 162 — — 162 
Stock-based compensation expense— — 3,695 — — 3,695 
Changes in unrealized loss on available-for-sale securities— — — (80)— (80)
Net loss— — — — (19,115)(19,115)
Balance at March 31, 202067,891 $68 $534,218 $(55)$(215,259)$318,972 
See accompanying notes to unaudited condensed consolidated financial statements.

4


NGM BIOPHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
20212020
Cash flows from operating activities
Net loss$(27,544)$(19,115)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation1,554 1,731 
Amortization of premium (discount) on marketable securities570 (122)
Stock-based compensation expense6,582 3,695 
Other non-cash (income) expenses, net(315)120 
Changes in operating assets and liabilities:
Related party receivable from collaboration8 4,464 
Related party contract asset1,500  
Prepaid expenses and other assets(1,299)(2,005)
Accounts payable(2,128)(5,343)
Accrued liabilities(427)3,026 
Deferred rent(726)(689)
Deferred revenue (4,872)
Net cash used in operating activities(22,225)(19,110)
Cash flows from investing activities
Purchase of marketable securities(144,996)(29,399)
Proceeds from sales and maturities of marketable securities28,000 56,837 
Purchase of property and equipment(160)(565)
Net cash provided by (used in) investing activities(117,156)26,873 
Cash flows from financing activities
Net proceeds from follow on offering134,570  
Proceeds from issuance of common stock upon exercise of stock options5,907 3,591 
Net cash provided by financing activities140,477 3,591 
Net increase in cash and cash equivalents1,096 11,354 
Cash, cash equivalents and restricted cash at beginning of period148,516 247,472 
Cash, cash equivalents and restricted cash at end of period$149,612 $258,826 
Non-cash investing and financing activities:
Vesting of common stock from early exercises41 162 
Property and equipment purchases accrued and not yet paid637 270 
See accompanying notes to unaudited condensed consolidated financial statements.
5


NGM BIOPHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
NGM Biopharmaceuticals, Inc. and its wholly-owned subsidiary, collectively referred to as the Company, is focused on discovering and developing novel therapeutics based on scientific understanding of key biological pathways underlying liver and metabolic diseases, retinal diseases and cancer. The Company’s robust portfolio of product candidates range from early discovery to late-stage development and include aldafermin, MK-3655, NGM621, NGM120, NGM707 and NGM438. The Company has additional undisclosed programs that are in various stages of development ranging from functional validation to preclinical development.
The Company was incorporated in Delaware in December 2007 and commenced operations in 2008. Its headquarters are located at 333 Oyster Point Blvd., South San Francisco, California 94080.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and Regulation S-X for interim consolidated financial information. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the United States Securities and Exchange Commission, or SEC, on March 15, 2021. These unaudited condensed consolidated financial statements reflect all adjustments that management believes are necessary for a fair presentation of the periods presented. All such adjustments are of a normal recurring nature and are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
These unaudited condensed consolidated financial statements include the consolidated accounts of NGM Biopharmaceuticals, Inc. and its wholly-owned foreign subsidiary in Australia. All intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Specific accounts that require management estimates include, but are not limited to, the valuation of common stock and the associated stock-based compensation expense, contract manufacturing accruals, clinical trial accruals and revenue recognition in accordance with Accounting Standards Codification 606 or, ASC 606. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Uses and Sources of Liquidity
Since inception, the Company has incurred net losses and negative cash flow from operations. During the three months ended March 31, 2021, the Company incurred a net loss of $27.5 million compared to $19.1 million for the three months ended March 31, 2020. As of March 31, 2021, the Company had an accumulated deficit of $326.2 million. The Company expects its accumulated deficit will increase significantly over time and does not expect to experience positive cash flows from operations in the near future.
As of March 31, 2021, the Company had $412.7 million of cash, cash equivalents and short-term marketable securities. In January 2021, the Company sold 5,324,074 shares of its common stock through an underwritten public offering at a price to the public of $27.00 per share for aggregate net proceeds to the Company of $134.6 million after deducting underwriting discounts and commissions and other offering expenses paid by the Company. In June 2020, the Company entered into an Open Market Sale AgreementSM, or the Sales Agreement, with Jefferies LLC. During the three months ended March 31, 2021, no shares of the Company's common stock
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were sold pursuant to the Sales Agreement. As of March 31, 2021, $127.4 million of the Company's common stock remained available to be sold under the Sales Agreement, subject to conditions specified in the Sales Agreement.
The Company believes its existing cash, cash equivalents and short-term marketable securities will be sufficient to fund its operations for a period of at least one year from the date of these unaudited condensed consolidated financial statements.
To fully implement the Company’s business plan and fund its operations, the Company will need to raise additional capital through public or private equity offerings (which may include potential net proceeds from future sales, if any, under the Sales Agreement), debt financings, government or other third-party funding, collaborations, strategic alliances and licensing arrangements or a combination of the foregoing.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, the related party receivable from collaboration and other current assets and liabilities approximate their respective fair values due to their short-term nature.
Cash and Cash Equivalents
Cash and cash equivalents are stated at fair value. Cash equivalents are securities with an original maturity of three months or less at the time of purchase. The Company limits its credit risk associated with cash and cash equivalents by placing its investments with a bank it believes is highly creditworthy and with highly rated money market funds. As of March 31, 2021 and December 31, 2020, cash and cash equivalents consisted of bank deposits and investments in money market funds.
Marketable Securities
The appropriate classification of the Company’s marketable securities is determined at the time of purchase and such designations are re-evaluated at each balance sheet date. All of the Company’s securities are considered as available-for-sale and carried at estimated fair values and reported in cash equivalents and short-term marketable securities. Unrealized gains and losses on available-for-sale securities are excluded from net loss and reported in accumulated other comprehensive gain as a separate component of stockholders’ equity. Other income (expense), net, includes interest, amortization of purchase premiums and accretion of purchase discounts, realized gains and losses on sales of securities and other-than-temporary declines in the fair value of securities, if any. The cost of securities sold is based on the specific identification method.
The Company’s investments are regularly reviewed for other-than-temporary declines in fair value. This review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. When the Company determines that the decline in fair value of an investment is below its carrying value and this decline is other-than-temporary, the Company reduces the carrying value of the security it holds and records a loss for the amount of such decline. As of March 31, 2021, the Company did not record any impairment related to other-than-temporary declines in the fair value of securities.
Restricted Cash
The Company’s restricted cash balance represents collateral required under the Company’s facility lease agreement and is classified as a non-current asset on the condensed consolidated balance sheets, as the collateral will not be returned to the Company within 12 months from the date of these condensed consolidated financial statements.
Concentration of Credit and Other Risks
Cash and cash equivalents and marketable securities from the Company’s available-for-sale and marketable security portfolio potentially subject the Company to concentrations of credit risk. The Company is invested in money market funds and marketable securities through custodial relationships with major U.S. and Australian banks. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government.
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Related party receivables from collaborations are typically unsecured. Accordingly, the Company may be exposed to credit risk generally associated with its current collaboration agreement with Merck Sharp & Dohme Corp., or Merck, and any future collaboration agreements with other collaboration partners. To date, the Company has not experienced any losses related to these receivables.
Amounts recognized as revenue prior to the Company having an unconditional right (other than a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's condensed consolidated balance sheets. Although the Company expects to have an unconditional right to receive such amounts, the Company may be exposed to the risk of not receiving the recorded amounts under its current collaboration agreement with Merck and any future collaboration agreements with other collaboration partners. To date, the Company has not experienced any losses related to contract assets.
Merck accounted for 100% of the Company’s revenue for the three months ended March 31, 2021 and 2020.
Property and Equipment, Net
Property and equipment is recorded at cost and consists of computer equipment, laboratory equipment and office furniture and leasehold improvements. Maintenance and repairs, and training on the use of equipment, are expensed as incurred. Costs that improve assets or extend their economic lives are capitalized. Depreciation is recognized using the straight-line method based on an estimated useful life of the asset, which is as follows:
Computer equipment3 years
Laboratory equipment and office furniture3 years
Leasehold improvementShorter of life of asset or lease term
Leases
The Company’s lease agreements for its laboratory and office facilities are classified as operating leases. Rent expense is recognized on a straight-line basis over the term of the lease. Incentives granted under the Company’s facilities leases, including allowances to fund leasehold improvements and rent holidays, are capitalized and are recognized as reductions to rental expense on a straight-line basis over the term of the lease.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. As of March 31, 2021 and December 31, 2020, no revision to the remaining useful lives or write-down of long-lived assets was required.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured at the balance sheet date using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted.
Revenue Recognition
Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606) requires an entity to recognize revenue upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applies the following five-step revenue recognition model outlined in ASC 606 to adhere to this core
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principle: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation.
All of the Company’s revenue to date has been generated from its collaboration agreements, primarily its collaboration agreement with Merck. The terms of these agreements generally require the Company to provide (i) license options for its compounds, (ii) research and development services and (iii) non-mandatory services in connection with participation in research or steering committees. Payments received under these arrangements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products. In some agreements, the collaboration partner is solely responsible for meeting defined objectives that trigger contingent or royalty payments. Often the partner only pursues such objectives subsequent to exercising an optional license on compounds identified as a result of the research and development services performed under the collaboration agreement.
The Company assesses whether the promises in its arrangements, including any options provided to the partner, are considered distinct performance obligations that should be accounted for separately. Judgment is required to determine whether the license to a compound is distinct from research and development services or participation in research or steering committees, as well as whether options create material rights in the contract.
The transaction price in each arrangement is generally comprised of a non-refundable upfront fee and unconstrained variable consideration related to the performance of research and development services. The Company typically submits a budget for the research and development services to the partner in advance of performing the services. The transaction price is allocated to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. Judgment is required to determine the SSP. In instances where the SSP is not directly observable, such as when a license or service is not sold separately, SSP is determined using information that may include market conditions and other observable inputs. The Company utilizes judgment to assess the nature of its performance obligations to determine whether they are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress toward completion. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
The Company’s collaboration agreements may include contingent payments related to specified development and regulatory milestones or contingent payments for royalties based on sales of a commercialized product. Milestones can be achieved for such activities in connection with progress in clinical trials, regulatory filings in various geographical markets and marketing approvals from health authorities. Sales-based royalties are generally related to the volume of annual sales of a commercialized product. At the inception of each agreement that includes such payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price by using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or its partner’s control, such as those related to regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation based on a relative SSP basis. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Pursuant to the guidance in ASC 606, sales-based royalties are not included in the transaction price. Instead, royalties are recognized at the later of when the performance obligation is satisfied or partially satisfied, or when the sale that gives rise to the royalty occurs.
Research and Development
Research and development costs are expensed as incurred. Research and development expenses primarily include salaries and benefits for medical, clinical, quality, preclinical, manufacturing and research personnel, costs related to research activities, preclinical studies, clinical trials, drug manufacturing expenses and allocated overhead and facility occupancy costs. The Company accounts for non-refundable advance payments for goods or services that will be used in future research and development activities as expenses when the goods have been received or when the service has been performed rather than when the payment is made.
Clinical trial costs are a component of research and development expenses. The Company expenses costs for its clinical trial activities performed by third parties, including clinical research organizations, or CROs, and other service providers, as they are incurred, based upon estimates of the work completed over the life of the individual
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study in accordance with associated agreements. The Company uses assessments by internal personnel and information it receives from outside service providers to estimate the clinical trial costs incurred.
Stock-Based Compensation
The Company’s stock-based compensation programs include stock option grants, as well as shares issued under its 2019 Employee Stock Purchase Plan, or ESPP. Grants are awarded to employees, directors and nonemployees. The Company measures employee and director stock-based compensation expense for all stock-based awards at the grant date based on the fair value measurement of the award. Subsequent to the adoption of ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting on January 1, 2019, stock-based compensation expense for non-employee awards is measured based on the fair value on the date of adoption. The expense is recorded on a straight-line basis over the requisite service period, which is generally the vesting period, for the entire award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures materially differ from estimates. The Company calculates the fair value measurement of stock options using the Black-Scholes option-pricing model.
Foreign Currency Transactions
The functional currency of NGM Biopharmaceuticals Australia Pty Ltd., the Company’s wholly-owned subsidiary, is the U.S. dollar. Accordingly, all monetary assets and liabilities of the subsidiary are remeasured into U.S. dollars at the current period-end exchange rates and non-monetary assets are remeasured using historical exchange rates. Income and expense elements are remeasured to U.S. dollars using the average exchange rates in effect during the period. Remeasurement gains and losses are recorded as other income (expense), net on the condensed consolidated statements of operations.
The Company is subject to foreign currency risk with respect to its clinical and manufacturing contracts denominated in currencies other than the U.S. dollar, primarily British Pounds, Swiss Francs, Australian dollars and the Euro. Payments on contracts denominated in foreign currencies are made at the spot rate on the day of payment. Changes in the exchange rate between billing dates and payment dates are recorded within other income (expense), net, on the condensed consolidated statements of operations.
Comprehensive Loss
Comprehensive loss is composed of net loss and certain changes in stockholders’ equity that are excluded from net loss, primarily unrealized gains or losses, net of taxes, on the Company’s marketable securities.
Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during the period, less shares subject to repurchase and excludes any dilutive effects of stock-based options and awards. Diluted net income per ordinary share is computed by giving effect to all potentially dilutive shares, including common stock issuable upon exercise of stock options. However, where there is a diluted net loss per ordinary share, no adjustment is made for potentially issuable shares since their effect would be anti-dilutive. In this case, diluted net loss per share is equal to basic net loss per share.
Net loss per share was computed as follows (in thousands, except share and per share amounts):
Three Months Ended
March 31,
20212020
Numerator:
Net loss$(27,544)$(19,115)
Denominator:
Weighted average number of shares used in calculating net loss per share—basic and diluted76,034,145 67,396,229 
Net loss per share—basic and diluted$(0.36)$(0.28)
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Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
Three Months Ended
March 31,
20212020
Options to purchase common stock11,300,905 10,824,034 
Shares committed under ESPP291,992 396,360 
Total11,592,897 11,220,394 
Segment and Geographical Information
The Company operates in one business segment. Substantially all of the Company’s long-lived assets, comprised of property and equipment, are based in the United States. For the three months ended March 31, 2021 and 2020, the Company’s revenues were entirely within the United States based upon the location of the Company and Merck.
Recent Accounting Pronouncements
New accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by the Company 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 the Company’s results of operations and financial position upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended, the JOBS Act, the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
Recently Adopted Accounting Pronouncements
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (ASC 808): Clarifying the Interaction between ASC 808 and ASC 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer. In addition, ASC 808 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the participant is not a customer for that transaction. The Company adopted ASU 2018-18 effective January 1, 2021, noting no material impact on the Company’s results of operations and financial position.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance modifies ASC 740 to simplify several aspects of accounting for income taxes, including eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation. The Company adopted ASU 2019-12 effective January 1, 2021, noting no material impact on the Company’s results of operations and financial position.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which increases lease transparency and comparability among organizations. Under the new standard, lessees will be required to recognize right-of-use, or ROU, assets and lease liabilities arising from lease arrangements on the balance sheet, with the exception of leases with a term of twelve months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize the ROU assets and lease liabilities. In March 2018, the FASB approved an alternative transition method to the modified retrospective approach, which eliminates the requirement to restate prior period financial statements and allows the cumulative effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption. In November 2019, the FASB issued ASU 2019-10, which deferred the effective date for certain ASUs including ASU 2016-02. In June 2020, due to the evolving impacts of the COVID-19 pandemic, the FASB issued ASU 2020-05, which further defers the effective date of ASU 2016-02, which is now effective for the Company’s fiscal year beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Company plans to adopt the new lease standard in the fiscal year beginning January 1, 2022, using the optional transition method, which allows the Company to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit at the date of adoption and apply the new disclosure requirements beginning in the
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period of adoption. The Company also plans to elect the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carryforward the historical lease classification and make an accounting policy election whereby ROU assets and lease liabilities associated with lease arrangements with terms less than one year will not be recognized. The Company continues to evaluate the impact of this new lease standard to its results of operations and financial position.

3. Fair Value Measurements
Cash equivalents and marketable securities are classified as available-for-sale securities and consisted of the following (in thousands):
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
As of March 31, 2021
Money market funds$124,089 $ $ $124,089 
U.S. government agencies securities113,153 26  113,179 
Corporate and agency bonds76,474 1 (45)76,430 
Commercial paper74,934   74,934 
Totals$388,650 $27 $(45)$388,632 
Classified as:
Cash and cash equivalents$124,089 
Short-term marketable securities (amortized cost of $264,561)
264,543 
Total$388,632 
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
As of December 31, 2020
Money market funds$137,658 $ $ $137,658 
U.S. government agencies securities98,647 9 (3)98,653 
Commercial paper41,945   41,945 
Corporate and agency bonds7,543  (2)$7,541 
Totals$285,793 $9 $(5)$285,797 
Classified as:
Cash and cash equivalents$137,658 
Short-term marketable securities (amortized cost of $148,135)
148,139 
Total$285,797 
Cash and cash equivalents in the table above excludes cash on deposit with banks of $24.0 million and $9.4 million as of March 31, 2021 and December 31, 2020, respectively.
To date, the Company has not recorded any impairment charges against the market value of its marketable securities. In determining whether a decline is other than temporary, the Company considers various factors including the length of time and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
As of March 31, 2021 and December 31, 2020, the Company’s marketable securities had remaining contractual maturities less than one year. As of March 31, 2021, there were eleven marketable securities in an unrealized loss position compared to one marketable security in an unrealized loss position as of December 31, 2020. Marketable securities that had been in unrealized loss positions as of March 31, 2021 and December 31, 2020 had been in an unrealized loss position for less than 12 months. The Company does not intend to sell
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marketable securities that are 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes, by major security type, our available-for-sale securities that were measured at fair value on a recurring basis and were categorized using the fair value hierarchy (in thousands):
Fair Value Measurements
As of March 31, 2021Level 1Level 2Level 3Total
Assets:
Money market funds$124,089 $ $ $124,089 
U.S. government agencies securities 113,179  113,179 
Commercial paper 74,934  74,934 
Corporate and agency bonds 76,430  76,430 
Totals$124,089 $264,543 $ $388,632 
Fair Value Measurements
As of December 31, 2020Level 1Level 2Level 3Total
Assets:
Money market funds$137,658 $ $ $137,658 
U.S. government agencies securities 98,653  98,653 
Commercial paper 41,945  41,945 
Corporate and agency bonds 7,541  7,541 
Totals$137,658 $148,139 $ $285,797 
The carrying amounts of cash and cash equivalents, the related party receivable and contract asset from collaboration and other current assets and liabilities approximate their respective fair values due to their short-term nature.
The Company estimates the fair values of investments in corporate agency bond securities, commercial paper and government agencies securities using Level 2 inputs by taking into consideration valuations obtained from third-party pricing services.
There were no transfers of assets or liabilities between the fair value measurement levels during the three months ended March 31, 2021 and year ended December 31, 2020.
4. Balance Sheet Components
Cash, Cash Equivalents and Restricted Cash
A reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount reported within the condensed consolidated statements of cash flows is as follows (in thousands):
March 31,
2021
December 31,
2020
Cash and cash equivalents$148,113 $147,017 
Restricted cash1,499 1,499 
Total cash, cash equivalents and restricted cash$149,612 $148,516 
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Property and Equipment
Property and equipment consisted of the following (in thousands):
March 31,
2021
December 31,
2020
Leasehold improvements$25,880 $25,880 
Laboratory equipment and office furniture23,585 23,638 
Computer equipment1,271 1,271 
Construction in process521 48 
Total property and equipment, gross51,257 50,837 
Less: accumulated depreciation and amortization(37,524)(36,311)
Total property and equipment, net$13,733 $14,526 
Depreciation expense was $1.6 million and $1.7 million for the three months ended March 31, 2021 and 2020, respectively.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
March 31,
2021
December 31,
2020
Clinical trials and research and development costs$9,758 $9,316 
Manufacturing costs8,644 8,297 
Personnel-related costs5,962 8,921 
Accrued expenses5,399 3,411 
Total accrued liabilities$29,763 $29,945 

5. Research Collaboration and License Agreements
Merck
In 2015, the Company entered into a collaboration agreement with Merck, or the Collaboration Agreement, covering the discovery, development and commercialization of novel therapies across a range of therapeutic areas, including a broad, multi-year drug discovery and early development program financially supported by Merck, but scientifically directed by the Company with input from Merck. In exchange for certain rights and access to the Company’s drug discovery approach, in April 2015, Merck paid the Company an upfront cash licensing fee of $94.0 million and purchased approximately $106.0 million of the Company’s Series E convertible preferred stock. The Company considered the ASC 606 criteria for combining contracts and determined that the Collaboration Agreement and stock purchase agreement should be combined into a single contract. The Company accounted for the combined agreement based on the fair values of the assets and services exchanged, resulting in $106.0 million allocated to the equity component and $94.0 million allocated to the revenue components.
The Collaboration Agreement contemplated an initial five-year research term, and Merck was granted the unilateral right to extend the research phase of the collaboration for two additional two-year terms. Each extension is considered to be and is accounted for as a separate arrangement, if and when the option is exercised by Merck. Under the current terms of the Collaboration Agreement, Merck is required to pay a $20.0 million extension fee each time it elects to exercise its unilateral right to extend the research phase of the collaboration for an additional two-year term. In March 2019, Merck exercised its first option to extend the research phase of the collaboration for two additional years through March 16, 2022.
Under the current terms of the Collaboration Agreement, if and when Merck elects to extend the research phase for an additional two years, the level of funding that Merck will provide to the Company during such extension will be negotiated at the time of the extension, subject to certain minimum and maximum funding limits based on a percentage of the then-existing funding. As part of the two-year extension through March 16, 2022, Merck agreed to continue to fund the Company’s research and development efforts up to $75.0 million each year consistent with the
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initial five-year term and, in lieu of a $20.0 million extension fee that would have otherwise been payable to the Company, Merck agreed to make additional payments totaling up to $20.0 million in support of the Company’s research and development program activities during 2021 and in the first quarter of 2022.
Under the current terms of the Collaboration Agreement, Merck was required to notify the Company no later than March 17, 2021 of its unilateral decision whether to exercise its option to extend the research phase of the collaboration for an additional two-year term through March 16, 2024. In March 2021, Merck initiated discussions with the Company with respect to elements of the ongoing collaboration that might be optimized to better address the evolving interests and priorities of both the Company and Merck during the remainder of the current research phase through March 16, 2022 and during any extension of the current research phase and any tail period after the end of the research phase (which tail period is discussed below). In this regard, the parties continue to negotiate potential modifications to the terms of the collaboration. In order to allow negotiations to proceed, the parties agreed to extend the March 17, 2021 deadline for Merck to deliver its extension notification decision until June 30, 2021.
The Company has determined the scientific direction and areas of therapeutic interest, with input from Merck, and is primarily responsible for the conduct of all research, preclinical and early clinical development activities, through human proof-of-concept trials. The Company has made the final determinations as to which compounds to advance into and through initial clinical trials and which to progress into a human proof-of-concept trial and the design of any such trials, with input from Merck through various governance committees.
Under the current terms of the Collaboration Agreement, upon completion of a human proof-of-concept study for a particular product candidate, regardless of the results of such study, Merck has the one-time option to obtain an exclusive, worldwide license, on specified terms, to that product candidate, as well as to all other molecules that are directed against the same target and that result in the same effect on such target, collectively referred to as a Merck Licensed Program. For each program that Merck licenses, Merck must pay the Company a one-time fee of $20.0 million. If Merck exercises its license option, Merck is responsible, at its own cost, for any further development and any commercialization activities for compounds within the applicable Merck Licensed Program, subject to the Company’s options to cost and profit share worldwide, and to co-detail those compounds in the United States. Where the Company exercises such an option, the compound is referred to as an NGM Optioned Product. If the Company elects to enter into a cost and profit share on an NGM Optioned Product, Merck has agreed to advance to the Company and/or assume up to 25% of the Company’s share of the global development costs, subject to an aggregate cap over the course of the collaboration. All amounts advanced or assumed accrue interest and would be recouped by Merck in full out of the Company’s share of any profits resulting from sales of the NGM Optioned Product before the Company is entitled to receive any of those profits. If the Company does not elect to enter into a cost and profit-sharing arrangement for a compound it has licensed to Merck, the Company is eligible to receive an aggregate of up to $449.0 million in pre-commercial milestone payments upon the achievement of specific clinical development and regulatory events with respect to the licensed compound for the first three indications in the United States, European Union, or EU, and Japan. The Company is also eligible to receive commercial milestone payments of up to $125.0 million and to receive royalties at ascending low-double digit to mid-teen percentage rates, depending on the level of net sales Merck achieves worldwide for each licensed compound.
Under the current terms of the Collaboration Agreement, the Company also granted Merck a worldwide, exclusive right to conduct research and development on, and to manufacture, use and commercialize, small molecule compounds identified or developed by Merck that have specified activity against any target that the Company is researching or developing under the research phase of the collaboration and that, but for use of the Company’s confidential and proprietary information, Merck would not have discovered. If Merck ultimately does not exercise its license option to a collaboration compound the Company has taken through a human proof-of-concept study that is directed to any such target, Merck’s research license for its own small molecule program with respect to such target will become non-exclusive, but it will retain an exclusive license to any small molecule compounds that it has, as of that time, identified and developed. Merck has sole responsibility for research and development of any of these small molecule compounds, at its own cost. The Company is eligible to receive milestone and royalty payments on small molecule compounds that are developed by Merck under such a license from the Company, in some cases at the same rates as those the Company is eligible to receive from Merck for a Merck Licensed Program originating from the Company’s own research and development efforts, provided that, but for use of the Company’s confidential and proprietary information, Merck would not have discovered such small molecule compounds. However, the Company will not have the option to cost and profit share or the option to co-detail those small molecule products.
Under the current terms of the Collaboration Agreement, during the three-month period before the end of the research phase, Merck has the right to review the Company’s then-existing programs and to elect to designate
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one or more such programs for which the Company will be required to continue to conduct research and development for up to three years, referred to as the tail period. Merck will pay all of the Company’s internal and external costs for its work on such Merck-designated programs, up to certain funding caps that decrease over the tail period and are each a specified percentage of certain funding actually provided to the Company by Merck during the last 12 months of the research phase. Merck also has the right to take over such Merck-designated programs and conduct such research and development activities itself or in partnership with a third party, at its own cost, or to terminate the tail period after a specified notice period. If Merck terminates the tail period, it has the right to elect to transition to itself or a third-party partner, at its own cost, any clinical trials that are then being conducted in such Merck-designated programs. If the Company completes a human proof-of-concept trial in one of such Merck-designated programs during the tail period or if Merck or its third-party partner completes a human proof-of-concept trial in one of such Merck-designated programs during or after the tail period, then Merck will have a one-time right to exercise its option to an exclusive, worldwide license for the collaboration product candidate tested in the proof-of-concept trial and certain related molecules in that program. Merck will lose its option rights at the end of the tail period with respect to all programs for which no collaboration product candidate has completed a human proof-of-concept trial by such time, except for Merck-designated programs that Merck is continuing to use commercially reasonable efforts to research and develop.
The Company evaluated the Collaboration Agreement with Merck under ASC 606. The Company identified the following promised goods or services at the inception of the Collaboration Agreement: (i) license to growth differentiation factor 15, or GDF15, agonist program; (ii) license to pursue research and development and commercialization of small molecule compounds; (iii) performance of research and development services for five years; (iv) two options to extend performance of the research and development services, each for two additional years; and (v) options to obtain licenses to additional compounds after proof-of-concept trials. The Company determined the GDF15 agonist program license and small molecule program license are not distinct from the research and development services, resulting in these items being combined into a single performance obligation.
The Company considered whether the options created material rights in the contract and concluded that the fee attached to the exercise of such options approximated the SSP of the promised goods or services included in the options. Therefore, the options do not give rise to material rights, are not performance obligations in the Collaboration Agreement and, if and when exercised, will be accounted for as separate arrangements under ASC 606.
Additionally, if a separate arrangement is created by the exercise of an option, such amounts would then be contingent on events outside of either party’s control, such as products proving to be commercially viable and governmental agencies granting regulatory approval. Such contingencies and uncertainties result in the amounts being constrained and withheld from inclusion in the estimated transaction price of a separate arrangement. Consequently, the estimated transaction price related to the Collaboration Agreement is comprised of the up-front payment and the ongoing research and development reimbursements.
Any fees associated with options, including upfront fees, funding fees and milestones, are not included in the transaction price as they are associated with options that are not material rights and, thus, are not performance obligations within the Collaboration Agreement. For example, in November 2018, Merck exercised its option for a license to further research and develop MK-3655, an agonistic antibody discovered by the Company that selectively activates fibroblast growth factor receptor 1c-beta-klotho, or FGFR1c/KLB, and other FGFR1c/KLB agonists and paid the Company $20.0 million. The $20.0 million license fee for MK-3655 was not included in the transaction price and was instead recognized in the period of exercise in the fourth quarter of 2018 as the Company had no further obligation related to that license. The Phase 3 clinical study for MK-3655 has not begun, and the Company has not made an election as to whether it will participate in the cost and profit share or receive milestone and royalty payments. The amounts do not impact the estimated transaction price associated with the single performance obligation identified in the Collaboration Agreement.
The transaction price associated with the initial five-year term of the Collaboration Agreement consisted of the $94.0 million upfront fee and the funding amounts of up to $75.0 million per year for each of the first five years of the Collaboration Agreement. No milestones or other forms of consideration were included in the transaction price as those amounts are contingent upon Merck exercising an option for licenses on additional compounds and would, therefore, be pursuant to separate arrangements and were not part of the Collaboration Agreement estimated transaction price. As there was only one performance obligation in the Collaboration Agreement, the transaction price was allocated entirely to that performance obligation.
At the end of the initial five-year term of the Collaboration Agreement, the remaining contract liability amount of $4.9 million related to the upfront license fee included within the transaction price as of December 31, 2019 was fully earned and recognized during the three months ended March 31, 2020. The Company has fully recognized
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revenue of approximately $388.1 million related to the single performance obligation associated with the initial five-year term of the Collaboration Agreement.
Upon Merck exercising its option to extend the research phase of the collaboration through March 16, 2022, the Company deemed that a separate arrangement containing a distinct two-year performance obligation to provide distinct research and development services was created on March 17, 2020 in accordance with ASC 606. The transaction price of $170.0 million for this two-year performance obligation consists of the potential funding amounts of up to $75.0 million per year plus the additional funding amount of $20.0 million to be made during 2021 and in the first quarter of 2022 if the Company exceeds the $75.0 million funding cap. The Company also uses a cost-based input method to calculate the corresponding amount of revenue to recognize. In applying the cost-based input measure of revenue recognition, the Company measures actual costs incurred relative to budgeted costs to fulfill this distinct two-year performance obligation. These costs consist of full-time equivalent hours plus allowable external (third-party) costs incurred. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligation applied to the transaction price. The Company re-evaluates the estimate of expected costs to satisfy the performance obligation each reporting period and makes adjustments for any significant changes. In addition, the Company also considers any necessary adjustments in an effort to ensure that the transaction price is within the range of potential funding amounts as described above. As such, management applies considerable judgment in estimating expected costs as such costs are key inputs when applying the cost-based input method. As the Company’s estimated measure of progress is updated at each reporting period and revenue is recognized on a cumulative catch-up basis, a significant change in the estimate of expected costs for the remainder of the contract term could have a material impact on revenue recognized (including the possible reversal of previously recognized revenue) at each reporting period, as well as the related impact on contract assets and liabilities.
Since the transaction price includes an additional funding amount of $20.0 million to be made during 2021 and in the first quarter of 2022, the timing of when the revenue is recognized for this additional funding amount for performance of the services and when this additional funding amount can be billed resulted in the recognition of a related party contract asset of $4.6 million at March 31, 2021 and $6.1 million at December 31, 2020.
In connection with Merck’s purchase of approximately $106.0 million of our Series E convertible preferred stock in 2015, the Company and Merck entered into an agreement whereby Merck agreed to purchase 4,121,683 shares of the Company’s common stock in a separate private placement concurrent with the completion of the Company’s IPO at a price per share equal to the public offering price of $16.00, resulting in Merck owning approximately 19.9% of the Company’s outstanding shares of common stock following the completion of the Company's initial public offering.
A breakout of the milestone payments in connection with the potential achievement of certain clinical development events is as follows (in thousands):
First
Indication
Second
Indication
Third
Indication
Upon administration of an applicable product to the first patient in the first Phase 3 clinical trial for such product for the given indication
$35,000 $25,250 $17,500 
A breakout of the milestone payments in connection with the potential achievement of various regulatory events for each of the three indications, for each of the three geographic areas, is as follows (in thousands):
First
Indication
Second
Indication
Third
Indication
Total
United States$75,000 $56,250 $37,500 $168,750 
European Union60,000 45,000 30,000 135,000 
Japan30,000 22,500 15,000 67,500 
$165,000 $123,750 $82,500 $371,250 
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Summary of Related Party Revenue
The Company recognized revenue from its collaboration and license agreements as follows (in thousands):
Three Months Ended
March 31,
20212020
Related party revenue$21,575 $24,364 
For the three months ended March 31, 2021, the Company recognized collaboration and license revenue under the Collaboration Agreement of $21.6 million primarily related to reimbursable research and development activities associated with the performance obligation for the two-year extension period. For the three months ended March 31, 2020, the Company recognized collaboration and license revenue under the Collaboration Agreement of $24.4 million of which $4.9 million related to the upfront license fee under the initial five-year term that ended in March 2020.
Related Party Contract Assets and Liabilities
Amounts recognized as revenue prior to the Company having an unconditional right (or a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's condensed consolidated balance sheets. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, the contract asset will be classified in current assets. As of March 31, 2021 and December 31, 2020, the Company recorded related party contract assets of $4.6 million and $6.1 million, respectively. Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s condensed consolidated balance sheets. If the related performance obligation is expected to be satisfied within the next twelve months, the contract liability will be classified in current liabilities. As of March 31, 2021 and December 31, 2020, there were no contract liabilities.
6. Commitments and Contingencies
Operating Lease and Lease Guarantee
In December 2015, the Company entered into an operating lease for its corporate office space and laboratory facility at 333 Oyster Point Blvd, South San Francisco, California for approximately 122,000 square feet that expires in December 2023. The lease provided a tenant improvement allowance of $15.2 million that the Company used in 2016 towards $22.3 million in total leasehold improvements that are amortized over the lease term of seven years. The 333 Oyster Point lease agreement required a letter of credit in the amount of $2.3 million as a security deposit to the lease, which the Company has recorded as non-current restricted cash on the condensed consolidated balance sheets. The Company has the right to reduce the letter of credit amount by $0.4 million on each of the third anniversary and fourth anniversary of the rent commencement date. In 2020, the Company reduced its letter of credit by $0.4 million and reclassified that amount from restricted cash to cash and cash equivalents on the condensed consolidated balance sheets.
In September 2009, the Company entered into an operating lease for a corporate office space and laboratory facility at 630 Gateway Blvd, in South San Francisco, California for approximately 50,000 square feet, as amended in June 2014. In July 2016, the Company assigned the operating lease of 630 Gateway to Merck, as part of the Company’s relocation to 333 Oyster Point. The operating lease expired in November 2020. Following expiration of the operating lease, the Company retains the obligation to indemnify the landlord and Merck under certain limited circumstances, but has no further payment obligations.
The Company recognizes rent expense on a straight-line basis over the lease period with the difference recorded as deferred rent. In addition, tenant improvement allowances recorded are amortized as a reduction to rent expense on a straight-line basis over the lease term. Rent expense under these facility operating leases was approximately $0.5 million for each of the three months ended March 31, 2021 and 2020.
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Future minimum payments under the unassigned lease obligations described above are as follows as of March 31, 2021 (in thousands):
Year Ending December 31,
2021$3,874 
20225,294 
20235,455 
Total$14,623 
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future but have not yet been made.
In accordance with the Company’s amended and restated certificate of incorporation and its amended and restated bylaws, the Company has indemnification obligations to its officers and directors, subject to some limits, with respect to their service in such capacities. The Company has also entered into indemnification agreements with its directors and certain of its officers. To date, the Company has not been subject to any claims, and it maintains director and officer insurance that may enable it to recover a portion of any amounts paid for future potential claims.
The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future but have not yet been made. The Company believes that the fair value of these indemnification obligations is minimal and, accordingly, it has not recognized any liabilities relating to these obligations for any period presented.
7. Stockholders’ Equity
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized, which may be issued at the discretion of the Company’s board of directors. The board of directors may issue shares of preferred stock in one or more series and fix the number, rights, preferences, privileges and restrictions for such series. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and sinking fund terms. As of March 31, 2021, the Company did not have any shares of preferred stock issued or outstanding.
Common Stock
Public Offering of Common Stock
In January 2021, the Company sold 5,324,074 shares of its common stock through an underwritten public offering at a price to the public of $27.00 per share for aggregate net proceeds to the Company of $134.6 million, after deducting underwriting discounts and commissions and other offering expenses paid by the Company. The offering closed on January 8, 2021.
As of March 31, 2021 and December 31, 2020, the Company had 76,913,578 and 70,585,364 shares of common stock outstanding, respectively, which included shares subject to repurchase of 938 and 6,508, respectively, as a result of early exercise of stock options not yet vested.
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As of March 31, 2021 and December 31, 2020, the Company reserved shares of common stock for issuance as follows:
March 31,
2021
December 31,
2020
Reserve balance for Sales Agreement14,190,300 14,190,300 
Common stock options outstanding11,300,905 10,017,918 
Common stock options available for grant6,726,717 6,186,497 
ESPP shares available for purchase700,074 700,074 
401(k) Matching Plan21,930 21,930 
Total32,939,926 31,116,719 
Open Market Sale Agreement
In June 2020, the Company entered into the Sales Agreement with Jefferies relating to the sale of shares of its common stock. In accordance with the terms of the Sales Agreement, the Company may offer and sell shares of its common stock having an aggregate offering price of up to $150.0 million from time to time through Jefferies acting as its sales agent.
As of March 31, 2021, $127.4 million of the Company’s common stock remained available to be sold under the Sales Agreement, subject to conditions specified in the Sales Agreement.

Stock Option Plan
In 2018, the Company adopted the 2018 Equity Incentive Plan, or the 2018 Plan, for eligible employees, officers, directors, advisors and consultants, which provides for the grant of incentive and non-statutory stock options, restricted stock awards and stock appreciation rights. The terms of the stock option agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2018 Plan. Options granted by the Company generally vest within four years and are exercisable from the grant date until ten years after the date of grant. Vesting of certain employee options may be accelerated in the event of a change in control of the Company.
Early Exercise of Stock Options
The 2018 Plan allows for the granting of options that may be exercised before the options have vested. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment or services, at the price paid by the purchaser, and are not deemed to be issued for accounting purposes until those related shares vest. The amounts received in exchange for these shares have been recorded as a liability on the condensed consolidated balance sheets and will be reclassified into common stock and additional paid-in-capital as the shares vest. The Company’s right to repurchase these shares generally lapses in equal installments over four years beginning from the original vesting commencement date. Since the beginning of March 2021, the Company has not granted any options under the 2018 Plan that can be early exercised prior to vesting.
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Stock Option Activity
A summary of the activity under the 2008 Plan and the 2018 Plan is as follows:
Outstanding OptionsWeighted
Average
Remaining
Contractual Life
(In Years)
Aggregate
Intrinsic
Value
(In Thousands)
Number of
Options
Weighted
Average
Exercise
Price
Balances at December 31, 202010,017,918 $10.52 6.45$198,097 
Options granted2,341,750 31.50 
Options exercised(1,000,588)5.90 
Options cancelled(58,175)14.79 
Balances at March 31, 202111,300,905 $15.25 7.33$162,188 
Vested and expected to vest at March 31, 202111,044,810 $15.05 7.28$160,638 
Exercisable at March 31, 20219,232,405 $11.54 6.76$162,108 
The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock.
The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2021 and 2020 was $19.83 and $9.73 per share, respectively. The intrinsic value of stock options exercised was $22.3 million and $12.8 million for the three months ended March 31, 2021 and 2020, respectively. Due to the Company’s net operating losses, the Company did not realize any tax benefits from stock-based payment arrangements for the three months ended March 31, 2021 and 2020.
Employee Stock-Based Compensation Expense
Employee and director stock-based compensation expense for the three months ended March 31, 2021 and 2020 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. The following table summarizes stock-based compensation expense related to stock-based payment awards previously granted to employees and directors and the Company’s ESPP for the three months ended March 31, 2021 and 2020, which was allocated as follows (in thousands):
Three Months Ended
March 31,
20212020
Research and development$3,504 $1,873 
General and administrative3,011 1,794 
Total stock-based compensation expense$6,515 $3,667 
Stock-based compensation expense related to stock-based payment awards to non-employees for the three months ended March 31, 2021 and 2020 was $67,000 and $28,000, respectively.
Employee Stock Purchase Plan
Under the ESPP, eligible employees are granted the right to purchase shares of the Company's common stock through payroll deductions that cannot exceed 15% of each employee’s salary. The ESPP provides for a 24-month offering period, which includes four six-month purchase periods. At the end of each purchase period, eligible employees are permitted to purchase shares of common stock at the lower of 85% of fair market value at the beginning of the offering period or fair market value at the end of the purchase period. As of March 31, 2021, 299,926 shares of common stock had been purchased under the ESPP.
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8. Income Taxes
Since inception, the Company has incurred net losses and expects to record a net loss for the year ending December 31, 2021. Additionally, the Company’s net deferred tax assets have been fully offset by a valuation allowance. Therefore, the Company did not record a tax provision for income taxes for the three months ended March 31, 2021 and 2020.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors that could impact our business, including those set forth in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions.
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 Quarterly Report on Form 10-Q, 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 we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Overview of Our Business
We are a biopharmaceutical company focused on discovering and developing novel therapeutics based on scientific understanding of key biological pathways underlying liver and metabolic diseases, retinal diseases and cancer. These diseases represent a significant burden for patients and healthcare systems and, in some cases, are leading causes of morbidity and mortality. Our strategy is to leverage a combination of interrogating human biology and engineering powerful biologics to discover and develop promising product candidates and seek to move them rapidly into proof-of-concept studies and late-stage development, with the goal of delivering impactful first-in-class or best-in-class treatments to underserved patients suffering from grievous diseases. Since the commencement of our operations in 2008, we have generated a robust portfolio of product candidates ranging from early discovery to late-stage development. We aspire to operate one of the most productive research and development engines in the biopharmaceutical industry.
Pipeline Programs and Operations Updates

Our discovery engine supports our ability to advance multiple product candidates across our three key therapeutic areas. We currently have five ongoing Phase 2 and Phase 2b programs. In 2021 to date, we have continued to progress the development of our leading product candidates as described below:

Liver and metabolic diseases.
Aldafermin. Aldafermin is an engineered analog of human hormone fibroblast growth factor 19, or FGF19, that is administered through a once-daily subcutaneous injection. Aldafermin is wholly-owned by us and is in Phase 2b development for the treatment of patients with non-alcoholic steatohepatitis, or NASH, with liver fibrosis stage 2, 3 or 4, or F2, F3 or F4. To date in 2021, we:
completed treatment of patients in our Phase 2b ALPINE 2/3 clinical trial of aldafermin in patients with NASH with F2 and F3 liver fibrosis and
continued enrollment in our Phase 2b ALPINE 4 clinical trial of aldafermin in patients with NASH with F4 liver fibrosis and compensated cirrhosis, with a goal of enrolling approximately 160 patients across 70 sites in the United States, Europe, Hong Kong and Australia.
Looking forward: We expect to report topline results from the ALPINE 2/3 trial in the second quarter of 2021. We are leveraging the results of our completed clinical trials of aldafermin, as well as guidance from the U.S. Food and Drug Administration, or FDA, to support our design of a pivotal clinical trial program to enable a potential biologics license application, or BLA, submission.
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MK-3655 (formerly NGM313). MK-3655 is an agonistic antibody discovered by us that selectively activates fibroblast growth factor receptor 1c-beta-klotho, or FGFR1c/KLB, which regulates insulin sensitivity, blood glucose and liver fat and is administered every four weeks through a subcutaneous injection. MK-3655 is in Phase 2b development for the treatment of NASH and was optioned by Merck Sharp & Dohme Corp., or Merck, under our collaboration with Merck described below. To date in 2021, Merck:
continued the worldwide 52-week randomized, double-blind Phase 2b trial of MK-3655 in patients with NASH with F2 or F3 liver fibrosis that it initiated in the fourth quarter of 2020.
Retinal diseases.
NGM621. NGM621 is a humanized Immunoglobulin 1, or IgG1, monoclonal antibody administered via intravitreal, or IVT, injection. NGM621 was engineered to potently inhibit the activity of complement C3 with the treatment goal of reducing disease progression in patients with geographic atrophy, or GA. Merck has a one-time option to license NGM621 upon completion of a proof-of-concept study in humans. To date in 2021, we:
continued enrollment in the Phase 2 CATALINA clinical trial of NGM621 in patients with GA to evaluate NGM621’s effects on disease progression when given every four weeks or every eight weeks. The CATALINA trial was designed to be a Phase 3-supportive or -enabling clinical trial.
Looking forward: Subject to any future impact of the COVID-19 pandemic on enrollment, we expect to complete enrollment in the CATALINA trial in mid-2021.
Oncology.
NGM120. NGM120 is an antagonistic antibody that binds glial cell-derived neurotrophic factor receptor alpha-like, or GFRAL, and inhibits growth differentiation factor 15, or GDF15, signaling, for the potential treatment of cancer and cancer-related cachexia. We are currently conducting clinical trials to assess NGM120’s effect on cancer-related cachexia and on cancer in patients with select advanced solid tumors and metastatic pancreatic cancer. Merck has a one-time option to license NGM120 upon completion of a proof-of-concept study in humans. To date in 2021, we:
initiated a Phase 2 placebo-controlled component of the ongoing Phase 1/2 clinical trial of NGM120 described below. This portion of the trial is testing NGM120 in combination with gemcitabine and Abraxane® (paclitaxel protein bound) as first-line treatment in patients with metastatic pancreatic cancer to assess NGM120’s effect on both cancer and cancer-related cachexia.
Looking forward: In the second half of 2021, we expect to report interim data from two Phase 1 dose-finding cohorts of the ongoing Phase 1/2 trial of NGM120: a Phase 1a cohort evaluating NGM120 as a monotherapy in patients with select advanced solid tumors and a Phase 1b cohort evaluating NGM120 in combination with gemcitabine and Abraxane in patients with metastatic pancreatic cancer.
NGM707. NGM707 is a dual antagonist monoclonal antibody that inhibits Immunoglobulin-like transcript 2, or ILT2 (also known as LILRB1), and Immunoglobulin-like transcript 4, or ILT4 (also known as LILRB2). ILT2 and ILT4 are key myeloid and lymphoid checkpoints that may restrict anti-tumor immunity, enable tumors to evade immune detection and contribute to T-cell checkpoint resistance. Merck has a one-time option to license NGM707 upon completion of a proof-of-concept study in humans.
Looking forward: We expect to commence a first-in-human Phase 1 clinical trial of NGM707 in patients with advanced solid tumors in mid-2021.
NGM438. NGM438 is an antagonistic antibody that is designed to inhibit leukocyte-associated immunoglobulin-like receptor 1, or LAIR1, and promote immune detection and activation against advanced solid tumors. Merck has a one-time option to license NGM438 upon completion of a proof-of-concept study in humans. In 2021, we:
advanced the preparation of an investigational new drug, or IND, application for a planned submission in the second half of 2021.
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Looking forward: We expect to commence a first-in-human Phase 1 clinical trial of NGM438 in patients with advanced solid tumors in the fourth quarter of 2021.
We have additional undisclosed programs that are in various stages of development ranging from functional validation to preclinical development.
The success of each of our product candidates may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability, sales capability, collaboration partners, regulatory matters, third-party payor matters and commercial viability. We do not have any products approved for sale and do not anticipate generating revenue from product sales for the foreseeable future, if ever.
Partnering has been and is expected to continue to be a key component of our strategy as we plan to continue to develop a broad portfolio of product candidates and, if approved, to commercialize the resulting products. Our existing research collaboration, product development and license agreement with Merck, or the Collaboration Agreement, which we entered into in 2015, has to date provided us with substantial financial support from Merck. The collaboration has also afforded us substantial freedom to pursue development efforts for our collaboration programs and product candidates. We are currently in discussions with Merck with respect to modifying certain terms of the collaboration, as described in more detail below. In addition, for any programs wholly-owned by us and not subject to the Merck collaboration, such as aldafermin, we may decide to pursue a strategic partner to progress, in whole or in part, the program or commercialize any resulting approved product.
In addition, all of our manufacturing activities are outsourced to third-party contract development and manufacturing organizations or third-party contract manufacturing organizations, which we refer to collectively as CMOs, who are generally single source suppliers of the drug product or drug substance they are manufacturing for us. We also utilize third-party contract research organizations, or CROs, to carry out many of our clinical development activities. We expect to be reliant on CMOs and CROs for these activities for the foreseeable future. Significant portions of our research and development resources are focused, and will continue to be focused, on activities required to prepare aldafermin for potential regulatory approval for the treatment of NASH, including manufacturing of clinical trial materials and preparation for potential Phase 3 testing. If our CROs fail to satisfy their contractual duties to us or meet expected deadlines or if our CMOs experience difficulties in scaling production or procuring raw materials or components or experience product loss due to contamination, equipment failure, improper installation or operation of equipment, vendor or operator error, turnover of qualified staff or improper storage conditions, our ongoing and planned aldafermin trials would be delayed, perhaps substantially, which could materially and adversely affect our business.
We seek to allocate our capital efficiently and strategically and fund our portfolio based on each program’s scientific and other merits. Our discipline has been demonstrated by the suspension of development activities on multiple viable product candidates for portfolio management reasons in order to concentrate our resources on what we consider our most promising product candidates. For example, in 2020, we suspended development activities related to multiple metabolic disease product candidates in order to concentrate our resources on aldafermin and certain other product candidates subject to our Merck collaboration.
Status of Merck Collaboration
The original research phase of our existing research collaboration, product development and license agreement with Merck, or the Collaboration Agreement, was for five years. In March 2019, Merck exercised its option to extend the research phase of the collaboration through March 16, 2022. Under the terms of the collaboration, Merck was required to notify us no later than March 17, 2021 of its unilateral decision whether to exercise its option to extend the research phase of the collaboration for an additional two-year term through March 16, 2024. In March 2021, Merck initiated discussions with us with respect to elements of the ongoing collaboration that might be optimized to better address the evolving interests and priorities of both NGM and Merck during the remainder of the current research phase through March 16, 2022 and during any extension of the current research phase and any tail period after the end of the research phase. In this regard, the parties continue to negotiate potential modifications to the terms of the collaboration. Such modifications may include, among other things, focusing NGM’s research and development under the collaboration on therapeutic areas of particular interest to Merck, while enabling NGM to conduct research and development outside of these therapeutic areas, which would, if mutually agreed to, allow NGM to discover and develop product candidates on its own or with third parties in other areas of interest. In order to allow negotiations to proceed, the parties agreed to extend the March 17, 2021 deadline for Merck to deliver its extension notification decision until June 30, 2021. While we do not know whether or when Merck will elect to extend the research phase of the collaboration or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase
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after March 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the research phase. In any event, we expect that following March 16, 2022, the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding for the development of our current and potential future product candidates will substantially increase regardless of whether we are able to reach agreement with Merck on modified terms.
Financial Highlights
Since inception, we have funded our operations primarily through:
fees received from collaboration partners, which since inception through March 31, 2021 includes reimbursement of research and development expenses of $423.7 million and upfront cash licensing fees of $123.0 million, primarily from Merck, and a payment of $20.0 million from Merck to license MK-3655 and related compounds;
proceeds from private placements of convertible preferred stock prior to our initial public offering, or IPO, including approximately $106.0 million of our Series E convertible preferred stock purchased by Merck;
net proceeds from our IPO in 2019 of approximately $107.8 million, together with proceeds from the concurrent private placement of shares of common stock to Merck of $65.9 million;
net proceeds of $21.9 million from sales of 809,700 shares of our common stock at an average price of $27.94 per share in December 2020 under an Open Market Sale AgreementSM, or the Sales Agreement, we entered into with Jefferies LLC, or Jefferies, in June 2020; and
net proceeds of $134.6 million from the sale of 5,324,074 shares of our common stock in January 2021 upon completion of an underwritten public offering of our common stock, or the follow-on offering, which included the full exercise by the underwriters of their option to purchase additional shares.
At March 31, 2021, we had $412.7 million in cash, cash equivalents and short-term marketable securities.
We have incurred net losses each year since our inception. As of March 31, 2021, we had an accumulated deficit of $326.2 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development, or R&D, programs and general and administrative costs associated with our operations. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials and our expenses on other R&D activities, and the amount of R&D funding we receive from collaboration partners, including Merck. For further discussion of our financial position and future sources of funding, see “Liquidity and Capital Resources” below.
COVID-19 Business Update
We continue to closely monitor the impact of the global COVID-19 pandemic on our business and have taken and continue to take proactive efforts designed to protect the health and safety of our patients, study investigators, clinical research staff and employees, while maintaining business continuity. Following guidance from federal, state and local authorities, we continue to operate with a substantially remote work model. Employees working on site continue to be primarily those individuals conducting essential in-person laboratory work and other business functions considered essential under COVID-19 regulations and guidance, and we are still encouraging all other individuals to work remotely where feasible. There have been relatively minor impacts on productivity overall, but future developments could more materially and adversely impact our productivity. In addition, in 2020 and early 2021, we experienced higher-than-normal employee turnover and an increased rate of hiring new employees. We cannot predict whether these trends will continue or be exacerbated, when we will be permitted to, and whether we will, return to a fully office-based working model or whether we will be required to adopt a more restrictive work model as the implications of the pandemic evolve.
For patients enrolled in our clinical trials, we continue to work closely with clinical trial investigators and site staff with the goal of continuing treatment in a manner designed to uphold trial integrity, while allowing some flexibility in the manner and timing of patient visits, and to observe government and institutional guidelines designed to safeguard the health and safety of patients, clinical trial investigators and site staff. We have experienced, from time to time, a slower pace of clinical trial site initiation and clinical trial enrollment than originally anticipated in certain of our clinical trials, including the ALPINE 4, CATALINA and NGM120 trials, and we experienced a higher dropout rate in our ALPINE 2/3 trial than we had anticipated based on our previous trials in patients with NASH. We
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believe this may be due to factors such as the vulnerability of our studied patient populations, clinical trial site suspensions, reallocation of medical resources and the challenges of working remotely due to shelter-in-place and similar government orders.
We have been proactively working to mitigate these and other effects of the COVID-19 pandemic by monitoring site initiations, patient enrollment and patient study adherence to provide support to patients and trial staff, often on a case‑by‑case and/or patient-by-patient basis. For example, we have implemented additional study policies and procedures designed to help protect trial participants from exposure to COVID-19 as a result of their trial participation, which include the use of telemedicine visits, remote monitoring of patients and clinical trial sites and other measures, as appropriate, designed to ensure that data from clinical trials that may be disrupted as result of the pandemic are collected pursuant to the study protocol and consistent with current Good Clinical Practices, with any material protocol deviation reviewed and approved by the clinical trial site Institutional Review Board. Most of our clinical trial sites, both within and outside of the United States, continue to screen patients in our clinical trials, and new patients are being enrolled when appropriate. While the COVID-19 pandemic has not yet resulted in a significant impact to our disclosed clinical development timelines and we believe the higher-than-planned enrollment we achieved in our ALPINE 2/3 trial has mitigated the effects of the increased dropout rate, as the pandemic continues, there may be continuing negative impacts on our ability to initiate new clinical trial sites, maintain enrollment of existing patients and enroll new patients, which may result in increased clinical trial costs and negatively impact our timelines and our ability to obtain regulatory approvals of our product candidates in a timely fashion, if at all.
We also could see an adverse impact on our ability to report clinical trial results, or interact with regulators, institutional review boards and ethics committees or other important agencies due to limitations in health authority employee resources or otherwise. Moreover, we rely on CROs and other third parties to assist us with clinical development activities, 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.
In addition, while we have not experienced any disruption to drug or related component supply for our ongoing clinical trials, we could experience disruptions to our supply chain and operations due to the continuing pandemic, and associated delays in the manufacturing and supply of drug substance and drug product for our clinical trials, which could adversely affect our ability to conduct ongoing and future clinical trials of our product candidates. For example, our aldafermin drug product CMO has advised us that it could be required under orders of the U.S. government to allocate manufacturing capacity to the manufacture or distribution of COVID-19 vaccines. If any of our CMOs become subject to acts or orders of U.S. or foreign government entities to allocate manufacturing capacity to the manufacture or distribution of COVID-19 vaccines or medical supplies needed to treat COVID-19 patients, this could also delay our clinical trials, perhaps substantially, particularly our ongoing and planned aldafermin trials, which could materially and adversely affect our business.
Finally, we cannot predict how the evolving effects of the COVID-19 pandemic may influence the future decisions of Merck to license any programs available to it under the Collaboration Agreement, to exercise its remaining option to extend the research phase of the collaboration beyond March 16, 2022 or to reach agreement with us on the terms of a modified collaboration, if any. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, see the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Financial Operations Overview
Related Party Revenue
Our revenue to date has been generated primarily from recognition of license fees and R&D service funding pursuant to our Collaboration Agreement with Merck. Merck is also a significant stockholder and, as such, collaboration revenue from Merck is referred to as related party revenue.
Merck Collaboration
In 2015, we entered into the Collaboration Agreement with Merck, covering the discovery, development and commercialization of novel therapies across a range of therapeutic areas, including a broad, multi-year drug discovery and early development program financially supported by Merck, but scientifically directed by us with input from Merck. Merck generally has a one-time right to exercise its option to an exclusive, worldwide license for any collaboration product candidate and related program when a human proof-of-concept trial is completed. In 2018, Merck exercised its option to license MK-3655, which is a potential treatment for NASH. Under the current terms of the Collaboration Agreement, for a program that Merck licenses, we retain an option, when a product candidate has advanced to Phase 3 clinical trials, to participate in up to 50% of the economic return from that product candidate if
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it becomes an approved medicine by agreeing to share up to 50% of the costs of future development. If we do not elect this option, we will instead receive milestone and royalty payments and we will not be required to share in development costs.
The aldafermin program is not included in the Collaboration Agreement and it remains wholly-owned and controlled by us.
For a more detailed description of the current terms of the Collaboration Agreement and the status of the collaboration, see “Our Collaboration with Merck” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and “Overview of Our Business — Status of Merck Collaboration” above. Since inception through March 31, 2021, Merck had paid us $518.5 million under the Collaboration Agreement. Due to the nature of our agreement with Merck and the timing of related revenue recognition, our revenue has fluctuated from period to period in the past and we expect that it will continue to fluctuate in future periods.
We use the cost-based input method in accordance with Accounting Standards Codification 606, or ASC 606, to calculate the corresponding amount of revenue to recognize at each reporting period. In applying the cost-based input measure of revenue recognition, we measure actual costs incurred relative to budgeted costs to fulfill our performance obligation. We apply considerable judgment when we re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes. A significant change in the estimate of expected costs for the remainder of the current two-year extension period could have a material impact on revenue recognized (including the possible reversal of previously recognized revenue) at each reporting period.
Our related party revenue was as follows (in thousands):
Three Months Ended
March 31,
20212020
Related party revenue$21,575 $24,364 
Research and Development Expenses
R&D efforts include drug discovery research activities and development activities relating to our product candidates, such as manufacturing drug substance, drug product and other clinical trial materials, conducting preclinical studies and clinical trials and providing support for these operations. Our R&D expenses consist of both internal and external costs. Our internal costs include employee, consultant, facility and other R&D operating expenses. Our external costs include fees paid to CROs and other service providers in connection with our clinical trials and preclinical studies, third-party license fees and CMO costs related to manufacturing drug substance, drug product and other clinical trial materials.
Our R&D expenses related to the development of aldafermin, MK-3655, NGM621, NGM120, NGM707 and NGM438 (and prior to suspending these programs, NGM386, NGM395 and NGM217) consist primarily of:
fees paid to our CROs in connection with our clinical trials and other related clinical trial fees, when applicable;
costs related to acquiring and manufacturing drug substance, drug product and clinical trial materials, including continued testing, such as process validation and stability, of drug substance and drug product;
costs related to toxicology testing and other research and preclinical related studies;
salaries and related overhead expenses, which include stock-based compensation and benefits, for personnel in R&D functions;
fees paid to consultants for R&D activities;
R&D operating expenses, including facility costs and depreciation expenses; and
costs related to compliance with regulatory requirements.
Our clinical development efforts are spread across multiple programs, most of which are subject to the Merck collaboration. For the foreseeable future, we anticipate the majority of our financial resources, other than those received from Merck and dedicated to Merck collaboration activities, will be dedicated to activities required to prepare aldafermin for potential regulatory approval for the treatment of NASH, including manufacturing of clinical trial materials and preparation for a potential pivotal program.
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In the future, we may devote financial resources to other programs in the event Merck does not elect to license these programs upon completion of a proof-of-concept study, in the event Merck elects to terminate its license to any program it licenses or in the event we opt to co-develop any Merck-licensed programs, or if Merck no longer funds such programs under modified terms of the collaboration.
Our R&D efforts under the Merck collaboration are extensive and costly and are currently subject to reimbursement under our Merck collaboration during the current two-year extension up to the funding caps provided in our Collaboration Agreement. If our R&D expenses for product candidates subject to the Merck collaboration, including the clinical development of product candidates subject to the Merck collaboration through completion of proof-of-concept studies, exceed the funding caps provided in the Collaboration Agreement, which happened in the fiscal year ended December 31, 2020 and could happen in the future, we will be required to devote our own financial resources toward the development of such product candidates or, if we are unwilling or unable to do so, pause or suspend such development to remain within the funding caps. In addition, while we do not know whether or when Merck will elect to extend the research phase of the collaboration through March 16, 2024 or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase after March 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the current research phase. In any event, we expect that following March 16, 2022, the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding for the development of our current and potential future product candidates will substantially increase, regardless of whether we are able to reach agreement with Merck on modified terms.
The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of our product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of:
our ability to hire and retain key R&D personnel;
manufacturing scale-up challenges, production shortages or other supply disruptions for clinical trial materials;
the evolving effects of the COVID-19 pandemic on our employees, patients, clinical trial sites and our CROs, CMOs and other service providers;
the timely and quality performance of our CROs, CMOs and other service providers;
whether Merck will elect to license, or to terminate its license, to any of our programs and the timing of such election or termination;
whether we exceed the current or any future funding caps provided in our Collaboration Agreement and whether Merck decides not to proceed with certain of our product candidates after the end of the research phase;
the effect of products that may compete with our product candidates or other market developments;
our ability to expand and enforce our intellectual property portfolio;
the scope, rate of progress, results and expense of our ongoing, as well as any future, clinical trials and other R&D-related activities; and
the impact and timing of any interactions with regulatory authorities.
A change in the outcome of any of the risks and uncertainties associated with the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another health authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. For additional discussion of the risks and uncertainties associated with our R&D efforts, see “Risk Factors—Risks Related to Our Business and Industry,” “—Risks Related to Our Dependence on Merck and Other Third Parties” and “—Risks Related to Regulatory Approvals” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation and benefits. Other significant costs include legal fees relating to patent and corporate matters, facility costs not otherwise included in R&D expenses and fees for accounting and other consulting services.
We anticipate that our general and administrative expenses will increase in the future to support our continued R&D activities. These increases will likely include increased costs related to the hiring of additional personnel, as well as fees paid to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate continued increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with Nasdaq listing rules and related Securities and Exchange Commission, or SEC, requirements and costs related to insurance, investor relations and SOX 404 compliance. In addition, we may incur expenses associated with building a commercial organization in connection with, and prior to, potential future regulatory approval of our product candidates.
Results of Operations
Our results of operations were as follows (in thousands):
Three Months Ended
March 31,
 20212020Change
Related party revenue$21,575 $24,364 $(2,789)
Operating expenses:
Research and development40,699 38,439 2,260 
General and administrative8,721 6,595 2,126 
Total operating expenses49,420 45,034 4,386 
Loss from operations(27,845)(20,670)(7,175)
Interest income114 1,175 (1,061)
Other income, net187 380 (193)
Net loss$(27,544)$(19,115)$(8,429)
Related Party Revenue from Merck
Revenue decreased $2.8 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to a decrease in the recognition of a portion of the initial upfront payment received from Merck in 2015 that was included within the transaction price and fully recognized over the initial five-year term of our Collaboration Agreement using the cost-based input model. The initial five-year term ended in the first quarter of 2020.
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Research and Development Expenses
Our R&D expenses by program were as follows (in thousands):
Three Months Ended
March 31,
20212020
External R&D expenses:
Aldafermin (FGF19 analog)$9,598 $14,151 
NGM621 (C3 inhibitor)3,686 1,298 
NGM120 (GFRAL antagonist)1,361 1,365 
NGM707 (Anti-ILT2/ILT4 dual antagonist)1,165 760 
NGM438 (LAIR1 antagonist)1,515 42 
NGM395 (GDF15 analog)235 476 
MK-3655 (FGFR1c/KLB agonist)35 129 
Other external R&D expenses708 1,935 
Total external R&D expenses18,303 20,156 
Personnel-related expenses14,269 10,818 
Internal and unallocated R&D expenses(1)8,127 7,465 
Total R&D expenses$40,699 $38,439 
(1)Internal and unallocated research and development expenses consist primarily of research supplies and consulting fees, which we deploy across multiple research and development programs.
R&D expenses increased $2.3 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to a $3.5 million increase in personnel-related expenses and an increase in external expenses driven by our ongoing clinical and preclinical studies of NGM621, NGM438 and NGM707. These increases were partially offset by decreases of $4.6 million in expenses for our manufacturing activities and our ongoing clinical trials of aldafermin and $1.2 million in external expenses related to our other development programs.
We expect R&D expenses for the remainder of 2021 to increase compared to 2020 due to our ongoing activities, particularly as we advance our clinical development of aldafermin. In addition, we may be required to develop and implement additional clinical study policies and procedures to mitigate the evolving effects of the COVID-19 pandemic, which could significantly increase our R&D expenses.
General and Administrative Expenses
General and administrative expenses increased $2.1 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to an increase in personnel-related expenses due to increased headcount and an increase in stock-based compensation expense primarily related to the increase in our stock price.
We anticipate general and administrative expenses for the remainder of 2021 to increase compared to 2020 due to an increase in compensation-related expenses driven by higher headcount and other expenses related to the expansion and support of our business including expenses related to SOX 404 compliance.

Interest Income
Interest income decreased $1.1 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to the decrease in market interest rates.
Liquidity and Capital Resources
Funding Requirements
We have incurred net losses every year since our inception. We have spent, and expect to continue to spend, significant resources to fund R&D of, and seek regulatory approvals for, our product candidates, particularly aldafermin. These activities require us to incur substantial costs related to research, development, manufacturing,
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preclinical studies, clinical trial and related activities, as well as to cover other expenses related to our ongoing operations. For example, we will require substantial additional capital to achieve our development and commercialization goals for our aldafermin program that is being conducted outside of the Merck collaboration or for any other programs in the event Merck does not elect to license these programs upon completion of a proof-of-concept study, in the event Merck elects to terminate its license to any program it licenses or in the event we opt to co-develop any Merck-licensed programs, or if Merck no longer funds such programs under modified terms of the collaboration. In addition, while we do not know whether or when Merck will elect to extend the research phase of the collaboration through March 16, 2024 or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase after March 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. See “Overview of Our Business – Status of Merck Collaboration” above. As a result, we expect to incur significant and increasing operating losses. We have no products approved for commercial sale, have not generated any revenue from product sales to date and we are not and may never be profitable. We have incurred losses in each year since commencing operations. As of March 31, 2021, we had an accumulated deficit of $326.2 million and we expect our accumulated deficit will increase significantly over time. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, how much revenue, if any, continues to be generated under the Merck collaboration and our ability to generate revenue outside of the Merck collaboration.
In addition, if our R&D expenses for product candidates subject to the Merck collaboration exceed the funding caps provided in our current Collaboration Agreement, which happened in the fiscal year ended December 31, 2020 and could happen in the future, or if Merck no longer funds such programs under modified terms of the collaboration, we will be required to devote our own financial resources toward the development of such product candidates or, if we are unwilling or unable to do so, pause or suspend such development to remain within the funding caps or to proceed with development of unfunded programs.
Sources of Liquidity
Merck Collaboration
The revenue we receive under our Collaboration Agreement with Merck is our only source of revenue. The original research phase of the Collaboration Agreement was for five years. As described in greater detail in “Overview of Our Business – Status of Merck Collaboration” above, the parties continue to negotiate potential modifications to the terms of the collaboration. While we do not know whether or when Merck will elect to extend the research phase of the collaboration or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase after March 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the research phase. In any event, we expect that following March 16, 2022, the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding with respect to the development of our current and potential future product candidates will substantially increase, regardless of whether we are able to reach agreement with Merck on modified terms. Accordingly, we will require significant additional capital in order to proceed with development and commercialization of our current and potential future product candidates, including any product candidate that had been subject to the Merck collaboration but Merck decides not to proceed with under the terms of a modified collaboration or after the end of the research phase, or we will need to enter into additional collaboration or license agreements in order to fund such development and commercialization. Neither may be possible and as a result, we may be required to delay, scale back or discontinue development of such product candidates.
Other Sources of Liquidity
In June 2020, we entered into the Sales Agreement with Jefferies relating to the sale of shares of our common stock. In accordance with the terms of the Sales Agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to $150.0 million from time to time through Jefferies, acting as our sales agent. As of March 31, 2021, $127.4 million of our common stock remained available to be sold under the Sales Agreement, subject to conditions specified in the Sales Agreement.
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In January 2021, we sold 5,324,074 shares of common stock (inclusive of shares sold pursuant to the full exercise of the option to purchase additional shares granted to the underwriters in connection with the offering) through an underwritten public offering at a price to the public of $27.00 per share for aggregate net proceeds to the Company of $134.6 million, or the follow-on offering.
As of March 31, 2021, we had cash and cash equivalents of $148.1 million, short-term marketable securities of $264.5 million, working capital of $385.5 million and an accumulated deficit of $326.2 million.
We believe that our existing cash, cash equivalents and short-term marketable securities will be sufficient to fund our operations for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. In addition, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors, including the factors discussed under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
We plan to finance our future cash needs through public or private equity or debt offerings, including under the Sales Agreement, government or other third-party funding, product collaborations, strategic alliances, licensing arrangements or a combination of these. Additional capital may not be available in sufficient amounts, on reasonable terms or when we need it, if at all, and our ability to raise additional capital may be adversely impacted by worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from, among other things, the evolving effects of the COVID-19 pandemic. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve restrictive covenants. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Furthermore, any securities that we may issue may have rights senior to those of our common stock and could contain covenants or protective rights that would lead to restrictions on our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to raise adequate additional capital, we may be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.
Cash Flow Activity
The following table summarizes our cash flow activity (in thousands):
Three Months Ended
March 31,
20212020
Net cash provided by (used in):
Operating activities(22,225)(19,110)
Investing activities(117,156)26,873 
Financing activities140,477 3,591 
Net increase in cash and cash equivalents$1,096 $11,354 
Cash Used in Operating Activities
During the three months ended March 31, 2021, cash used in operating activities was $22.2 million, which consisted of a net loss of $27.5 million, adjusted for non-cash charges of $8.4 million and net cash used in operating assets and liabilities of $3.1 million. The non-cash charges consisted primarily of stock-based compensation expense of $6.6 million and depreciation expense of $1.6 million. The change in operating assets and liabilities was mainly driven by decreases in accounts payable of $2.1 million, related party contract assets of $1.5 million and deferred rent of $0.7 million, partially offset by an increase in prepaid expenses and other current assets of $1.3 million.
During the three months ended March 31, 2020, cash used in operating activities was $19.1 million, which consisted of a net loss of $19.1 million, adjusted for non-cash charges of $5.4 million and cash used through changes in operating assets and liabilities of $5.4 million. The non-cash charges consisted primarily of stock-based compensation expense of $3.7 million and depreciation expense of $1.7 million. The change in operating assets and liabilities was mainly driven by an increase in prepaid expenses and other assets of $2.0 million and an
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increase in accrued expenses of $3.0 million. These increases were partially offset by a decrease in related party receivable from our Merck collaboration of $4.5 million, a decrease in accounts payable of $5.3 million, a decrease in deferred rent of $0.7 million and a decrease in deferred revenue of $4.9 million primarily attributable to the timing of advance payments from Merck related to the reimbursement of costs associated with R&D activities.
Cash Provided by (Used in) Investing Activities
During the three months ended March 31, 2021, cash used in investing activities was $117.2 million, which consisted of purchases of marketable securities of $145.0 million with net proceeds from our follow-on offering, partially offset by $28.0 million in net proceeds on maturity of marketable securities. During the three months ended March 31, 2020, cash provided by investing activities was $26.9 million, which consisted of $56.8 million in net proceeds on maturity of marketable securities, partially offset by purchases of marketable securities of $29.4 million and purchases of property and equipment of $0.5 million.
Cash Provided by Financing Activities
During the three months ended March 31, 2021 cash provided by financing activities was $140.5 million and consisted of net proceeds from the follow-on offering of $134.6 million and proceeds from employee equity incentive plans of $5.9 million. During the three months ended March 31, 2020, cash provided by financing activities was $3.6 million and consisted of proceeds from employee equity incentive plans.
Off-Balance Sheet Arrangements
We currently have not entered into and do not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.
Contractual Obligations
During the three months ended March 31, 2021, there were no material changes to our contractual obligations as set forth in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, as well as revenue and expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe that there have been no significant changes in our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Newly Issued Accounting Pronouncements
Except as described in Note 2 to the condensed consolidated financial statements under the headings “Recently Adopted Accounting Pronouncements” and “Recent Accounting Pronouncements Not Yet Adopted,” there have been no new accounting pronouncements or changes to accounting pronouncements during the three months ended March 31, 2021, as compared to the recent accounting pronouncements described in our audited consolidated financial statements and notes for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, that are of significance or potential significance to us.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2021, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2021, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, the design and operation of our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material litigation or other material legal proceedings.
Item 1A. Risk Factors.
Our business involves significant risks, some of which are described below. You should carefully consider the following risks, as well as the other information in this Quarterly Report on Form 10-Q, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below could have a material adverse effect on our business, results of operations, financial condition, prospects and stock price. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and the market price of our common stock.
Summary Risk Factors
Below is a summary of material factors that make an investment in our common stock speculative or risky. Importantly, this summary does not address all of the risks and uncertainties that we face. Additional discussion of the risks and uncertainties summarized in this risk factor summary, as well as other risks and uncertainties that we face, can be found under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. The below summary is qualified in its entirety by that more complete discussion of such risks and uncertainties. You should carefully consider the risks and uncertainties described under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q as part of your evaluation of an investment in our common stock:
our most advanced product candidate, aldafermin, an engineered analog of human hormone fibroblast growth factor 19, or FGF19, that is administered through a once-daily subcutaneous injection, is still only in Phase 2 development, may fail to demonstrate safety and efficacy in ongoing and future clinical trials, including ALPINE 2/3, our Phase 2b clinical trial of aldafermin in patients with non-alcoholic steatohepatitis, or NASH, with liver fibrosis stage 2 or 3, or F2 or F3, and ALPINE 4, our Phase 2b clinical trial of aldafermin in patients with NASH with F4 liver fibrosis and compensated cirrhosis, may never achieve regulatory approval and may not be able to be successfully commercialized due to competition or other factors;
similarly, clinical trials of our other product candidates, including our ongoing Phase 2 CATALINA trial of NGM621, a humanized Immunoglobulin 1 monoclonal antibody inhibiting complement C3 administered via intravitreal, or IVT, injection in patients with geographic atrophy, or GA, may fail to produce positive results or to demonstrate safety and efficacy to the satisfaction of health authorities;
aldafermin and MK-3655, an agonistic antibody discovered by us that selectively activates fibroblast growth factor receptor 1c-beta-klotho, or FGFR1c/KLB, which regulates insulin sensitivity, blood glucose and liver fat and is administered every four weeks through a subcutaneous injection, are being developed for the treatment of NASH, an indication for which there are no approved products, which makes it difficult to predict the timing, cost and potential success of their clinical development and regulatory approval for the treatment of NASH;
we have incurred net losses every year since our inception, we have no source of product revenue, we expect to continue to incur significant and increasing operating losses and we may never become profitable;
we do not know whether Merck Sharp & Dohme Corp., or Merck, will elect to extend the research phase of our collaboration and the level of research funding support we may obtain during any such extension or whether we may otherwise be able to reach agreement with Merck on the terms of a modified collaboration, and regardless of whether we and Merck reach agreement on the terms of a modified collaboration, our collaboration with Merck involves numerous risks, any of which could materially and adversely affect our business and financial condition;
we currently depend on our collaboration with Merck, and in the future may depend on collaborations with additional third parties, for the development and commercialization of our product candidates;
we will require additional capital to finance our operations, which may not be available to us on acceptable terms, or at all, and as a result, we may not have the resources to complete the development and commercialization of our current and potential future product candidates;
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we will need to successfully complete rigorous preclinical and clinical testing of our product candidates before we can seek regulatory approval, which could delay or prevent commercialization of our product candidates;
we may not successfully identify new product candidates to expand our development pipeline;
the process of manufacturing aldafermin and our other biologic product candidates is complex, highly regulated and subject to many manufacturing risks, including difficulties in supply chain, including procuring raw materials and components and in production, particularly in scaling up and validating initial production and ensuring the avoidance of contamination, any of which could substantially increase our costs and limit supply of our product candidates and any future products needed for clinical trials and commercialization;
the regulatory approval processes of the U.S. Food and Drug Administration, or FDA, and comparable foreign health authorities are lengthy, time-consuming and inherently unpredictable;
our future success depends in part on our ability to attract and retain highly skilled employees, including members of our current senior management team, especially Dr. Jin-Long Chen;
the COVID-19 pandemic continues to adversely impact our business and could materially and adversely affect our operations, as well as the businesses or operations of our manufacturers, clinical research organizations or other third parties with whom we conduct business;
we face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully than, us;
our success depends in significant part upon our ability to obtain and maintain intellectual property protection for our products and technologies;
our principal stockholders, including entities affiliated with The Column Group, Merck and our management, own a substantial percentage of our stock and will be able to exert significant control over matters subject to stockholder approval;
we may not be able to obtain and maintain the relationships with third parties that are necessary to develop, manufacture and commercialize some or all of our product candidates;
we or third parties we rely on could experience a cybersecurity incident that could harm our business; and
the market price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.
Risks Related to Our Financial Condition and Capital Needs
We have incurred net losses every year since our inception and have no source of product revenue. We expect to continue to incur significant and increasing operating losses and may never become profitable.
We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we expect to continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each year since commencing operations. Our net losses were $102.5 million, $42.8 million and $0.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of March 31, 2021, we had an accumulated deficit of $326.2 million.
We have spent, and expect to continue to spend, significant resources to fund research and development of, and seek regulatory approvals for, our product candidates. We expect to incur substantial and increasing operating losses over the next several years as our research, development, manufacturing, preclinical studies, clinical trial and related activities increase. We also expect that following March 16, 2022, the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding with respect to the development of our current and potential future product candidates will substantially increase, regardless of whether we are able to reach agreement with Merck on modified terms. As a result, our expenses and accumulated deficit will also increase significantly in future periods. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, including those resulting from the evolving effects of the COVID-19 pandemic. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, whether Merck will exercise its option to extend the research phase of our collaboration or whether and on what terms we will reach agreement with Merck on a modified collaboration and our ability to otherwise continue to generate revenue, if at all, under the Merck collaboration, and to generate any revenue outside of the Merck collaboration. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
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In addition, we will not be able to generate product revenue unless and until one of our product candidates successfully completes clinical trials, receives regulatory approval and is successfully commercialized. As our product candidates are in Phase 2 trials or in earlier stages of development, we do not expect to receive product revenue from our product candidates for a number of years, if ever. Our ability to generate future product revenue from our current or future product candidates also depends on a number of additional factors, including our or our current collaborator’s and potential future collaborators’ ability to:
successfully complete research and clinical development of current and future product candidates;
establish and maintain supply and manufacturing relationships with third parties, and ensure adequate, scaled up and legally compliant manufacturing of bulk drug substances and drug products to maintain sufficient supply;
launch and commercialize any product candidates for which we obtain marketing approval, if any, and, if launched independently by us without a collaborator, successfully establish a sales force and marketing and distribution infrastructure;
demonstrate the necessary safety data (and, if accelerated approval is obtained, verify the clinical benefit) post-approval to ensure continued regulatory approval;
obtain coverage and adequate product reimbursement from third-party payors, including government payors, for any approved products;
achieve market acceptance for any approved products;
establish, maintain, protect and enforce our intellectual property rights; and
attract, hire and retain qualified personnel.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, including that our product candidates may not advance through development or be approved for commercial sale, we are unable to predict if or when we will generate product revenue or achieve or maintain profitability. Even if we successfully complete development and regulatory processes, we anticipate incurring significant costs associated with launching and commercializing any products. If we fail to become profitable or do not sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or cease our operations.
All of our revenue for recent periods has been received from a single collaboration partner.
In recent years, all of our revenue has been from our collaboration partner, Merck. Other than our agreement with Merck, we currently have no agreements that could provide us with material, ongoing future revenue and we may never enter into any agreements. As described under “Overview of Our Business – Status of Merck Collaboration” in Part I, Item 2 of this Quarterly Report on Form 10-Q, the parties continue to negotiate potential modifications to the terms of their Research Collaboration, Product Development and License Agreement with Merck, or the Collaboration Agreement. Under the current terms of the Collaboration Agreement, Merck agreed to reimburse us for research and development activities up to certain specified funding caps during the current two-year extension of the research phase through March 16, 2022. If our research and development expenses for product candidates subject to the Merck collaboration exceed the funding caps provided in our Collaboration Agreement, which happened in the fiscal year ended December 31, 2020 and could happen in the future, we will be required to devote our own financial resources toward the development of such product candidates or, if we are unwilling or unable to do so, pause or suspend such development to remain within the funding caps. In addition, while we do not know whether or when Merck will elect to extend the research phase of the collaboration through March 16, 2024 or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase after March 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the current research phase. In any event, we expect that following March 16, 2022, the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding with respect to the development of our current and potential future product candidates will substantially increase, regardless of whether we are able to reach agreement with Merck on modified terms. Accordingly, we will require significant additional capital in order to proceed with development and commercialization of our current and potential future product candidates, including
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any product candidate that had been subject to the Merck collaboration but Merck decides not to proceed with under the terms of a modified collaboration or after the end of the research phase, or we will need to enter into additional collaboration or license agreements in order to fund such development and commercialization. Neither may be possible and as a result, we may be required to delay, scale back or discontinue development of such product candidates. For more information, see “Risks Related to Our Dependence on Merck and Other Third Parties” below.
We will require substantial additional capital to finance our operations, which may not be available to us on acceptable terms, or at all. As a result, we may not have the resources to complete the development and commercialization of our current and potential future product candidates.
As a research and development company, our operations have consumed substantial amounts of cash since inception and we will require substantial additional capital to finance our operations and pursue our strategy. In this regard, we do not have any committed external source of funds, other than pursuant to the current terms of our collaboration with Merck, which is limited in scope and duration, and may be unilaterally terminated by Merck under certain circumstances. In addition, as described in more detail under “Risks Related to Our Dependence on Merck and Other Third Parties” below, the level of future annual research support or other funding from Merck following the end of the current research phase is uncertain, and even if Merck elects to extend the current research phase, such annual research support from Merck is expected to be meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase through March 16, 2022. We also expect our research and development expenses to increase substantially in connection with our ongoing activities regardless of whether we are able to reach agreement with Merck on the terms of a modified collaboration, particularly to the extent that product candidates whose costs will not be included in a modified Merck collaboration, such as aldafermin and other product candidates Merck decides not to proceed with under the terms of a modified collaboration or after the end of the research phase, advance in clinical development. In addition, we may be required to develop and implement additional clinical study policies and procedures to mitigate the evolving effects of the COVID-19 pandemic, which could significantly increase our research and development expenses.
We believe that our existing cash, cash equivalents and short-term marketable securities will be sufficient to fund our operations for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. In addition, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. Our future funding requirements, both short- and long-term, will depend on many factors, including:
the initiation, progress, timing, delays, costs and results of preclinical studies and clinical trials for our current and future product candidates;
whether and on what terms Merck exercises, if at all, its remaining option to extend the research phase of the collaboration, including whether such exercise would trigger an extension payment to us under the terms of a modified collaboration;
whether and on what terms we and Merck agree to a modified collaboration, including the level of annual research support from Merck, if any, under a modified collaboration and, relatedly, the scope and extent of our need to fund the development of our current and potential future product candidates, including with respect to any such product candidates whose costs will not be included in a modified Merck collaboration such as aldafermin and other product candidates Merck decides not to proceed with under the terms of a modified collaboration or after the end of the research phase;
whether Merck exercises its option to license product candidates upon completion of proof-of-concept studies for each such candidate in humans;
whether Merck terminates the research phase of the collaboration under pre-specified circumstances set forth in the Collaboration Agreement or terminates a program that it has licensed (such as Merck’s termination of its license for our growth differentiation factor 15, GDF15, agonist program, including the NGM395 and NGM386 product candidates);
whether we exceed the funding caps provided in the Collaboration Agreement;
the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign health authorities, including the potential for such authorities to require that we perform more studies than those that we currently expect or to change their requirements on studies that had previously been agreed to;
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the cost to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patents or other intellectual property rights;
the effect of products that may compete with our product candidates or other market developments;
market acceptance of any approved product candidates, including product pricing and product reimbursement by third-party payors;
the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;
the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial-scale manufacturing;
the cost of establishing sales, marketing and distribution capabilities for our product candidates for which we may receive regulatory approval and that we determine to commercialize ourselves or in collaboration with partners; and
the extent to which any of the foregoing costs are the responsibility of Merck.
We plan to finance our future cash needs through public or private equity or debt offerings, including under the Open Market Sale AgreementSM, or the Sales Agreement, we entered into with Jefferies L