UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 20202021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission File No. 001-36276
ULTRAGENYX PHARMACEUTICAL INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
| 27-2546083 |
(State or other jurisdiction of incorporation or organization) |
|
| (I.R.S. Employer Identification No.) |
60 Leveroni Court |
| 94949 |
(Address of principal executive offices) |
| (Zip Code) |
(415) 483-8800
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.001 par value | RARE | The Nasdaq Global Select Market |
As of May 1, 2020, the registrant had 59,749,189 shares of common stock issued and outstanding.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☑ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☑ |
| Accelerated filer |
| ☐ |
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☐ |
|
|
|
| Emerging growth company |
| ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑
As of April 30, 2021, the registrant had 67,482,733 shares of common stock issued and outstanding.
ULTRAGENYX PHARMACEUTICAL INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 20202021
INDEX
|
|
|
|
|
| Page |
|
|
|
|
| ||
| 1 | |||||
|
|
|
|
| ||
Part I – |
|
|
| |||
|
|
|
|
|
|
|
|
| Item 1. |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| 2 | |
|
|
|
|
|
|
|
|
|
|
|
| 3 | |
|
|
|
|
|
|
|
|
|
|
| Condensed Consolidated Statements of Comprehensive |
| 4 |
|
|
|
|
|
|
|
|
|
|
|
| 5 | |
|
|
|
|
|
|
|
|
|
|
|
| 6 | |
|
|
|
|
|
|
|
|
|
|
|
| 7 | |
|
|
|
|
|
|
|
|
| Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 19 |
|
|
|
|
|
|
|
|
| Item 3. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 4. |
|
|
| |
|
|
|
|
| ||
Part II – |
|
|
| |||
|
|
|
|
|
|
|
|
| Item 1. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 1A. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 2. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 3. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 4. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 5. |
|
|
| |
|
|
|
|
|
|
|
|
| Item 6. |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the Quarterly Report) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words, or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
| • | our commercialization, marketing, and manufacturing capabilities and strategy; |
| • | our expectations regarding the timing of clinical study commencements and reporting results from same; |
| • | the timing and likelihood of regulatory approvals for our product candidates; |
| • | the anticipated indications for our product candidates, if approved; |
| • | the potential market opportunities for commercializing our products and product candidates; |
| • | our expectations regarding the potential market size and the size of the patient populations for our products and product candidates, if approved for commercial use; |
| • | the impact of the COVID-19 pandemic and related health measures on our business, financial condition and liquidity; |
| • | estimates of our expenses, revenue, capital requirements, and our needs for additional financing; |
| • | our ability to develop, acquire, and advance product candidates into, and successfully complete, clinical studies; |
| • | the implementation of our business model and strategic plans for our business, products and product candidates and the integration and performance of any businesses we have acquired or may acquire; |
| • | the initiation, timing, progress, and results of ongoing and future preclinical and clinical studies, and our research and development programs; |
| • | the scope of protection we are able to establish and maintain for intellectual property rights covering our products and product candidates; |
| • | our ability to maintain and establish collaborations or strategic relationships or obtain additional funding; |
| • | our ability to maintain and establish relationships with third parties, such as contract research organizations, contract manufacturing organizations, suppliers, and distributors; |
| • | our financial performance and the expansion of our organization; |
| • | our ability to obtain supply of our products and product candidates; |
| • | the scalability and commercial viability of our manufacturing methods and processes; |
| • | developments and projections relating to our competitors and our industry; and |
| • | other risks and uncertainties, including those listed under Part II, Item 1A. Risk Factors. |
Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those discussed under Part II, Item 1A. Risk Factors and discussed elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
This Quarterly Report also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRAGENYX PHARMACEUTICAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
| March 31, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 298,190 |
|
| $ | 433,584 |
| $ | 383,794 |
|
| $ | 713,526 |
|
Short-term investments |
| 365,088 |
|
|
| 321,646 |
| |||||||
Receivable related to Daiichi Sankyo license agreement |
| 125,550 |
|
|
| — |
| |||||||
Marketable debt securities |
| 581,614 |
|
|
| 488,007 |
| |||||||
Accounts receivable, net |
| 29,327 |
|
|
| 32,844 |
|
| 25,032 |
|
|
| 23,093 |
|
Inventory |
| 11,375 |
|
|
| 11,546 |
|
| 12,462 |
|
|
| 13,048 |
|
Prepaid expenses and other current assets |
| 64,788 |
|
|
| 51,397 |
|
| 68,034 |
|
|
| 57,630 |
|
Total current assets |
| 894,318 |
|
|
| 851,017 |
|
| 1,070,936 |
|
|
| 1,295,304 |
|
Property and equipment, net |
| 47,596 |
|
|
| 44,348 |
|
| 87,570 |
|
|
| 73,515 |
|
Investment in Arcturus equity securities |
| 35,420 |
|
|
| 27,752 |
| |||||||
Long-term investments |
| 41,711 |
|
|
| 5,174 |
| |||||||
Equity investments |
| 134,756 |
|
|
| 155,375 |
| |||||||
Marketable debt securities |
| 81,624 |
|
|
| 10,506 |
| |||||||
Right-of-use assets |
| 35,827 |
|
|
| 30,328 |
|
| 38,511 |
|
|
| 40,524 |
|
Intangible assets, net |
| 129,000 |
|
|
| 129,000 |
|
| 131,031 |
|
|
| 131,113 |
|
Goodwill |
| 44,406 |
|
|
| 44,406 |
|
| 44,406 |
|
|
| 44,406 |
|
Other assets |
| 4,862 |
|
|
| 3,471 |
|
| 8,929 |
|
|
| 8,812 |
|
Total assets | $ | 1,233,140 |
|
| $ | 1,135,496 |
| $ | 1,597,763 |
|
| $ | 1,759,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 14,405 |
|
| $ | 12,871 |
| $ | 15,744 |
|
| $ | 12,923 |
|
Accrued liabilities |
| 67,719 |
|
|
| 83,194 |
|
| 82,699 |
|
|
| 108,491 |
|
Short-term contract liability |
| 107,247 |
|
|
| — |
| |||||||
Short-term lease liabilities |
| 7,487 |
|
|
| 7,235 |
| |||||||
Contract liabilities |
| 19,221 |
|
|
| 59,219 |
| |||||||
Lease liabilities |
| 9,380 |
|
|
| 8,976 |
| |||||||
Total current liabilities |
| 196,858 |
|
|
| 103,300 |
|
| 127,044 |
|
|
| 189,609 |
|
Long-term contract liability |
| 38,036 |
|
|
| — |
| |||||||
Long-term lease liabilities |
| 34,958 |
|
|
| 29,757 |
| |||||||
Contract liabilities |
| 5,868 |
|
|
| 7,349 |
| |||||||
Lease liabilities |
| 36,752 |
|
|
| 39,251 |
| |||||||
Deferred tax liabilities |
| 33,306 |
|
|
| 33,306 |
|
| 33,306 |
|
|
| 33,306 |
|
Liability related to the sale of future royalties |
| 320,836 |
|
|
| 315,369 |
|
| 340,211 |
|
|
| 335,665 |
|
Total liabilities |
| 623,994 |
|
|
| 481,732 |
|
| 543,181 |
|
|
| 605,180 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock — 25,000,000 shares authorized; nil outstanding as of March 31, 2020 and December 31, 2019 |
| — |
|
|
| — |
| |||||||
Common stock — 250,000,000 shares authorized; 59,488,873 and 57,838,220 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively |
| 59 |
|
|
| 58 |
| |||||||
Preferred stock — 25,000,000 shares authorized; nil outstanding as of March 31, 2021 and December 31, 2020 |
| — |
|
|
| — |
| |||||||
Common stock — 250,000,000 shares authorized; 67,439,477 and 66,818,520 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively |
| 67 |
|
|
| 67 |
| |||||||
Additional paid-in capital |
| 2,162,667 |
|
|
| 2,086,863 |
|
| 2,810,176 |
|
|
| 2,773,195 |
|
Accumulated other comprehensive loss |
| (1,545 | ) |
|
| (147 | ) | |||||||
Accumulated other comprehensive income |
| 56 |
|
|
| 689 |
| |||||||
Accumulated deficit |
| (1,552,035 | ) |
|
| (1,433,010 | ) |
| (1,755,717 | ) |
|
| (1,619,576 | ) |
Total stockholders’ equity |
| 609,146 |
|
|
| 653,764 |
|
| 1,054,582 |
|
|
| 1,154,375 |
|
Total liabilities and stockholders’ equity | $ | 1,233,140 |
|
| $ | 1,135,496 |
| $ | 1,597,763 |
|
| $ | 1,759,555 |
|
See accompanying notes.
2
ULTRAGENYX PHARMACEUTICAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration and license | $ | 27,215 |
|
| $ | 14,238 |
|
| $ | 79,010 |
|
| $ | 27,215 |
|
|
Product sales |
| 6,479 |
|
|
| 3,934 |
|
|
| 16,513 |
|
|
| 6,479 |
|
|
Non-cash collaboration royalty revenue |
| 2,615 |
|
|
| — |
|
|
| 3,872 |
|
|
| 2,615 |
|
|
Total revenues |
| 36,309 |
|
|
| 18,172 |
|
|
| 99,395 |
|
|
| 36,309 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
| (3,503 | ) |
|
| 452 |
|
|
| 5,188 |
|
|
| (3,503 | ) |
|
Research and development |
| 112,961 |
|
|
| 78,105 |
|
|
| 147,518 |
|
|
| 112,961 |
|
|
Selling, general and administrative |
| 47,516 |
|
|
| 38,829 |
|
|
| 53,258 |
|
|
| 47,516 |
|
|
Total operating expenses |
| 156,974 |
|
|
| 117,386 |
|
|
| 205,964 |
|
|
| 156,974 |
|
|
Loss from operations |
| (120,665 | ) |
|
| (99,214 | ) |
|
| (106,569 | ) |
|
| (120,665 | ) |
|
Interest income |
| 2,919 |
|
|
| 3,086 |
|
|
| 639 |
|
|
| 2,919 |
|
|
Change in fair value of investment in Arcturus equity securities |
| 7,668 |
|
|
| — |
|
| ||||||||
Change in fair value of equity investments |
| (20,619 | ) |
|
| 7,668 |
|
| ||||||||
Non-cash interest expense on liability related to the sale of future royalties |
| (8,082 | ) |
|
| — |
|
|
| (8,418 | ) |
|
| (8,082 | ) |
|
Other expense |
| (456 | ) |
|
| (412 | ) |
|
| (795 | ) |
|
| (456 | ) |
|
Loss before income taxes |
| (118,616 | ) |
|
| (96,540 | ) |
|
| (135,762 | ) |
|
| (118,616 | ) |
|
Provision for income taxes |
| (409 | ) |
|
| (216 | ) |
|
| (379 | ) |
|
| (409 | ) |
|
Net loss | $ | (119,025 | ) |
| $ | (96,756 | ) |
| $ | (136,141 | ) |
| $ | (119,025 | ) |
|
Net loss per share, basic and diluted | $ | (2.05 | ) |
| $ | (1.82 | ) |
| $ | (2.03 | ) |
| $ | (2.05 | ) |
|
Shares used in computing net loss per share, basic and diluted |
| 57,995,999 |
|
|
| 53,209,215 |
|
| ||||||||
Weighted-average shares used in computing net loss per share, basic and diluted |
| 67,102,342 |
|
|
| 57,995,999 |
|
|
See accompanying notes.
3
ULTRAGENYX PHARMACEUTICAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| ||||
Net loss | $ | (119,025 | ) |
| $ | (96,756 | ) |
| $ | (136,141 | ) |
| $ | (119,025 | ) |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
| ||||||||
Other comprehensive loss: |
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation adjustments |
| (49 | ) |
|
| 129 |
|
|
| (285 | ) |
|
| (49 | ) |
|
Unrealized gain (loss) on available-for-sale securities |
| (1,349 | ) |
|
| 356 |
|
| ||||||||
Other comprehensive income (loss) |
| (1,398 | ) |
|
| 485 |
|
| ||||||||
Unrealized loss on available-for-sale securities |
| (348 | ) |
|
| (1,349 | ) |
| ||||||||
Other comprehensive loss |
| (633 | ) |
|
| (1,398 | ) |
| ||||||||
Total comprehensive loss | $ | (120,423 | ) |
| $ | (96,271 | ) |
| $ | (136,774 | ) |
| $ | (120,423 | ) |
|
See accompanying notes.
4
ULTRAGENYX PHARMACEUTICAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share amounts)
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Deficit |
|
| Equity |
|
| ||||||
Balance as of December 31, 2019 |
|
| 57,838,220 |
|
| $ | 58 |
|
| $ | 2,086,863 |
|
| $ | (147 | ) |
| $ | (1,433,010 | ) |
| $ | 653,764 |
|
|
Issuance of common stock in connection with license agreement, net of issuance costs |
|
| 1,243,913 |
|
|
| 1 |
|
|
| 55,267 |
|
|
| — |
|
|
| — |
|
|
| 55,268 |
|
|
Employee stock-based compensation |
|
| — |
|
|
| — |
|
|
| 20,157 |
|
|
| — |
|
|
| — |
|
|
| 20,157 |
|
|
Issuance of common stock under exercise of warrants and equity plan awards, net of tax |
|
| 406,740 |
|
|
| — |
|
|
| 380 |
|
|
| — |
|
|
| — |
|
|
| 380 |
|
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,398 | ) |
|
| — |
|
|
| (1,398 | ) |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (119,025 | ) |
|
| (119,025 | ) |
|
Balance as of March 31, 2020 |
|
| 59,488,873 |
|
| $ | 59 |
|
| $ | 2,162,667 |
|
| $ | (1,545 | ) |
| $ | (1,552,035 | ) |
| $ | 609,146 |
|
|
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Deficit |
|
| Equity |
|
| ||||||
Balance as of December 31, 2020 |
|
| 66,818,520 |
|
| $ | 67 |
|
| $ | 2,773,195 |
|
| $ | 689 |
|
| $ | (1,619,576 | ) |
| $ | 1,154,375 |
|
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 24,220 |
|
|
| — |
|
|
| — |
|
|
| 24,220 |
|
|
Issuance of common stock under equity plan awards, net of tax |
|
| 620,957 |
|
|
| — |
|
|
| 12,761 |
|
|
| — |
|
|
| — |
|
|
| 12,761 |
|
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (633 | ) |
|
| — |
|
|
| (633 | ) |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (136,141 | ) |
|
| (136,141 | ) |
|
Balance as of March 31, 2021 |
|
| 67,439,477 |
|
| $ | 67 |
|
| $ | 2,810,176 |
|
| $ | 56 |
|
| $ | (1,755,717 | ) |
| $ | 1,054,582 |
|
|
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Deficit |
|
| Equity |
|
| ||||||
Balance as of December 31, 2018 |
|
| 50,860,588 |
|
| $ | 51 |
|
| $ | 1,639,773 |
|
| $ | (633 | ) |
| $ | (1,030,283 | ) |
| $ | 608,908 |
|
|
Issuance of common stock in connection with underwritten public offering, net of issuance costs |
|
| 5,833,333 |
|
|
| 6 |
|
|
| 330,409 |
|
|
| — |
|
|
| — |
|
|
| 330,415 |
|
|
Issuance of common stock in connection with at-the-market offering, net of issuance costs |
|
| 379,707 |
|
|
| — |
|
|
| 19,305 |
|
|
| — |
|
|
| — |
|
|
| 19,305 |
|
|
Employee stock-based compensation |
|
| — |
|
|
| — |
|
|
| 20,475 |
|
|
| — |
|
|
| — |
|
|
| 20,475 |
|
|
Issuance of common stock under equity plan awards, net of tax |
|
| 230,260 |
|
|
| — |
|
|
| 3,897 |
|
|
| — |
|
|
| — |
|
|
| 3,897 |
|
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 485 |
|
|
| — |
|
|
| 485 |
|
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (96,756 | ) |
|
| (96,756 | ) |
|
Balance as of March 31, 2019 |
|
| 57,303,888 |
|
| $ | 57 |
|
| $ | 2,013,859 |
|
| $ | (148 | ) |
| $ | (1,127,039 | ) |
| $ | 886,729 |
|
|
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Deficit |
|
| Equity |
|
| ||||||
Balance as of December 31, 2019 |
|
| 57,838,220 |
|
| $ | 58 |
|
| $ | 2,086,863 |
|
| $ | (147 | ) |
| $ | (1,433,010 | ) |
| $ | 653,764 |
|
|
Issuance of common stock in connection with license agreement, net of issuance costs |
|
| 1,243,913 |
|
|
| 1 |
|
|
| 55,267 |
|
|
| — |
|
|
| — |
|
|
| 55,268 |
|
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 20,157 |
|
|
| — |
|
|
| — |
|
|
| 20,157 |
|
|
Issuance of common stock upon exercise of warrants and under equity plan awards, net of tax |
|
| 406,740 |
|
|
| — |
|
|
| 380 |
|
|
| — |
|
|
| — |
|
|
| 380 |
|
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,398 | ) |
|
| — |
|
|
| (1,398 | ) |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (119,025 | ) |
|
| (119,025 | ) |
|
Balance as of March 31, 2020 |
|
| 59,488,873 |
|
| $ | 59 |
|
| $ | 2,162,667 |
|
| $ | (1,545 | ) |
| $ | (1,552,035 | ) |
| $ | 609,146 |
|
|
See accompanying notes.
5
ULTRAGENYX PHARMACEUTICAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended March 30, |
| Three Months Ended March 31, |
| ||||||||||
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss | $ | (119,025 | ) |
| $ | (96,756 | ) | $ | (136,141 | ) |
| $ | (119,025 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
| 20,155 |
|
|
| 20,221 |
|
| 24,254 |
|
|
| 20,155 |
|
Amortization of discount on investment securities, net |
| (299 | ) |
|
| (839 | ) | |||||||
Amortization of premium (discount) on marketable debt securities, net |
| 940 |
|
|
| (299 | ) | |||||||
Depreciation and amortization |
| 2,852 |
|
|
| 2,119 |
|
| 3,367 |
|
|
| 2,852 |
|
Foreign currency remeasurement loss |
| 474 |
|
|
| 589 |
| |||||||
Change in fair value of investment in Arcturus equity securities |
| (7,668 | ) |
|
| — |
| |||||||
Change in fair value of equity investments |
| 20,619 |
|
|
| (7,668 | ) | |||||||
Non-cash collaboration royalty revenue |
| (2,615 | ) |
|
| — |
|
| (3,872 | ) |
|
| (2,615 | ) |
Non-cash interest expense on liability related to the sale of future royalties |
| 8,082 |
|
|
| — |
|
| 8,418 |
|
|
| 8,082 |
|
Other |
| 325 |
|
|
| 463 |
| |||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| 3,500 |
|
|
| (2,899 | ) |
| (1,993 | ) |
|
| 3,500 |
|
Inventory |
| 149 |
|
|
| (3,647 | ) |
| 474 |
|
|
| 149 |
|
Prepaid expenses and other assets |
| (15,096 | ) |
|
| (1,414 | ) |
| (10,656 | ) |
|
| (15,096 | ) |
Receivable related to the Daiichi Sankyo license agreement |
| (125,550 | ) |
|
| — |
|
| — |
|
|
| (125,550 | ) |
Right-of-use assets |
| (5,522 | ) |
|
| (6,880 | ) | |||||||
Accounts payable, accrued, and other liabilities |
| (5,383 | ) |
|
| (13,081 | ) |
| (23,602 | ) |
|
| (5,383 | ) |
Contract liabilities |
| 145,283 |
|
|
| — |
|
| (41,479 | ) |
|
| 145,283 |
|
Lease liabilities |
| 5,511 |
|
|
| 6,812 |
| |||||||
Net cash used in operating activities |
| (95,152 | ) |
|
| (95,775 | ) |
| (159,346 | ) |
|
| (95,152 | ) |
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
| (14,096 | ) |
|
| (3,059 | ) |
| (16,414 | ) |
|
| (14,096 | ) |
Purchase of investments |
| (285,229 | ) |
|
| (260,734 | ) | |||||||
Proceeds from the sale of investments |
| 16,600 |
|
|
| 22,600 |
| |||||||
Proceeds from maturities of investments |
| 187,600 |
|
|
| 140,000 |
| |||||||
Purchase of marketable debt securities |
| (405,230 | ) |
|
| (285,229 | ) | |||||||
Proceeds from sale of marketable debt securities |
| 14,980 |
|
|
| 16,600 |
| |||||||
Proceeds from maturities of marketable debt securities |
| 224,240 |
|
|
| 187,600 |
| |||||||
Net cash used in investing activities |
| (95,125 | ) |
|
| (101,193 | ) |
| (182,424 | ) |
|
| (95,125 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock in connection with the license agreement, net |
| 55,268 |
|
|
| — |
|
| — |
|
|
| 55,268 |
|
Proceeds from the issuance of common stock in connection with underwritten public offerings, net |
| — |
|
|
| 330,415 |
| |||||||
Proceeds from the issuance of common stock in connection with at-the-market offering, net |
| — |
|
|
| 19,305 |
| |||||||
Proceeds from the issuance of common stock from exercise of warrants and equity plan awards, net |
| 380 |
|
|
| 3,897 |
|
| 12,761 |
|
|
| 380 |
|
Principal repayments of financing leases |
| (33 | ) |
|
| — |
| |||||||
Other |
| (112 | ) |
|
| (33 | ) | |||||||
Net cash provided by financing activities |
| 55,615 |
|
|
| 353,617 |
|
| 12,649 |
|
|
| 55,615 |
|
Effect of exchange rate changes on cash |
| (623 | ) |
|
| (198 | ) |
| (771 | ) |
|
| (623 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
| (135,285 | ) |
|
| 156,451 |
| |||||||
Net decrease in cash, cash equivalents and restricted cash |
| (329,892 | ) |
|
| (135,285 | ) | |||||||
Cash, cash equivalents and restricted cash at beginning of period |
| 436,244 |
|
|
| 115,525 |
|
| 726,294 |
|
|
| 436,244 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 300,959 |
|
| $ | 271,976 |
| $ | 396,402 |
|
| $ | 300,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired lease liabilities arising from obtaining right-of-use assets | $ | 7,397 |
|
| $ | 8,280 |
| $ | — |
|
| $ | 7,397 |
|
See accompanying notes.
ULTRAGENYX PHARMACEUTICAL INC.
Notes to Condensed Consolidated Financial Statements
1. | Organization |
Ultragenyx Pharmaceutical Inc. (the Company) is a biopharmaceutical company incorporated in California on April 22, 2010. The Company subsequently reincorporated in the state of Delaware in June 2011.
The Company is focused on the identification, acquisition, development, and commercialization of novel products for the treatment of serious rare and ultra-rare genetic diseases. The Company operates as 1 reportable segment. The Company has twothree commercially approved therapies. Crysvita®products. Crysvita® (burosumab) is approved in the United States by the U.S. Food and Drug Administration (FDA) and in Canada for the treatment of X-linked hypophosphatemia (XLH) in adult and pediatric patients one year of age and older, and has receivedis approved in the European conditional marketing authorizationUnion (EU) and the United Kingdom, for the treatment of XLH with radiographic evidence of bone disease in children one year of age and older, adolescents, and adolescents with growing skeletons.adults. In Brazil and Mexico, Crysvita is approved for treatment of XLH in adult and pediatric patients one year of age and older. Crysvita is also approved in the United States by the FDA for the treatment of fibroblast growth factor 23 (FGF23)-related hypophosphatemia in tumor-induced osteomalacia (TIO), associated with phosphaturic mesenchymal tumors that cannot be curatively resected or localized in adults and pediatric patients 2 years of age and older.
The Company has also received FDA approval for Mepsevii™Mepsevii® (vestronidase alfa), the first medicine approved for the treatment of children and adults with mucopolysaccharidosis VII (MPS VII), also known as Sly syndrome. In the European Union and the United Kingdom, Mepsevii is approved under exceptional circumstances for patients of all ages for the treatment of non-neurological manifestations of MPS VII. In Brazil, Mepsevii is approved for the treatment of MPS VII for patients of all ages.
In addition toDojolvi®, formerly known as UX007, is approved in the approved treatments for XLHUnited States and MPS VII, the Company has four ongoing clinical development programs. Crysvita is being studiedCanada for the treatment of tumor induced osteomalacia (TIO), a rare disease that impairs bone mineralization. UX007 is being studied inpediatric and adult patients severely affected by long-chain fatty acid oxidation disorders (LC-FAOD), a genetic disorder in which.
In addition to the body is unable to convert long chain fatty acids into energy. Theapproved products, the Company has two gene therapy pipeline candidates: DTX301 is an adeno-associated virus 8 (AAV8) gene therapy product candidate inthe following ongoing clinical development for the treatment of patients with ornithine transcarbamylase (OTC) deficiency, the most common urea cycle disorder; and DTX401 is an AAV8 gene therapy product candidate for the treatment of patients with glycogen storage disease type Ia (GSDIa). The Company operates as 1 reportable segment.programs:
• | DTX401 is an adeno-associated virus 8 (AAV8) gene therapy product candidate for the treatment of patients with glycogen storage disease type Ia (GSDIa); |
• | DTX301 is an AAV8 gene therapy product candidate in development for the treatment of patients with ornithine transcarbamylase (OTC) deficiency, the most common urea cycle disorder; |
• | UX143 (setrusumab) is a fully human monoclonal antibody that inhibits sclerostin, a protein that acts on a key bone-signaling pathway and inhibits the activity of bone-forming cells for the treatment of patients with osteogenesis imperfect (OI); |
• | GTX-102 is an antisense oligonucleotide (ASO), which the Company is collaborating on the development with GeneTx Biotherapeutics LLC (GeneTx) for the treatment of Angelman syndrome, a debilitating and rare neurogenetic disorder caused by loss-of-function of the maternally inherited allele of the UBE3A gene; |
• | UX701 is an AAV type 9 gene therapy designed to deliver stable expression of a truncated version of the ATP7B copper transporter following a single intravenous infusion to improve copper distribution and excretion from the body and reverse pathological findings of Wilson liver disease; and |
• | UX053 is a messenger RNA (mRNA) product candidate designed for the treatment of patients with Glycogen Storage Disease Type III (GSDIII), a disease caused by a glycogen debranching enzyme (AGL) deficiency that results in glycogen accumulation in the liver and muscle. |
The Company has sustained operating losses and expects such annual losses to continue over the next several years. The Company’s ultimate success depends on the outcome of its research and development and commercialization activities, for which it expects to incur additional losses in the future. Management recognizes that wethe Company will likely need to raise additional capital to fully implement its business plans. Through March 31, 2020,2021, the Company has relied primarily on the proceeds fromits sale of equity offerings andsecurities, its sale of future royalties, and strategic collaboration arrangements, to finance its operations.
The Company will likely raise additional capital through the issuance of equity, borrowings, or strategic alliances with partner companies. However, if such financing is not available at adequate levels, the Company would need to reevaluate its operating plans.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated financial Statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the preceding fiscal year contained in the Company’s Annual Report on Form 10-K filed on February 14, 202012, 2021 with the United States Securities and Exchange Commission (SEC).
The results of operations for the three months ended March 31, 20202021 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.2021. The Condensed Consolidated Balance Sheet as of December 31, 20192020 has been derived from audited financial statements at that date, but does not include all of the information required by GAAP for complete financial statements.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to clinical trial accruals, fair value of assets and liabilities, income taxes, stock-based compensation, and the liability related to the sale of future royalties. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Restricted cash primarily consists of money market accounts used as collateral for the Company’s obligations under its facility leases.leases and the gene therapy building construction project. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows (in thousands):
|
| March 31, |
| March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||
Cash and cash equivalents |
| $ | 298,190 |
|
| $ | 269,712 |
| $ | 383,794 |
|
| $ | 298,190 |
|
Restricted cash included in prepaid expenses and other current assets |
|
| 161 |
|
|
| 351 |
|
| 10,687 |
|
|
| 161 |
|
Restricted cash included in other assets |
|
| 2,608 |
|
|
| 1,913 |
|
| 1,921 |
|
|
| 2,608 |
|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows |
| $ | 300,959 |
|
| $ | 271,976 |
| $ | 396,402 |
|
| $ | 300,959 |
|
Credit Losses
Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments — Credit Losses, (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, the Company uses a new forward-looking expected loss model that generally results in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the losses are recognized as allowances rather than as reductions in the amortized cost of the securities.
The Company is exposed to credit losses primarily through receivables from customers and collaborators and through its available-for-sale debt securities. The Company’s expected loss allowance methodology for the receivables is developed using historical collection experience, current and future economic market conditions, a review of the current aging status and financial condition of the entities. Specific allowance amounts are established to record the appropriate allowance for customers that have a higher probability of default. Balances are written off when determined to be uncollectible. The Company’s expected loss allowance methodology for the debt securities is developed by reviewing the extent of the unrealized loss, the size, term, geographical location, and industry of the issuer, the issuers’ credit ratings and any changes in those ratings, as well as reviewing current and future economic market conditions and the issuers’ current status and financial condition. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus (COVID-19) pandemic and determined that the estimate of credit losses was not significantly impacted. The adoption of ASU 2016-13 did not have a material impact on the Condensed Consolidated Financial Statements and related disclosures and thereThere was no material allowance recorded for losses on receivables and available-for-sale debt securities which were attributable to credit risk for the three months ended March 31, 2021 and 2020.
Revenue Recognition
Collaboration and license revenue
The Company has certain license and collaboration agreements that are within the scope of Accounting Standards Codification (ASC) 808, Collaborative Agreements, which provides guidance on the presentation and disclosure of collaborative arrangements. Generally, the classification of the transactions under the collaborative arrangements is determined based on the nature of contractual terms of the arrangement, along with the nature of the operations of the participants. The Company records its share of collaboration revenue, net of transfer pricing related to net sales in the period in which such sales occur, if the Company is considered as an agent in the arrangement. The Company is considered an agent when the collaboration partner controls the product before transfer to the customers and has the ability to direct the use of and obtain substantially all of the remaining benefits from the product. Funding received related to research and development services and commercialization costs is generally classified as a reduction of research and development expenses and selling, general and administrative expenses, respectively, in the consolidated statement of operations, because the provision of such services for collaborative partners are not considered to be part of the Company’s ongoing major or central operations.
The Company also records royalty revenues under certain of the Company’s license or collaboration agreements in exchange for license of intellectual property. If the Company does not have any future performance obligations for these license or collaboration agreements, royalty revenue is recorded as the underlying sales occur.
In order to record collaboration revenue, the Company utilizes certain information from its collaboration partners, including revenue from the sale of the product, associated reserves on revenue, and costs incurred for development and sales activities. For the periods covered in the financial statements presented, there have been no material changes to prior period estimates of revenues and expenses.
The Company sold the right to receive certain royalty payments from net sales of Crysvita to RPI Finance Trust (RPI), an affiliate of Royalty Pharma, as further described in Note 7. The Company records the royalty revenue from the net sales of Crysvita in the applicable European territories on a prospective basis as non-cash royalty revenue in the Consolidated Statements of Operations over the term of the arrangement.
The terms of the Company’s collaboration and license agreements may contain multiple performance obligations, which may include licenses and research and development activities. The Company evaluates these agreements under ASC 606, Revenue from Contracts with Customers (ASC 606), to determine the distinct performance obligations. The Company analogizes to ASC 606 for the accounting for distinct performance obligations for which there is a customer relationship. Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Total consideration may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.
If there are multiple distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The standalone selling price is generally determined based on the prices charged to customers or using expected cost pluscost-plus margin. The Company estimates the efforts needed to complete the performance obligations and recognizes revenue by measuring the progress towards complete satisfaction of the performance obligations using input measures.
Product sales
The Company sells its approved products through a limited number of distributors. Under ASC 606, revenue from product sales is recognized at the point in time when the delivery is made and when title and risk of loss transfers to these distributors. The Company also recognizes revenue from sales of certain products on a “named patient” basis, which are allowed in certain countries prior to the commercial approval of the product. Prior to recognizing revenue, the Company makes estimates of the transaction price, including any variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Product sales are recorded net of estimated government-mandated rebates and chargebacks, estimated product returns, and other deductions.
Provisions for returns and other adjustments are provided for in the period the related revenue is recorded, as estimated by management. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are reviewed periodically and adjusted as necessary. The Company’s estimates of government mandated rebates, chargebacks, estimated product returns, and other deductions depends on the identification of key customer contract terms and conditions, as well as estimates of sales volumes to different classes of payors. If actual results vary, the Company may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.
Non-cash collaboration royalty revenue
Effective January 1, 2020, the Company sold the right to receive certain royalty payments arising from the net sales of Crysvita to RPI Finance Trust (RPI), an affiliate of Royalty Pharma, as further described in Note 7. The Company will continue to record the royalty revenue rising from the net sales of Crysvita in the applicable European territories as non-cash royalty revenue in the Consolidated Statements of Operations over the term of the arrangement.
3. | Financial Instruments |
Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
The Company determines the fair value of its equity investments in Arcturus Therapeutics Holdings Inc. (Arcturus) and Solid Biosciences Inc. (Solid) by using the quoted market prices, which are Level 1 fair value measurements.
The following tables set forth the fair value of the Company’s financial assets remeasured on a recurring basis based on the three-tier fair value hierarchy (in thousands):
| March 31, 2020 |
| March 31, 2021 |
| ||||||||||||||||||||||||||
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Money market funds | $ | 183,256 |
|
| $ | — |
|
| $ | — |
|
| $ | 183,256 |
| $ | 327,655 |
|
| $ | — |
|
| $ | — |
|
| $ | 327,655 |
|
Time deposits |
| — |
|
|
| 10,000 |
|
|
| — |
|
|
| 10,000 |
| |||||||||||||||
Certificate of deposits and time deposits |
| — |
|
|
| 12,502 |
|
|
| — |
|
|
| 12,502 |
| |||||||||||||||
Corporate bonds |
| — |
|
|
| 223,386 |
|
|
| — |
|
|
| 223,386 |
|
| — |
|
|
| 204,050 |
|
|
| — |
|
|
| 204,050 |
|
Commercial paper |
| — |
|
|
| 96,945 |
|
|
| — |
|
|
| 96,945 |
|
| — |
|
|
| 286,498 |
|
|
| — |
|
|
| 286,498 |
|
Asset-backed securities |
| — |
|
|
| 19,359 |
|
|
| — |
|
|
| 19,359 |
|
| — |
|
|
| 51,659 |
|
|
| — |
|
|
| 51,659 |
|
U.S. Government Treasury and agency securities |
| 67,499 |
|
|
| 62,591 |
|
|
| — |
|
|
| 130,090 |
|
| 75,796 |
|
|
| 42,809 |
|
|
| — |
|
|
| 118,605 |
|
Investment in Arcturus equity securities |
| 32,616 |
|
|
| — |
|
|
| 2,804 |
|
|
| 35,420 |
| |||||||||||||||
Debt securities in government-sponsored entities |
| — |
|
|
| 15,259 |
|
|
| — |
|
|
| 15,259 |
| |||||||||||||||
Investments in Arcturus and Solid common stock |
| 134,137 |
|
|
| — |
|
|
| — |
|
|
| 134,137 |
| |||||||||||||||
Total | $ | 283,371 |
|
| $ | 412,281 |
|
| $ | 2,804 |
|
| $ | 698,456 |
| $ | 537,588 |
|
| $ | 612,777 |
|
| $ | — |
|
| $ | 1,150,365 |
|
| December 31, 2019 |
| December 31, 2020 |
| ||||||||||||||||||||||||||
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Money market funds | $ | 293,309 |
|
| $ | — |
|
| $ | — |
|
| $ | 293,309 |
| $ | 598,392 |
|
| $ | — |
|
| $ | — |
|
| $ | 598,392 |
|
Repurchase agreements |
| — |
|
|
| 100,000 |
|
|
| — |
|
|
| 100,000 |
| |||||||||||||||
Time deposits |
| — |
|
|
| 10,000 |
|
|
| — |
|
|
| 10,000 |
|
| — |
|
|
| 10,000 |
|
|
| — |
|
|
| 10,000 |
|
Corporate bonds |
| — |
|
|
| 77,026 |
|
|
| — |
|
|
| 77,026 |
|
| — |
|
|
| 193,802 |
|
|
| — |
|
|
| 193,802 |
|
Commercial paper |
| — |
|
|
| 80,119 |
|
|
| — |
|
|
| 80,119 |
|
| — |
|
|
| 173,859 |
|
|
| — |
|
|
| 173,859 |
|
Asset-backed securities |
| — |
|
|
| 30,406 |
|
|
| — |
|
|
| 30,406 |
|
| — |
|
|
| 11,225 |
|
|
| — |
|
|
| 11,225 |
|
U.S. Government Treasury and agency securities |
| 96,329 |
|
|
| 53,979 |
|
|
| — |
|
|
| 150,308 |
|
| 167,967 |
|
|
| 17,661 |
|
|
| — |
|
|
| 185,628 |
|
Investment in Arcturus equity securities |
| 26,088 |
|
|
| — |
|
|
| 1,664 |
|
|
| 27,752 |
| |||||||||||||||
Investments in Arcturus and Solid common stock |
| 154,756 |
|
|
| — |
|
|
| — |
|
|
| 154,756 |
| |||||||||||||||
Total | $ | 415,726 |
|
| $ | 351,530 |
|
| $ | 1,664 |
|
| $ | 768,920 |
| $ | 921,115 |
|
| $ | 406,547 |
|
| $ | — |
|
| $ | 1,327,662 |
|
In July 2020, the Company invested $2.5 million in a private diagnostic company, in the form of a convertible promissory note that matures in two years, if not converted earlier. The Company determinedwas also issued a warrant to purchase up to $1.0 million of the entity’s preferred stock. The fair value of the Arcturus Therapeutics Holdings Inc. (Arcturus) common stock by using the quoted market price on March 31, 2020, which is a Level 1 fair value measurement. The change in fair valuewarrant to purchase shares of the Arcturus common stock for the three months ended March 31, 2020 and 2019 was $6.5 million and NaN, respectively, which was recognized in the Condensed Consolidated Statements of Operations.
The fair value of the option to purchase additional shares of Arcturus common stockentity was based on unobservable inputs that are significant to the measurement of the fair value of the asset and is supported by little or no market data; accordingly, the fair value of the optionwarrant is considered a Level 3 financial asset.asset and is remeasured on a nonrecurring basis. The Company measuresmeasured the Level 3 financial assetfair value of the warrant by applying the Black-Scholes option pricing method and utilizesutilizing the following inputs: stock price, strike price, volatility, risk freerisk-free interest rate, and expected term. The expected term isCompany recognizes the Company’s estimated period to purchase additional stock.interest income on the convertible promissory note based on the effective interest rate method over the life of the note. As of March 31, 2021, the balance of the convertible promissory note was $2.1 million, including $0.3 million in interest receivable, and was The changerecorded in other assets, and the allocated fair value of the option to purchase additional Arcturus common stock forwarrant was $0.6 million and was recorded in investments in equity securities.
In December 2020, the three months ended Company invested $1.4 million in Mazi Therapeutics, Inc. (Mazi), a private pharmaceutical company founded by a current employee of the Company, in the form of a convertible promissory note that matures in two years, if not converted earlier. As of March 31, 2020 and 20192021, the balance of the convertible promissory note was $1.1 million and NaN, respectively, which was recognized in the Condensed Consolidated Statements of Operations.
See “Note 6. License and Research Agreements” for additional details on the Arcturus transaction.$1.4 million.
4. | Balance Sheet Components |
Cash Equivalents and Investments
The fair values of cash equivalents and short-term investments classified as available-for-sale securities consisted of the following (in thousands):
| March 31, 2020 |
| March 31, 2021 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
| Gross Unrealized |
|
|
|
|
|
|
|
|
|
| Gross Unrealized |
|
|
|
|
| ||||||||||
|
| Amortized Cost |
|
| Gains |
|
| Losses |
|
| Estimated Fair Value |
|
| Amortized Cost |
|
| Gains |
|
| Losses |
|
| Estimated Fair Value |
| ||||||||
Money market funds |
| $ | 183,256 |
|
| $ | — |
|
| $ | — |
|
| $ | 183,256 |
|
| $ | 327,655 |
|
| $ | — |
|
| $ | — |
|
| $ | 327,655 |
|
Time deposits |
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
| ||||||||||||||||
Certificate of deposits and time deposits |
|
| 12,502 |
|
|
| — |
|
|
| — |
|
|
| 12,502 |
| ||||||||||||||||
Corporate bonds |
|
| 225,081 |
|
|
| 28 |
|
|
| (1,723 | ) |
|
| 223,386 |
|
|
| 204,147 |
|
|
| 28 |
|
|
| (125 | ) |
|
| 204,050 |
|
Commercial paper |
|
| 96,945 |
|
|
| — |
|
|
| — |
|
|
| 96,945 |
|
|
| 286,498 |
|
|
| — |
|
|
| — |
|
|
| 286,498 |
|
Asset-backed securities |
|
| 19,409 |
|
|
| — |
|
|
| (50 | ) |
|
| 19,359 |
|
|
| 51,678 |
|
|
| 1 |
|
|
| (20 | ) |
|
| 51,659 |
|
U.S. Government Treasury and agency securities |
|
| 129,535 |
|
|
| 555 |
|
|
| — |
|
|
| 130,090 |
|
|
| 118,566 |
|
|
| 39 |
|
|
| — |
|
|
| 118,605 |
|
Debt securities in government-sponsored entities |
|
| 15,270 |
|
|
|
|
|
|
| (11 | ) |
|
| 15,259 |
| ||||||||||||||||
Total |
| $ | 664,226 |
|
| $ | 583 |
|
| $ | (1,773 | ) |
| $ | 663,036 |
|
| $ | 1,016,316 |
|
| $ | 68 |
|
| $ | (156 | ) |
| $ | 1,016,228 |
|
| December 31, 2019 |
| December 31, 2020 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
| Gross Unrealized |
|
|
|
|
|
|
|
|
|
| Gross Unrealized |
|
|
|
|
| ||||||||||
|
| Amortized Cost |
|
| Gains |
|
| Losses |
|
| Estimated Fair Value |
|
| Amortized Cost |
|
| Gains |
|
| Losses |
|
| Estimated Fair Value |
| ||||||||
Money market funds |
| $ | 293,309 |
|
| $ | — |
|
| $ | — |
|
| $ | 293,309 |
|
| $ | 598,392 |
|
| $ | — |
|
| $ | — |
|
| $ | 598,392 |
|
Repurchase agreements |
|
| 100,000 |
|
|
| — |
|
|
| — |
|
|
| 100,000 |
| ||||||||||||||||
Time deposits |
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
Corporate bonds |
|
| 77,022 |
|
|
| 17 |
|
|
| (13 | ) |
|
| 77,026 |
|
|
| 193,610 |
|
|
| 209 |
|
|
| (17 | ) |
|
| 193,802 |
|
Commercial paper |
|
| 80,119 |
|
|
| — |
|
|
| — |
|
|
| 80,119 |
|
|
| 173,859 |
|
|
| — |
|
|
| — |
|
|
| 173,859 |
|
Asset-backed securities |
|
| 30,375 |
|
|
| 31 |
|
|
| — |
|
|
| 30,406 |
|
|
| 11,224 |
|
|
| 1 |
|
|
| — |
|
|
| 11,225 |
|
U.S. Government Treasury and agency securities |
|
| 150,184 |
|
|
| 124 |
|
|
| — |
|
|
| 150,308 |
|
|
| 185,561 |
|
|
| 67 |
|
|
| — |
|
|
| 185,628 |
|
Total |
| $ | 741,009 |
|
| $ | 172 |
|
| $ | (13 | ) |
| $ | 741,168 |
|
| $ | 1,172,646 |
|
| $ | 277 |
|
| $ | (17 | ) |
| $ | 1,172,906 |
|
At March 31, 2020,2021, the remaining contractual maturities of available-for-sale securities were less than twothree years. There have been 0 significant realized gains or losses on available-for-sale securities for the three months ended March 31, 20202021 and 2019, respectively.2020. All marketable securities with unrealized losses at March 31, 20202021 have been in a loss position for less than twelve months.months and were temporary in nature. Based onWe do not intend to sell the Company’s application of its expected loss allowance methodology, it is probableinvestments that the principal and interest will be collectedare in accordance with the contractual terms, and that thean unrealized loss on these securities were not attributable to credit risk.position before recovery of their amortized cost basis.
Inventory
Inventory consists of the following (in thousands):
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Work-in-process |
| $ | 8,231 |
|
| $ | 8,191 |
|
| $ | 6,783 |
|
| $ | 7,184 |
|
Finished goods |
|
| 3,144 |
|
|
| 3,355 |
|
|
| 5,679 |
|
|
| 5,864 |
|
Total inventory |
| $ | 11,375 |
|
| $ | 11,546 |
|
| $ | 12,462 |
|
| $ | 13,048 |
|
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Research, clinical study, and manufacturing expenses |
| $ | 29,497 |
|
| $ | 22,894 |
|
| $ | 23,456 |
|
| $ | 25,875 |
|
Payroll and related expenses |
|
| 24,572 |
|
|
| 41,324 |
|
|
| 33,850 |
|
|
| 58,176 |
|
Other |
|
| 13,650 |
|
|
| 18,976 |
|
|
| 25,393 |
|
|
| 24,440 |
|
Total accrued liabilities |
| $ | 67,719 |
|
| $ | 83,194 |
|
| $ | 82,699 |
|
| $ | 108,491 |
|
5. | Revenue |
The following table disaggregates total revenues from external customers (in thousands):
| Three Months Ended March 31, |
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
|
| ||||
Collaboration and license revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crysvita collaboration revenue in profit-share territory | $ | 27,215 |
|
| $ | 11,939 |
| $ | 36,260 |
|
| $ | 27,215 |
|
|
Royalty revenue in European territory |
| — |
|
|
| 2,015 |
| ||||||||
Bayer |
| — |
|
|
| 284 |
| ||||||||
Daiichi Sankyo |
| 42,750 |
|
|
| — |
|
| |||||||
Total collaboration and license revenue |
| 27,215 |
|
|
| 14,238 |
|
| 79,010 |
|
|
| 27,215 |
|
|
Product sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crysvita |
| 1,610 |
|
|
| 588 |
|
| 5,872 |
|
|
| 1,610 |
|
|
Mepsevii |
| 3,425 |
|
|
| 2,673 |
|
| 3,607 |
|
|
| 3,425 |
|
|
UX007 |
| 1,444 |
|
|
| 673 |
| ||||||||
Dojolvi |
| 7,034 |
|
|
| 1,444 |
|
| |||||||
Total product sales |
| 6,479 |
|
|
| 3,934 |
|
| 16,513 |
|
|
| 6,479 |
|
|
Non-cash collaboration royalty revenue |
| 2,615 |
|
|
| — |
| ||||||||
Crysvita non-cash collaboration royalty revenue |
| 3,872 |
|
|
| 2,615 |
|
| |||||||
Total revenues | $ | 36,309 |
|
| $ | 18,172 |
| $ | 99,395 |
|
| $ | 36,309 |
|
|
The following table disaggregates total revenues based on geographic location (in thousands):
| Three Months Ended March 31, |
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
|
| ||||
United States | $ | 30,357 |
|
| $ | 14,455 |
| ||||||||
North America | $ | 87,742 |
|
| $ | 30,357 |
|
| |||||||
Europe |
| 4,157 |
|
|
| 2,911 |
|
| 5,637 |
|
|
| 4,157 |
|
|
All other |
| 1,795 |
|
|
| 806 |
|
| 6,016 |
|
|
| 1,795 |
|
|
Total revenues | $ | 36,309 |
|
| $ | 18,172 |
| $ | 99,395 |
|
| $ | 36,309 |
|
|
The following table presents changes in the contract assets (liabilities)liabilities (in thousands):
| Three Months Ended March 30, |
| Three Months Ended March 31, |
| ||||||||||
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||
Balance of contract assets (liabilities) at beginning of period | $ | — |
|
| $ | 2,979 |
| |||||||
Balance of contract liabilities at beginning of period | $ | 66,568 |
|
| $ | — |
| |||||||
Additions |
| (145,283 | ) |
|
| 283 |
|
| 1,271 |
|
|
| 145,283 |
|
Deductions |
| — |
|
|
| (3,331 | ) |
| (42,750 | ) |
|
| — |
|
Balance of contract liabilities at end of period | $ | (145,283 | ) |
| $ | (69 | ) | $ | 25,089 |
|
| $ | 145,283 |
|
See Note 6 for additional details on contract liabilities activities.
The Company’s largest accounts receivable balance accounted for 93%54% and 87%71% of the total accounts receivable balance as of March 31, 20202021 and December 31, 2019,2020, respectively, and was due from a collaboration partner.
6. | License and Research Agreements |
Kyowa Kirin Collaboration and License Agreement
In August 2013, the Company entered into a collaboration and license agreement with Kyowa Kirin Co., Ltd. (KKC, or formerly Kyowa Hakko Kirin Co., Ltd. or KHK). Under the terms of this collaboration and license agreement, as amended, the Company and KKC collaborate on the development and commercialization of Crysvita in the field of orphan diseases in the United States and Canada, or the profit-share territory, and in the European Union, United Kingdom, and Switzerland, or the European territory, and the Company has the right to develop and commercialize such products in the field of orphan diseases in Mexico and Central and South America, or Latin America.
Development Activities
In the field of orphan diseases, and except for ongoing studies being conducted by KKC, the Company is the lead party for development activities in the profit-share territory and in the European territory until the applicable transition date; the Company is also the lead party for core development activities conducted in Japan and Korea, for which the core development plan is limited to clinical trials mutually agreed to by the Company and KKC.date. The Company shares the costs for development activities in the profit-share territory and the European territory conducted pursuant to the development plan before the applicable transition date equally
with KKC. KKC is responsible for 100% of the costs for development activities in Japan and Korea. In April 2023, which is the transition date for the profit-share territory, and on the applicable transition date for the European territory, KKC will become the lead party and be responsible for the costs of the development activities. However, the Company will continue to share the costs of the studies commenced prior to the applicable transition date equally with KKC. Crysvita was approved in the European Union and United Kingdom in February 2018 and was approved by the FDA in April 2018.
12
The collaboration and license agreements are within the scope of ASC 808, which provides guidance on the presentation and disclosure of collaborative arrangements.
Collaboration revenue related to sales in profit-share territory
The Company and KKC share commercial responsibilities and profits in the profit-share territory until April 2023. Under the collaboration agreement, KKC manufactures and supplies Crysvita for commercial use in the profit-share territory and charges the Company the transfer price of 35% of net sales through December 31, 2022, and 30% thereafter. The remaining profit or loss after supply costs from commercializing products in the profit-share territory are shared between the Company and KKC on a 50/50 basis until April 2023. Thereafter, the Company will be entitled to receive a tiered double-digit revenue share in the mid-to-high 20% range.
As KKC is the principal in the sale transaction with the customer, the Company recognizes a pro-rata share of collaboration revenue, net of transfer pricing, in the period the sale occurs. The Company concluded that its portion of KKC’s sales in the profit-share territory is analogous to a royalty and therefore recorded its share as collaboration revenue, similar to a royalty.
Royalty revenue related to sales in European territory
KKC has the commercial responsibility for Crysvita in the European territory. In December 2019, the Company sold its right to receive royalty payments based on sales in the European territory to Royalty Pharma, effective January 1, 2020, as further described in Note 7. Prior to the Company’s sale of the royalty, the Company received a royalty of up to 10% on net sales in the European territory, which was recognized as the underlying sales occur. Beginning in 2020, the Company is recordingrecorded the royalty revenue as non-cash royalty revenuesrevenues..
The Company’s share of collaboration and royalty revenue related to Crysvita was as follows (in thousands):
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| ||||
Company's share of revenue in profit share territory | $ | 27,215 |
|
| $ | 11,939 |
|
| ||||||||
Royalty revenue in European territory |
| — |
|
|
| 2,015 |
|
| ||||||||
Company's share of revenue in profit-share territory | $ | 36,260 |
|
| $ | 27,215 |
|
| ||||||||
Non-cash royalty revenue in European territory |
| 2,615 |
|
|
| — |
|
|
| 3,872 |
|
|
| 2,615 |
|
|
Total | $ | 29,830 |
|
| $ | 13,954 |
|
| $ | 40,132 |
|
| $ | 29,830 |
|
|
Product revenue related to sales in other territories
The Company is responsible for commercializing Crysvita in Latin America and Turkey. The Company is considered the principal in these territories as the Company controls the product before it is transferred to the customer. Accordingly, the Company records revenue on a gross basis related to the sale of Crysvita once the product is delivered and the risk and title of the product is transferred to the distributor. For the three months ended March 31, 2020 and 2019, theThe Company recorded product sales of $5.9 million and $1.6 million for the three months ended March 31, 2021 and $0.6 million,2020, respectively, net of estimated product returns and other deductions. KKC has the option to assume responsibility for commercialization efforts in Turkey from the Company, after a certain minimum period.
Under the collaboration agreement, KKC manufactures and supplies Crysvita, which is purchased by the Company for sales in the above territories and is based on 35% of the net sales through December 31, 2022 and 30% thereafter. The Company also pays to KKC a low single-digit royalty on net sales in Latin America.
Cost sharing payments
Under the collaboration agreement, KKC and the Company share certain development and commercialization costs. As a result, the Company was reimbursed for these costs and operating expenses were reduced as follows (in thousands):
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| ||||
Research and development | $ | 5,490 |
|
| $ | 7,099 |
|
| $ | 6,185 |
|
| $ | 5,490 |
|
|
Selling, general and administrative |
| 7,052 |
|
|
| 5,213 |
|
|
| 7,495 |
|
|
| 7,052 |
|
|
Total | $ | 12,542 |
|
| $ | 12,312 |
|
| $ | 13,680 |
|
| $ | 12,542 |
|
|
Collaboration receivable and payable
The Company had accounts receivable from KKC in the amount of $27.4$14.1 million and $28.5$16.4 million from profit-share revenue and royalties and other receivables recorded in prepaid and other current assets of $17.0$5.1 million and $17.8$9.6 million and accrued
liabilities of $1.0$3.8 million and $0.9$2.4 million from commercial and development activity reimbursements, as of March 31, 20202021 and December 31, 2019,2020, respectively.
Bayer HealthCare LLC
The Company has an agreement with Bayer Healthcare LLC (Bayer) to research, develop and commercialize AAV gene therapy products for the treatment of hemophilia A (DTX 201). Under this agreement, Bayer has been granted an exclusive license to develop and commercialize one or more novel gene therapies for hemophilia A. The agreement requires that Bayer use commercially
13
reasonable efforts to conduct and fund a proof-of-concept (POC) clinical trial and any subsequent clinical trials and commercialization of gene therapy products for treatment of hemophilia A. Bayer will havehas worldwide rights to commercialize the potential future product.
Bayer iswas responsible to fundfor funding certain research and development services performed by the Company in the performance of its obligations under the annual research plan and budget. Under the terms of the agreement, with Bayer, the Company is eligible to receive development and commercialization milestone payments of up to $232.0 million, as well as, royalty payments ranging in the high single-digit to low double-digit percentages, not exceeding the mid-teens, of net sales of licensed products. The Company achieved the first milestone in December 2017, the second milestone in April 2018, and has received $15.0 million for such milestones to date.
The Company’sCompany has no further obligations under the contract were completed by end of December 31, 2019 and as a result, 0 revenue was recorded for the three months ended March 31, 2020.contract. The Company willmay record future milestone payments as revenue, whenif it isbecomes probable that a significant reversal in the amount of revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved.
Arcturus
The Company has a Research Collaboration and License Agreement with Arcturus to research and develop therapies for select rare diseases. Pursuant to the agreement, the Company incurred 0ne and $0.2 million forFor the three months ended March 31, 20202021 and 2019, respectively, in2020, there were 0 research and development expenseexpenses incurred for the funding of certain research services received from Arcturus.
TheIn May 2020, the Company owns 2,400,000 shares of Arcturus’ common stock, or 18.2% of Arcturus’ outstanding common stock as of the purchase date. The Company also hasexercised an option to purchase an additional 600,000 shares of Arcturus’ common stock at $16.00 per share, which is exercisable until June 18, 2021, which isor a total purchase price of $9.6 million. In December 2020, the two year anniversaryCompany sold 800,000 shares of the agreement effective date. The ArcturusArcturus’ common stock is also restricted for sale or transfer by the Company for two years from the purchase date, subject to certain conditions. In the event the option to purchase an additional 600,000 sharesat a weighted-average price of Arcturus common stock is exercised, the restriction is reduced to six months from the exercise date, subject to certain conditions.$100.81 per share and received net proceeds of $79.8 million. The Company has elected to apply the fair value option to account for the equity investment in Arcturus. TheAs of March 31, 2021, the Company also accounts for the option to purchase additionalheld 2,200,000 shares of ArcturusArcturus’ common stock at fair value based on the Black-Scholes option pricing method.stock.
The changes in the fair value of the Company’s equity investment in Arcturus securities were as follows (in thousands):
| Arcturus common stock |
|
| Option to purchase additional shares of Arcturus common stock |
|
| Total |
| |||
December 31, 2019 | $ | 26,088 |
|
| $ | 1,664 |
|
| $ | 27,752 |
|
Change in fair value |
| 113,978 |
|
|
| 23,948 |
|
|
| 137,926 |
|
Transfer of value upon option exercise |
| 35,212 |
|
|
| (25,612 | ) |
|
| 9,600 |
|
Sale of shares |
| (79,842 | ) |
|
| — |
|
|
| (79,842 | ) |
December 31, 2020 |
| 95,436 |
|
|
| — |
|
|
| 95,436 |
|
Change in fair value |
| (4,576 | ) |
|
| — |
|
|
| (4,576 | ) |
March 31, 2021 | $ | 90,860 |
|
| $ | — |
|
| $ | 90,860 |
|
The Company recorded $4.6 million in unrealized loss and $7.7 million in unrealized gain for the three months ended March 31, 2021 and 2020, respectively, from the fair value adjustments on the equity investment in Arcturus securities.
| Arcturus common stock |
| Fair value of option to purchase additional shares of Arcturus common stock |
| ||
December 31, 2018 | $ | — |
| $ | — |
|
Acquisition of investment in Arcturus securities |
| 13,872 |
|
| 467 |
|
Change in fair value |
| 12,216 |
|
| 1,197 |
|
December 31, 2019 |
| 26,088 |
|
| 1,664 |
|
Change in fair value |
| 6,528 |
|
| 1,140 |
|
March 31, 2020 | $ | 32,616 |
| $ | 2,804 |
|
GeneTx
In August 2019, the Company entered into a Program Agreement and a Unitholder Option Agreement with GeneTx Biotherapeutics, LLC (GeneTx) to collaborate on the development of GeneTx’s GTX-102, an antisense oligonucleotide (ASO)ASO for the treatment of Angelman syndrome.
Pursuant to the terms of the Unitholder Option Agreement, the Company made an upfront payment of $20.0 million for an exclusive option to acquire GeneTx, which was exercisable any time prior to 30 days following FDA acceptance of the IND for GTX-102. Pursuant to the agreement, upon acceptance of the IND, which occurred in January 2020, the Company elected to extend the option period by paying an option extension payment of $25.0 million (option extension premium) during the quarter ended March 31, 2020. The Company has athe right to acquire GeneTx for a payment of $125.0 million, at any time, until the earlier of 30 months from the first dosing of a patient in a planned Phase 1/2 study (subject to extensions) or 90 days after results are available from that study. This exclusive option to acquire
GeneTx can be extended under certain circumstances, by up to 4 additional three-month periods, by paying an additional extension fee for each three-month period.
During the exclusive option period, GeneTx is responsible for conducting the program based on the development plan agreed between the parties and, subject to the terms in the Program Agreement, has the decision-making authority on all matters in connection with the research, development, manufacturing and regulatory activities with respect to the Program. The Company will provide support, at its discretion, including strategic guidance and clinical expertise. The Company and GeneTx will collaborate on the submission of the IND and management of the Phase 1/2 study in patients with Angelman syndrome. If the Company acquires GeneTx, the Company will then be responsible for all development and commercialization activities from the date of acquisition. The Company would also be required to make payments upon achievement of certain development and commercial milestones, as well as royalties, depending upon the success of the program.
Although GeneTx is a variable interest entity, the Company is not the primary beneficiary as it currently does not have the power to direct the activities that would most significantly impact the economic performance of GeneTx. Prior to product regulatory approval, all consideration paid to GeneTx represents rights to potential future benefits associated with GeneTx’s in-process research
14
and development activities, which have not reached technological feasibility and have no alternative future use. Accordingly, for the three months ended March 31, 2020, the Company recorded the option extension payment of $25.0 million as an in-process research and development expense.
REGENXBIO, Inc.
In March 2020, the Company executed a License Agreement with REGENXBIO, Inc. (REGENEX), for an exclusive, sublicensable, worldwide license to REGENX’s NAV AAV8 and AAV9 Vectors for the development and commercialization of gene therapy treatments for a rare metabolic disorder. In return for these rights, the Company made an upfront payment of $7.0 million, which was recorded as an in-process research and development expense forduring the three months ended March 31, 2020. The Company will pay certain annual fees of $0.1 million, milestone payments of up to $14.0 million, and royalties on any net sales of products incorporating the licensed intellectual property that range from a high single-digit to low double-digit royalty.
Daiichi Sankyo
In March 2020, the Company executed a License and Technology Access Agreement (License(the License Agreement) with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo). Pursuant to the License Agreement, the Company granted Daiichi Sankyo a non-exclusive license to intellectual property, including know-how and patent applications, with respect to its HeLa PCL and HEK293 transient transfection manufacturing technology platforms for AAV-based gene therapy products. The Company retains the exclusive right to use the manufacturing technology for its current target indications and additional indications identified now and in the future. The Company will provide certain technical assistance and technology transfer services during the technology transfer period of three years to enable Daiichi Sankyo to use the technologies for its internal gene therapy programs. Daiichi Sankyo has an option to extend the technology transfer period including know-how improvements by two additional one-year periods by paying a fixed amount for each additional year. Daiichi Sankyo will be responsible for the manufacturing, development, and commercialization of products manufactured with the licensed technology; however, the Company has the option to co-develop and co-commercialize rare disease products at the IND stage. Ultragenyx may also provide strategic consultation to Daiichi Sankyo on the development of both AAV-based gene therapy products and other products for rare diseases.
Under the terms of the License Agreement, Daiichi Sankyo made an upfront payment of $125.0 million and will pay an additional $25.0 million upon completion of the technology transfer of the HeLAHeLa PCL and HEK293 platforms, as well as single-digit royalties on net sales of products manufactured in either system. Daiichi Sankyo will reimburse the Company for all costs associated with the transfer of the manufacturing technology.
The Company also entered into a Stock Purchase Agreement (SPA) with Daiichi Sankyo, pursuant to which Daiichi Sankyo purchased 1,243,913 shares of the Company’s common stock in exchange for $75.0 million in cash.cash during the first quarter of 2020. The fair market value of the common stock issued to Daiichi Sankyo was $55.3 million based on the stock price of $44.43 per share on the date of issuance, resulting in a $19.7 million premium on the SPA. Daiichi Sankyo is also subject to a three-year standstill and restrictions on sale of the shares (subject to customary exceptions or release).
In June 2020, the Company executed a subsequent license agreement (the Sublicense Agreement) with Daiichi Sankyo for transfer of certain technology in consideration for an upfront payment of $8.0 million and annual maintenance fees,milestone payments, and royalties on any net sales of products incorporating the licensed intellectual property.
The License Agreement, the Sublicense Agreement, and the SPA are being accounted for as one arrangement because they were entered into at or near the same time with interrelated financial terms.and negotiated in contemplation of one another. The Company evaluated the license agreementLicense Agreement and the Sublicense Agreement under ASC 606 and determined that the performance obligations under the agreementagreements are (i) intellectual property with respect to its HeLa PCL and HEK293 transient transfection manufacturing technology platforms together with related the initial technical assistance and technology transfer services, which are expected to be completed over a periodin the fourth quarter of 18 months,2021, and (ii) the transfer of any know-how and improvements after the completion of the initial technology transfer through the end of the three year technology transfer period.period ending March 2023.
The Company determined that the total transaction price of the License Agreement was $173.4$183.4 million which was comprised of the $19.7 million premium from the SPA, the $125.0 million upfront payment, the $25.0 million in unconstrained milestone payments, $8.0 million from the Sublicense Agreement, and the $3.7$5.7 million estimated reimbursement ofamount for delivering the license and technology services.
Total revenue recognized under the license agreement through March 31, 2021 is $132.0 million.
15
The Company allocated the total transaction price to the two performance obligations on a relative stand-alone selling price basis. Revenue allocated to the intellectual property and the technology transfer services will be recognized over an initial period which is estimated periodto end in the fourth quarter of 18 months,2021, measuring the progress toward complete satisfaction of the individual performance obligation using an input measure. Revenue for know-how and improvements after the completion of technology transfer will be recognized on a straight-line basis over the remaining technology transfer period, (i.e., months 19-36) on a straight-line basis,which ends in March 2023, as it is expected that Daiichi Sankyo will receive and consume the benefits consistently throughout the period. The performance obligations are estimated to be substantially complete by March 2023. The estimated period to complete the technology transfer services and the related milestones payments, if any, are subject to revised estimates which could be impacted by limitations or delays from the COVID-19 pandemic, successful scale-up of the manufacturing, and other changes that may impact timing. Royalties from commercial sales will be accounted for as revenue upon achievement of such sales, assuming all other revenue recognition criteria are met.
NaN revenue was recognized forFor the quarterthree months ended March 31, 2021 and 2020, as the effortsCompany recognized $42.8 million and NaN, respectively, in revenue related to begin the transfer of the technology had not begun. this arrangement. Accordingly, the Company had recorded $107.3$25.1 million as short-term contract liability and $38.0 million as long- term contract liabilityliabilities, net, as of March 31, 2020. 2021.The Company had arecorded an accounts receivable related to the License Agreementabove agreements of $125.6$1.3 million as of March 31, 2021.
Solid Biosciences, Inc.
In October 2020, the Company entered into a strategic Collaboration and License Agreement with Solid Biosciences Inc., or Solid, and received an exclusive license for any pharmaceutical product that expresses Solid’s proprietary microdystrophin construct from AAV8 and variants thereof in clade E for use in the treatment of Duchenne muscular dystrophy and other diseases resulting from lack of functional dystrophin, including Becker muscular dystrophy. The Company will collaborate to develop products that combine Solid’s differentiated microdystrophin construct, the Company’s HeLa PCL manufacturing platform, and the Company’s AAV8 variants. Solid will also provide development support and was granted an exclusive option to co-invest in products the Company develops for profit share participation in certain territories. On a product-by-product basis, the Company may be obligated to make development milestone payments of up to $25.0 million, regulatory milestone payments of up to $65.0 million, and commercial milestone payments of up to $165.0 million, if such milestones are achieved, as well as royalties on any net sales of products incorporating the licensed intellectual property that range from a low to mid-double-digit percentage. The royalty rate changes to mid to high double-digit percentage if Solid decides to co-invest in the product.
The Company also entered into a Stock Purchase Agreement and the Investor Agreement with Solid, pursuant to which, the Company purchased7,825,797 shares of Solid’s common stock for an aggregate purchase price of $40.0 million. Subject to the terms of the Investor Agreement, the Company is restricted from selling, transferring or otherwise disposing of the shares without the prior approval of Solid until the earlier of (i) 18 months following the closing of the transaction, (ii) the termination of the Collaboration and License Agreement and (iii) certain other specified events. The Company also agreed to customary standstill restrictions in accordance with the terms of the Investor Agreement until the earlier of (a) 24 months after the closing of the transaction and (b) certain specified events.
The Company’s investment in Solid is being accounted at fair value, as the fair value is readily determinable. The Company recorded the common stock investment at $26.8 million on the transaction date, which was subsequently receivedbased on the quoted market price on the closing date.
Although Solid is a variable interest entity, the Company is not the primary beneficiary as it does not have the power to direct the activities that would most significantly impact the economic performance of Solid. Prior to the achievement of certain development milestones, all consideration paid to Solid represents rights to potential future benefits associated with Solid’s in-process research and development activities, which have not reached technological feasibility and have no alternative future use. Accordingly, the remaining $13.2 million of the total $40.0 million paid as consideration was attributed to the license rights obtained and was recorded as in-process research and development expense during the year ended December 31, 2020.
The changes in April 2020.the fair value of the Company’s investment in Solid’s common stock were as follows (in thousands):
| Solid common stock |
| |
Acquisition of investment in Solid common stock in October 2020 | $ | 26,843 |
|
Change in fair value |
| 32,477 |
|
December 31, 2020 |
| 59,320 |
|
Change in fair value |
| (16,043 | ) |
March 31, 2021 | $ | 43,277 |
|
Mereo BioPharma 3 Limited
In December 2020, the Company entered into a License and Collaboration Agreement with Mereo BioPharma 3 Limited, or Mereo, to collaborate on the development of setrusumab. Under the terms of the agreement, the Company will lead future global development of setrusumab in both pediatric and adult patients with Osteogenesis Imperfecta, or OI. The Company was granted an exclusive license to develop and commercialize setrusumab in the U.S., Turkey, and the rest of the world, excluding the European Economic Area, United Kingdom, and Switzerland, or the Mereo territory, where Mereo retains commercial rights. Each party will be responsible for post-marketing commitments and commercial supply in their respective territories.
Upon the closing of the transaction in January 2021, the Company made a payment of $50.0 million to Mereo and will be required to make payments of up to $254.0 million upon the achievement of certain clinical, regulatory, and commercial milestones. The Company will pay for all global development costs as well as tiered double-digit percentage royalties to Mereo on net sales in the U.S., Turkey, and the rest of the world (excluding the Mereo Territory), and Mereo will pay the Company a fixed double-digit percentage royalty on net sales in the Mereo Territory.
Although Mereo is a variable interest entity, the Company is not the primary beneficiary as it does not have the power to direct the activities that would most significantly impact the economic performance of Mereo. Prior to the achievement of certain development milestones, all consideration paid to Mereo represents rights to potential future benefits associated with Mereo’s in-process research and development activities, which have not reached technological feasibility and have no alternative future use. Accordingly, for the three months ended March 31, 2021, the Company recorded the upfront payment of $50.0 million as in-process research and development expense.
7. Liability Related to the Sale of Future Royalties
In December 2019, the Company entered into a Royalty Purchase Agreement with RPI. Pursuant to the agreement, RPI paid $320.0 million to the Company in consideration for the right to receive royalty payments effective January 1, 2020, arising from the net sales of Crysvita in the European Union, the United Kingdom, and Switzerland under the terms of the Company’s Collaboration and License Agreement with KKC dated August 29, 2013, as amended. The agreement with RPI will automatically terminate, and the payment of royalties to RPI will cease, in the event aggregate royalty payments received by RPI are equal to or greater than $608.0 million prior to December 31, 2030, or in the event aggregate royalty payments received by RPI are less than $608.0 million prior to December 31, 2030, when aggregate royalty payments received by RPI are equal to $800.0 million.
As RPI’s rate of return is explicitly limited due to the cap on royalties they may receive, proceedsProceeds from the transaction were recorded as a liability (liability related to sale of future royalties on the Consolidated Balance Sheets). The Company amortizes $320.0 million, net of transaction cost of $5.8 million using the effective interest method over the estimated life of the arrangement. In order to determine the amortization of the liability, the Company is required to estimate the total amount of future royalty payments to be received by the Company and paid to RPI, subject to the capped amount, over the life of the arrangement. The excess of future estimated royalty payments (subject to the capped amount), over the $314.2 million of net proceeds, will beis recorded as non-cash interest expense over the life of the arrangement. Consequently, the Company estimates an imputed interest on the unamortized portion of the liability and records interest expense relating to the transaction. The Company records the royalty revenue risingarising from the net sales of Crysvita in the applicable European territories as non-cash royalty revenue in the Consolidated Statements of Operations.Operations over the term of the arrangement.
The Company periodically assesses the expected royalty payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. The Company’s effective annual interest rate was approximately 10.2% and 10.1% as of9.8% for the three months ended March 31, 2020 and December 31, 2019, respectively.2021.
There are a number of factors that could materially affect the amount and timing of royalty payments from KKC in the applicable European territories, most of which are not within the Company’s control. Such factors include, but are not limited to, the success of KKC’s sales and promotion of Crysvita, changing standards of care, delays or disruptions related to the COVID-19 pandemic, the introduction of competing products, approval of label expansion for adults, pricing for reimbursement in various European territories, manufacturing or other delays, intellectual property matters, adverse events that result in governmental health authority imposed restrictions on the use of Crysvita, significant changes in foreign exchange rates as the royalty payments are made in U.S. dollars (USD) while significant portions of the underlying European sales of Crysvita are made in currencies other than USD, and other events or circumstances that could result in reduced royalty payments from European sales of Crysvita, all of which would result in a reduction of non-cash royalty revenue and the non-cash interest expense over the life of the arrangement. Conversely, if sales of Crysvita in Europe are more than expected, the non-cash royalty revenue and the non-cash interest expense recorded by the Company would be greater over the term of the arrangement.
The following table shows the activity within the liability account (in thousands):
17
| Liability related to the sale of future royalties |
| Liability related to the sale of future royalties |
| ||
December 31, 2018 | $ | — |
| |||
Proceeds from sale of future royalties |
| 314,234 |
| |||
Non-cash interest expense |
| 1,135 |
| |||
December 31, 2019 |
| 315,369 |
| $ | 315,369 |
|
Non-cash collaboration royalty revenue |
| (2,615 | ) |
| (12,995 | ) |
Non-cash interest expense |
| 8,082 |
|
| 33,291 |
|
March 31, 2020 | $ | 320,836 |
| |||
December 31, 2020 |
| 335,665 |
| |||
Non-cash collaboration royalty revenue |
| (3,872 | ) | |||
Non-cash interest expense |
| 8,418 |
| |||
March 31, 2021 | $ | 340,211 |
|
8. | Stock-Based Awards |
The 2014 Incentive Plan (the 2014 Plan) provides for automatic annual increases in shares available for grant, beginning on January 1, 2015 through January 1, 2024. As of March 31, 2020,2021, there were 3,424,9004,192,549 shares reserved under the 2014 Plan for the future issuance of equity awards, and 3,361,2243,995,536 shares reserved for the 2014 Employee Stock Purchase Plan, and 500,000 shares reserved for the Employment Inducement Plan.
The table below sets forth the stock-based compensation expense for the periods presented (in thousands):
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
|
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| ||||
Cost of sales | $ | 68 |
|
| $ | 34 |
|
| $ | 379 |
|
| $ | 68 |
|
|
Research and development |
| 10,929 |
|
|
| 11,230 |
|
|
| 13,489 |
|
|
| 10,929 |
|
|
Selling, general and administrative |
| 9,175 |
|
|
| 8,957 |
|
|
| 10,430 |
|
|
| 9,175 |
|
|
Total stock-based compensation expense | $ | 20,172 |
|
| $ | 20,221 |
|
| $ | 24,298 |
|
| $ | 20,172 |
|
|
9. | Net Loss Per Share |
Basic net loss per share has been computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock and potential dilutive securities outstanding during the period.
The following weighted-average outstanding common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
| Three Months Ended March 31, |
| Three Months Ended March 31, |
| ||||||||||
| 2020 |
|
| 2019 |
| 2021 |
|
| 2020 |
| ||||
Options to purchase common stock and restricted stock units |
| 8,404,411 |
|
|
| 7,426,556 |
|
| 8,084,585 |
|
|
| 8,404,411 |
|
Employee stock purchase plan |
| 62,434 |
|
|
| 42,055 |
|
| 33,636 |
|
|
| 62,434 |
|
Common stock warrants |
| 118,444 |
|
|
| 149,700 |
|
| — |
|
|
| 118,444 |
|
|
| 8,585,289 |
|
|
| 7,618,311 |
|
| 8,118,221 |
|
|
| 8,585,289 |
|
10. | Equity Transactions |
In July 2017, the Company entered into an At-The-Market, or ATM, sales agreement with Cowen and Company, LLC (Cowen), whereby the Company can sell up to $150.0 million in aggregate proceeds of common stock from time to time, through with Cowen as its sales agent. During the three months ended March 31,October 2020, and 2019, the Company sold NaN and 379,707 shares of common stock, resulting in net proceeds of NaN and $19.3 million, respectively, after commissions and other offering costs.
In February 2019, the Company completed an underwritten public offering in which 5,833,3335,111,110 shares of common stock were sold, which included 760,869666,666 shares purchased by the underwriters pursuant to an option granted to them in connection with the offering, at a public offering price of $60.00$90.00 per share. TheFor the year ended December 31, 2020, the total proceeds that the Company received from the offering were approximately $330.4$435.6 million, net of underwriting discounts and commissions.
11. | Accumulated Other Comprehensive |
Total accumulated other comprehensive lossincome consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Foreign currency translation adjustments |
| $ | (355 | ) |
| $ | (306 | ) |
Unrealized gain (loss) on securities available-for-sale |
|
| (1,190 | ) |
|
| 159 |
|
Total accumulated other comprehensive loss |
| $ | (1,545 | ) |
| $ | (147 | ) |
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Foreign currency translation adjustments |
| $ | 144 |
|
| $ | 429 |
|
Unrealized gain (loss) on available-for-sale securities |
|
| (88 | ) |
|
| 260 |
|
Total accumulated other comprehensive income |
| $ | 56 |
|
| $ | 689 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 20192020 (the “Annual Report”).
Overview
Ultragenyx Pharmaceutical Inc. (we or the Company) is a biopharmaceutical company focused on the identification, acquisition, development, and commercialization of novel products for the treatment of serious rare and ultra-rare genetic diseases. We target diseases for which the unmet medical need is high, the biology for treatment is clear, and for which there are typically no approved therapies treating the underlying disease. Our strategy, which is predicated upon time- and cost-efficient drug development, allows us to pursue multiple programs in parallel with the goal of delivering safe and effective therapies to patients with the utmost urgency.
Impact of COVID-19 Pandemic
The continuing COVID-19 outbreak, which was declared a pandemic by the World Health Organization in March 2020, and the governmental efforts to mitigate the spread of the pandemic, has caused significant volatility and uncertainty in U.S. and international markets and could materially and adversely affect our business and operating results. As with so many other companies throughout the U.S. and globally, ourOur business operations have been and continue to be affected by the COVID-19 pandemic. WeIn addition to some impact on our preclinical manufacturing activities and certain regulatory interactions, we have experienced interruptions to our clinical trial activities, primarily due to delays or disruptions to patient enrollment and dosing as a result of shelter-in-place orders or quarantines, and we anticipate that certain data from our gene therapy product candidates may bewas delayed as a result of the COVID-19 pandemic. Although we have not experienced significant supply interruptionsThe FDA has also delayed certain key meetings or discussions with us related to date,one of our product candidates, which has impacted the progression of our clinical study for such product candidate. The continuing outbreak has caused delays in delivery of ancillary clinical trial materials as certain of our third partythird-party manufacturers or suppliers have prioritized and allocated more resources and capacity to supply drug product or raw materials to other companies engaged in the study of potential treatments or vaccinations for COVID-19. In response to these events, we are currently seeking alternative sources of supply of drug product or raw materials in an attempt to avoid future potential delays in supply of product, which may result in additional expenses. Social distancing measures and travel limitations in response to the pandemic have also made it difficult for us to identify new patients for our commercialized products, which may result in loss of revenue. We have also restricted access to our facilities to personnel and third parties who perform critical activities that must be performed on-site and as a result, most of our personnel currently work remotely. Such remote working policies may negatively impact productivity and disrupt our business operations.
As the COVID-19 global pandemic continues, we may experience lower revenue and increased expenses as a result of disruptions to our clinical trial, commercialization and regulatory activities, in addition to delays or shortages of drug product and raw materials. The magnitude and extent to which the pandemic may impact our business operations and operating results will continue to remain highly dependent on future developments, which are very uncertain and cannot be predicted with confidence. As a result, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our financial statements in the second quarter2021 and beyond. See Item 1A: "Risk Factors" for additional details.
Approved Therapies and Clinical Product Candidates
Our current approved therapies and clinical-stage pipeline consist of threefour product categories: biologics, small molecules, and gene therapy, and nucleic acid product candidates. See section entitled “Recent Program Updates” below for a description of recent updates to certain of our approved therapies and clinical-stage pipeline products.
Our biologic products include approved therapies Crysvita® (burosumab) and Mepsevii® (vestronidase alfa): and UX143 in clinical development:
| • | Crysvita is an antibody |
Crysvita is also approved in the United States for the treatment of FGF23-related hypophosphatemia in tumor-induced osteomalacia, or TIO, associated with phosphaturic mesenchymal tumors that cannot be curatively resected or localized in adults and pediatric patients 2 years of age and older. TIO can lead to severe hypophosphatemia, osteomalacia, fractures, fatigue, bone and muscle pain, and muscle weakness.
We are collaborating with Kyowa Kirin Co., Ltd., or KKC (formerly Kyowa Hakko Kirin Co., Ltd., or KHK), and Kyowa Kirin, a wholly owned subsidiary of KKC, on the development and commercialization of Crysvita globally.
Crysvita is also being developed for the treatment of tumor-induced osteomalacia, or TIO. TIO results from typically benign tumors that produce excess levels of FGF23, which can lead to severe hypophosphatemia, osteomalacia, fractures, fatigue, bone and muscle pain, and muscle weakness. The U.S. Food and Drug Administration, or FDA, has accepted the supplemental Biologics License Application, or sBLA, and has assigned priority review designation with a Prescription Drug
User Fee Act, or PDUFA, target date of June 18, 2020. The FDA has not indicated, up to this time, that any inspections would be required for completion of their review.
| • | Mepsevii is an intravenous, or IV, enzyme replacement therapy, developed for the treatment of Mucopolysaccharidosis VII, also known as MPS VII or Sly syndrome, a rare lysosomal storage disease that often leads to multi-organ dysfunction, pervasive skeletal disease, and death. MPS VII is one of the rarest MPS disorders, affecting an estimated 200 patients in the |
19
developed world. Mepsevii is approved in the United States for the treatment of children and adults with MPS VII. In the EU and the United Kingdom, Mepsevii is approved under exceptional circumstances for the treatment of non-neurological manifestations of MPS VII for patients of all ages. In Brazil and Mexico, Mepsevii is approved for the treatment of MPS VII for patients of all ages. |
• | UX143 (setrusumab), which is subject to our collaboration agreement with Mereo and the lead clinical asset in our bone endocrinology franchise, is a fully human monoclonal antibody that inhibits sclerostin, a protein that acts on a key bone-signaling pathway and inhibits the activity of bone-forming cells. Setrusumab is being studied for the treatment of osteogenesis imperfecta (OI) and has received orphan drug designation from the FDA and European Medicines Agency (EMA), rare pediatric disease designation from the FDA, and was accepted into the EMA’s Priority Medicines program (PRIME). There are an estimated 60,000 patients in the developed world affected by OI. Initiation of a pediatric Phase 2/3 study is expected in the second half of 2021 and a separate pivotal study is currently being planned for adults with OI. |
Our small molecule pipeline includes UX007, which is in clinical development forproducts include the treatment ofapproved therapy Dojolvi® (triheptanoin):
• | Dojolvi is a highly purified, synthetic, 7-carbon fatty acid triglyceride specifically designed to provide medium-chain, odd-carbon fatty acids as an energy source and metabolite replacement for people with long-chain fatty acid oxidation disorders, or
Our clinical-stage gene therapy pipeline includes DTX401, DTX301, DTX201 and
Our clinical-stage nucleic acid pipeline includes GTX-102 for the treatment of Angelman syndrome, and UX053 for the treatment of GSDIII:
20 The following table summarizes our approved products and clinical product candidate pipeline: Recent
DTX701 for the In 21 DTX401 for the treatment of GSDIa We have completed the Scientific Advice process with the EMA and the End-of-Phase 2 meeting with the FDA to discuss the Phase 2 data, the Phase 3 design, and endpoints. We have submitted the Phase 3 study design to the FDA and are currently finalizing the endpoints for the DTX301 for the treatment of
GTX-102 for the treatment of Angelman Syndrome, partnered with GeneTx
In Canada, an amendment to the open clinical trial agreement was submitted and included the additional data and updated protocol and is pending review. Discussions with the FDA are continuing and a request for a meeting has been granted and will take place in the second quarter 2021. The meeting will review additional clinical data requested by the FDA regarding the previously treated patients that confirm that the serious adverse event in the previously treated patients has fully reversed as well as an The Phase 1/2 study is UX053 for the treatment of
Financial Operations Overview We are a biopharmaceutical company with a limited operating history. To date, we have invested substantially all of our efforts and financial resources in identifying, acquiring, and developing our products and product candidates, including conducting clinical studies and providing selling, general and administrative support for these operations. To date, we have funded our operations primarily from the sale of our equity securities, We have incurred net losses in each year since inception. Our net loss was
As of March 31, Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other 22 factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes in our critical accounting policies during the three months ended March 31, Results of Operations Comparison of the three months ended March 31, Revenue (dollars in thousands)
In March 2020, we
The increase in product sales of The increase in Crysvita non-cash collaboration royalty revenue of $1.3 million primarily reflects the launch progress by our collaboration partner in European countries and an increase in the number of patients on therapy. Cost of Sales (dollars in thousands)
Cost of sales related to our approved products Prior to the approval of our 23 ended March 31, 2021 and the credit of $4.6 million for the three months ended March 31, 2020 as noted above were excluded, we estimate that cost of sales for the three months ended March 31, 2021 and 2020 Research and Development Expenses (dollars in thousands)
Research and development expenses include internal and external costs incurred for research and development of our programs and program candidates and expenses related to certain technology that we acquire or license through business development transactions. These expenses consist primarily of clinical studies performed by contract research organizations, manufacturing of drug substance and drug product performed by contract manufacturing organizations, materials and supplies, fees from collaborative and other arrangements including milestones, licenses and other fees, personnel costs including salaries, benefits and stock-based compensation, and overhead allocations consisting of various support and infrastructure costs. Commercial programs include costs for disease monitoring programs and certain regulatory and medical affairs support activities for programs after commercial approval. Clinical programs include study conduct and manufacturing costs related to clinical program candidates. Translational research include costs for preclinical study work and costs related to preclinical programs prior to IND filing. Upfront license and milestone fees include any significant expenses related to strategic licensing agreements. Infrastructure costs include direct costs related to laboratory, IT, and equipment depreciation costs, and overhead allocations for human resources, IT and other allocable costs. The following table provides a breakout of our research and development expenses by major program type and business activities:
Total research and development expenses increased
24
We expect our annual research and development expenses to continue to increase in the future as we advance our product candidates through clinical development. The timing and amount of expenses incurred will depend largely upon the outcomes of current or future clinical studies for our product candidates as well as the related regulatory requirements, manufacturing costs, and any costs associated with the advancement of our preclinical programs. Selling, General and Administrative Expenses (dollars in thousands)
Selling, general and administrative expenses increased We expect selling, general and administrative expenses to continue to increase in the future to support our organizational growth and for our expected staged build out of our commercial organization over the next several years related to our approved products and multiple clinical-stage product candidates. Interest Income (dollars in thousands)
Interest income decreased Change in Fair Value of
The Non-cash Interest Expense on Liability Related to the Sale of Future Royalties (dollars in thousands)
The non-cash interest expense on liability related to the sale of future royalties 25 net sales of Crysvita in the European territory, Other Expense (dollars in thousands)
Other expense increased by $0.3 million for the three months ended March 31, 2021 compared to the same period in 2020. The increase was primarily due to fluctuations in foreign exchange rates. Provision for Income Taxes (dollars in thousands)
The provision for incomes taxes decreased by a nominal amount for the three months ended March 31,
Liquidity and Capital Resources To date, we have funded our operations primarily from the sale of our equity securities, As of March 31,
The following table summarizes our cash flows for the periods indicated (in thousands):
Cash Used in Operating Activities Our primary use of cash is to fund operating expenses, which consist primarily of research and development and commercial expenditures. Due to our significant research and development expenditures, we have generated significant operating losses since our inception. Cash used to fund operating expenses is affected by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. Cash used in operating activities for the three months ended March 31, 2021 was $159.3 million and reflected a net loss of $136.1 million and $3.9 million for non-cash collaboration royalty revenues related to the sale of future royalties to RPI Finance Trust (RPI), an affiliate of Royalty Pharma, offset by non-cash charges of $24.3 million for stock-based compensation, $0.9 million for the amortization of the premium paid on purchased marketable debt securities, $3.4 million for depreciation, $20.6 million for a change in fair value of equity investments from Arcturus and Solid, and $8.4 million for non-cash interest incurred on the liability related to the sale of future royalties to RPI. Cash used in operating activities also reflected a $2.0 million decrease due to an increase in accounts receivable primarily related to higher revenues, a $10.7 million decrease due to an increase in prepaid expenses and other current assets primarily due to an increase in prepaid manufacturing, insurance, and subscriptions, a $23.6 million decrease in accounts payable, accrued liabilities, and other liabilities primarily due to the payout of 2020 annual bonuses, and a decrease of $41.5 million in 26 contract liabilities, primarily related to the revenue recognized from the license agreements with Daiichi Sankyo, offset by a $0.5 million increase due to a decrease in inventory. Cash used in operating activities for the three months ended March 31, 2020 was $95.2 million and reflected a net loss of $119.0 million, $0.3 million for the amortization of the discount paid on purchased Cash Used in Investing Activities Cash used in
Cash used in investing activities for the three months ended March 31, 2020 was $95.1 million and related to purchases of property and equipment of $14.1 million and purchases of Cash Cash provided by financing activities for the three months ended March 31,
Cash provided by financing activities for the three months ended March 31, 2020 was $55.6 million and was comprised of $55.3 million from the sale of common stock in connection with the license and technology access agreement with Daiichi Sankyo in March 2020 and $0.4 million in net proceeds from the issuance of common stock pursuant to the exercise of warrants and equity plan awards.
Funding Requirements We anticipate that, excluding non-recurring items, If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may be required to delay, limit, reduce the scope of, or terminate one or more of our clinical studies, research and development programs, future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our future funding requirements will depend on many factors, including the following:
We expect to satisfy future cash needs through existing capital balances and through some combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, and other marketing and distribution arrangements. Please see “Risk Factors—Risks Related to Our Financial Condition and Capital Requirements.” Contractual Obligations and Commitments We have contractual obligations from our operating and finance leases, manufacturing and service contracts, licenses, royalties, development and collaboration arrangements, and other research and development activities. The following table summarizes our significant binding contractual obligations at March 31,
The terms of certain of our licenses, royalties, development and collaboration agreements, as well as other research and development activities, require us to pay potential future milestone payments based on product development success. The above table excludes such obligations as the amount and timing of such obligations are unknown or uncertain. Off-Balance Sheet Arrangements We have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Item 3. Quantitative and Qualitative Disclosures about Market Risk Equity Risk We have exposure to equity risk with respect to the equity Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to interest earned on our cash equivalents and 28 Foreign Currency Risk We face foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars. Due to the uncertain timing of expected payments in foreign currencies, we do not utilize any forward exchange contracts. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made. Volatile market conditions arising from the COVID-19 pandemic may result in significant changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our revenue and operating income as expressed in U.S. dollars. An adverse movement in foreign exchange rates could have a material effect on payments made to foreign suppliers and for license agreements. For the three months ended March 31, Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures
Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our PART II. OTHER INFORMATION
Item 1. Legal Proceedings We are not currently a party to any material legal proceedings. We may, however, in the ordinary course of business face various claims brought by third parties or government regulators and we may, from time to time, make claims or take legal actions to assert our rights, including claims relating to our directors, officers, stockholders, intellectual property rights, employment matters and the safety or efficacy of our products. Any of these claims could subject us to costly litigation and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business.
Item 1A. Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the following material risks, together with all the other information in this Quarterly Report, including our financial statements and notes thereto, before deciding to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risk and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually materialize, our operating results, financial condition, and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. Our company’s business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, prospects, financial condition, operating results and stock price. 29 Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of the Annual Report. 30 Risk Factor Summary
31
Risks Related to Our Financial Condition and Capital Requirements We have a history of operating losses and anticipate that we will continue to incur losses for the foreseeable future. We are a biopharmaceutical company with a history of operating losses, and anticipate continuing to incur operating losses for the foreseeable future. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have devoted substantially all of our financial resources to identifying, acquiring, and developing our products and product candidates, including conducting clinical studies, developing manufacturing processes, manufacturing product candidates for clinical studies, and providing selling, general and administrative support for these operations. The amount of our future net losses will depend, in part, on non-recurring events, the success of our commercialization efforts, and the rate of our future expenditures. We anticipate that our expenses will increase substantially if and as we:
The net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. We Our ability to generate significant revenue from product sales depends on our ability, alone or with strategic collaboration partners, to successfully commercialize our products and to complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize,
If the number of our addressable rare disease patients is not as significant as we estimate, the indication approved by regulatory authorities is narrower than we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice, or treatment guidelines, we may not generate significant revenue from sales of our products, even if they receive regulatory approval. We expect we will As of March 31,
Any additional fundraising efforts may divert our management’s attention from their day-to-day activities, which may adversely affect our ability to develop our product candidates and commercialize our products. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. The terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. If we incur debt, it could result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business. We have in the past sought and may in the future seek funds through a sale of future royalty payments similar to our transaction with Royalty Pharma or through collaborative partnerships, strategic alliances, and licensing or other arrangements, such as our transaction with Daiichi Sankyo, and we may be required to relinquish rights to some of our technologies or product candidates, future revenue streams, research programs, and other product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results, and prospects. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.
If we are unable to obtain funding on a timely basis or at all, we may be required to significantly curtail, delay, or discontinue one or more of our research or development programs or the commercialization of our products and any approved product candidates or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition, and results of operations. 34 Risks Related to the Discovery and Development of Our Product Candidates Clinical drug development involves a lengthy and expensive process with uncertain outcomes and the potential for substantial delays, and the results of earlier studies may not be predictive of future study results. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical studies to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive, time consuming, and uncertain as to outcome. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical studies can occur at any stage of testing, and our future clinical studies may not be successful. Product candidates that have shown promising results in early-stage clinical studies may still suffer significant setbacks or fail in subsequent clinical studies. The safety or efficacy results generated to date in clinical studies do not ensure that later clinical studies will demonstrate similar results. For example, our Phase 3 studies that evaluated Ace-ER in patients with GNE myopathy and UX007 in patients with Glut1 DS experiencing disabling paroxysmal movement disorders did not achieve their primary or secondary endpoints. Results from investigator-sponsored studies or compassionate-use studies may not be confirmed in company-sponsored studies or may negatively impact the prospects for our programs. Additionally, given the nature of the rare diseases we are seeking to treat, we often have to devise newly-defined endpoints to be tested in our studies, which can lead to some subjectivity in interpreting study results and could result in regulatory agencies not agreeing with the validity of our endpoints, or our interpretation of the clinical data, and therefore delaying or denying approval. Given the illness of the patients in our studies and the nature of their rare diseases, we may also be required or choose to conduct certain studies on an open-label basis. We have in the past, and may in the future elect to review interim clinical data at multiple time points during the studies, which could introduce bias into the study results and potentially result in denial of approval. In the biopharmaceutical industry, there is a high failure rate for drugs and biologics proceeding through clinical studies, and product candidates in later stages of clinical studies may fail to show the desired safety and efficacy despite having progressed through nonclinical studies and initial clinical studies. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical studies due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies. Scenarios that may prevent successful or timely completion of clinical development include but are not limited to:
Any inability to successfully complete nonclinical and clinical development could result in additional costs to us or negatively impact our ability to generate revenue. In addition, if we make manufacturing or formulation changes to our product candidates, we may need to conduct additional toxicology, comparability or other studies to bridge our modified product candidates to earlier versions. Clinical study delays could also shorten any periods during which our products have commercial exclusivity and may allow our competitors to bring products to market before we do, which could negatively impact our ability to obtain orphan exclusivity and to successfully commercialize our product candidates and may harm our business and results of operations. If we do not achieve our projected development goals in the For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory, and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies and clinical trials, the timing of patient dosing, the submission or acceptance of regulatory filings, and the potential approval of such regulatory filings. We periodically make public announcements about the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions, but the actual timing of these milestones can vary dramatically from our estimates. If we do not meet these publicly announced milestones, the commercialization of our products may be delayed and the credibility of our management may be adversely affected and, as a result, our stock price may decline. We may find it difficult to identify and enroll patients in our clinical studies given the limited number of patients who have the diseases for which our product candidates are being studied. Difficulty in enrolling patients could delay or prevent clinical studies of our product candidates. Identifying and qualifying patients to participate in clinical studies of our product candidates is critical to our success. The timing of our clinical studies depends in part on the speed at which we can recruit patients to participate in testing our product candidates, and we may experience delays in our clinical studies if we encounter difficulties in enrollment. Each of the conditions for which we plan to evaluate our current product candidates is a rare genetic disease. Accordingly, there are limited patient pools from which to draw for clinical studies. For example,
In addition to the rarity of these diseases, the eligibility criteria of our clinical studies will further limit the pool of available study participants as we will require patients to have specific characteristics that we can measure or to assure their disease is either severe enough or not too advanced to include them in a study. The process of finding and diagnosing patients 36 The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming, and inherently unpredictable. Even if we achieve positive results in our pre-clinical and clinical studies, if we are ultimately unable to obtain timely regulatory approval for our product candidates, our business will be substantially harmed. Our future success is dependent on our ability to successfully commercialize our products and develop, obtain regulatory approval for, and then successfully commercialize one or more product candidates. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities. We have only obtained regulatory approval for To obtain regulatory approval in the United States and other jurisdictions, we must comply with numerous and varying requirements regarding safety, efficacy, chemistry, manufacturing and controls, clinical studies (including good clinical practices), commercial sales, pricing, and distribution of our product
Furthermore, the disease states we are evaluating often will not have clear regulatory paths for approval and/or do not have validated outcome measures. In these circumstances, we work closely with the regulatory authorities to define the approval path and may have to qualify outcome measures as part of our development programs. Additionally, many of the disease states we are targeting This lengthy and uncertain approval process, as well as the unpredictability of the clinical and nonclinical studies, may result in our failure to obtain regulatory approval to market any of our product candidates, or delayed regulatory approval, which would significantly harm our business, results of operations, and prospects.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any. Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or halt clinical studies or further development, and could result in a more restrictive label, the delay or denial of regulatory approval by the FDA or other comparable foreign authorities, or a Risk Evaluation and Mitigation Strategy, or REMS, plan, which could include a medication guide outlining the risks of such side effects for distribution to patients, restricted distribution, a communication plan for healthcare providers, and/or other elements to assure safe use. Our product candidates are in development and the safety profile has not been established. Further, as one of the goals of Phase 1 and/or 2 clinical trials is to identify the highest dose of treatment that can be safely provided to study participants, adverse side effects, including serious adverse effects, have occurred in certain studies as a result of changes to the dosing regimen during such studies. For Drug-related side effects could affect patient recruitment and the ability of enrolled patients to complete a study. Such side effects could also result in potential product liability claims. Additionally, even though we received regulatory approval for Crysvita, Mepsevii, and
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations, and prospects. Serious adverse events in clinical trials involving gene therapy product candidates may damage public perception of the safety of our product candidates, increase government regulation, and adversely affect our ability to obtain regulatory approvals for our product candidates or conduct our business. Gene therapy remains a novel technology. Public perception may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. For example, potential risk of 38 delayed adverse events following exposure to gene therapy products due to persistent biological activity of the genetic material or other components of products used to carry the genetic material. Serious adverse events in our clinical trials, or other clinical trials involving gene therapy products, particularly AAV gene therapy products such as candidates based on the same capsid serotypes as our product candidates, or occurring during use of our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our gene therapy product candidates, stricter labeling requirements for those gene therapy product candidates that are approved and a decrease in demand for any such gene therapy product candidates, all of which would have an adverse effect on our business, financial condition, results of operations and prospects. Refer to the risk factor above entitled, “Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any”for a description of the serious adverse events experienced by patients in our Phase 1/2 study of GTX-102. Even if we obtain regulatory approval for our product candidates, our products will remain subject to regulatory scrutiny. Our products and any product candidates that are approved are subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, distribution, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory Manufacturers and manufacturers’ facilities are required to comply with extensive FDA, and comparable foreign regulatory authority, requirements, including ensuring that quality control and manufacturing procedures conform to Good Manufacturing Practices (GMP) regulations. As such, we and our contract manufacturers Any regulatory approvals that we receive for our product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or other conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical studies, and surveillance to monitor the safety and efficacy of the product candidate. We could also be asked to conduct post-marketing clinical studies to verify the safety and efficacy of our products in general or in specific patient subsets. If original marketing approval was obtained via the accelerated approval or conditional marketing authorization pathways, we would be required to conduct a successful post-marketing clinical study to confirm clinical benefit for our products. An unsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of marketing approval. We will be required to report certain adverse events and manufacturing problems, if any, to the FDA and comparable foreign regulatory authorities. If we fail to comply with applicable regulatory requirements, or there are safety or efficacy problems with a product, a regulatory agency or enforcement authority may, among other things:
Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. If we are unable to identify, source, and develop effective biomarkers, or our collaborators are unable to successfully develop and commercialize companion diagnostics for our product candidates, or experience significant delays in doing so, we may not realize the full commercial potential of our product candidates. We are developing companion diagnostic tests to identify the right patients for certain of our product candidates and to monitor response to treatment. In certain cases, diagnostic tests may need to be developed as companion diagnostics and regulatory approval obtained in order to commercialize some product candidates. We currently use and expect to continue to use biomarkers to identify the right patients for certain of our product candidates. We may also need to develop predictive biomarkers in the future. For example, to evaluate therapeutic response of DTX301, we are measuring ammonia levels and other biomarkers, including 13C-acetate, which are established measures of OTC deficiency disease status and ureagenesis. We offer no assurances that 13C-acetate or any other future potential biomarker will in fact prove predictive, be reliably measured, or be accepted as a measure of efficacy by the FDA or other regulatory authorities. In addition, our success may depend, in part, on the development and commercialization of companion diagnostics. We also expect the FDA will require the development and regulatory approval of a companion diagnostic assay as a condition to approval of our gene therapy product candidates. There has been limited success to date industrywide in developing and commercializing these types of companion diagnostics. Development and manufacturing of companion diagnostics is complex and there are limited manufacturers with the necessary expertise and capability. Even if we are able to Companion diagnostics are subject to regulation by FDA and similar regulatory authorities outside the United States as medical devices and require regulatory clearance or approval prior to commercialization. In the United States, companion diagnostics are cleared or approved through FDA’s 510(k) premarket notification or premarket approval, or PMA, process. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted 510(k) premarket notification, PMA or equivalent application types in jurisdictions outside the United States, may cause delays in the approval, clearance or rejection of an application. Given our limited experience in developing and commercializing diagnostics, we expect to rely in part or in whole on third parties for companion diagnostic design and commercialization. We and our collaborators may encounter difficulties in developing and obtaining approval or clearance for the companion diagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility, or clinical validation. Any delay or failure by us or our collaborators to develop or obtain regulatory approval of the companion diagnostics could delay or prevent approval of our product candidates. 40 Risks Related to our Reliance on Third Parties We rely on third parties to conduct our nonclinical and clinical studies and perform other tasks for us. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, we may be exposed to sub-optimal quality and reputational harm, we may not be able to obtain regulatory approval for or commercialize our product candidates, and our business could be substantially harmed. We have relied upon and plan to continue to rely upon third parties, including CROs, collaborative partners, and independent investigators to analyze, collect, monitor, and manage data for our ongoing nonclinical and clinical programs. We rely on third parties for execution of our nonclinical and clinical studies, and for estimates regarding costs and efforts completed, and we control only certain aspects of their activities. For example, pursuant to the terms of our collaboration with GeneTx on the development of GeneTx’s GTX-102, an antisense oligonucleotide (ASO) for the treatment of Angelman syndrome, subject to certain limited rights we have, GeneTx retains the decision-making authority on all matters in connection with the research, development, manufacturing and regulatory activities with respect to the program. Our CROs and other vendors and partners are not our employees and If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative vendors or do so on commercially reasonable terms. Switching or adding additional vendors involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new vendor commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. We also rely on third parties in other ways, including efforts to support patient diagnosis and identify patients, to assist our finance and legal departments, and to provide other resources for our business. Use of these third parties could expose us to sub-optimal quality, missed deadlines, and non-compliance with applicable laws, all of which could result in reputational harm to us and negatively affect our business. We are dependent on KKC for the clinical and commercial supply of Crysvita for all major markets and for the development and commercialization of Crysvita in certain major markets, and KKC’s failure to provide an adequate supply of Crysvita or to commercialize Crysvita in those markets could result in a material adverse effect on our business and operating results. Under our agreement with KKC, KKC has the sole right to commercialize Crysvita in Europe and, at a specified time, in the United States, Canada, and Turkey, subject to a limited promotion right we retained. Our partnership with KKC may not be successful, and we may not realize the expected benefits from such partnership, due to a number of important factors, including but not limited to the following:
41
We
During the fourth quarter 2020, we
Gene therapy and mRNA, DNA and siRNA product candidates are novel, complex, expensive and difficult to manufacture. We could experience manufacturing problems that result in delays in developing and commercializing these programs or otherwise harm our business. The manufacturing process used to produce our gene therapy, mRNA, DNA and siRNA product candidates is novel, complex, and has not been validated for commercial use. Several factors could cause production interruptions, including equipment malfunctions, regulatory inspections, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error or disruptions in the operations of our suppliers. Further, given that cGMP gene therapy, mRNA, DNA and siRNA manufacturing is a nascent industry, there are a small number of CMOs with the experience necessary to manufacture our gene therapy product candidates and we may have difficulty finding or maintaining relationships with such CMOs or hiring experts for internal manufacturing and accordingly, our production capacity may be limited. Our gene therapy, mRNA, DNA and siRNA product candidates require processing steps that are more complex than those required for most small molecule drugs. Moreover, unlike small molecules, the physical and chemical properties of a biologic such as gene therapy, mRNA, DNA and siRNA product candidates generally cannot be fully characterized. As a result, assays of the finished product candidate may not be sufficient to ensure that the product candidate is consistent from lot to lot or will perform in the intended manner. Accordingly, we employ multiple steps to control the manufacturing process to assure that the process works reproducibly, and the product candidate is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, noncompliance with regulatory requirements, product recalls, product liability claims or insufficient inventory. We may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, the EMA or other applicable standards or specifications with consistent and acceptable production yields and costs. In addition, FDA, the EMA and other foreign regulatory authorities may require us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, FDA, the EMA or other foreign regulatory authorities may require that we not distribute a lot until the agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects. We
As we currently lack the resources and the capability to manufacture our products and most of our product candidates on a clinical or commercial scale, we rely on third parties to manufacture our products and product candidates. Although we oversee the contract manufacturers, we cannot control the manufacturing process of, and are substantially dependent on, our contract manufacturing partners for compliance with the regulatory requirements. See “- Even if we obtain regulatory approval for our product candidates, our products will remain subject to regulatory scrutiny” risk factor above. Further, we depend on our manufacturers to purchase from third-party suppliers the materials necessary to produce our products and product candidates. There are a limited number of suppliers for raw materials that we use to manufacture our drugs, placebos, or active controls, and there may be a need to identify alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our products and our product candidates for our clinical studies, and, if approved, ultimately for commercial sale. We also do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. We may also experience interruptions in supply of product if the product or raw material components fail to meet our quality control standards or the quality control standards of our suppliers. Further, manufacturers that produce our products and product candidates may not have experience producing our products and product candidates at commercial levels and may not produce our products and product candidates at the cost, quality, quantities, locations, and timing needed to support profitable commercialization. We have not yet secured manufacturing capabilities for commercial quantities of all of our product candidates and may be unable to negotiate binding agreements with manufacturers to support our commercialization activities on commercially reasonable terms. Even if our third-party product manufacturers develop acceptable manufacturing processes that provide the necessary quantities of our products and product candidates in a compliant and timely manner, the cost to us for the supply of our products and product candidates manufactured by such third parties may be high and could limit our profitability. For instance, KKC is our sole supplier of commercial quantities of Crysvita. The supply price to us for commercial sales of Crysvita in Latin America and the transfer price for commercial sales of the product in the United States and Canada is 35% of net sales through December 31, 2022 and 30% thereafter, which is higher than the typical cost of goods sold by companies focused on rare diseases. 43 The process of manufacturing our products and product candidates is complex, highly regulated, and subject to several risks, including but not limited to those listed below.
Any adverse developments affecting manufacturing operations for our products and product candidates may result in shipment delays, inventory shortages, lot failures, withdrawals or recalls, or other interruptions in the supply of our products and product candidates. For instance, during the fourth quarter of 2019, we experienced disruptions from our The drug substance and drug product for our products and most of our product candidates are currently acquired from single-source suppliers. The loss of these suppliers, or their failure to supply us with the necessary drug substance or drug product, could materially and adversely affect our business. We acquire most of the drug substances and drug products for our products and product candidates from single sources. If any single source supplier breaches an agreement with us, or terminates the agreement in response to an alleged breach by us or otherwise becomes unable to fulfill its supply obligations, we would not be able to manufacture and distribute the product or product candidate until a qualified alternative supplier is identified, which could significantly impair our ability to commercialize such product or delay the development of such product candidate. The drug substance and drug product for Crysvita are made by KKC pursuant to our license and collaboration agreement with KKC. The drug substance and drug product for Mepsevii are currently manufactured by Rentschler under a commercial supply and services agreement, accompanying purchase orders, and other agreements.
The actions of distributors and specialty pharmacies could affect our ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such distributors and specialty pharmacies could adversely affect our revenues, financial condition, or results of operations. We rely on commercial distributors and specialty pharmacies for a considerable portion of our product sales and such sales are concentrated within a small number of distributors and specialty pharmacies. The financial failure of any of these parties could adversely affect our revenues, financial condition or results of operations. Our revenues, financial condition or results of operations may also be affected by fluctuations in buying or distribution patterns of such distributors and specialty pharmacies. These fluctuations may result from seasonality, pricing, wholesaler inventory objectives, or other factors. 44 Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed. Because we rely on third parties in connection with the development and manufacture of our products and product candidates and will likely rely on third parties in connection with the commercialization of our approved products, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements, letters of engagement, or other similar agreements with our collaborators, advisors, employees, and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, such as trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business. Risks Related to Commercialization of Our Products and Product Candidates If the market opportunities for our products and product candidates are smaller than we believe they are, our revenue may be adversely affected, and our business may suffer. Because the target patient populations of our products and product candidates are small, and the addressable patient population potentially even smaller, we must be able to successfully identify patients and acquire a significant market share to achieve profitability and growth. We focus our research and product development on treatments for rare and ultra-rare genetic diseases. Given the small number of patients who have the diseases that we are targeting, it is critical to our ability to grow and become profitable that we continue to successfully identify patients with these rare and ultra-rare genetic diseases. Some of our current clinical programs may be most appropriate for patients with more severe forms of their disease. For instance,
We face intense competition and rapid technological change and the possibility that our competitors may develop therapies that are similar, more advanced, or more effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our product candidates. The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We are currently aware of various existing treatments that may compete with our products and product candidates. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, specialty pharmaceutical companies, biotechnology companies, startups, academic research institutions, government agencies, and public and private research institutions. Many of our competitors have substantially greater financial, technical, and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring, or licensing on an exclusive basis, products that are more effective or less costly than any product candidate that we may develop, or achieve earlier patent protection, regulatory approval, product commercialization, and market penetration than we do. Additionally, technologies developed by our competitors may render our potential products and product candidates uneconomical or obsolete, and we may not be successful in marketing our products and product candidates against competitors. 45 We We expect we will need additional managerial, operational, marketing, financial, legal, and other resources to support our development and commercialization plans and strategies. In order to successfully commercialize
Our exclusive right to promote Crysvita in the United States and Canada expires in 2023. Pursuant to the terms of our collaboration and license agreement with KKC, we have the sole right to promote Crysvita in the United States and Canada, or the profit-share territory, for a specified period of time, with KKC increasingly participating in the promotion of the product until the transition date of April 2023, which is the fifth anniversary of the commercial launch of the product in the United States. After the transition date, KKC will have the right to promote the product, subject to a limited promotion right retained by us. The commercial success of any current or future product will depend upon the degree of market acceptance by physicians, patients, third-party payors, and others in the medical community. Even with the requisite approvals from the FDA and comparable foreign regulatory authorities, the commercial success of our current and future products will depend in part on the medical community, patients, and payors accepting our current and future products as medically useful, cost-effective, and safe. Any product that we bring to the market may not gain market acceptance by physicians, patients, payors, and others in the medical community. The degree of market acceptance of any of our current and future products will depend on a number of factors, including:
Even if a potential product displays a favorable efficacy and safety profile in nonclinical and clinical studies, market acceptance of the product will not be fully known until after it is launched. Our efforts to educate the medical community and payors on the benefits of the product candidates The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue. Our target patient populations are small, and accordingly the pricing, coverage, and reimbursement of our products and product candidates, if approved, must be adequate to support our commercial infrastructure. Our per-patient prices must be sufficient to recover our development and manufacturing costs and potentially achieve profitability. We expect the cost of a single administration of gene therapy products, such as those we are developing, to be substantial, when and if they achieve regulatory approval. Accordingly, the availability and adequacy of coverage and reimbursement by governmental and private payors are essential for most patients to afford expensive treatments such as ours, assuming approval. Sales of our products and product candidates, if approved, will depend substantially, both domestically and abroad, on the extent to which their costs will be paid for by health maintenance, managed care, pharmacy benefit, and similar healthcare management organizations, or reimbursed by government authorities, private health insurers, and other payors. If coverage and reimbursement are not available, are available only to limited levels, or are not available on a timely basis, we may not be able to successfully commercialize our products and product candidates, if approved. For example, deteriorating economic conditions and political instability in certain Latin American countries and in Turkey may cause us to experience significant delays in receiving approval for reimbursement for our products and consequently impact our product commercialization timelines in such regions. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to sustain our overall enterprise. There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS or private payors will decide with respect to reimbursement for products such as ours, especially our gene therapy product candidates as there is a limited body of established practices and precedents for gene therapy products. Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada, and other countries will put pressure on the pricing and usage of our products and product candidates. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. Other countries allow companies to fix their own prices for medicinal products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue and profits. Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for our products and product candidates. We expect to experience pricing pressures in connection with the sale of any of our products and product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, additional legislative changes, and statements by elected officials. For example, proposals 47 The
Risks Related to Our Intellectual Property If we are unable to obtain and maintain effective patent rights for our products, product candidates, or any future product candidates, we may not be able to compete effectively in our markets. We rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to our technologies, our products, and our product candidates. Our success depends in large part on our and our licensors’ ability to obtain and maintain patent and other intellectual property protection in the United States and in other countries with respect to our proprietary We have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies, products and The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unsolved. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our products or product candidates in the United States or in other foreign countries. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover our products or product candidates, third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable, or invalidated. Furthermore, even if the patents and patent applications we own or in-license are unchallenged, they may not adequately protect our intellectual property, provide exclusivity for our products or product candidates, or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business. We, independently or together with our licensors, have filed several patent applications covering various aspects of our products or product candidates. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents could impair the exclusivity position of our products or
We may not have sufficient patent terms to effectively protect our products and business. Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its effective filing date. Although various extensions may be available, the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired for a product, we may be open to competition from generic or biosimilar medications.
Patent term extensions under the Hatch-Waxman Act in the United States and under supplementary protection certificates in Europe may not be available to extend the patent exclusivity term for Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we or our licensors were the first to make the invention claimed in our owned and In 2011, the Leahy-Smith America Invents Act If we are unable to maintain effective proprietary rights for our products, product candidates, or any future product candidates, we may not be able to compete effectively in our markets. In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our products or product candidate discovery and development processes that involve proprietary know-how, information, or technology that is not covered by patents. However, trade secrets can be difficult to protect.
Claims of intellectual property infringement may prevent or delay our development and commercialization efforts. Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of others. There have been many lawsuits and other proceedings involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, inter partes reviews, post grant reviews, oppositions, and reexamination proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by other parties, exist in the fields in which we are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our products or product candidates may be subject to claims of infringement of the patent rights of these other parties. 49 Other parties may assert that we are employing their proprietary technology without authorization. There may be patents or patent applications with claims to materials, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our products or product candidates. We have conducted freedom to operate analyses with respect only to our products and certain of our product candidates, and therefore we do not know whether there are any patents of other parties that would impair our ability to commercialize all of our product candidates. We also cannot guarantee that any of our analyses are complete and thorough, nor can we be sure that we have identified each and every patent and pending application in the United States and abroad that is relevant or necessary to the commercialization of our products or product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our products or product candidates may infringe. We are aware of Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to continue commercialization of our products, or block our ability to develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products, or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. We may not be successful in obtaining or maintaining necessary rights to our product candidates through acquisitions and in-licenses. We currently have rights to the intellectual property, through licenses from third parties and under patents that we own, to commercialize our product candidates. Because our programs may require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to acquire, in-license, or use these proprietary rights. For example, our product candidates may require specific formulations to work effectively and efficiently and the rights to these formulations may be held by others. We may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that we identify as necessary for our product candidates. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources, and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. We sometimes collaborate with U.S. and foreign academic institutions to accelerate our preclinical research or development under written agreements with these institutions. Typically, these institutions provide us an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such option, we may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our program. If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of that program and our business and financial condition could suffer. 50 We may face competition from biosimilars, which may have a material adverse impact on the future commercial prospects of Even if we are successful in achieving regulatory approval to commercialize a product candidate faster than our competitors, we may face competition from biosimilars with respect to In Europe, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past few years. In Europe, a competitor may reference data supporting approval of an innovative biological product, but will not be able to get on the market until 10 years after the time of approval of the innovative product. This 10-year marketing exclusivity period will be extended to 11 years if, during the first eight of those 10 years, the marketing authorization holder obtains an approval for one or more new therapeutic indications that bring significant clinical benefits compared with existing therapies. In addition, companies may be developing biosimilars in other countries that could compete with our products. If competitors are able to obtain marketing approval for biosimilars referencing our products, our products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences.
Under the Hatch-Waxman Act, a pharmaceutical manufacturer may file an abbreviated new drug application, or ANDA, seeking approval of a generic copy of an approved innovator product. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under section 505(b)(2) that references the FDA’s finding of safety and effectiveness of a previously approved drug. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product. Innovative small molecule drugs may be eligible for certain periods of regulatory exclusivity (e.g., five years for new chemical entities, three years for changes to an approved drug requiring a new clinical study, and seven years for orphan drugs), which preclude FDA approval (or in some circumstances, FDA filing and review of) an ANDA or 505(b)(2) NDA relying on the FDA’s finding of safety and effectiveness for the innovative drug. In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in the “Orange Book.” If there are patents listed in the Orange Book, a generic applicant that seeks to market its product before expiration of the patents must include in the ANDA or 505(b)(2) what is known as a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving notice the innovator sues to enforce its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court. Accordingly, We may not be successful in securing or maintaining proprietary patent protection for products and technologies we develop or license. Moreover, if any patents that are granted and listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, the affected product could more immediately face generic competition and its sales would likely decline materially. Should sales decline, we may have to write off a portion or all of the intangible assets associated with the affected product and our results of operations and cash flows could be materially and adversely affected. The patent protection and patent prosecution for some of our products and product candidates is dependent on third parties. While we normally seek and gain the right to fully prosecute the patents relating to our products or product candidates, there may be times when patents relating to our products or product candidates are controlled by our licensors. This is the case with our agreement with KKC, who is primarily responsible for the prosecution of certain patents and patent applications covering Crysvita which are licensed to us under the collaboration agreement. 51 In addition, we have in-licensed patents and patent applications owned by the University of Pennsylvania, relating to the AAV8 vector used in DTX301 and DTX401. These patents and patent applications are licensed or sublicensed by REGENXBIO and sublicensed to us. We do not have the right to control the prosecution of these patent applications, or the maintenance of any of these patents. In addition, under our agreement with REGENXBIO, we do not have the first right to enforce the licensed patents, and our enforcement rights are subject to certain limitations that may adversely impact our ability to use the licensed patents to exclude others from commercializing competitive products. Moreover, REGENXBIO and the University of Pennsylvania may have interests which differ from ours in determining whether and the manner in which to enforce such patents. If KKC, the University of Pennsylvania, or any of our future licensing partners fail to appropriately prosecute, maintain, and enforce patent protection for the patents covering any of our products or product candidates, our ability to develop and commercialize those products or product candidates may be adversely affected and we may not be able to prevent competitors from making, using, and selling competing products. In addition, even where we now have the right to control patent prosecution of patents and patent applications we have licensed from third parties, we may still be adversely affected or prejudiced by actions or inactions of our licensors and their counsel that took place prior to us assuming control over patent prosecution. If we fail to comply with our obligations in the agreements under which we license intellectual property and other rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business. We are a party to a number of intellectual property license agreements that are important to our business and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty, and other obligations on us. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, we may be required to make certain payments to the licensor, we may lose the exclusivity of our license, or the licensor may have the right to terminate the license, in which event we would not be able to develop or market products covered by the license. Additionally, the milestone and other payments associated with these licenses will make it less profitable for us to develop our In certain cases, we control the prosecution of patents resulting from licensed technology. In the event we breach any of our obligations related to such prosecution, we may incur significant liability to our licensing partners. Licensing of intellectual property is of critical importance to our business and involves complex legal, business, and scientific issues. Disputes may arise regarding intellectual property subject to a licensing agreement, including but not limited to:
If disputes over intellectual property and other rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
Competitors may infringe our patents or the patents of our licensors. 52 Interference proceedings or derivation proceedings now available under the Leahy-Smith Act provoked by third parties or brought by us or declared or instituted by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. In addition, the validity of our patents could be challenged in the USPTO by one of the new post grant proceedings (i.e., inter partes review or post grant review) now available under the Leahy-Smith Act. Our defense of litigation, interference proceedings, or post grant proceedings under the Leahy-Smith Act may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may in the future also be subject to claims that former employees, collaborators, or other third parties have an interest in our patents as an inventor or co-inventor. In addition,
We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. We employ certain individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products. As is the case with other biotechnology and pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology and pharmaceutical industries involves both technological and legal complexity. Therefore, obtaining and enforcing such patents is costly, time consuming, and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. For example, in Association for Molecular Pathology v. Myriad Genetics, Inc., the Supreme Court ruled that a “naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated,” invalidating Myriad Genetics’ patents on the BRCA1 and BRCA2 genes. Certain claims of our licensed U.S. patents covering DTX301 and DTX401 relate to isolated AAV8 vectors, capsid proteins, or nucleic acids. To the extent that such claims are deemed to be directed to natural products, or to lack an inventive concept above and beyond an isolated natural product, a court may decide the claims are invalid under Myriad. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. 53 We may not be able to protect our intellectual property rights throughout the world. Filing, prosecuting, and defending patents on our products or product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Further, licensing partners such as KKC may not prosecute patents in certain jurisdictions in which we may obtain commercial rights, thereby precluding the possibility of later obtaining patent protection in these countries. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. Risks Related to Our Business Operations
A public health epidemic or outbreak, and the public and governmental efforts to mitigate the spread of such disease, could materially and adversely impact the commercialization of our products, development and regulatory approval of our product candidates and our clinical trial operations and significantly disrupt our business operations as well as those of our third party suppliers, CRO and collaboration partners that we rely on. In December 2019, a new strain of novel coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared COVID-19 a pandemic.
Our clinical trial activities, including the initiation and completion of such activities and the timing thereof, have been and are expected to continue to be significantly delayed or disrupted by COVID-19. For instance, enrollment of patients in certain of our clinical trials for our gene therapy product candidates have been disrupted The COVID-19 pandemic
We have experienced delays in delivery of treatments or vaccinations for COVID-19, which In an effort to protect the health of our employees, their families and our communities, and in accordance with shelter-in-place direction from state and local government authorities, we have restricted access to our facilities to personnel and third parties who must perform critical activities that must be completed on-site, limited the number of such personnel that can be present at our facilities at any one time, and requested that most of our personnel work remotely, including significant limitations on access to our laboratory space. As vaccines against COVID-19 become more widely available, we plan to ease restrictions to our facilities and allow our employees to return to work on-site. The The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets, which could adversely impact our operating results. For instance, delays or defaults in payments by our customer and third-party partners could adversely impact our accounts receivables. The value of our investments currently held in a variety of accounts could also be negatively impacted by the volatility in certain markets, such as the fixed income market, and impact our sources of liquidity. The stock market in general and the stock price of biopharmaceutical companies, in particular, have also experienced extreme price and volume fluctuations. Broad market and industry factors, including worsening economic conditions or a recession resulting from the ongoing COVID-19 pandemic, may adversely impact the value of our common stock and our ability to raise capital. If we do raise additional capital and issue equity securities when the value of our common stock is depressed, the dilutive impact on our stockholders may be greater compared to when the value of our common stock is higher. The COVID-19 pandemic Our future success depends in part on our ability to retain our Founder, President, and Chief Executive Officer and to attract, retain, and motivate other qualified personnel. We are dependent on Emil D. Kakkis, M.D., Ph.D., our Founder, President, and Chief Executive Officer, the loss of whose services may adversely impact the achievement of our objectives. Dr. Kakkis could leave our employment at any time, as he is an “at will” employee. Recruiting and retaining other qualified employees, consultants, and advisors for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled personnel in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. 55 If we fail to obtain or maintain orphan drug exclusivity for our products, our competitors may sell products to treat the same conditions and our revenue will be reduced. Our business strategy focuses on the development of drugs that are eligible for FDA and EU orphan drug designation. In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical study costs, tax advantages, and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. In the EU, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity following drug or biological product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Because the extent and scope of patent protection for our products may in some cases be limited, orphan drug designation is especially important for our products for which orphan drug designation may be available. For eligible drugs, we plan to rely on the exclusivity period under the Orphan Drug Act to maintain a competitive position. If we do not obtain orphan drug exclusivity for our drug products and biologic products that do not have broad patent protection, our competitors may then sell the same drug to treat the same condition sooner than if we had obtained orphan drug exclusivity, and our revenue will be reduced. Even though we have orphan drug designation for
Our operating results would be adversely impacted if our intangible assets become impaired. As a result of the accounting for our acquisition of Dimension Therapeutics, Inc. (Dimension) in November 2017, we have recorded on our balance sheet intangible assets for in-process research and development (IPR&D) related to DTX301 and DTX401. Following the FDA approval of Dojolvi in June 2020, we have also recorded contract-based intangible assets related to our license from third parties for certain assets related to the product. We test the intangible assets for impairment annually during the fourth quarter and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If the associated research and development effort is abandoned, the related assets will be written-off and we will record a noncash impairment loss on our statement of operations. We have not recorded any impairments related to our intangible assets through the end of March 31, We may not be successful in our efforts to identify, license, discover, develop, or commercialize additional product candidates.
If any of these events occur, we may be forced to abandon our development efforts for a program or programs, or we may not be able to identify, license, discover, develop, or commercialize additional product candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations. We may expend our limited resources to pursue a particular product, product candidate or indication and fail to capitalize on products, product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus our sales, marketing and research programs on certain products, product candidates or for specific indications. As a result, we may forego or delay pursuit of opportunities with other products or product candidates or other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product or product candidate, we may relinquish valuable rights through collaboration, licensing, or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights or we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.
Changes to healthcare and FDA laws, regulations, and policies may have a material adverse effect on our business and results of operations.
We expect that additional state and federal healthcare reform measures and regulations will be adopted in the future, including proposals to reduce the exclusivity protections provided to already approved biological products and to provide biosimilar and interchangeable biologic products an easier path to approval. Any of these measures and regulations could limit the amounts that federal and state governments will pay for healthcare products and services, result in reduced demand for our product candidates or additional pricing pressures and affect our product development, testing, marketing approvals and post-market activities.
Failure to comply with laws and regulations could harm our business and our reputation. Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States, and in other circumstances these requirements may be more stringent in the United States. In particular, our operations are directly, and indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations and patient privacy regulations, including the EU General Data Protection Regulation and the California Consumer Privacy Act (CCPA), as described in “Item 1. Business – Government Regulation” of our Annual Report. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. For instance, as we and our employees increasingly use social media tools as a means of communication with the public, there is a risk that the use of social media by us or our employees to communicate about our products or business may cause to be found in violation of applicable laws, despite our attempts to monitor such social media communications through company policies and guidelines. In addition, our employees may knowingly or inadvertently make use of social media in ways that may not comply with our company policies or other legal or contractual requirements, which may give rise to liability, lead to the loss of trade secrets or other intellectual property, or result in public exposure of personal information of our employees, clinical trial patients, customers, and others. If our operations are found to be in violation of any of the laws described above or any other governmental regulations
Our research and development activities, including our process and analytical development activities in our quality control laboratory, and our and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use, and disposal of hazardous materials, including the components of our product candidates, such as viruses, and other hazardous compounds, which subjects us to laws and regulations governing such activities. In some cases, these hazardous materials and various wastes resulting from their use are stored at our or our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts, and business operations or environmental damage that could result in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. We cannot guarantee that the safety procedures utilized by us and our third-party manufacturers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages—and such liability could exceed our resources—and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage. International expansion of our business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States. Our business strategy includes international expansion. We currently conduct clinical studies and regulatory activities and we also commercialize products outside of the United States. Doing business internationally involves a number of risks, including but not limited to:
Any of these factors could significantly harm our future international expansion and operations and, consequently, our results of operations. 58 Risks generally associated with a company-wide implementation of an enterprise resource planning (ERP) system may adversely affect our business and results of operations or the effectiveness of our internal controls over financial reporting. We are in the process of implementing a company-wide ERP system to upgrade certain existing business, operational, and financial processes. Our ERP implementation is a complex and time-consuming project that we expect will require multiple years to complete. Our results of operations could be adversely affected if we experience time delays or cost overruns during the ERP implementation process, or if the ERP system or associated process changes do not give rise to the benefits that we expect. This project has required and may continue to require investment of capital and human resources, the re-engineering of processes of our business, and the attention of many employees who would otherwise be focused on other aspects of our business. Any deficiencies in the design and implementation of the new ERP system could result in potentially much higher costs than we had incurred and could adversely affect our ability to develop and launch solutions, provide services, fulfill contractual obligations, file reports with the SEC in a timely manner, operate our business or otherwise affect our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition. Our business and operations may be materially adversely affected in the event of computer system failures or security breaches.
We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster. Our corporate headquarters and one of our laboratories are located in the San Francisco Bay Area, and our collaboration partner for Crysvita, KKC, is located in Japan, which have both in the past experienced severe earthquakes and other natural disasters. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations or those of our collaborators, and have a material adverse effect on our business, results of operations, financial condition, and prospects. If a natural disaster, power outage, or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure (such as the manufacturing facilities of our third-party contract manufacturers) or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are may be inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business. 59 We may acquire companies or products or engage in strategic transactions, which could divert our management’s attention and cause us to incur various costs and expenses, or result in fluctuations with respect to the value of such investment, which could impact our operating results. We may acquire or invest in businesses or products that we believe could complement or expand our business or otherwise offer growth opportunities. For example, we acquired Dimension in November 2017 and during the third quarter 2019, we entered into an agreement with GeneTx to collaborate on the development of a product for the treatment of Angelman Syndrome which included an exclusive option to acquire GeneTx. The pursuit of potential acquisitions or investments may divert the attention of management and may cause us to incur various costs and expenses in identifying, investigating, and pursuing them, whether or not they are consummated. We may not be able to identify desirable acquisitions or investments or be successful in completing or realizing anticipated benefits from such transactions. In addition, we may receive inquiries relating to potential strategic transactions, including collaborations, licenses, and acquisitions. Such potential transactions may divert the attention of management and may cause us to incur various costs and expenses in investigating and evaluating such transactions, whether or not they are consummated. The value of our investments in other companies or businesses may also fluctuate significantly and impact our operating results quarter to quarter or year to year. For instance, in June 2019, we purchased 2.4 million shares of common stock of Arcturus
Risks Related to Ownership of Our Common Stock The market price of our common stock may be highly volatile. The market price of our common stock has been, and is likely to continue to be, volatile, including for reasons unrelated to changes in our business. Our stock price could be subject to wide fluctuations in response to a variety of factors, including but not limited to the following:
In addition, biotechnology and biopharmaceutical companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall. We will need additional capital in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities, or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders. Pursuant to our 2014 Incentive Plan, or the 2014 Plan, our management is authorized to grant stock options and other equity-based awards to our employees, directors, and consultants. At March 31, Pursuant to our 2014 Employee Stock Purchase Plan, or 2014 ESPP, eligible employees can acquire shares of our common stock at a discount to the prevailing market price. At March 31,
61 We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock. We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings, if any, for the development, operation, and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock. Provisions in our amended and restated certificate of incorporation and by-laws, as well as provisions of Delaware law, could make it more difficult for a third-party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. Our amended and restated certificate of incorporation, amended and restated by-laws, and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and by-laws include provisions that:
These provisions, alone or together, could delay, deter, or prevent hostile takeovers and changes in control or changes in our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Further, no stockholder is permitted to cumulate votes at any election of directors because this right is not included in our amended and restated certificate of incorporation. Any provision of our amended and restated certificate of incorporation or amended and restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or other employees to us or to our stockholders, (3) any action asserting a claim against us arising under the Delaware General Corporation Law or under our amended and restated certificate of incorporation or bylaws, or (4) any action against us asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition. 62 General Risk Factors If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our stock may decrease. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. Section 404(b) of the Sarbanes-Oxley Act also requires our independent auditors to attest to, and report on, this management assessment. Ensuring that we have adequate internal controls in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. If we are not able to comply with the requirements of Section 404 or if we or our independent registered public accounting firm are unable to attest to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities, which would require additional financial and management resources. We may incur additional tax liabilities related to our operations. We have a multinational tax structure and are subject to income tax in the United States and various foreign jurisdictions. Our effective tax rate is influenced by many factors including changes in our operating structure, changes in the mix of our earnings among countries, our allocation of profits and losses among our subsidiaries, our intercompany transfer pricing agreements and rules relating to transfer pricing, the availability of U.S. research and development tax credits, and future changes in tax laws and regulations in the U.S. and foreign countries. Significant judgment is required in determining our tax liabilities including management’s judgment for uncertain tax positions. The Internal Revenue Service, other domestic taxing authorities, or foreign taxing authorities may disagree with our interpretation of tax laws as applied to our operations. Our reported effective tax rate and after-tax cash flows may be materially and adversely affected by tax assessments in excess of amounts accrued for our financial statements. This could materially increase our future effective tax rate thereby reducing net income and adversely impacting our results of operations for future periods. Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. We have incurred substantial losses during our history. To the extent that we continue to generate taxable losses, unused taxable losses will, subject to certain limitations, carry forward to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the IRC, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOL carryforwards, and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. An analysis to determine limitations upon our NOL carryforwards and other pre-change tax attributes for ownership changes that have occurred previously has been performed, resulting in a permanent decrease of federal and state NOL carryforwards in the amount of $7.2 million and a permanent decrease in federal research tax credit carryforwards in the amount of $0.2 million. As a result of these decreases and others that may occur as a result of future ownership changes, our ability to use our pre-change NOL carryforwards and other tax attribute carryforwards to offset U.S. federal taxable income and tax liabilities is limited and may become subject to even greater limitations, which could potentially accelerate or permanently increase future federal tax liabilities for us. In addition, there may be periods during which the use of state income tax NOL carryforwards and other state tax attribute carryforwards (such as state research tax credits) are suspended or otherwise limited, which could potentially accelerate or permanently increase future state tax liabilities for us.
We have
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. 63 Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None.
Item 6. Exhibits
# Indicates management contract or compensatory plan. † Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
*The certification attached as Exhibit 32.1 that accompanies this Quarterly Report is furnished to, and not deemed filed with, the SEC and is not to be incorporated by reference into any filing of the Registrant under the Securities Act or the Exchange Act, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
66 |