prta-20200930
false2020Q30001559053--12-317 years, 9 months, 30 daysP10DP10YP10YP10Y00015590532020-01-012020-09-30xbrli:shares00015590532020-10-30iso4217:USD00015590532020-09-3000015590532019-12-31iso4217:EURxbrli:sharesiso4217:USDxbrli:shares0001559053prta:CollaborationMember2020-07-012020-09-300001559053prta:CollaborationMember2019-07-012019-09-300001559053prta:CollaborationMember2020-01-012020-09-300001559053prta:CollaborationMember2019-01-012019-09-300001559053us-gaap:LicenseMember2020-07-012020-09-300001559053us-gaap:LicenseMember2019-07-012019-09-300001559053us-gaap:LicenseMember2020-01-012020-09-300001559053us-gaap:LicenseMember2019-01-012019-09-3000015590532020-07-012020-09-3000015590532019-07-012019-09-3000015590532019-01-012019-09-300001559053us-gaap:RetainedEarningsMember2020-07-012020-09-300001559053us-gaap:RetainedEarningsMember2020-01-012020-09-3000015590532018-12-3100015590532019-09-300001559053prta:OrdinaryShareMember2020-06-300001559053us-gaap:AdditionalPaidInCapitalMember2020-06-300001559053us-gaap:RetainedEarningsMember2020-06-3000015590532020-06-300001559053prta:OrdinaryShareMember2020-07-012020-09-300001559053us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001559053prta:OrdinaryShareMember2020-09-300001559053us-gaap:AdditionalPaidInCapitalMember2020-09-300001559053us-gaap:RetainedEarningsMember2020-09-300001559053prta:OrdinaryShareMember2019-06-300001559053us-gaap:AdditionalPaidInCapitalMember2019-06-300001559053us-gaap:RetainedEarningsMember2019-06-3000015590532019-06-300001559053us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-300001559053us-gaap:RetainedEarningsMember2019-07-012019-09-300001559053prta:OrdinaryShareMember2019-09-300001559053us-gaap:AdditionalPaidInCapitalMember2019-09-300001559053us-gaap:RetainedEarningsMember2019-09-300001559053prta:OrdinaryShareMember2019-12-310001559053us-gaap:AdditionalPaidInCapitalMember2019-12-310001559053us-gaap:RetainedEarningsMember2019-12-310001559053us-gaap:AdditionalPaidInCapitalMember2020-01-012020-09-300001559053prta:OrdinaryShareMember2020-01-012020-09-300001559053prta:OrdinaryShareMember2018-12-310001559053us-gaap:AdditionalPaidInCapitalMember2018-12-310001559053us-gaap:RetainedEarningsMember2018-12-310001559053us-gaap:AccountingStandardsUpdate201602Memberus-gaap:RetainedEarningsMember2018-12-310001559053us-gaap:AccountingStandardsUpdate201602Member2018-12-310001559053us-gaap:AdditionalPaidInCapitalMember2019-01-012019-09-300001559053prta:OrdinaryShareMember2019-01-012019-09-300001559053us-gaap:RetainedEarningsMember2019-01-012019-09-300001559053country:US2020-09-300001559053country:IE2020-09-300001559053country:US2019-12-310001559053country:IE2019-12-310001559053us-gaap:FairValueInputsLevel1Member2020-09-300001559053us-gaap:FairValueInputsLevel1Member2019-12-310001559053us-gaap:EmployeeStockOptionMember2020-07-012020-09-300001559053us-gaap:EmployeeStockOptionMember2019-07-012019-09-300001559053us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001559053us-gaap:EmployeeStockOptionMember2019-01-012019-09-30xbrli:pure0001559053us-gaap:AccountingStandardsUpdate201602Member2020-09-30utr:sqft00015590532016-03-012016-03-3100015590532016-04-3000015590532016-12-012016-12-310001559053us-gaap:PropertySubjectToOperatingLeaseMember2016-04-300001559053us-gaap:PropertySubjectToOperatingLeaseMember2016-04-012016-04-300001559053us-gaap:PropertySubjectToOperatingLeaseMember2020-09-3000015590532018-07-182018-07-1800015590532018-07-1800015590532018-09-242018-09-240001559053prta:DublinIrelandMember2018-09-012018-09-300001559053prta:DublinIrelandMember2018-09-27iso4217:EUR0001559053prta:DublinIrelandMember2020-09-300001559053us-gaap:AccruedLiabilitiesMember2020-09-300001559053us-gaap:LicensingAgreementsMember2020-09-300001559053prta:LicenseAgreementsMember2020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2014-02-012014-02-280001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2014-05-012014-05-310001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2017-06-012017-06-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2020-01-012020-09-300001559053us-gaap:CollaborativeArrangementMember2020-01-012020-09-300001559053prta:DevelopmentCostsReimbursementMemberprta:RocheMember2018-01-012018-12-310001559053prta:RocheMember2019-12-310001559053prta:RocheMember2020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMemberprta:RoyaltyBearingLicenseMember2020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:INDandDevelopmentServicesMemberprta:RocheMember2020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMemberprta:SupplyServicesMember2020-09-300001559053prta:RocheMemberprta:RoyaltyBearingLicenseMember2020-09-300001559053prta:INDandDevelopmentServicesMemberprta:RocheMember2020-09-300001559053prta:RocheMemberprta:ClinicalProductSupplyMember2020-09-300001559053prta:RocheMemberprta:SupplyServicesMember2020-09-300001559053prta:RocheMember2020-01-012020-09-300001559053prta:ResearchReimbursementMemberprta:RocheMember2020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2020-07-012020-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2019-07-012019-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2019-01-012019-09-300001559053us-gaap:CollaborativeArrangementMemberprta:RocheMember2019-12-310001559053prta:CelgeneMember2018-03-200001559053us-gaap:PrivatePlacementMemberprta:CelgeneMember2018-03-202018-03-200001559053us-gaap:PrivatePlacementMemberprta:CelgeneMember2018-03-200001559053prta:CelgeneMemberprta:CollaborationProgramUSRightsMember2018-03-202018-03-200001559053prta:CelgeneMemberprta:CollaborationProgramGlobalRightsMember2018-03-202018-03-200001559053prta:CelgeneMember2018-03-202018-03-20prta:agreement_term0001559053prta:CelgeneMemberus-gaap:CollaborativeArrangementMember2018-03-200001559053srt:MinimumMemberprta:CollaborationProgramUSRightsMember2018-03-200001559053srt:MaximumMemberprta:CollaborationProgramUSRightsMember2018-03-200001559053srt:MinimumMemberprta:CollaborationProgramGlobalRightsMember2018-03-200001559053srt:MaximumMemberprta:CollaborationProgramGlobalRightsMember2018-03-200001559053prta:CollaborationProgramUSRightsMember2018-03-200001559053prta:CollaborationProgramGlobalRightsMember2018-03-20prta:vote0001559053prta:AmendedAndRestated2018LongTermIncentivePlanMember2020-05-192020-05-190001559053prta:AmendedAndRestated2018LongTermIncentivePlanMember2018-05-150001559053prta:AmendedAndRestated2018LongTermIncentivePlanMember2018-05-152018-05-150001559053prta:AmendedAndRestated2018LongTermIncentivePlanMember2020-09-300001559053prta:AmendedAndRestated2018LongTermIncentivePlanMember2020-01-012020-09-300001559053prta:A2012LongTermIncentivePlanMember2020-01-012020-09-300001559053prta:A2020EmploymentInducementIncentivePlanMember2020-04-012020-04-010001559053prta:A2020EmploymentInducementIncentivePlanMember2020-07-012020-09-300001559053prta:A2020EmploymentInducementIncentivePlanMember2020-02-252020-02-250001559053prta:A2020EmploymentInducementIncentivePlanMember2020-09-300001559053us-gaap:ResearchAndDevelopmentExpenseMember2020-07-012020-09-300001559053us-gaap:ResearchAndDevelopmentExpenseMember2019-07-012019-09-300001559053us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-09-300001559053us-gaap:ResearchAndDevelopmentExpenseMember2019-01-012019-09-300001559053us-gaap:GeneralAndAdministrativeExpenseMember2020-07-012020-09-300001559053us-gaap:GeneralAndAdministrativeExpenseMember2019-07-012019-09-300001559053us-gaap:GeneralAndAdministrativeExpenseMember2020-01-012020-09-300001559053us-gaap:GeneralAndAdministrativeExpenseMember2019-01-012019-09-300001559053us-gaap:CommonStockMember2020-07-012020-09-300001559053us-gaap:CommonStockMember2019-07-012019-09-300001559053us-gaap:CommonStockMember2020-01-012020-09-300001559053us-gaap:CommonStockMember2019-01-012019-09-3000015590532019-01-012019-12-310001559053us-gaap:RevenueCommissionersIrelandMember2020-01-012020-09-300001559053us-gaap:AccountingStandardsUpdate201602Member2019-01-010001559053us-gaap:InternalRevenueServiceIRSMember2020-01-012020-09-30

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
______________________________________ 
FORM 10-Q
 _____________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-35676
______________________________________ 
PROTHENA CORPORATION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
______________________________________ 
Ireland 98-1111119
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification Number)
 
77 Sir John Rogerson’s Quay, Block C
Grand Canal Docklands
Dublin 2, D02 T804,Ireland
(Address of principal executive offices including Zip Code)
Registrant’s telephone number, including area code: 011-353-1-236-2500
 ______________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Ordinary Shares, par value $0.01 per sharePRTAThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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, a smaller reporting company, or an emerging growth company. See 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  
The number of ordinary shares outstanding was 39,921,413 as of October 30, 2020.




PROTHENA CORPORATION PLC
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended September 30, 2020
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2020 and 2019
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
EXHIBIT INDEX



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Prothena Corporation plc and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share data)


September 30,December 31,
20202019
Assets
Current assets:
Cash and cash equivalents$314,525 $375,723 
Accounts receivable22 68 
Prepaid expenses and other current assets4,586 2,584 
Restricted cash, current1,352  
Total current assets320,485 378,375 
Non-current assets:
Property and equipment, net2,899 3,874 
Operating lease right-of-use assets19,197 23,274 
Deferred tax assets11,524 9,956 
Restricted cash, non-current1,352 2,704 
Other non-current assets327 1,085 
Total non-current assets35,299 40,893 
Total assets$355,784 $419,268 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$2,810 $1,242 
Accrued research and development7,617 5,826 
Income taxes payable, current258 5 
Lease liability, current5,408 5,101 
Other current liabilities5,629 5,540 
Total current liabilities21,722 17,714 
Non-current liabilities:
Deferred revenue, non-current110,242 110,242 
Lease liability, non-current13,753 17,838 
Other liabilities553 553 
Total non-current liabilities124,548 128,633 
Total liabilities146,270 146,347 
Commitments and contingencies (Note 6)
Shareholders’ equity:
Euro deferred shares, €22 nominal value:
  
Authorized shares — 10,000 at September 30, 2020 and December 31, 2019
Issued and outstanding shares — none at September 30, 2020 and December 31, 2019
Ordinary shares, $0.01 par value:
399 399 
Authorized shares — 100,000,000 at September 30, 2020 and December 31, 2019
Issued and outstanding shares — 39,921,413 and 39,898,561 at September 30, 2020 and December 31, 2019, respectively
Additional paid-in capital961,428 944,407 
Accumulated deficit(752,313)(671,885)
Total shareholders’ equity209,514 272,921 
Total liabilities and shareholders’ equity$355,784 $419,268 
 See accompanying Notes to Condensed Consolidated Financial Statements.
1


Prothena Corporation plc and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
 (unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Collaboration revenue$157 $205 $443 $558 
License revenue  50  
Total revenue157 205 493 558 
Operating expenses:
Research and development21,605 12,486 54,124 35,365 
General and administrative9,398 8,691 28,795 27,677 
Restructuring credits   (61)
Total operating expenses31,003 21,177 82,919 62,981 
Loss from operations(30,846)(20,972)(82,426)(62,423)
Other income (expense):
Interest income43 2,034 1,359 6,634 
Other income (expense), net11 (42)3 176 
Total other income, net54 1,992 1,362 6,810 
Loss before income taxes(30,792)(18,980)(81,064)(55,613)
Provision for (benefit from) income taxes(215)468 (636)510 
Net loss$(30,577)$(19,448)$(80,428)$(56,123)
Basic and diluted net loss per share $(0.77)$(0.49)$(2.02)$(1.41)
Shares used to compute basic and diluted net loss per share
39,917 39,897 39,912 39,877 
See accompanying Notes to Condensed Consolidated Financial Statements.


2


Prothena Corporation plc and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

Nine Months Ended
September 30,
20202019
Operating activities
Net loss$(80,428)$(56,123)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization1,152 1,164 
Share-based compensation16,806 18,298 
Deferred income taxes(1,568)(751)
Amortization of right-of-use assets4,077 3,923 
Changes in operating assets and liabilities:
Accounts receivable46 2 
Prepaid and other assets(1,244)(15,033)
Accounts payable, accruals and other liabilities3,669 13,993 
Restructuring liability (461)
Operating lease liabilities(3,778)(3,493)
Net cash used in operating activities(61,268)(38,481)
Investing activities
Purchases of property and equipment(145)(449)
Proceeds from disposal of fixed assets 8 
Net cash used in investing activities(145)(441)
Financing activities
Proceeds from issuance of ordinary shares upon exercise of stock options215 215 
Net cash provided by financing activities215 215 
Net decrease in cash, cash equivalents and restricted cash(61,198)(38,707)
Cash, cash equivalents and restricted cash, beginning of the year378,427 431,715 
Cash, cash equivalents and restricted cash, end of the period$317,229 $393,008 
Supplemental disclosures of cash flow information
Cash paid for income taxes, net$672 $1,200 
Supplemental disclosures of non-cash investing and financing activities
Acquisition of property and equipment included in accounts payable and accrued liabilities
$37 $82 
Right-of-use assets recorded upon adoption of ASC 842$ $28,530 
Reduction of build-to-suit lease obligation upon adoption of ASC 842$ $(51,546)
Reduction of amounts capitalized under build-to-suit lease upon adoption of ASC 842
$ $(46,760)
Reduction of capitalized interest under build-to-suit lease upon adoption of ASC 842
$ $(1,099)
 See accompanying Notes to Condensed Consolidated Financial Statements.
3


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows.
Nine Months Ended
September 30,
20202019
Cash and cash equivalents$314,525 $390,304 
Restricted cash, current1,352  
Restricted cash, non-current1,352 2,704 
Total cash, cash equivalents and restricted cash, end of the period$317,229 $393,008 
4


Prothena Corporation plc and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
(unaudited)

Three Months Ended September 30, 2020
Ordinary SharesAdditional Paid-in CapitalAccumulated DeficitTotal Shareholders' Equity
SharesAmount
Balances at June 30, 202039,911,413 $399 $955,781 $(721,736)$234,444 
Share-based compensation— — 5,583 — 5,583 
Issuance of ordinary shares upon exercise of stock options10,000 — 64 — 64 
Net loss— — — (30,577)(30,577)
Balances at September 30, 202039,921,413 $399 $961,428 $(752,313)$209,514 

Three Months Ended September 30, 2019
Ordinary SharesAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Shareholders' Equity
SharesAmount
Balances at June 30, 2019
39,896,561 399 933,291 (630,883)302,807 
Share-based compensation
— — 5,816 — 5,816 
Net loss
— — — (19,448)(19,448)
Balances at September 30, 2019
39,896,561 $399 $939,107 $(650,331)$289,175 

Nine Months Ended September 30, 2020
Ordinary SharesAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Shareholders' Equity
SharesAmount
Balances at December 31, 2019
39,898,561 $399 $944,407 $(671,885)$272,921 
Share-based compensation
— — 16,806 — 16,806 
Issuance of ordinary shares upon exercise of stock options
22,852 — 215 — 215 
Net loss
— — — (80,428)(80,428)
Balances at September 30, 202039,921,413 $399 $961,428 $(752,313)$209,514 

Nine Months Ended September 30, 2019
Ordinary SharesAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Shareholders' Equity
SharesAmount
Balances at December 31, 2018
39,863,711 $399 $920,594 $(597,995)$322,998 
Cumulative adjustment to accumulated deficit upon adoption of ASC 842
— — — 3,787 3,787 
Share-based compensation
— — 18,298 — 18,298 
Issuance of ordinary shares upon exercise of stock options
32,850 — 215 — 215 
Net loss
— — — (56,123)(56,123)
Balances at September 30, 201939,896,561 $399 $939,107 $(650,331)$289,175 
See accompanying Notes to Consolidated Financial Statements.
5


Notes to the Condensed Consolidated Financial Statements
(unaudited)
1.Organization
Description of Business

Prothena Corporation plc (“Prothena” or the “Company”) is a late-stage clinical company with expertise in protein dysregulation and a diverse pipeline of investigational therapeutics for neurodegenerative and rare peripheral amyloid diseases. Fueled by our deep scientific expertise built over decades of research, the Company is advancing a pipeline of therapeutic candidates for a number of indications and novel targets for which our ability to integrate scientific insights around neurological dysfunction and the biology of misfolded proteins can be leveraged. Prothena's partnered programs include prasinezumab (PRX002/RG7935), in collaboration with Roche for the potential treatment of Parkinson’s disease and other related synucleinopathies, and programs that target tau (PRX005), TDP-43 and an undisclosed target in collaboration with Bristol-Myers Squibb for the potential treatment of Alzheimer’s disease, amyotrophic lateral sclerosis (ALS), frontotemporal dementia (FTD) or other neurodegenerative diseases. The Company's wholly-owned programs include PRX004 for the potential treatment of ATTR amyloidosis, and a portfolio of programs for the potential treatment of Alzheimer’s disease including PRX012 that targets Aβ (Amyloid beta).

The Company was formed on September 26, 2012, under the laws of Ireland and re-registered as an Irish public limited company on October 25, 2012. The Company's ordinary shares began trading on The Nasdaq Global Market under the symbol “PRTA” on December 21, 2012, and currently trade on The Nasdaq Global Select Market.
Liquidity and Business Risks
As of September 30, 2020, the Company had an accumulated deficit of $752.3 million and cash and cash equivalents of $314.5 million.
Based on the Company's business plans, management believes that the Company’s cash and cash equivalents at September 30, 2020, are sufficient to meet its obligations for at least the next twelve months. To operate beyond such period, or if the Company elects to increase its spending on research and development programs significantly above current long-term plans or enters into potential licenses and or other acquisitions of complementary technologies, products or companies, the Company may need additional capital. The Company expects to continue to finance future cash needs that exceed its cash from operating activities primarily through its current cash and cash equivalents, its collaborations with Roche and Bristol-Myers Squibb, and, to the extent necessary, through proceeds from public or private equity or debt financings, loans and other collaborative agreements with corporate partners or other arrangements.
The Company is subject to a number of risks, including but not limited to: the uncertainty of the Company’s research and development (“R&D”) efforts resulting in future successful commercial products; obtaining regulatory approval for its product candidates; its ability to successfully commercialize its product candidates, if approved; significant competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; dependence on corporate partners and collaborators; the outbreak of the novel strain of coronavirus SARS-CoV-2; and possible restrictions on reimbursement from governmental agencies and healthcare organizations, as well as other changes in the healthcare industry.

2.Summary of Significant Accounting Policies
Basis of Preparation and Presentation of Financial Information
These accompanying Unaudited Interim Condensed Consolidated Financial Statements have been prepared in accordance with the accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions for Form 10-Q and Regulation S-X statements. Accordingly, they do not include all of the information and notes required for complete financial statements. These interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 3, 2020 (the “2019 Form 10-K”). These Unaudited Interim Condensed Consolidated Financial Statements are presented in U.S. dollars, which is the functional currency of the Company and its consolidated subsidiaries. These Unaudited Interim Condensed Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current year presentation.
6


Unaudited Interim Financial Information
The accompanying Unaudited Interim Condensed Consolidated Financial Statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements, however certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates, including critical accounting policies or estimates related to revenue recognition, share-based compensation, research and development expenses and leases. The Company bases its estimates on historical experience and on various other market specific and other relevant assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because of the uncertainties inherent in such estimates, actual results may differ materially from these estimates.
Significant Accounting Policies
There were no significant changes to the accounting policies during the nine months ended September 30, 2020, from the significant accounting policies described in Note 2 of the Notes to Consolidated Financial Statements in the 2019 Form 10-K.

Segment and Concentration of Risks
The Company operates in one segment. The Company’s chief operating decision maker (the “CODM”), its Chief Executive Officer, manages the Company’s operations on a consolidated basis for purposes of allocating resources. When evaluating the Company’s financial performance, the CODM reviews all financial information on a consolidated basis.
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company places its cash equivalents with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents and its credit risk exposure is up to the extent recorded on the Company's Consolidated Balance Sheet.
The receivables recorded in the Condensed Consolidated Balance Sheet include amounts due from a Roche entity located in Switzerland. Collaboration revenue recorded in the Condensed Consolidated Statements of Operations consists of reimbursement from Roche for research and development services. The Company's credit risk exposure is up to the extent recorded on the Company's Condensed Consolidated Balance Sheet.
As of September 30, 2020, $2.9 million of the Company’s property and equipment, net were held in the U.S. and none were in Ireland. As of December 31, 2019, $3.9 million of the Company's property and equipment, net were held in the U.S. and none were in Ireland.
The Company does not own or operate facilities for the manufacture, packaging, labeling, storage, testing or distribution of nonclinical or clinical supplies of any of its drug candidates. The Company instead contracts with and relies on third-parties to manufacture, package, label, store, test and distribute all preclinical development and clinical supplies of our drug candidates, and it plans to continue to do so for the foreseeable future. The Company also relies on third-party consultants to assist in managing these third-parties and assist with its manufacturing strategy.
Recent Accounting Pronouncements
On December 18, 2019, the Finance Accounting Standards Board ("FASB") issued Accounting Standards Update 2019-12 ("ASU 2019-12"), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes as part of the FASB’s overall initiative to reduce complexity in accounting standards. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. While not required to be adopted until 2021 for most calendar year public business entities (and 2022 for other entities), early adoption is permitted for any financial statements. The Company does not expect the adoption of ASU 2019-12 to have a significant impact on its
7


consolidated financial statements. The Company will continue to evaluate the impact of ASU 2019-12 on its consolidated financial statements.
3.Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1 —    Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2  —    Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
Level 3 —    Unobservable inputs that are supported by little or no market activities, which would require the Company to develop its own assumptions.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities, and low market interest rates, if applicable.
Based on the fair value hierarchy, the Company classifies its cash equivalents within Level 1. This is because the Company values its cash equivalents using quoted market prices. The Company’s Level 1 securities consisted of $254.1 million and $338.2 million in money market funds included in cash and cash equivalents at September 30, 2020, and December 31, 2019, respectively.
4.Composition of Certain Balance Sheet Items
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
September 30,December 31,
20202019
Machinery and equipment$9,343 $9,312 
Leasehold improvements1,261 1,261 
Purchased computer software1,444 1,308 
12,048 11,881 
Less: accumulated depreciation and amortization(9,149)(8,007)
Property and equipment, net$2,899 $3,874 

Depreciation expense was $0.4 million and $1.2 million for the three and nine months ended September 30, 2020, respectively, compared to $0.4 million and $1.2 million for the three and nine months ended September 30, 2019, respectively.
8



Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
September 30,December 31,
20202019
Payroll and related expenses$4,467 $4,818 
Professional services547 400 
Other615 322 
Other current liabilities$5,629 $5,540 

5.Net Loss Per Ordinary Share
Basic net income (loss) per ordinary share is calculated by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Shares used in diluted net income per ordinary share would include the dilutive effect of ordinary shares potentially issuable upon the exercise of stock options outstanding. However, potentially issuable ordinary shares are not used in computing diluted net loss per ordinary share as their effect would be anti-dilutive due to the loss recorded during the three and nine months ended September 30, 2020, and 2019, and therefore diluted net loss per share is equal to basic net loss per share.
Net loss per ordinary share was determined as follows (in thousands, except per share amounts):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Numerator:
Net loss$(30,577)$(19,448)$(80,428)$(56,123)
Denominator:
Weighted-average ordinary shares outstanding39,917 39,897 39,912 39,877 
Net loss per share:
Basic and diluted net loss per share$(0.77)$(0.49)$(2.02)$(1.41)
The equivalent ordinary shares not included in diluted net loss per share because their effect would be anti-dilutive are as follows (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Stock options to purchase ordinary shares8,795 7,185 8,795 7,185 

6. Commitments and Contingencies
Lease Commitments

The Company adopted ASC 842, Leases effective January 1, 2019. Prior period amounts have not been adjusted and continued to be reported in accordance with the Company’s historical accounting under ASC 840. For lease arrangements entered prior to the adoption of ASC 842, right-of-use asset and lease liability are determined based on the present value of minimum lease payments over the remaining lease term and the Company’s incremental borrowing rate based on information available as of January 1, 2019. The right-of-use asset also includes any lease prepayments made and excludes unamortized lease incentives including rent abatements and/or concessions and rent holidays. Tenant improvements made by the Company as a lessee, in which such improvements are deemed to be owned by the lessor, are viewed as lease prepayments by the Company and are included in the right-of-use asset. Lease expense is recognized on a straight-line basis over the expected lease term. Total operating lease cost was $1.6 million and $4.8 million for the three and nine months ended September 30, 2020, respectively, and $1.6 million and $4.8 million three and nine months ended September 30, 2019, respectively. Total cash paid against the operating lease liability was $1.5 million and $4.5 million for the three and nine months ended September 30, 2020, respectively, and $1.5 million and $4.3 million for the three and nine months ended September 30, 2019, respectively.

9


For the purpose of estimating the incremental borrowing rate in the adoption of ASC 842, the Company inquired with banks that had a business relationship with the Company to determine the Company's collateralized incremental borrowing rate. The discount rate used to determine the lease liability was 4.25%. There was no change in the accounting of the Sub-Sublease (as defined below) of the Current SSF Facility (as defined below) upon adoption of ASC 842. Furthermore, the Company's operating lease in Dublin is not included in the lease liability and right-of-use asset recorded due to its nominal amount.
As of September 30, 2020, the Company performed an evaluation of its other contracts with customers and suppliers in accordance with ASC 842 and have determined that, except for the leases described below and a nominal operating lease for office equipment, none of the Company’s contracts contain a lease.

Current SSF Facility

In March 2016, the Company entered into a noncancelable operating sublease (the “Lease”) to lease 128,751 square feet of office and laboratory space in South San Francisco, California, U.S. (the “Current SSF Facility”). Subsequently, in April 2016, the Company took possession of the Current SSF Facility. The Lease includes a free rent period and escalating rent payments and has a remaining lease term of 3.25 years that expires on December 31, 2023, unless terminated earlier. The Company's obligation to pay rent commenced on August 1, 2016. The Company is obligated to make lease payments totaling approximately $39.2 million over the lease term. The Lease further provides that the Company is obligated to pay to the sublandlord and master landlord certain costs, including taxes and operating expenses. The Lease is considered an operating lease under ASC 842. Prior to the Company's adoption of ASC 842, this Lease was considered a build-to-suit lease.

In connection with this Lease, the Company received a tenant improvement allowance of $14.2 million from the sublandlord and the master landlord, for the costs associated with the design, development and construction of tenant improvements for the Current SSF Facility. The Company is obligated to fund all costs incurred in excess of the tenant improvement allowance. The initial measurement of right-of-use asset for the Lease includes the tenant improvement added by the Company wherein the lessor was deemed the accounting owner, net of the tenant improvement allowance received from the sublandlord and the master landlord.

The Company obtained a standby letter of credit in April 2016 in the initial amount of $4.1 million, which may be drawn down by the sublandlord in the event the Company fails to fully and faithfully perform all of its obligations under the Lease and to compensate the sublandlord for all losses and damages the sublandlord may suffer as a result of the occurrence of any default on the part of Company not cured within the applicable cure period. This standby letter of credit is collateralized by a certificate of deposit of the same amount which is classified as restricted cash. The Company was entitled to a $1.4 million reduction in the face amount of the standby letter of credit on the third anniversary of the contractual rent commencement, which was received in 2019, and another $1.4 million on the fifth anniversary of the contractual rent commencement. As a condition to the reduction of the standby letter of credit amount, no uncured default by the Company shall then exist under the Lease. As of September 30, 2020, none of the remaining standby letter of credit amount of $2.7 million has been used.

Sub-Sublease of Current SSF Facility

On July 18, 2018, the Company entered into a Sub-Sublease Agreement (the “Sub-Sublease”) with Assembly Biosciences, Inc. (the “Sub-Subtenant”) to sub-sublease approximately 46,641 square feet of office and laboratory space of the Current SSF Facility to the Sub-Subtenant. The Sub-Sublease is considered an operating lease under ASC 842. There was no change in the accounting of the Sub-Sublease of the Current SSF Facility upon the Company's adoption of ASC 842. For the three and nine months ended September 30, 2020, the Company recorded $0.7 million and $2.2 million, respectively, and $0.7 million and $2.2 million three and nine months ended September 30, 2019, respectively, of sub-lease rental income as an offset to its operating expenses.

The Sub-Sublease provides for initial annual base rent for the complete Sub-Subleased Premises of approximately $2.7 million, with increases of approximately 3.5% in annual base rent on September 1, 2019 and each anniversary thereof. The Sub-Sublease rental income excludes reimbursements for executory costs received from the Sub-Subtenant. The Sub-Sublease became effective on September 24, 2018, and has a term of 5.2 years which terminates on December 15, 2023. The Sub-Sublease will terminate if the Lease or the corresponding master lease terminates. The Company or the Sub-Subtenant may elect, subject to limitations set forth in the Sub-Sublease, to terminate the Sub-Sublease following a material casualty or condemnation affecting the Subleased Premises. The Company may terminate the Sub-Sublease following an event of default, which is defined in the Sub-Sublease to include, among other things, non-payment of amounts owing by the Sub-Subtenant under the Sub-Sublease.

10


The Company is required under the Lease to pay to the sublandlord 50% of that portion of the cash sums and other economic consideration received from the Sub-Subtenant that exceeds the base rent paid by the Company to the sublandlord after deducting certain of the Company’s costs.

Dublin

The Company entered into an agreement to lease 133 square feet of office space in Dublin, Ireland (the "Dublin Lease"). The current lease term expires on November 30, 2021. The Dublin Lease also has an automatic renewal clause, pursuant to which the agreement will be extended automatically for successive periods equal to the current term but no less than three months, unless the agreement is cancelled by the Company. This operating lease is not included in the lease liability and operating lease right-of-use asset recorded due to its nominal amount.
As of September 30, 2020, the Company is obligated to make lease payments over the remaining term of the Dublin Lease of approximately €28,000, or $33,000 as converted using an exchange rate as of September 30, 2020.

Future minimum payments under the above-described noncancelable operating leases, including a reconciliation to the lease liabilities recognized in the Condensed Consolidated Balance Sheets, and future minimum rentals to be received under the Sub-Sublease as of September 30, 2020, are as follows (in thousands):

Year Ended December 31,Operating LeasesSub-Sublease Rental
2020 (3 months)1,529 727 
20216,191 2,944 
20226,350 3,047 
20236,535 3,019 
Total 20,605 $9,737 
Less: Present value adjustment(1,411)
Nominal lease payments(33)
Lease liability$19,161 

Indemnity Obligations
The Company has entered into indemnification agreements with its current and former directors and officers and certain key employees. These agreements contain provisions that may require the Company, among other things, to indemnify such persons against certain liabilities that may arise because of their status or service and advance their expenses incurred as a result of any indemnifiable proceedings brought against them. The obligations of the Company pursuant to the indemnification agreements continue during such time as the indemnified person serves the Company and continues thereafter until such time as a claim can be brought. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer liability insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had no liabilities recorded for these agreements as of September 30, 2020 and 2019.
Other Commitments
In the normal course of business, the Company enters into various firm purchase commitments primarily related to research and development activities. As of September 30, 2020, the Company had non-cancelable purchase commitments to suppliers for $9.2 million of which $3.2 million is included in accrued current liabilities, and contractual obligations under license agreements of $0.8 million of which $0.1 million is included in accrued current liabilities. The following is a summary of the Company's non-cancelable purchase commitments and contractual obligations as of September 30, 2020 (in thousands):
Total20202021202220232024Thereafter
Purchase Obligations (1)
$9,155 $9,155 $ $ $ $ $ 
Contractual obligations under license agreements (2)
815 125 85 70 70 60 405 
Total
$9,970 $9,280 $85 $70 $70 $60 $405 
________________
(1) Purchase obligations consist of non-cancelable purchase commitments to suppliers.
11


(2) Excludes future obligations pursuant to the cost-sharing arrangement under the Company's License Agreement with Roche. Amounts of such obligations, if any, cannot be determined at this time.

7. Significant Agreements
Roche License Agreement
In December 2013, the Company through its wholly owned subsidiary Prothena Biosciences Limited and Prothena Biosciences Inc entered into a License, Development, and Commercialization Agreement (the “License Agreement”) with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, “Roche”) to develop and commercialize certain antibodies that target α-synuclein, including prasinezumab, which are referred to collectively as “Licensed Products.” Upon the effectiveness of the License Agreement in January 2014, the Company granted to Roche an exclusive, worldwide license to develop, make, have made, use, sell, offer to sell, import and export the Licensed Products. The Company retained certain rights to conduct development of the Licensed Products and an option to co-promote prasinezumab in the U.S. During the term of the License Agreement, the Company and Roche will work exclusively with each other to research and develop antibody products targeting alpha-synuclein (or α-synuclein) potentially including incorporation of Roche’s proprietary Brain Shuttle™ technology to potentially increase delivery of therapeutic antibodies to the brain. The License Agreement provided for Roche making an upfront payment to the Company of $30.0 million, which was received in February 2014; making a clinical milestone payment of $15.0 million upon initiation of the Phase 1 study for prasinezumab, which was received in May 2014; and making a clinical milestone payment of $30.0 million upon dosing of the first patient in the Phase 2 study for prasinezumab, which was achieved in June 2017.
For prasinezumab, Roche is also obligated to pay:
up to $350.0 million upon the achievement of development, regulatory and various first commercial sales milestones;
up to an additional $175.0 million upon achievement of ex-U.S. commercial sales milestones; and
tiered, high single-digit to high double-digit royalties in the teens on ex-U.S. annual net sales, subject to certain adjustments.
Roche bore 100% of the cost of conducting the research collaboration under the License Agreement during the research term, which expired December 31, 2017. In the U.S., the parties share all development and commercialization costs, as well as profits, all of which will be allocated 70% to Roche and 30% to the Company, for prasinezumab in the Parkinson’s disease indication, as well as any other Licensed Products and/or indications for which the Company opts in to participate in co-development and co-funding. After the completion of specific clinical trial activities, the Company may opt out of the co-development and cost and profit sharing on any co-developed Licensed Products and instead receive U.S. commercial sales milestones totaling up to $155.0 million and tiered, single-digit to high double-digit royalties in the teens based on U.S. annual net sales, subject to certain adjustments, with respect to the applicable Licensed Product.
The Company filed an Investigational New Drug Application (“IND”) with the FDA for prasinezumab and subsequently initiated a Phase 1 study in 2014. Following the Phase 1 studies, Roche became primarily responsible for developing, obtaining and maintaining regulatory approval for and commercializing Licensed Products. Roche also became responsible for the clinical and commercial manufacture and supply of Licensed Products.
In addition, the Company has an option under the License Agreement to co-promote prasinezumab in the U.S. in the Parkinson’s disease indication. If the Company exercises such option, it may also elect to co-promote additional Licensed Products in the U.S. approved for Parkinson’s disease. Outside the U.S., Roche will have responsibility for developing and commercializing the Licensed Products. Roche bears all costs that are specifically related to obtaining or maintaining regulatory approval outside the U.S. and will pay the Company a variable royalty based on annual net sales of the Licensed Products outside the U.S.
While Roche will record product revenue from sales of the Licensed Products, the Company and Roche will share in the net profits and losses of sales of the prasinezumab for the Parkinson's disease indication in the U.S. on a 70%/30% basis with the Company receiving 30% of the profit and losses provided that the Company has not exercised its opt-out right.
The License Agreement continues on a country-by-country basis until the expiration of all payment obligations under the License Agreement. The License Agreement may also be terminated (i) by Roche at will after the first anniversary of the effective date of the License Agreement, either in its entirety or on a Licensed Product-by-Licensed Product basis, upon 90 days’ prior written notice to the Company prior to first commercial sale and 180 days’ prior written notice to Prothena after first commercial sale, (ii) by either party, either in its entirety or on a Licensed Product-by-Licensed Product or region-by-region
12


basis, upon written notice in connection with a material breach uncured 90 days after initial written notice, and (iii) by either party, in its entirety, upon insolvency of the other party. The License Agreement may be terminated by either party on a patent-by-patent and country-by-country basis if the other party challenges a given patent in a given country. The Company’s rights to co-develop Licensed Products under the License Agreement will terminate if the Company commences certain studies for certain types of competitive products. The Company’s rights to co-promote Licensed Products under the License Agreement will terminate if the Company commences a Phase 3 study for such competitive products.
The License Agreement cannot be assigned by either party without the prior written consent of the other party, except to an affiliate of such party or in the event of a merger or acquisition of such party, subject to certain conditions. The License Agreement also includes customary provisions regarding, among other things, confidentiality, intellectual property ownership, patent prosecution, enforcement and defense, representations and warranties, indemnification, insurance, and arbitration and dispute resolution.

Collaboration Accounting

The License Agreement was evaluated under ASC 808, Collaborative Agreements. At the outset of the License Agreement, the Company concluded that it did not qualify as collaboration under ASC 808 because the Company does not share significant risks due to the net profit and loss split (under which Roche incurs substantially more of the costs of the collaboration) and because of the Company’s opt-out provision. The Company believes that Roche will be the principal in future sales transactions with third parties as Roche will be the primary obligor bearing inventory and credit risk. The Company will record its share of pre-tax commercial profit generated from the collaboration as collaboration revenue once the Company can conclude it is probable that a significant revenue reversal will not occur in future periods. Prior to commercialization of a Licensed Product, the Company’s portion of the expenses related to the License Agreement reflected on its income statement will be limited to R&D expenses. After commercialization, if the Company opts-in to co-detail commercialization, expenses related to commercial capabilities, including expenses related to the establishment of a field sales force and other activities to support the Company’s commercialization efforts, will be recorded as sales, general and administrative (“SG&A”) expense and will be factored into the computation of the profit and loss share. The Company will record the receivable related to commercialization activities as collaboration revenue once the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.

Adoption of ASC 606, Revenue from Contracts with Customers

The Company adopted ASC 606, Revenue from Contracts with Customers, as of January 1, 2018, using the modified retrospective transition method. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of the accumulated deficit as of January 1, 2018.

As of January 1, 2018, the Company did not record any changes to the opening balance of the accumulated deficit since the cumulative effect of applying the new revenue standard was the same as applying ASC 605. The impact of the adoption of ASC 606 to revenues for the year ended December 31, 2018, was an increase of $1.0 million, which represents the revenue recognized for the development services provided by the Company during the period that is reimbursable by Roche. Historically, the Company recorded such reimbursement as an offset against its R&D expenses under ASC 605. Upon the adoption of ASC 606, the reimbursement for development services is now included as part of the Company’s collaboration revenue.

Performance Obligations

The License Agreement was evaluated under ASC 606. The License Agreement includes the following distinct performance obligations: (1) the Company’s grant of an exclusive royalty bearing license, with the right to sublicense to develop and commercialize certain antibodies that target α-synuclein, including prasinezumab, and the initial know how transfer which was delivered at the effective date (the “Royalty Bearing License”); (2) the Company’s obligation to supply clinical material as requested by Roche for a period up to twelve months (the “Clinical Product Supply Obligation”); (3) the Company’s obligation to provide manufacturing related services to Roche for a period up to twelve months (the “Supply Services Obligation”); (4) the Company’s obligation to prepare and file the IND (the “IND Obligation”); and (5) the Company’s obligation to provide development activities under the development plan during Phase 1 clinical trials (the “Development Services Obligation”). Revenue allocated to the above performance obligations under the License Agreement are recognized when the Company has satisfied its obligations either at a point in time or over a period of time.

The Company concluded that the Royalty Bearing License and the Clinical Product Supply Obligation were satisfied at a point in time. The Royalty Bearing License is considered to be a functional intellectual property, in which the revenue would be recognized at the point in time since (a) the Company concluded that the license to Roche has a significant stand-alone
13


functionality, (b) the Company does not expect the functionality of the intellectual property to be substantially changed during the license period as a result of activities of Prothena, and (c) Prothena’s activities transfer a good or service to Roche. The Clinical Product Supply Obligation does not meet criteria for over time recognition; as such, the revenue related to such performance obligation was recognized the point in time at which Roche obtained control of manufactured supplies, which occurred during the first quarter of 2014.

The Company concluded that the Supply Services Obligation, the IND Obligation and the Development Services Obligation were satisfied over time. The Company utilized an input method measure of progress by basing the recognition period on the efforts or inputs towards satisfying the performance obligation (i.e. costs incurred and the time elapsed to complete the related performance obligations). The Company determined that such input method provides an appropriate measure of progress toward complete satisfaction of such performance obligations.

As of September 30, 2020, and December 31, 2019, there were no remaining performance obligations under License Agreement since the obligations related to research and development activities were only for the Phase 1 clinical trial and the remaining obligations were delivered or performed.

Transaction Price

According to ASC 606-10-32-2, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Factors considered in the determination of the transaction price include, among other things, estimated selling price of the license and costs for clinical supply and development costs.

The initial transaction price under the License Agreement, pursuant to ASC 606, was $55.1 million, including $45.0 million for the Royalty Bearing License, $9.1 million for the IND and Development Services Obligations, and $1.1 million for the Supply Services Obligation. The $45.0 million for the Royalty Bearing License included the upfront payment of $30.0 million and the clinical milestone payment of $15.0 million upon initiation of the Phase 1 clinical trial of prasinezumab, both of which were made in 2014. The remaining transaction price amounts the Company expected to receive as reimbursements were based on costs expected to be paid to third parties and other costs to be incurred by the Company in order to satisfy its performance obligations. They are considered to be variable considerations not subject to constraint. The Company did not incur any incremental costs, such as commissions, to obtain or fulfill the License Agreement.
Under ASC 606, the transaction price was allocated to the performance obligations as follows: $48.9 million to the Royalty Bearing License; $4.6 million to the IND and Development Services Obligations; $1.1 million to the Clinical Product Supply Obligation; and $0.6 million to the Supply Services Obligation. As of September 30, 2020, the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied is $nil. Prior to the adoption of ASC 606, the transaction price was allocated to the deliverables as follows: $35.6 million to the Royalty Bearing License; $3.3 million to the IND and Development Services Obligations; $0.8 million to the Clinical Product Supply Obligation; and $0.4 million to the Supply Services Obligation.
The Company allocated the initial transaction price to the Royalty Bearing License and other performance obligations using the relative selling price method based on its best estimate of selling price for the Royalty Bearing License and third party evidence for the remaining performance obligations. The best estimate of selling price for the Royalty Bearing License was based on a discounted cash flow model. The key assumptions used in the discounted cash flow model used to determine the best estimate of selling price for the Royalty Bearing License included the market opportunity for commercialization of prasinezumab in the U.S. and the royalty territory (for licensed products that are jointly funded the royalty territory is worldwide except for the U.S., and for all licensed products that are not jointly funded the Royalty Territory is worldwide), the probability of successfully developing and commercializing prasinezumab, the estimated remaining development costs for prasinezumab, and the estimated time to commercialization of prasinezumab. The Company concluded that a change in the assumptions used to determine the best estimate of selling price (“BESP”) of the license deliverable would not have a significant effect on the allocation of arrangement consideration.
The Company’s discounted cash flow model included several market conditions and entity-specific inputs, including the likelihood that clinical trials for prasinezumab will be successful, the likelihood that regulatory approval will be obtained and the product commercialized, the appropriate discount rate, the market locations, size and potential market share of the product, the expected life of the product, and the competitive environment for the product. The market assumptions were generated using a patient-based forecasting approach, with key epidemiological, market penetration, dosing, compliance, length of treatment and pricing assumptions derived from primary and secondary market research, referenced from third-party sources.

14



Significant Payment Terms

Payments for development services are due within 45 days after receiving an invoice from the Company. Variable considerations related to clinical and regulatory milestone payments are constrained due to high likelihood of a revenue reversal. The payment term for all milestone payments are due within 45 days after the achievement of the relevant milestone and receipt by Roche of an invoice for such an amount from the Company.
According to ASC 606-10-32-17, a significant financing component does not exist if a substantial amount of the consideration promised by the customer is variable, and the amount or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the customer or the entity. Since a “substantial amount of the consideration” promised by Roche to the Company is variable (i.e., is in the form of either milestone payments or sales-based royalties) and the amount of such variable consideration varies based upon the occurrence or nonoccurrence of future events that are not within the control of either Roche or the Company (i.e., are largely subject to regulatory approval), the License Agreement does not have a significant financing component.

Optional Goods and Services
An option for additional goods or services exists when a customer has a present contractual right that allows it to choose the amount of additional distinct goods or services that are purchased. Prior to the customer’s exercise of that right, the vendor is not presently obligated to provide those goods or services. ASC 606-10-25-18(j) requires recognition of an option as a distinct performance obligation when the option provides a customer with a material right.
In addition to the distinct performance obligations noted above, the Company was obligated to provide indeterminate research services for up to three years ending in 2017 at rates that were not significantly discounted and fully reimbursable by Roche (the “Research Services”). The amount for any such Research Services was not fixed and determinable and was not at a significant incremental discount. There were no refund rights, concessions or performance bonuses to consider.
The Company evaluated the obligation to perform Research Services under ASC 606-10-55-42 and 55-43 to determine whether it gave Roche a “material right”. According to ASC 606-10-55-43, if a customer has the option to acquire an additional good or services at a price that would reflect the standalone selling price for that good or service, that option does not provide the customer with a material right even if the option can be exercised only by entering into a previous contract.
The Company concluded that Roche’s option to have the Company perform Research Services did not represent a “material right” to Roche that it would not have received without entering into the License Agreement. As a result, Roche’s option to acquire additional Research Services was not considered a performance obligation at the outset of the License Agreement under ASC 606. Accordingly, this deliverable will become new performance obligation for Prothena when Roche asks Prothena to conduct such Research Services. As of September 30, 2020, there were no remaining Research Services performance obligations.
Post Contract Deliverables
Any development services provided by the Company after performance of the Development Service Obligation are not considered a contractual performance obligation under the License Agreement, since the License Agreement does not require the Company to provide any development services after completion of the Development Service Obligation. However, the collaboration’s Joint Steering Committee approved continued funding for additional development services to be provided by the Company (the “Additional Development Services”). Under the License Agreement and upon the adoption of ASC 606, the Company recognizes the reimbursements for Additional Development Services as collaboration revenue as earned.

Revenue and Expense Recognition

The Company recognized $0.2 million and $0.4 million as collaboration revenue from Roche for the three and nine months ended September 30, 2020, respectively, as compared to $0.2 million and $0.6 million for the three and nine months ended September 30, 2019, respectively. Cost sharing payments to Roche are recorded as R&D expenses. The Company recognized $3.8 million and $12.3 million in R&D expenses for payments made to Roche during the three and nine months ended September 30, 2020, respectively, as compared to $2.7 million and $6.7 million for the three and nine months ended September 30, 2019, respectively. The Company had accounts receivable from Roche of $2,000 and $2,000 at September 30, 2020 and December 31, 2019, respectively.
15


Milestone Accounting
Under the License Agreement, only if the U.S. and or global options are exercised, the Company is eligible to receive milestone payments upon the achievement of development, regulatory and various first commercial sales milestones. Milestone payments are evaluated under ASC Topic 606. Factors considered in this determination included scientific and regulatory risk that must be overcome to achieve each milestone, the level of effort and investment required to achieve the milestone, and the monetary value attributed to the milestone. Accordingly, the Company estimates payments in the transaction price based on the most likely approach, which considers the single most likely amount in a range of possible amounts related to the achievement of these milestones. Additionally, milestone payments are included in the transaction price only when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods when the milestone is achieved.

The Company excludes the milestone payments and royalties in the initial transaction price calculation because such payments are considered to be variable considerations with constraint. Such milestone payments and royalties will be recognized as revenue once the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
The clinical and regulatory milestones under the License Agreement after the point at which the Company could opt-out are considered to be variable considerations with constraint due to the fact that active participation in the development activities that generate the milestones is not required under the License Agreement, and the Company can opt-out of these activities. There are no refunds or claw-back provisions and the milestones are uncertain of occurrence even after the Company has opted out. Based on this determination, these milestones will be recognized when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
Collaboration Agreement with Bristol-Myers Squibb
Overview

On March 20, 2018, the Company, through its wholly owned subsidiary Prothena Biosciences Limited, entered into a Master Collaboration Agreement (the “Collaboration Agreement”) with Celgene Switzerland LLC (“Celgene”), a subsidiary of Celgene Corporation (which was acquired by Bristol-Myers Squibb ("BMS") in November 2019), pursuant to which Prothena granted to Celgene a right to elect in its sole discretion to exclusively license rights both in the U.S. (the “US Rights”) and on a global basis (the “Global Rights”), with respect to the Company’s programs to develop and commercialize antibodies targeting Tau, TDP-43 and an undisclosed target (the “Collaboration Targets”). For each such program, BMS may exercise its US Rights at the IND filing, and if it so exercises such US Rights would also have a right to expand the license to Global Rights. If BMS exercises its US Rights for a program, then following the first to occur of (a) completion by the Company, in its discretion and at its cost, of Phase 1 clinical trials for such program or (b) the date on which BMS elects to assume responsibility for completing such Phase 1 clinical trials (at its cost), BMS would have decision making authority over development activities and all regulatory, manufacturing and commercialization activities in the U.S.
The Collaboration Agreement provided for Celgene making an upfront payment to the Company of $100.0 million, which was received in April 2018, plus future potential license exercise payments and regulatory and commercial milestones for each program under the Collaboration Agreement, as well as royalties on net sales of any resulting marketed products. In connection with the Collaboration Agreement, the Company and Celgene entered into a Share Subscription Agreement on March 20, 2018, under which Celgene subscribed to 1,174,536 of the Company’s ordinary shares for a price of $42.57 per share, for a total of approximately $50.0 million.
BMS US and Global Rights and Licenses

On a program-by-program basis, beginning on the effective date of the Collaboration Agreement and ending on the date that the IND Option term expires for such program (which generally occurs sixty days after the date on which Prothena delivers to BMS the first complete data package for an IND that was filed for a lead candidate from the relevant program), BMS may elect in its sole discretion to exercise its US Rights to receive an exclusive license to develop, manufacture and commercialize antibodies targeting the applicable Collaboration Target in the U.S. (the “US License”). If BMS exercises its US Rights for a collaboration program, it is obligated to pay the Company an exercise fee of approximately $80.0 million per program. Thereafter, following the first to occur of (a) completion by the Company, in its discretion and at its cost, of Phase 1 clinical trials for such program or (b) BMS’s election to assume responsibility to complete such Phase 1 clinical trials (at its cost), BMS would have the sole right to develop, manufacture and commercialize antibody products targeting the relevant Collaboration Target for such program (the “Collaboration Products”) in the U.S.
On a program-by-program basis, following completion of a Phase 1 clinical trial for a collaboration program for which BMS has previously exercised its US Rights, BMS may elect in its sole discretion to exercise its Global Rights with respect to
16


such collaboration program to receive a worldwide, exclusive license to develop, manufacture and commercialize antibodies targeting the applicable Collaboration Target (the “Global License”). If BMS exercises its Global Rights, BMS would be obligated to pay the Company an additional exercise fee of $55.0 million for such collaboration program. The Global Rights would then replace the US Rights for that collaboration program, and BMS would have decision making authority over developing, obtaining and maintaining regulatory approval for, manufacturing and commercializing the Collaboration Products worldwide.
After BMS’s exercise of Global Rights for a collaboration program, the Company is eligible to receive up to $562.5 million in regulatory and commercial milestones per program. Following an exercise by BMS of either US Rights or Global Rights for such collaboration program, the Company will also be eligible to receive tiered royalties on net sales of Collaboration Products ranging from high single digit to high teen percentages, on a weighted average basis depending on the achievement of certain net sales thresholds. Such exercise fees, milestones and royalty payments are subject to certain reductions as specified in the Collaboration Agreement, the agreement for US Rights and the agreement for Global Rights.
BMS will continue to pay royalties on a Collaboration Product-by-Collaboration Product and country-by-country basis, until the latest of (i) expiration of certain patents covering the Collaboration Product, (ii) expiration of all regulatory exclusivity for the Collaboration Product, and (iii) an agreed period of time after the first commercial sale of the Collaboration Product in the applicable country (the “Royalty Term”).
Term and Termination
The research term under the Collaboration Agreement continues for a period of six years, which BMS may extend for up to two additional 12-month periods by paying an extension fee of $10.0 million per extension period. The term of the Collaboration Agreement continues until the last to occur of the following: (i) expiration of the research term; (ii) expiration of all US Rights terms; and (iii) expiration of all Global Rights terms.
The term of any US License or Global License would continue on a Licensed Product-by-Licensed Product and country-by-country basis until the expiration of all Royalty Terms under such agreement.
The Collaboration Agreement may be terminated (i) by either party on a program-by-program basis if the other party remains in material breach of the Collaboration Agreement following a cure period to remedy the material breach, (ii) by BMS at will on a program-by-program basis or in its entirety, (iii) by either party, in its entirety, upon insolvency of the other party, or (iv) by Prothena, in its entirety, if BMS challenges a patent licensed by Prothena to BMS under the Collaboration Agreement.
Share Subscription Agreement
Pursuant to the terms of the Collaboration Agreement, the Company entered into a Share Subscription Agreement (the “SSA”) with Celgene, pursuant to which the Company issued, and Celgene subscribed for, 1,174,536 of the Company’s ordinary shares (the “Shares”) for an aggregate subscription price of approximately $50.0 million, pursuant to the terms and conditions thereof.
Under the SSA, BMS (formerly Celgene) is subject to certain transfer restrictions. In addition, BMS will be entitled to request the registration of the Shares with the U.S. Securities and Exchange Commission on Form S-3ASR or Form S-3 following termination of the transfer restrictions if the Shares cannot be resold without restriction pursuant to Rule 144 promulgated under the U.S. Securities Act of 1933, as amended.
Collaboration Accounting

The Collaboration Agreement was evaluated under ASC 808, Collaborative Agreements. At the outset of the Collaboration Agreement, the Company concluded that it does not qualify as collaboration under ASC 808 because the Company does not share significant risks due to economics of the collaboration.
Performance Obligations

The Company assessed the Collaboration Agreement and concluded that it represented a contract with a customer within the scope of ASC 606. Per ASC 606, a performance obligation is defined as a promise to transfer a good or service or a series of distinct goods or services. At inception of the Collaboration Agreement, the Company is not obligated to transfer the US License or Global License to BMS unless BMS exercises its US Rights or Global Rights, respectively, and the Company is not obligated to perform development activities under the development plan during preclinical and Phase 1 clinical trials including the regulatory filing of the IND.
17


The discovery, preclinical and clinical development activities performed by the Company are to be performed at the Company’s discretion and are not promised goods or services and therefore are not considered performance obligations under ASC 606, unless and until the Company agrees to perform the Phase 1 clinical studies (after the IND option exercise) that are determined to be performance obligations at the time the option is exercised. Per the terms of the Collaboration Agreement, the Company may conduct discovery activities to characterize, identify and generate antibodies to become collaboration candidates that target such Collaboration Target, and thereafter may pre-clinically develop collaboration candidates to identify lead candidates that target such Collaboration Target and file an IND with the U.S. Food and Drug Administration (the “FDA”) for a Phase 1 clinical trial for such lead candidates. In the event the Company agrees to be involved in a Phase 1 clinical study, the Company will further evaluate whether any such promise represents a performance obligation at the time the option is exercised. If it is concluded that the Company has obligated itself to an additional performance obligation besides the license granted at IND option exercise, then the effects of the changes in the arrangement will be evaluated under the modification guidance of ASC 606.
The Company is not obligated to perform manufacturing activities. Per the terms of the Collaboration Agreement, to the extent that the Company, at its discretion, conducts a program, the Company shall be responsible for the manufacture of collaboration candidates and collaboration products for use in such program, as well as the associated costs. Delivery of manufactured compound (clinical product supply) is not deemed a performance obligation under ASC 606 as the Company is not obligated to transfer supply of collaboration product to BMS unless BMS exercises its right to participate in the Phase 1 development.
Compensation for the Company’s provision of inventory supply, to the extent requested by BMS would be paid to Prothena by BMS at a reasonable stand-alone selling price for such supply. Given that (i) there is substantial uncertainty about the development of the programs, (ii) the pricing for the inventory is at its standalone selling price and (iii) the manufacturing services require the entity to transfer additional goods or services that are incremental to the goods and services provided prior to the resolution of the contingency, the Company’s supply of product is not a material right. Therefore, the inventory supply is not considered a performance obligation unless and until, requested by BMS.

In addition to the grant of the US License after BMS exercises its US Rights for a program, BMS is entitled to receive certain ancillary development services from the Company, such as technology transfer assistance, regulatory support, safety data reporting activities and transition supply, if requested by BMS.

In addition to the grant of the Global License after BMS exercises the Global Rights for a program, BMS is entitled to receive certain ancillary development services from Prothena, such as ongoing clinical trial support upon request by BMS, transition supply, if requested by BMS, and regulatory support for coordination of pharmacovigilance matters.

The Company evaluated the potential obligations to transfer the US Licenses and Global Licenses and performance of the ancillary development services subsequent to exercise of the US Rights and Global Rights, if the options are exercised by BMS, under ASC 606-10-55-42 and 55-43 to determine whether the US Rights or the Global Rights provided BMS a “material right” and concluded that BMS’s options to exercise its US Rights and Global Rights represented “material rights” to BMS that it would not have received without entering into the Agreement.

There are a total of six options including US Rights and Global Rights to acquire a US License and a Global License, respectively, and rights to request certain development services (following exercise of the US Rights and Global Rights, respectively) for each of the three programs. Per ASC 606, the US Rights and Global Rights are material rights and therefore are performance obligations. The goods and services underlying the options are not accounted for as separate performance obligations, but rather become performance obligations, if and when, an option is exercised.

Transaction Price

According to ASC 606-10-32-2, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Factors considered in the determination of the transaction price included, among other things, estimated selling price of the license and costs for clinical supply and development costs.
The initial transaction price under the Collaboration Agreement, pursuant to ASC 606, was $110.2 million, including the $100.0 million upfront payment and $10.2 million premium on the ordinary shares purchased under the SSA. The Company expects that the initial transaction price will be allocated across the US Rights and Global Rights for each program in a range of approximately $15-$25 million and $10-$18 million, respectively.
18


The Company did not include the option fees in the initial transaction price because such fees are contingent on the options to the US Rights and the Global Rights being exercised. Upon the exercise of the US Rights and the Global Rights for a program, the Company will have the obligation to deliver the US License and Global License and provide certain ancillary development services if requested by BMS, subsequent to its exercise of the US Rights and Global Rights, respectively, for such program. The Company will include the option fees in the transaction price at the point in time a material right is exercised. In addition, the Company did not include in the initial transaction price certain clinical and regulatory milestone payments since they relate to licenses for which BMS has not yet exercised its option to obtain and these variable considerations are constrained due to the likelihood of a significant revenue reversal.
At the inception of the Collaboration Agreement, the Company did not transfer any goods or services to BMS (formerly Celgene) that are material. Accordingly, the Company has concluded that the initial transaction price will be recognized as contract liability and will be deferred until the Company transfers control of goods or services to BMS (which would be when BMS exercises the US Right or Global Right and receives control of the US License or Global License for at least one of the programs), or when the IND Option term expires if BMS does not exercise the US Right (which is generally sixty days after the date on which Prothena delivers to BMS the first complete data package for an IND that was filed for a lead candidate from the relevant program), or when the Phase 1 Option term expires if BMS does not exercise the Global Right (which is generally ninety days after the date on which Prothena delivers to BMS the first complete data package for a Phase 1 clinical trial for a lead candidate from the relevant program) or at the termination of the Collaboration Agreement, whichever occurs first. At such point that the Company transfers control of goods or services to BMS, or when the option expires, the Company will recognize revenue as a continuation of the original contract. Under this approach, the Company will treat the consideration allocated to the material right as an addition to the consideration for the goods or services underlying the contract option.
At inception of the Collaboration Agreement, the Company estimated the standalone selling price for each performance obligation (i.e., the US Rights and Global Rights by program). The estimate of standalone selling price for the US Rights and Global Rights by program was based on the adjusted market assessment approach using a discounted cash flow model. The key assumptions used in the discounted cash flow model included the market opportunity for commercialization of each program in the U.S. or globally depending on the license, the probability of successfully developing and commercializing a given program target, the estimated remaining development costs for the respective program, the estimated time to commercialization of the drug for that program and a discount rate.

Significant Payment Terms

The upfront payment of $100.0 million was due within ten business days after the effective date of the Collaboration Agreement and was received in April 2018, while all option fees and milestone payments are due within 30 days after the achievement of the relevant milestone by BMS or receipt by BMS of an invoice for such an amount from the Company.

The Collaboration Agreement does not have a significant financing component since a substantial amount of consideration promised by BMS to the Company is variable and the amount of such variable consideration varies based upon the occurrence or non-occurrence of future events that are not within the control of either BMS or the Company. Variable considerations related to clinical and regulatory milestone payments and option fees are constrained due to the likelihood of a significant revenue reversal.

Milestone and Royalties Accounting

The Company is eligible to receive milestone payments of up to $90.0 million per program upon the achievement of certain specified regulatory milestones and milestone payments of up to $375.0 million per program upon the achievement of certain specified commercial sales milestones under the US License for such program. The Company is also eligible to receive milestone payments of up to $187.5 million per program upon the achievement of certain specified regulatory milestones and milestone payments of up $375.0 million per program upon the achievement of certain specified commercial sale milestones under the Global License for such program. Milestone payments are evaluated under ASC Topic 606. Factors considered in this determination included scientific and regulatory risk that must be overcome to achieve each milestone, the level of effort and investment required to achieve the milestone, and the monetary value attributed to the milestone. Accordingly, the Company estimates payments in the transaction price based on the most likely approach, which considers the single most likely amount in a range of possible amounts related to the achievement of these milestones. Additionally, milestone payments are included in the transaction price only when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
The Company excluded the milestone payments and royalties in the initial transaction price because such payments are considered to be variable considerations with constraint. Such milestone payments and royalties will be recognized as revenue
19


at a point in time when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
The Company did not achieve any clinical and regulatory milestones under the Collaboration Agreement during the three and nine months ended September 30, 2020, and 2019.

8. Shareholders' Equity
Ordinary Shares
As of September 30, 2020, the Company had 100,000,000 ordinary shares authorized for issuance with a par value of $0.01 per ordinary share and 39,921,413 ordinary shares issued and outstanding. Each ordinary share is entitled to one vote and, on a pro rata basis, to dividends when declared and the remaining assets of the Company in the event of a winding up.
Euro Deferred Shares
As of September 30, 2020, the Company had 10,000 Euro Deferred Shares authorized for issuance with a nominal value of €22 per share. No Euro Deferred Shares are outstanding at September 30, 2020. The rights and restrictions attaching to the Euro Deferred Shares rank pari passu with the ordinary shares and are treated as a single class in all respects.

9. Share-Based Compensation
2018 Long Term Incentive Plan
In May 2018, the Company’s shareholders approved the 2018 Long Term Incentive Plan. In May 2020, the Company's shareholders approved an amendment to the 2018 Long Term Incentive Plan (as amended, the “2018 LTIP”) to increase the number of ordinary shares available for issuance under that Plan by 1,500,000 ordinary shares. Under the 2018 LTIP, the number of ordinary shares authorized for issuance under the 2018 LTIP is equal to the sum of (a) 3,300,000 ordinary shares, (b) 1,177,933 ordinary shares that were available for issuance under the 2012 LTIP as of the May 15, 2018, effective date of the 2018 LTIP, and (c) any ordinary shares subject to issued and outstanding awards under the 2012 Long Term Incentive Plan (the “2012 LTIP”) that expire, are cancelled or otherwise terminate following the effective date of the 2018 LTIP; provided, that no more than 2,500,000 ordinary shares may be issued pursuant to the exercise of ISOs. The 2018 LTIP provides for the grant of ISOs, NQSOs, SARs, restricted shares, RSUs, performance bonus awards, performance share units awards, dividend equivalents and other share or cash-based awards to eligible individuals. Options under the 2018 LTIP may be granted for periods up to ten years. All options issued to date have had a ten year life.
Amended and Restated 2012 Long Term Incentive Plan
Prior to the effective date of the 2018 LTIP, employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company’s Board of Directors, received equity awards under the 2012 LTIP. Options under the 2012 LTIP were granted for periods up to ten years. All options issued to date have had a ten year life.
2020 Employment Inducement Incentive Plan
On February 25, 2020, the Company's Board of Directors approved the 2020 Employment Inducement Incentive Plan. On April 1, 2020, the Company's Board of Directors approved an amendment to the 2020 Employment Inducement Incentive Plan (as amended, the "2020 EIIP") to increase the ordinary shares available for issuance under that Plan by 120,000 ordinary shares. During the three months ended September 30, 2020, the 2020 EIIP was further amended to increase the ordinary shares available for issuance under that Plan by 120,000 ordinary shares. The 2020 EIIP provides for the grant of NQSOs, SARs, restricted shares, RSUs, performance bonus awards, performance share units awards, or other share or cash-based awards to eligible individuals. Options under the 2020 EIIP may be granted for periods up to ten years. All options issued to date have had a ten year life. As of September 30, 2020, the number of ordinary shares authorized for issuance under the 2020 EIIP was 480,000 and no ordinary shares remained available for future awards under the 2020 EIIP, although the Company's Board of Directors reserves the right to amend the 2020 EIIP to increase the number of ordinary shares available and to make additional awards to key new hires.

20


Shares Available for Grant
The Company granted 147,000 and 292,500 options during the three months ended September 30, 2020, and 2019, respectively, and 1,865,950 and 1,290,475 options during the nine months ended September 30, 2020 and 2019, respectively, in aggregate under its equity plans. The Company’s option awards generally vest over four years. As of September 30, 2020, 1,389,154 ordinary shares remained available for grant under the 2018 LTIP and options to purchase 8,795,230 ordinary shares in aggregate under the Company's equity plans were outstanding with a weighted-average exercise price of approximately $20.97 per share.
Share-based Compensation Expense
The Company estimates the fair value of share-based compensation on the date of grant using an option-pricing model. The Company uses the Black-Scholes model to value share-based compensation, excluding RSUs, which the Company values using the fair market value of its ordinary shares on the date of grant. The Black-Scholes option-pricing model determines the fair value of share-based payment awards based on the share price on the date of grant and is affected by assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the Company’s share price, volatility over the expected life of the awards and actual and projected employee stock option exercise behaviors. Since the Company does not have sufficient historical employee share option exercise data, the simplified method has been used to estimate the expected life of all options. The Company uses its historical volatility for the Company’s stock to estimate expected volatility starting January 1, 2018. Although the fair value of share options granted by the Company is estimated by the Black-Scholes model, the estimated fair value may not be indicative of the fair value observed in a willing buyer and seller market transaction.
As share-based compensation expense recognized in the Condensed Consolidated Financial Statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. Forfeitures were estimated based on estimated future turnover and historical experience.
Share-based compensation expense will continue to have an adverse impact on the Company’s results of operations, although it will have no impact on its overall financial position. The amount of unearned share-based compensation currently estimated to be expensed from now through the year 2024 related to unvested share-based payment awards at September 30, 2020, is $36.8 million. The weighted-average period over which the unearned share-based compensation is expected to be recognized is 2.48 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate and/or increase any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that the Company grants additional equity awards.
Share-based compensation expense recorded in these Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2020, and 2019 was based on awards granted under the 2012 LTIP, the 2018 LTIP, and the 2020 EIIP. The following table summarizes share-based compensation expense for the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Research and development$2,088 $1,955 $6,163 $6,154 
General and administrative 3,495 3,861 10,643 12,144 
Total share-based compensation expense$5,583 $5,816 $16,806 $18,298 
The Company recognized tax benefits from share-based awards of $1.1 million and $1.2 million for the three months ended September 30, 2020, and 2019, and $3.3 million and $3.6 million for the nine months ended September 30, 2020 and 2019, respectively.
The fair value of the options granted to employees and non-employee directors during the three and nine months ended September 30, 2020, and 2019 was estimated as of the grant date using the Black-Scholes option-pricing model assuming the weighted-average assumptions listed in the following table:
21


Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Expected volatility79.6%81.0%81.1%81.4%
Risk-free interest rate0.3%1.8%1.0%2.3%
Expected dividend yield%%%%
Expected life (in years)6.06.06.06.0
Weighted average grant date fair value$8.56$7.09$8.22$8.61
The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period for each award. Each of the inputs discussed above is subjective and generally requires significant management judgment to determine.
The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2020:
OptionsWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 20197,008,403 $23.34 7.24$11,901 
Granted1,865,950 11.94 
Exercised(22,852)9.42 
Forfeited(34,935)13.18 
Expired(21,336)33.61 
Outstanding at September 30, 20208,795,230 $20.97 7.37$1,994 
Vested and expected to vest at September 30, 20208,378,260 $21.34 7.07$1,986 
Vested at September 30, 20204,859,859 $25.93 6.26$1,918 
The total intrinsic value of options exercised was approximately $59,000 and nil during the three months ended September 30, 2020, and 2019, respectively, and $94,000 and $109,000 during the nine months ended September 30, 2020 and 2019, respectively, determined as of the date of exercise.

10. Income Taxes
The major taxing jurisdictions for the Company are Ireland and the U.S. The Company recorded an income tax benefit of $215,000 and $636,000 for the three and nine months ended September 30, 2020, respectively, as compared to an income tax provision of $468,000 and $510,000 for the three and nine months ended September 30, 2019, respectively. The provision for income taxes differs from the statutory tax rate of 12.5% applicable to Ireland primarily due to Irish net operating losses for which a tax provision benefit is not recognized, U.S. income taxed at different rates, and net tax shortfall from cancellations of stock options. The income tax provision reflects the estimate of the effective tax rate expected to be applicable for the full year and the Company re-evaluates this estimate each quarter based on its forecasted tax expense for the full year. Jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.
Pursuant to ASU 2016-09, the Company recorded a net tax shortfall of a nominal amount and $0.1 million for the three and nine months ended September 30, 2020, respectively, and a net tax shortfall of $0.9 million and $1.9 million for the three and nine months ended September 30, 2019, respectively, all of which were recorded as part of its income tax provision in the Condensed Consolidated Statements of Operations.
On January 1, 2019, the Company adopted ASC 842, and it recorded a reduction in deferred tax assets of $1.0 million as part of the $3.8 million change in the opening balance of the accumulated deficit for the cumulative effect of applying ASC 842.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's deferred tax assets are composed primarily of its Irish subsidiaries' net operating loss carryovers, state net operating loss carryforwards available to reduce future taxable income of the Company's U.S. subsidiaries, federal and California tax credit carryforwards, share-based
22


compensation and other temporary differences. The Company maintains a valuation allowance against certain U.S. federal and state and Irish deferred tax assets. Each reporting period, the Company evaluates the need for a valuation allowance on its deferred tax assets by jurisdiction.
No provision for income tax in Ireland has been recognized on undistributed earnings of the Company’s U.S. subsidiaries. The Company considers the U.S. earnings to be indefinitely reinvested. The Company's Swiss subsidiary, Prothena Switzerland GmbH (“PSG”) has ceased operations and the Company finalized the liquidation of PSG in May 2020. Unremitted earnings may be subject to withholding taxes (potentially at 5% in the U.S.) and Irish taxes (potentially at a rate of 12.5%) if they were to be distributed as dividends. However, Ireland allows a credit against Irish taxes for U.S. taxes withheld, and as of September 30, 2020, the Company's current year net operating losses in Ireland are sufficient to offset any potential dividend income received from its overseas subsidiaries.
23


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may include words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect our beliefs, objectives, and expectations as of the date hereof, are estimates based on our best judgment. These statements relate to, among other things, our expected increase in research and development (“R&D”) and general and administrative (“G&A”) expenses in 2020; the sufficiency of our cash and cash equivalents to meet our obligations; our anticipated need for additional capital; our current intention not to repatriate funds to Ireland; and our estimates of certain future contractual obligations.
Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. You should bear this in mind as you consider forward-looking statements, and you are cautioned not to place undue reliance on forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, the risks and uncertainties listed below as well as those discussed under Part II Item 1A - Risk Factors of this Form 10-Q:
our ability to obtain additional financing in future offerings and/or obtain funding from future collaborations;
our operating losses;
our ability to successfully complete research and development of our drug candidates;
our ability to develop, manufacture and commercialize products;
our collaborations with third parties, including Roche and Bristol-Myers Squibb;
our ability to protect our patents and other intellectual property;
our ability to hire and retain key employees;
tax treatment of our separation from Elan and subsequent distribution of our ordinary shares;
our ability to maintain financial flexibility and sufficient cash, cash equivalents and investments and other assets capable of being monetized to meet our liquidity requirements;
potential disruptions in the U.S. and global capital and credit markets;
government regulation of our industry;
the volatility of the market price of our ordinary shares;
the outbreak of the novel strain of coronavirus SARS-CoV-2; and
business disruptions.
Except as required by law or by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), we undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this Quarterly Report on Form 10-Q.
This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and Notes contained in our Annual Report on Form 10-K filed with the SEC on March 3, 2020 (the “2019 Form 10-K”).

Overview

Prothena Corporation plc (“Prothena” or the “Company”) is a late-stage clinical company with expertise in protein dysregulation and a diverse pipeline of novel investigational therapeutics with the potential to change the course of devastating neurodegenerative and rare peripheral amyloid diseases. Fueled by our deep scientific expertise built over decades of research, we are advancing a pipeline of therapeutic candidates for a number of indications and novel targets for which our ability to integrate scientific insights around neurological dysfunction and the biology of misfolded proteins can be leveraged. Our partnered programs include prasinezumab (PRX002/RG7935), in collaboration with Roche for the potential treatment of
24


Parkinson’s disease and other related synucleinopathies, and programs that target tau (PRX005), TDP-43 and an undisclosed target in collaboration with Bristol-Myers Squibb for the potential treatment of Alzheimer’s disease, amyotrophic lateral sclerosis (ALS), frontotemporal dementia (FTD) or other neurodegenerative diseases. Our wholly-owned programs include PRX004 for the potential treatment of ATTR amyloidosis, and a portfolio of programs for the potential treatment of Alzheimer’s disease including PRX012 that targets Aβ (Amyloid beta).

We were formed on September 26, 2012, under the laws of Ireland and re-registered as an Irish public limited company on October 25, 2012. Our ordinary shares began trading on The Nasdaq Global Market under the symbol “PRTA” on December 21, 2012, and currently trade on The Nasdaq Global Select Market.

Recent Developments

Prasinezumab (PRX002/RG7935) for the Potential Treatment of Parkinson’s Disease and other synucleinopathies

Prasinezumab is an investigational monoclonal antibody targeting alpha-synuclein designed to slow the progressive neurodegeneration associated with synuclein misfolding and/or the cell-to-cell transmission of the pathogenic, aggregated forms of synuclein in Parkinson’s disease and other synucleinopathies. Prasinezumab is the focus of a worldwide collaboration between Prothena and Roche, and Roche is conducting the ongoing Phase 2 PASADENA study in patients with early Parkinson’s disease. There are currently no disease-modifying treatments available that target the underlying cause of Parkinson’s disease and can slow its progression.

In September 2020, Roche presented data from Part 1 of the Phase 2 PASADENA study at the International Parkinson and Movement Disorder Society’s MDS Virtual Congress 2020. As previously reported, the study did not meet the primary objective, but signals of efficacy showing a reduction in disease progression were observed in both of the prasinezumab arms when compared to placebo. Prasinezumab is the first potentially disease-modifying, anti-alpha-synuclein antibody to demonstrate signals of efficacy on multiple pre-specified secondary and exploratory clinical endpoints, including measures of motor function and biomarkers, in patients with early Parkinson’s disease

In the PASADENA study, prasinezumab significantly reduced decline in motor function by 35% (pooled dose levels) vs. placebo after one year of treatment on the centrally rated assessment of Movement Disorder Society-Unified Parkinson's Disease Rating Scale (“MDS-UPDRS”) Part III, a clinical examination of motor function. Motor symptoms associated with Parkinson’s disease include slowness of movement (bradykinesia), tremor, rigidity, and gait. Prasinezumab-treated patients also demonstrated a significant delay in time to clinically meaningful worsening of motor progression on the site rated assessment of time to at least a 5-point progression on MDS-UPDRS Part III vs. placebo over one year, with a hazard ratio of 0.82 (pooled dose levels).

The clinical results from the PASADENA study are consistent with the expectation that both tested dose levels of prasinezumab saturate the target of aggregated alpha-synuclein in the brain of patients as was predicted based on preclinical studies and CNS exposure in the Phase 1b clinical study. Comparing the results of the pooled treatment arms vs. placebo, a pre-specified exploratory analysis of MDS-UPDRS, increases the overall sample size of prasinezumab treated patients and thereby increases the confidence in the observed effect. The statistical analyses were conducted in alignment with the powering to detect changes at a two-sided alpha of 0.20; thus p-values below 0.20 are considered significant. As previously reported, the primary endpoint of the study – change from baseline in the MDS-UPDRS total score (Parts I, II and III) at 52 weeks in each treatment group vs. the placebo group – was not met (pooled dose levels: –14.0%, –1.30, 80% CI=(–3.18, 0.58), p=0.38; low dose level: –21.5%, –2.02, 80% CI=(–4.21, 0.18); and high dose level: –6.6%, –0.62, 80% CI=(–2.82, 1.58)). As a result of the primary objective not meeting the criteria for statistical significance, subsequent nominal p-values are for descriptive purposes, without alpha control for multiple comparison.

Signals of efficacy were observed on multiple pre-specified secondary and exploratory clinical endpoints including change from baseline in MDS-UPDRS Part III in prasinezumab-treated patients vs. placebo at 52 weeks by central rating (pooled dose levels: –35.0%, –1.88, 80% CI=(–3.31, –0.45), p=0.09; low dose level: –45.4%, –2.44, 80% CI=(–4.09, –0.78); and high dose level: –24.7%, –1.33, 80% CI=(–2.99, 0.34)) and by site rating (pooled dose levels: –25.0%, –1.44, 80% CI=(–2.83, –0.06), p=0.18; low dose level: –33.8%, –1.88, 80% CI=(–3.49, –0.27); and high dose level: –18.2%, –1.02, 80% CI=(–2.64, 0.61)). MDS-UPDRS Part III is a clinical examination of motor function that assesses motor symptoms associated with Parkinson’s disease. Prasinezumab also delayed time to clinically meaningful worsening of motor progression in prasinezumab-treated patients vs. placebo over 52 weeks as demonstrated by site rating of time to at least a 5-point progression in MDS-UPDRS Part III (pooled dose levels: HR=0.82, 80% CI=0.64 to 0.99, p=0.17; low dose level: HR=0.77, 80% CI=0.63 to 0.96; and high dose level: HR=0.87, CI=0.70 to 1.07).

25


Additional signals of efficacy on bradykinesia and, separately, a digital motor score developed by Roche using a novel smartphone technology further extended the results shown on MDS-UPDRS Part III. Signals of efficacy were observed on change from baseline on bradykinesia in prasinezumab-treated patients vs. placebo at 52 weeks by site rating (pooled dose levels: –27.0%, –0.75, 80% CI=(–1.62, 0.11); low dose level: –38.3%, –1.07, 80% CI=(–2.07, –0.07); and high dose level: –15.7%, –0.44, 80% CI=(–1.45, 0.56)). Bradykinesia is one of the cardinal symptoms of Parkinson’s disease and is assessed as a component of the MDS-UPDRS Part III clinical motor examination. Positive signals on motor function were also confirmed by digital measures of progression as assessed by the digital motor score, a composite score built from 80% bradykinesia features and 20% resting tremor features. Prasinezumab-treated patients demonstrated reduced motor progression as measured by a slope analysis of the digital motor score vs. placebo at 52 weeks (pooled dose levels: –25.0%, –0.030, 80% CI=(–0.050, –0.010); low dose level: –30.3%,–0.040, 80% CI=(–0.063, –0.017); and high dose level: –21.5%, –0.029, 80% CI=(–0.052, –0.006)).

Consistent signals favoring prasinezumab were also demonstrated at both dose levels on Montreal Cognitive Assessment (“MoCA”), a screening assessment of cognitive function. On average, patients in the PASADENA study were in the cognitively normal range at baseline and prasinezumab treated patients showed an improvement in MoCA score. MoCA is a 30 point-scale and a higher score indicates better cognitive performance. Consistent signals favoring prasinezumab were also demonstrated with both dose levels on Clinical Global Impression of Improvement (“CGI-I”) and Patient Global Impression of Change (“PGI-C”), two assessments of global impression of change. On both the CGI-I and PGI-C, assessments that measure change in health state by the clinician and patient respectively, prasinezumab-treated patients demonstrated a reduced risk of worsening.

In an analysis of cerebral blood flow, assessed by changes in magnetic resonance-arterial spin labeling (“MRI-ASL”) in a subset of patients, prasinezumab-treated patients showed improvement in cerebral blood flow in the putamen, an area of the brain associated with the loss of dopaminergic terminals and presence of alpha-synuclein pathology in Parkinson’s disease, suggesting an impact on the underlying biology implicated in disease progression. On endpoints that minimally progressed over 52 weeks, signals favoring prasinezumab were not observed, including on MDS-UPDRS Part I or Part II, the The Schwab and England Activities of Daily Living scale, and DaT-SPECT endpoints.

Prasinezumab was found to be generally safe and well tolerated, with the majority of adverse events reported as mild or moderate and similar across placebo and both treatment arms. The majority of reported Adverse Events (“AE”) (92%) were mild (grade 1-2). A single grade 4 AE was reported and deemed to be unrelated to study drug. There were no grade 5 AEs.

Based on positive signals of efficacy consistent with disease modification in the Phase 2 PASADENA study, Roche and Prothena plan to advance prasinezumab into a Phase 2b study in patients with early Parkinson’s disease. The study will be designed to further assess the efficacy of prasinezumab by expanding upon the patient population enrolled in PASADENA to include patients with early Parkinson’s disease on stable levodopa therapy. Prasinezumab is the first anti-alpha synuclein antibody to advance into late-stage development.

Phase 2 PASADENA Study Design

PASADENA is a two-part Phase 2 clinical study in early Parkinson’s disease patients that is being conducted by Roche. Part 1 is a randomized, double-blind, placebo-controlled, three-arm study that enrolled 316 patients to evaluate the efficacy and safety of prasinezumab in patients over 52-weeks. In Part 1, patients were randomized on a 1:1:1 basis to receive one of two active doses (1500 mg or 4500/3500 mg, depending on body weight) of prasinezumab or placebo via intravenous infusion once every 4 weeks. Eligible patients were not on dopaminergic therapy and were not expected to require dopaminergic therapy for at least 52 weeks. Part 2 of the study, which is ongoing, is a 52-week blinded extension phase in which patients from the placebo arm of the study have been re-randomized onto one of two active doses on a 1:1 basis, so that all participants are on active treatment. Patients who were originally randomized to an active dose will continue at that dose level for an additional 52 weeks. In Part 2, patients are allowed to start dopaminergic therapy. Any patient who medically required initiation of dopaminergic therapy during Part 1 has had their subsequent data censored for the primary endpoint analysis.

The primary endpoint of the PASADENA study is change from baseline in the MDS-UPDRS total score (Parts I, II and III) at the completion of Part 1 (52-weeks) in each treatment group vs the placebo group. The signal-detection study was designed to include 100 patients per arm, resulting in 80% power and two-sided alpha of 0.20, to detect a 37.5% relative change in MDS-UPDRS total score between groups from baseline to week 52. A pre-specified exploratory analysis compares the results of the two pooled treatment arms vs. placebo. More information about the PASADENA study can be found on clinicaltrials.gov by searching NCT #03100149.

The 52-week blinded extension of the study (Part 2 of the Phase 2 PASADENA Study) is ongoing. COVID-19 has caused some participants to miss assessments in Part 2 of the study. Mitigation efforts have been put in place to ensure patient safety,
26


and the situation is improving in most geographies. Roche continues to monitor the situation carefully to minimize patient risk and the impact on the study.

Discovery and Preclinical Development Alzheimer’s Disease Portfolio

In November 2020, Prothena presented preclinical data from two programs in its Alzheimer’s disease portfolio, a next generation anti-Aβ antibody for subcutaneous administration to improve convenience and patient access, and a multi-immunogen Aβ-Tau vaccine, at the 13th Clinical Trials on Alzheimer’s Disease Conference 2020. The two programs are part of Prothena’s portfolio of Alzheimer’s disease programs including antibodies, vaccine and small molecule approaches to address unmet needs including more convenient dosing, patient access, and prevention.

Novel anti-Aβ antibody

Prothena has developed anti-Aβ antibodies with greater potency that retain or improve on key attributes that are thought to underlie the observed efficacy of N-terminally directed therapeutics such as aducanumab, with the aim of offering similar or improved efficacy with sub-cutaneous dosing regimen. Prothena antibodies demonstrated a higher binding strength to amyloid than aducanumab; specifically, a 5- to 11-fold greater affinity/avidity for fibrillar Aβ than aducanumab while also neutralizing soluble, toxic (i.e., oligomeric) Aβ species. Prothena antibodies were also shown to recognize Aβ pathology to a greater extent than aducanumab, demonstrating more extensive plaque area binding at lower antibody concentrations, which are estimated to be clinically relevant exposures in the central nervous system following systemic dosing.

Multi-Immunogen Aβ-Tau Vaccine

Prothena is developing a multi-immunogen vaccine (“MIV”) that targets essential epitopes within the Aβ and Tau proteins. The MIV is a single vaccine and is being developed for the prevention and treatment of Alzheimer’s disease. The Aβ-tau MIV generates polyclonal responses against essential epitopes with the N-terminal of Aβ and specific regions of tau to promote amyloid clearance and blockade of tau transmission. Immunohistochemistry using sera from immunized animals showed an appropriate and balanced immune response with antibodies that react to both Aβ plaques and Tau tangles and at concentrations expected to be reached in CNS following immunization and resultant titer generation.

Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

There were no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2020, from the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K.
Recent Accounting Pronouncements
There have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2020, as compared to the recent accounting pronouncements described in our 2019 Form 10-K, that are of significance or potential significance to us.



27


Results of Operations
Comparison of Three and Nine Months Ended September 30, 2020 and 2019
Revenue
Three Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Collaboration revenue$157 $205 (23)%
Total revenue$157 $205 (23)%

Nine Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Collaboration revenue$443 $558 (21)%
License revenue$50 $— n/m
Total revenue$493 $558 (12)%
_____________
n/m = not meaningful
Total revenue was $0.2 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively, and $0.5 million and $0.6 million for the nine months ended September 30, 2020 and 2019, respectively.
Collaboration revenue includes reimbursements under our License Agreement with Roche. See Note 7, “Significant Agreements” to the Condensed Consolidated Financial Statements regarding the Roche License Agreement for more information.
License revenue includes revenue from the transfer of license technology to a third party.

Operating Expenses

Three Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Research and development21,605 12,486 73 %
General and administrative9,398 8,691 %
Total operating expenses31,003 21,177 46 %

Nine Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Research and development54,124 35,365 53 %
General and administrative28,795 27,677 %
Restructuring credits— (61)(100)%
Total operating expenses82,919 62,981 32 %

Total operating expenses consist of R&D expenses, G&A expenses and restructuring credits. Our operating expenses were $31.0 million and $82.9 million for the three and nine months ended September 30, 2020, respectively, and $21.2 million and $63.0 million for the three and nine months ended September 30, 2019, respectively.
28


Our R&D expenses primarily consist of personnel costs and related expenses, including share-based compensation and external costs associated with nonclinical activities and drug development related to our drug programs, including NEOD001, prasinezumab, PRX004 and our discovery programs. Pursuant to our License Agreement with Roche, we make payments to Roche for our share of the development expenses incurred by Roche related to the prasinezumab program, which is included in our R&D expense.
Our G&A expenses primarily consist of professional service expenses and personnel costs and related expenses, including share-based compensation.
Research and Development Expenses
Our R&D expense increased by $9.1 million or 73%, for the three months ended September 30, 2020, and increased by $18.8 million, or 53%, for the nine months ended September 30, 2020, compared to the same periods in the prior year. The increase for the three and nine months ended September 30, 2020 was primarily due to higher manufacturing costs (primarily related to the tau, NEOD001, Aβ and PRX004 programs), higher collaboration expense with Roche related to the prasinezumab program and higher R&D consulting expenses.
Our research activities are aimed at developing new drug products. Our development activities involve the translation of our research into potential new drugs. R&D expenses include personnel costs and related expenses, external expenses associated with nonclinical and drug development and materials, equipment and facilities costs that are allocated to clearly related R&D activities.
The following table sets forth the R&D expenses for our major programs (specifically, any program with successful first dosing in a Phase 1 clinical trial, which were NEOD001, prasinezumab, PRX003 and PRX004) and other R&D expenses for the three and nine months ended September 30, 2020 and 2019 and the cumulative amounts to date (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,Cumulative to Date
2020201920202019
NEOD001 (1)
$4,840 $221 $7,725 $956 $318,001 
Prasinezumab (PRX002/RG7935)(2)
4,254 3,331 13,606 8,395 93,008 
PRX003 (3)
28 34 (236)116 58,931 
PRX004 (4)
2,565 4,754 9,343 12,922 72,951 
Other R&D (5)
9,918 4,146 23,686 12,976 
$21,605 $12,486 $54,124 $35,365 
(1)Cumulative R&D costs to date for NEOD001 include the costs incurred from the date when the program was separately tracked in preclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. In April 2018, we announced that we were discontinuing development of NEOD001. Since that date we have incurred costs associated with the close out of NEOD001 studies and ongoing evaluation of NEOD001.
(2)Cumulative R&D costs to date for prasinezumab and related antibodies include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. Prasinezumab costs include payments to Roche for our share of the development expenses incurred by Roche related to prasinezumab programs and, through December 31, 2017, is net of reimbursements from Roche for development and supply services recorded as an offset to R&D expense. For the three and nine months ended September 30, 2020, $0.2 million and $0.4 million, respectively, and for the three and nine months ended September 30, 2019, $0.2 million and $0.6 million, respectively, of reimbursements from Roche for development services were recorded as part of collaboration revenue.
(3)Cumulative R&D costs to date for PRX003 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. Based on the Phase 1b multiple ascending dose study results announced in September 2017, we announced that we will not advance PRX003 into mid-stage clinical development for psoriasis or psoriatic arthritis as previously planned.
(4)Cumulative R&D costs to date for PRX004 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount.
29


(5)Other R&D is comprised of preclinical development and discovery programs that have not progressed to first patient dosing in a Phase 1 clinical trial.
We expect our R&D expenses to increase for the full year ended December 31, 2020 over the prior year, primarily due to investments in our neuroscience programs.

General and Administrative Expenses
Our G&A expenses increased by $0.7 million, or, 8%, for the three months ended September 30, 2020, and increased by $1.1 million, or 4%, for the nine months ended September 30, 2020, compared to the same periods in the prior year. The increase for the three and nine months ended September 30, 2020, compared to the prior year, was primarily due to higher costs for our director and officer insurance premiums offset in part by lower share-based compensation expense.

We expect our G&A expenses to increase for the full year ended December 31, 2020 compared to the prior year, primarily related to increases in our director and officer insurance premiums.

Restructuring Credits

In May 2018, we commenced a reorganization plan to reduce our operating costs and better align our workforce with the needs of our business following our decision in April 2018 to discontinue further development of NEOD001. For the nine months ended September 30, 2019, we recorded a restructuring credit of approximately $61,000 primarily due to an adjustment in previously recorded employee termination benefits.
Other Income (Expense)
Three Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Interest income$43 $2,034 (98)%
Other income, net11 (42)(126)%
Total other income, net$54 $1,992 (97)%

Nine Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Interest income$1,359 $6,634 (80)%
Other income (expense), net176 (98)%
Total other income, net$1,362 $6,810 (80)%

Interest income decreased by $2.0 million, or 98%, for the three months ended September 30, 2020, and decreased by $5.3 million, or 80%, for the nine months ended September 30, 2020, compared to the same periods in the prior year, primarily due to lower interest income from our cash and money market accounts resulting from lower interest rates and lower cash and money market balances. Other income (expense), net for the three and nine months ended September 30, 2020 and 2019, was primarily foreign exchange gains (losses) from transactions with vendors denominated in Euros.

Provision for (benefit from) Income Taxes
Three Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Provision for (benefit from) income taxes$(215)$468 (146)%

30


Nine Months Ended September 30,Percentage Change
20202019
(Dollars in thousands)
Provision for (benefit from) income taxes$(636)$510 (225)%

The benefit from income taxes for the three months ended September 30, 2020 was $215,000 and the provision for income taxes for the three months ended September 30, 2019 was $468,000. The benefit from income taxes for the nine months ended September 30, 2020 was $636,000 and the provision for income taxes for nine months ended September 30, 2019 was $510,000. The benefit from income taxes increased by $683,000 and $1,146,000 for the three and nine months ended September 30, 2020, compared to the same periods in the prior year. The change in provision for (benefit from) income taxes for the three and nine months ended September 30, 2020, was primarily due to a decrease in tax shortfall related to higher stock option cancellations in the prior year.
The tax provisions for all periods presented reflect U.S. federal taxes associated with recurring profits attributable to intercompany services that our U.S. subsidiary performs for the Company. No tax benefit has been recorded related to tax losses recognized in Ireland and any deferred tax assets for those losses are offset by a valuation allowance.

Liquidity and Capital Resources

Overview
September 30,December 31,
20202019
Working capital$298,763 $360,661 
Cash and cash equivalents314,525 375,723 
Total assets355,784 419,268 
Total liabilities146,270 146,347 
Total shareholders’ equity209,514 272,921 
Working capital was $298.8 million as of September 30, 2020, a decrease of $61.9 million from working capital of $360.7 million as of December 31, 2019. This decrease in working capital during the nine months ended September 30, 2020, was primarily due to cash use of $82.9 million for operating expenses (adjusted to exclude non-cash charges).
As of September 30, 2020, we had $314.5 million in cash and cash equivalents. Although we believe, based on our current business plans, that our existing cash and cash equivalents will be sufficient to meet our obligations for at least the next twelve months, we anticipate that we will require additional capital in the future in order to continue the research and development of our drug candidates. As of September 30, 2020, $145.0 million of our outstanding cash and cash equivalents related to U.S. operations are considered permanently reinvested. We do not intend to repatriate these funds. However, if these funds were repatriated back to Ireland, we would incur a withholding tax from the dividend distribution.
We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates. Our future capital requirements will depend on numerous factors, including, without limitation, the timing of initiation, progress, results and costs of our clinical trials; the results of our research and nonclinical studies; the costs of clinical manufacturing and of establishing commercial manufacturing arrangements; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; the costs and timing of capital asset purchases; our ability to establish research collaborations, strategic collaborations, licensing or other arrangements; the costs to satisfy our obligations under current and potential future collaborations; the costs of any in-licensing transactions; and the timing, receipt, and amount of revenues or royalties, if any, from any approved drug candidates. Pursuant to the License Agreement with Roche, in the U.S., we and Roche share all development and commercialization costs, as well as profits, all of which will be allocated 70% to Roche and 30% to us, for prasinezumab, as well as any other Licensed Products and/or indications for which we opt in to co-develop and co-fund. Pursuant to the Collaboration Agreement with BMS (formerly Celgene), the Company is eligible to receive payments for commercial and regulatory milestones and royalties on net sales of Collaboration Products. In order to develop and obtain regulatory approval for our potential products we will need to raise substantial additional funds. We expect to raise any such additional funds through public or private equity or debt financings, collaborative agreements with corporate partners or other
31


arrangements. We cannot assume that such additional financings will be available on acceptable terms, if at all, and such financings may only be available on terms dilutive to our shareholders.
Cash Flows for the Nine Months Ended September 30, 2020 and 2019
The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows (in thousands):
Nine Months Ended September 30,
 20202019
Net cash used in operating activities$(61,268)$(38,481)