SEC Company Response from ADC Therapeutics SA (ADCT) (CIK 0001771910) (ADCT) — Apr 28, 2020
ADC Therapeutics SA (ADCT) (CIK 0001771910)
Date: April 28, 2020 · CIK: 0001771910 · Accession: 0001140361-20-010010
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 333-237841
Referenced dates: March 25, 2020
Letter
Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-3628
Dear Mr. Wyman:
On behalf of ADC Therapeutics SA, a corporation organized under the laws of Switzerland (the “Company”), we are providing the information that follows to the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) in response to Comment #1 contained in the Staff’s letter dated March 25, 2020 (the “Comment Letter”) relating to the Company’s Draft Registration Statement on Form F-1, confidentially submitted on March 2, 2020 (the “Registration Statement”), in connection with the initial public offering of the Company’s common shares (the “Offering”).
The response and information below are based on information provided to us by the Company. For convenience, the Staff’s comment is repeated below in italics, followed by the Company’s response to the comment. Capitalized terms used but not defined herein are used herein as defined in the Registration Statement. On September 19, 2019, the Company effected a one-to-15,625 share split of all issued shares, and on April 24, 2020, the Company effected a five-to-four reverse share split. For the Staff’s convenience, all shares and per share amounts have been adjusted to reflect these share splits.
1.
Once you have an estimated offering price range, please explain to us the reasons for any differences between recent valuations of your common shares leading up to the planned offering and the midpoint of your estimated offering price range. This information will help facilitate our review of your accounting for equity issuances, including stock compensation.
The Company has three share-based compensation plans, all of which are based on common shares:
•
a share option plan (the 2014 Incentive Plan);
•
a share purchase plan (the 2016 Share Purchase Plan), which is common in Switzerland and which involves an advance ruling from the Swiss tax authorities; and
•
a share-based compensation plan (the 2019 Equity Incentive Plan), adopted in November 2019, under which the Company has issued only share options to date.
The 2014 Incentive Plan was primarily intended for international employees, the 2016 Share Purchase Plan was primarily intended for Swiss resident employees, and the 2019 Equity Incentive Plan is intended for all employees, directors, consultants and advisors. At or prior to the closing of the Offering, we intend to cease issuing new grants under our 2014 Incentive Plan and 2016 Share Purchase Plan and issue any new grants under our 2019 Equity Incentive Plan. In accordance with the International Financial Reporting Standards (“IFRS”), all three share-based compensation plans are accounted for as share option plans in the Company’s consolidated financial statements. Historically, the Company has made incentive plan awards throughout the course of its fiscal year, such as upon the hiring of new employees and/or upon annual performance reviews.
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
April 28, 2020
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
As set forth below, the Company believes that its use of the Back Solve method in the context of the Option Pricing Model for awards granted through June 30, 2019 and of the Hybrid Method, combining the Back Solve method in the context of the Option Pricing Model with the Probability Weighted Expected Return Model (“PWERM”), for awards granted after June 30, 2019 provided the most reliable and appropriate results for its share-based compensation valuations, given the uncertainties associated with the probability of success of the clinical development of the Company’s two lead product candidates, Lonca and Cami, and the fact that an initial public offering was not the most likely liquidity outcome until July 2019. The Company believes that these factors, in addition to the elimination of the significant liquidation preferences enjoyed by the preferred shares as part of the Conversion to be effected in connection with this Offering, the fact that key value inflection points that significantly increased the Company’s value did not occur until May, July and August 2019, as well as the Company’s withdrawal of its Registration Statement in October 2019 and certain other factors customary to an initial public offering, explain the difference between the historical valuation of the Company’s common shares for the purpose of its share-based compensation and the midpoint of the estimated price range of the Offering.
Historical Fair Value Determination Methodology
Approach
The Company’s discussion of share-based compensation is primarily contained in the Registration Statement section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Share-Based Compensation Expense.”
As there has been no public market for the Company’s common shares since its inception, the Company’s Board of Directors has engaged independent third-party valuation specialists to assist them in determining the estimated fair value of the Company’s share-based awards and of the underlying common shares using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants’ (the “AICPA”) Audit and Accounting Practice Aid Series: Valuation of Privately-Held-Company Equity Securities Issued as Compensation. There were various objective and subjective factors that the Company believed were relevant in determining the valuation methodology to be applied and in estimating the fair value of its common shares at each grant date, including:
•
the prices at which the Company sold preferred shares during the relevant period;
•
the rights and preferences of the preferred shares relative to those of the common shares, including the right to liquidation payments in preference to holders of common shares in the event of a liquidation, which will be distributed to shareholders in the following order, which, for the avoidance of doubt, would not be applicable in an initial public offering of the Company’s common shares:
i.
to Class E shareholders in an amount equal to the total price paid for the Class E preferred shares, plus an 8% per annum return;
ii.
to Class D shareholders in an amount equal to the total price paid for the Class D preferred shares, plus an 8% per annum return;
iii.
to Class C shareholders in an amount equal to the total price paid for the Class C preferred shares;
iv.
pari passu, to Class B shareholders in an amount equal to the total price paid for the Class B preferred shares, plus an 8% per annum return, and to Class C shareholders in an amount equal to an 8% per annum return on the total price paid for the Class C preferred shares; and
v.
to all shareholders in proportion to the nominal value of their shares;
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
April 28, 2020
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
•
the lack of an active public market for the common shares and the preferred shares;
•
the Company’s stage of development and its business strategy, external market conditions affecting the biotechnology industry and trends within the biotechnology industry;
•
the Company’s research and development pipeline, and in particular factors affecting the likelihood of success of its two lead product candidates, Lonca and Cami, including safety and efficacy data and feedback from the U.S. Food and Drug Administration (“FDA”), which may impact the probability of success and the inherent value of the Company’s lead product candidates and of the Company as a whole;
•
the Company’s financial position, including cash and cash equivalents, and its historical and forecasted performance and operating results;
•
the likelihood of achieving an IPO or private sale of the Company and management’s estimate of the price per share that might be achieved; and
•
analysis of initial public offerings and the market performance of comparable companies in the biotechnology industry.
Valuing the options
As noted above and in accordance with IFRS, all of the Company’s share-based compensation plans are accounted for as share option plans in the Company’s consolidated financial statements. The fair value of the options granted pursuant to the plans are calculated on the same basis using the traditional Black-Scholes option pricing model.
In consultation with the independent third-party valuation specialists referred to above, the Company applies a Black-Scholes option pricing model-based valuation methodology using assumptions and inputs that the Company believes are reasonable to arrive at an estimated fair value of the options for the purpose of determining share-based compensation expense. These inputs are set forth in the Registration Statement section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Share-Based Compensation Expense.” One of these inputs is the fair value of the Company’s common shares at each grant date.
Methods used to value the Company’s common shares
To estimate the fair value of the Company’s common shares at each grant date, the Company used the Back Solve method in the context of an Option Pricing Method for awards granted through June 30, 2019, and used the Hybrid Method, combining the Back Solve method in the context of the Option Pricing Model with the PWERM allocation method, for awards granted after June 30, 2019.
The Back Solve method in the context of an Option Pricing Method values the total equity of the Company and works backwards through the various preferred shares, taking into account the seniority, preference and conditions of each class of preferred shares, including liquidation payments (defined to include normal course sale proceeds), in preference to holders of common shares in certain situations and the right to receive dividends prior to any dividends declared or paid on any of the Company’s common shares, to determine the fair value of the Company’s common shares at each grant date.
The PWERM allocation method incorporates the results from multiple scenarios into a single conclusion of value. The model requires assumptions as to the probability of achieving a liquidity event under various scenarios, such as an initial public offering, disposal by way of strategic sale or merger or winding up the company by orderly dissolution or court liquidation, as well as a valuation for each scenario. The model results in a value that is based on a weighted probability for each outcome.
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
April 28, 2020
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
The Company believes that the Back Solve method in the context of an Option Pricing Method was the most appropriate method for share-based compensation valuations for awards granted through June 30, 2019. Having been approached by a number of pharmaceutical and biotechnology companies that expressed an interest in acquiring rights to the Company’s pipeline, the Board of Directors took the view that a strategic transaction would be the most likely liquidity event. Therefore, the Company believed that the Back Solve method was the most appropriate method for share-based compensation valuations through June 30, 2019.
Also, the PWERM allocation method requires certain data and inputs. Until June 30, 2019, owing to uncertainties associated with the probability of success of the clinical development of Lonca and Cami, as highlighted below, such data and inputs were not reasonably quantifiable. Therefore, the Company believes that the Back Solve method in the context of an Option Pricing Method was also the most practical method for share-based compensation valuations through June 30, 2019.
Subsequently, following the analysis of the interim data from the pivotal Phase 2 clinical trial of Lonca for the treatment of relapsed or refractory DLBCL in July and August 2019 and based on investor feedback received in August 2019, the Board of Directors decided to pursue an initial public offering. At that stage, an initial public offering became a likely liquidity event. The Company therefore decided to adopt the Hybrid Method, combining the Back Solve method in the context of the Option Pricing Model with the PWERM allocation method, for awards granted after June 30, 2019.
Application of Back Solve method
The Back Solve method derives an implied common equity value based on the most recent or relevant financing round that the Company has completed. Through December 31, 2019, the Company had raised $558.6 million in gross cash proceeds from equity financings through issuance of various classes of preferred shares (Class B, C, D and E). Each class of preferred shares includes economic rights and preferences over previously issued classes of preferred shares, and all classes of preferred shares include economic rights and preferences, including priority entitlement to any liquidation preferences and certain dividend rights, over common shares.
For share-based compensation awards issued in 2019, the most recent financing rounds were completed in November 2017 and July 2019 and involved the issuance and sale of Class E preferred shares. Both financing rounds included new institutional private equity investors, and the Company believes that these financing rounds were arm’s-length market transactions. The Company used the share price in these financing rounds, initially alone and later in combination with the PWERM allocation method, to determine the implied total equity value of the Company, and in turn to derive the fair value of the respective preferred and common shares at any given point in time.
On November 16, 2017, the Company completed a $200.1 million round of equity financing. It issued and sold 7,712,500 Class E preferred shares at $25.94 per share. For awards granted under the Company’s share-based compensation plans from November 16, 2017 to April 1, 2019 (being the date of the last grant in the six months ended June 30, 2019), the Compan
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New York
Northern California
Washington DC
London
Paris
Madrid
Tokyo
Beijing
Hong Kong
São Paulo
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
212 450 4000 tel
212 701 5800 fax
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
April 28, 2020
Re:
ADC Therapeutics SA
Registration Statement on Form F-1
Filed April 24, 2020
CIK No. 0001771910
File No. 333-237841
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-3628
Dear Mr. Wyman:
On behalf of ADC Therapeutics SA, a corporation organized under the laws of Switzerland (the “Company”), we are providing the information that follows to the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) in
response to Comment #1 contained in the Staff’s letter dated March 25, 2020 (the “Comment Letter”) relating to the Company’s Draft Registration Statement on Form F-1, confidentially submitted on March 2, 2020 (the “Registration Statement”), in
connection with the initial public offering of the Company’s common shares (the “Offering”).
The response and information below are based on information provided to us by the Company. For convenience, the Staff’s comment is repeated below in italics, followed by the Company’s response to the comment. Capitalized terms used but not defined
herein are used herein as defined in the Registration Statement. On September 19, 2019, the Company effected a one-to-15,625 share split of all issued shares, and on April 24, 2020, the Company effected a five-to-four reverse share split. For the
Staff’s convenience, all shares and per share amounts have been adjusted to reflect these share splits.
1.
Once you have an estimated offering price range, please explain to us the reasons for any differences between recent valuations of your common shares leading up to the planned offering and the midpoint of your
estimated offering price range. This information will help facilitate our review of your accounting for equity issuances, including stock compensation.
The Company has three share-based compensation plans, all of which are based on common shares:
•
a share option plan (the 2014 Incentive Plan);
•
a share purchase plan (the 2016 Share Purchase Plan), which is common in Switzerland and which involves an advance ruling from the Swiss tax authorities; and
•
a share-based compensation plan (the 2019 Equity Incentive Plan), adopted in November 2019, under which the Company has issued only share options to date.
The 2014 Incentive Plan was primarily intended for international employees, the 2016 Share Purchase Plan was primarily intended for Swiss resident employees, and the 2019 Equity Incentive Plan is intended for all employees, directors, consultants
and advisors. At or prior to the closing of the Offering, we intend to cease issuing new grants under our 2014 Incentive Plan and 2016 Share Purchase Plan and issue any new grants under our 2019 Equity Incentive Plan. In accordance with the
International Financial Reporting Standards (“IFRS”), all three share-based compensation plans are accounted for as share option plans in the Company’s consolidated financial statements. Historically, the Company has made incentive plan awards
throughout the course of its fiscal year, such as upon the hiring of new employees and/or upon annual performance reviews.
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
2
April 28, 2020
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
As set forth below, the Company believes that its use of the Back Solve method in the context of the Option Pricing Model for awards granted through June 30, 2019 and of the Hybrid Method, combining the Back Solve method in the context of the Option
Pricing Model with the Probability Weighted Expected Return Model (“PWERM”), for awards granted after June 30, 2019 provided the most reliable and appropriate results for its share-based compensation valuations, given the uncertainties associated with
the probability of success of the clinical development of the Company’s two lead product candidates, Lonca and Cami, and the fact that an initial public offering was not the most likely liquidity outcome until July 2019. The Company believes that these
factors, in addition to the elimination of the significant liquidation preferences enjoyed by the preferred shares as part of the Conversion to be effected in connection with this Offering, the fact that key value inflection points that significantly
increased the Company’s value did not occur until May, July and August 2019, as well as the Company’s withdrawal of its Registration Statement in October 2019 and certain other factors customary to an initial public offering, explain the difference
between the historical valuation of the Company’s common shares for the purpose of its share-based compensation and the midpoint of the estimated price range of the Offering.
Historical Fair Value Determination Methodology
Approach
The Company’s discussion of share-based compensation is primarily contained in the Registration Statement section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Share-Based Compensation Expense.”
As there has been no public market for the Company’s common shares since its inception, the Company’s Board of Directors has engaged independent third-party valuation specialists to assist them in determining the estimated fair value of the
Company’s share-based awards and of the underlying common shares using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants’ (the “AICPA”) Audit and Accounting Practice Aid Series: Valuation
of Privately-Held-Company Equity Securities Issued as Compensation. There were various objective and subjective factors that the Company believed were relevant in determining the valuation methodology to be applied and in estimating the fair value of
its common shares at each grant date, including:
•
the prices at which the Company sold preferred shares during the relevant period;
•
the rights and preferences of the preferred shares relative to those of the common shares, including the right to liquidation payments in preference to holders of common shares in the event of a liquidation, which will be distributed to
shareholders in the following order, which, for the avoidance of doubt, would not be applicable in an initial public offering of the Company’s common shares:
i.
to Class E shareholders in an amount equal to the total price paid for the Class E preferred shares, plus an 8% per annum return;
ii.
to Class D shareholders in an amount equal to the total price paid for the Class D preferred shares, plus an 8% per annum return;
iii.
to Class C shareholders in an amount equal to the total price paid for the Class C preferred shares;
iv.
pari passu, to Class B shareholders in an amount equal to the total price paid for the Class B preferred shares, plus an 8% per annum return, and to Class C shareholders in an amount equal to an 8%
per annum return on the total price paid for the Class C preferred shares; and
v.
to all shareholders in proportion to the nominal value of their shares;
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
3
April 28, 2020
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
•
the lack of an active public market for the common shares and the preferred shares;
•
the Company’s stage of development and its business strategy, external market conditions affecting the biotechnology industry and trends within the biotechnology industry;
•
the Company’s research and development pipeline, and in particular factors affecting the likelihood of success of its two lead product candidates, Lonca and Cami, including safety and efficacy data and feedback from the U.S. Food and Drug
Administration (“FDA”), which may impact the probability of success and the inherent value of the Company’s lead product candidates and of the Company as a whole;
•
the Company’s financial position, including cash and cash equivalents, and its historical and forecasted performance and operating results;
•
the likelihood of achieving an IPO or private sale of the Company and management’s estimate of the price per share that might be achieved; and
•
analysis of initial public offerings and the market performance of comparable companies in the biotechnology industry.
Valuing the options
As noted above and in accordance with IFRS, all of the Company’s share-based compensation plans are accounted for as share option plans in the Company’s consolidated financial statements. The fair value of the options granted pursuant to the plans
are calculated on the same basis using the traditional Black-Scholes option pricing model.
In consultation with the independent third-party valuation specialists referred to above, the Company applies a Black-Scholes option pricing model-based valuation methodology using assumptions and inputs that the Company believes are reasonable to
arrive at an estimated fair value of the options for the purpose of determining share-based compensation expense. These inputs are set forth in the Registration Statement section titled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Share-Based Compensation Expense.” One of these inputs is the fair value of the Company’s common shares at each grant date.
Methods used to value the Company’s common shares
To estimate the fair value of the Company’s common shares at each grant date, the Company used the Back Solve method in the context of an Option Pricing Method for awards granted through June 30, 2019, and used the Hybrid Method, combining the Back
Solve method in the context of the Option Pricing Model with the PWERM allocation method, for awards granted after June 30, 2019.
The Back Solve method in the context of an Option Pricing Method values the total equity of the Company and works backwards through the various preferred shares, taking into account the seniority, preference and conditions of each class of preferred
shares, including liquidation payments (defined to include normal course sale proceeds), in preference to holders of common shares in certain situations and the right to receive dividends prior to any dividends declared or paid on any of the Company’s
common shares, to determine the fair value of the Company’s common shares at each grant date.
The PWERM allocation method incorporates the results from multiple scenarios into a single conclusion of value. The model requires assumptions as to the probability of achieving a liquidity event under various scenarios, such as an initial public
offering, disposal by way of strategic sale or merger or winding up the company by orderly dissolution or court liquidation, as well as a valuation for each scenario. The model results in a value that is based on a weighted probability for each
outcome.
Mr. Franklin Wyman
Division of Corporation Finance
U.S. Securities and Exchange Commission
4
April 28, 2020
FOIA Confidential Treatment Request
Pursuant to Rule 83 by ADC Therapeutics SA
The Company believes that the Back Solve method in the context of an Option Pricing Method was the most appropriate method for share-based compensation valuations for awards granted through June 30, 2019. Having been approached by a number of
pharmaceutical and biotechnology companies that expressed an interest in acquiring rights to the Company’s pipeline, the Board of Directors took the view that a strategic transaction would be the most likely liquidity event. Therefore, the Company
believed that the Back Solve method was the most appropriate method for share-based compensation valuations through June 30, 2019.
Also, the PWERM allocation method requires certain data and inputs. Until June 30, 2019, owing to uncertainties associated with the probability of success of the clinical development of Lonca and Cami, as highlighted below, such data and inputs were
not reasonably quantifiable. Therefore, the Company believes that the Back Solve method in the context of an Option Pricing Method was also the most practical method for share-based compensation valuations through June 30, 2019.
Subsequently, following the analysis of the interim data from the pivotal Phase 2 clinical trial of Lonca for the treatment of relapsed or refractory DLBCL in July and August 2019 and based on investor feedback received in August 2019, the Board of
Directors decided to pursue an initial public offering. At that stage, an initial public offering became a likely liquidity event. The Company therefore decided to adopt the Hybrid Method, combining the Back Solve method in the context of the Option
Pricing Model with the PWERM allocation method, for awards granted after June 30, 2019.
Application of Back Solve method
The Back Solve method derives an implied common equity value based on the most recent or relevant financing round that the Company has completed. Through December 31, 2019, the Company had raised $558.6 million in gross cash proceeds from equity
financings through issuance of various classes of preferred shares (Class B, C, D and E). Each class of preferred shares includes economic rights and preferences over previously issued classes of preferred shares, and all classes of preferred shares
include economic rights and preferences, including priority entitlement to any liquidation preferences and certain dividend rights, over common shares.
For share-based compensation awards issued in 2019, the most recent financing rounds were completed in November 2017 and July 2019 and involved the issuance and sale of Class E preferred shares. Both financing rounds included new institutional
private equity investors, and the Company believes that these financing rounds were arm’s-length market transactions. The Company used the share price in these financing rounds, initially alone and later in combination with the PWERM allocation method,
to determine the implied total equity value of the Company, and in turn to derive the fair value of the respective preferred and common shares at any given point in time.
On November 16, 2017, the Company completed a $200.1 million round of equity financing. It issued and sold 7,712,500 Class E preferred shares at $25.94 per share. For awards granted under the Company’s share-based compensation plans from November
16, 2017 to April 1, 2019 (being the date of the last grant in the six months ended June 30, 2019), the Compan