0001558370-16-005983.txt : 20160513 0001558370-16-005983.hdr.sgml : 20160513 20160513160811 ACCESSION NUMBER: 0001558370-16-005983 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 51 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160513 DATE AS OF CHANGE: 20160513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Editas Medicine, Inc. CENTRAL INDEX KEY: 0001650664 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 464097528 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37687 FILM NUMBER: 161648420 BUSINESS ADDRESS: STREET 1: 300 THIRD STREET STREET 2: FIRST FLOOR CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 617-401-9000 MAIL ADDRESS: STREET 1: 300 THIRD STREET STREET 2: FIRST FLOOR CITY: CAMBRIDGE STATE: MA ZIP: 02142 10-Q 1 edit-20160331x10q.htm 10-Q edit_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ________

 

 

Commission File Number 001-37687


EDITAS MEDICINE, INC.

(Exact name of registrant as specified in its charter)


 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

46‑4097528
(I.R.S. Employer
Identification No.)

 

 

 

300 Third Street, First Floor
Cambridge, Massachusetts
(Address of principal executive offices)

 

02142
(Zip Code)

 

(617) 401‑9000

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

 

Large accelerated filer

Accelerated filer 

 

 

 

 

Non‑accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No 

 

The number of shares of the Common Stock outstanding as of May 6, 2016 was 36,608,136.

 

 


 

Editas Medicine, Inc.

TABLE OF CONTENTS

 

 

 

 

 

    

    

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

3

 

 

 

Item 1. 

Financial Statements (unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2015

 

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4. 

Controls and Procedures

 

29

 

 

 

 

PART II. OTHER INFORMATION 

 

30

 

 

 

 

Item 1. 

Legal Proceedings

 

30

Item 1A. 

Risk Factors

 

30

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

79

Item 6. 

Exhibits

 

80

 

 

 

 

Signatures 

 

81

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

Editas Medicine, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(amounts in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

229,204

 

$

143,180

 

Accounts receivable

 

 

1,108

 

 

1,019

 

Prepaid expenses and other current assets

 

 

1,874

 

 

786

 

Total current assets

 

 

232,186

 

 

144,985

 

Property and equipment, net

 

 

15,003

 

 

2,130

 

Restricted cash and other non-current assets

 

 

1,619

 

 

2,248

 

Total assets

 

$

248,808

 

$

149,363

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND  STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,909

 

$

1,381

 

Accrued expenses

 

 

7,251

 

 

5,456

 

Deferred rent, current portion

 

 

62

 

 

88

 

Total current liabilities

 

 

10,222

 

 

6,925

 

Deferred rent, net of current portion

 

 

71

 

 

 —

 

Deferred revenue

 

 

25,479

 

 

25,321

 

Warrant to purchase redeemable securities

 

 

 —

 

 

289

 

Construction financing lease obligation

 

 

11,649

 

 

 —

 

Other non-current liabilities

 

 

24

 

 

27

 

Total liabilities

 

 

47,445

 

 

32,562

 

Commitments and contingencies (see note 6)

 

 

 

 

 

 

 

Series A-1 redeemable convertible preferred stock, $0.0001 par value per share: no shares and 21,320,000 shares authorized at March 31, 2016 and December 31, 2015, respectively; no shares and 21,260,000 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

 —

 

 

21,137

 

Series A-2 redeemable convertible preferred stock, $0.0001 par value per share: no shares and 16,890,699 shares authorized, issued and outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

 —

 

 

59,027

 

Series B redeemable convertible preferred stock, $0.0001 par value per share: no shares and 26,666,660 shares authorized, issued and outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

 —

 

 

119,751

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 shares and no shares authorized at March 31, 2016 and December 31, 2015, respectively; no shares issued or outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value per share: 195,000,000 shares and 92,000,000 shares authorized at March 31, 2016 and December 31, 2015, respectively; 36,608,136 and 4,869,829 shares issued and 35,169,842 and 3,233,638 shares outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

4

 

 

 —

 

Additional paid-in capital

 

 

307,448

 

 

5,234

 

Accumulated deficit

 

 

(106,089)

 

 

(88,348)

 

Total stockholders’ equity (deficit)

 

 

201,363

 

 

(83,114)

 

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)

 

$

248,808

 

$

149,363

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


 

 

Editas Medicine, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(amounts in thousands, except per share and share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Collaboration revenue

 

$

805

 

$

 —

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

8,882

 

 

1,888

 

General and administrative

 

 

9,762

 

 

3,273

 

Total operating expenses

 

 

18,644

 

 

5,161

 

Operating loss

 

 

(17,839)

 

 

(5,161)

 

Other income (expense), net

 

 

 

 

 

 

 

Other expense, net

 

 

(30)

 

 

(99)

 

Interest income (expense), net

 

 

124

 

 

(31)

 

Total other income (expense), net

 

 

94

 

 

(130)

 

Net loss and comprehensive loss

 

$

(17,745)

 

$

(5,291)

 

Reconciliation of net loss to net loss attributable to common stockholders:

 

 

 

 

 

 

 

Net loss

 

$

(17,745)

 

$

(5,291)

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

(47)

 

 

(95)

 

Net loss attributable to common stockholders

 

$

(17,792)

 

$

(5,386)

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.80)

 

$

(2.75)

 

Weighted-average common shares outstanding, basic and diluted

 

 

22,280,797

 

 

1,957,378

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

4


 

 

Editas Medicine, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(17,745)

 

$

(5,291)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

4,210

 

 

65

 

Depreciation

 

 

187

 

 

83

 

Non-cash interest expense

 

 

 —

 

 

13

 

Re-measurement of warrant to purchase redeemable securities

 

 

87

 

 

 —

 

Change in fair value of preferred stock tranche asset or liability

 

 

 —

 

 

73

 

Changes in fair value of anti-dilutive protection liability

 

 

 —

 

 

26

 

Changes in deferred rent

 

 

45

 

 

(21)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(89)

 

 

 

Prepaid expenses and other current assets

 

 

(1,088)

 

 

(142)

 

Other non-current assets

 

 

2,248

 

 

 —

 

Accounts payable

 

 

544

 

 

(1,612)

 

Accrued expenses

 

 

1,814

 

 

863

 

Deferred revenue

 

 

158

 

 

 

Net cash used in operating activities

 

 

(9,629)

 

 

(5,943)

 

Cash flow from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(943)

 

 

(305)

 

Changes in restricted cash

 

 

(1,619)

 

 

 —

 

Net cash used in investing activities

 

 

(2,562)

 

 

(305)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Proceeds from equipment loan, net of issuance costs

 

 

 —

 

 

791

 

Proceeds from initial public offering of common stock, net of issuance costs

 

 

98,182

 

 

 —

 

Proceeds from stock option exercises

 

 

33

 

 

 —

 

Net cash provided by financing activities

 

 

98,215

 

 

791

 

Net increase (decrease) in cash and cash equivalents

 

 

86,024

 

 

(5,457)

 

Cash and cash equivalents, beginning of period

 

 

143,180

 

 

10,623

 

Cash and cash equivalents, end of period

 

$

229,204

 

$

5,166

 

Supplemental disclosure of cash and non-cash activities:

 

 

 

 

 

 

 

Conversion of preferred stock to common stock upon closing of the initial public offering

 

$

199,915

 

$

 —

 

Capitalization of construction-in-progress related to facility lease obligation

 

 

11,649

 

 

 —

 

Fixed asset additions included in accounts payable and accrued expenses

 

 

526

 

 

113

 

Initial public offering costs incurred but unpaid at period end

 

 

497

 

 

 

Reclassification of warrants to additional paid-in capital

 

 

376

 

 

 —

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

47

 

 

95

 

Reclassification of liability for common stock subject to repurchase

 

 

3

 

 

 —

 

Accrual of final payment fee on equipment loan and debt discount

 

 

 —

 

 

30

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5


 

Editas Medicine, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Nature of business

 

Editas Medicine, Inc. (the “Company”) is a research stage company dedicated to treating patients with genetically defined diseases by correcting their disease‑causing genes. The Company was incorporated in the state of Delaware in September 2013. Its principal offices are in Cambridge, Massachusetts.

 

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital, and has financed its operations through various equity and debt financings, including the initial public offering of its common stock (the “IPO”), private placements of preferred stock and an equipment loan, and from upfront fees paid under a research collaboration.

 

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot‑scale manufacturing to large‑scale production of products.

 

On February 8, 2016, the Company completed its IPO whereby the Company sold 6,785,000 shares of its common stock, inclusive of 885,000 shares of common stock sold by the Company pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering, at a price to the public of $16.00 per share. The shares began trading on the NASDAQ Global Select Market on February 3, 2016. The aggregate net proceeds received by the Company from the offering were $97.7 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In connection with the IPO, the board of directors and the stockholders of the Company approved a one-for-2.6 reverse stock split of the Company’s issued and outstanding common stock. The reverse stock split became effective on January 15, 2016. All share and per share amounts in the condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 24,929,709 shares of common stock. Following these transactions, the Company’s total issued common stock as of March 31, 2016 was 35,169,842 shares. The significant increase in shares outstanding in the first quarter of 2016 is expected to impact the year-over-year comparability of the Company’s net loss per share calculations for the next twelve months.

 

The Company has incurred annual net operating losses in every year since its inception. The Company had an accumulated deficit of $106.1 million at March 31, 2016, and will require substantial additional capital to fund operations. The Company has not generated any product revenues and has financed its operations primarily through a public offering, private placements of its equity securities, an equipment loan, and funding from its collaboration with Juno Therapeutics. There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations, and financial condition.

 

2. Summary of significant accounting policies

 

Unaudited interim financial information

 

The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report, as is permitted by

6


 

such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Annual Report”).

 

The unaudited condensed consolidated financial statements include the accounts of Editas Medicine, Inc. and its wholly owned subsidiary. All intercompany transactions and balances of the subsidiary have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The three months ended March 31, 2016 and 2015 are referred to as the first quarter of 2016 and 2015, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

 

Use of estimates 

   

The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to revenue recognition, accrued expenses, stock‑based compensation expense, valuation of the redeemable convertible preferred stock tranche liability and the anti‑dilutive protection liability, valuation of the warrant liability, deferred tax valuation allowances, the fair value of common stock prior to the completion of the Company’s IPO and construction lease financing obligations. The Company bases its estimates on historical experience and other market‑specific or relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

   

Summary of significant accounting policies

 

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.

 

Recent accounting pronouncements

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU No. 2016-09”), which simplifies share-based payment accounting through a variety of amendments. The standard will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the potential impact ASU 2016-09 may have on its financial position.

 

For a discussion of other recent accounting pronouncements please refer to Note 2, “Summary of Significant Accounting Policies,” in the Annual Report. The Company did not adopt any new accounting pronouncements during the three months ended March 31, 2016.

 

3. Fair Value Measurements

 

The Company classifies fair value based measurements using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1, quoted market prices in active markets for identical assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level 1such as quoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data; and Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including estimates and assumptions

7


 

developed by the Company, reflective of those that a market participant would use, as inputs to certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

Assets measured at fair value on a recurring basis as of March 31, 2016 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

March 31, 

 

Identical Assets

 

Inputs

 

Inputs

 

Assets

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

$

229,204

 

$

229,204

 

$

 —

 

$

 —

 

Money market funds, included in other current assets

 

 

320

 

 

320

 

 

 —

 

 

 —

 

Money market funds, included in other non-current assets

 

 

1,619

 

 

1,619

 

 

 —

 

 

 —

 

Total

 

$

231,143

 

$

231,143

 

$

 

$

 

 

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

December 31, 

 

Identical Assets

 

Inputs

 

Inputs

 

Assets

 

2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

$

143,180

 

$

143,180

 

$

 —

 

$

 —

 

Money market funds, included in other current assets

 

 

320

 

 

320

 

 

 —

 

 

 —

 

Total

 

$

143,500

 

$

143,500

 

$

 —

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

289

 

$

 

$

 

$

289

 

 

There were no transfers between fair value measurement levels during the three month period ended March 31, 2016 or 2015. The fair value of the preferred stock warrant liability was determined based on “Level 3” inputs utilizing the Black-Scholes option pricing model. Upon the completion of the IPO, the Company’s outstanding warrant to purchase preferred stock converted into a warrant to purchase common stock and the Company reclassified the fair value of the warrant to additional paid-in capital. The following table presents activity in the preferred stock warrant during the three months ended March 31, 2016 (in thousands):

 

 

 

 

 

 

 

    

 

Warrant

 

 

 

 

Liability

 

Fair value at December 31, 2015

 

$

289

 

Increase in fair value recognized in other expense

 

 

87

 

Reclassification to additional paid-in capital in connection with IPO

 

 

(376)

 

Fair value at March 31, 2016

 

$

 —

 

 

Cash and cash equivalents

 

The Company considers all highly liquid securities with original final maturities of three months or less from the date of purchase to be cash equivalents. As of March 31, 2016 and December 31, 2015, cash and cash equivalents comprise funds in cash and money market accounts.

 

 

8


 

4. Accrued expenses

 

Accrued expenses consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

March 31, 

 

December 31, 

 

 

    

2016

    

2015

 

Patent and license fees

 

$

5,290

 

$

3,395

 

Deferred initial public offering costs

 

 

 —

 

 

283

 

Employee compensation costs

 

 

677

 

 

1,016

 

Professional services

 

 

1,048

 

 

382

 

Other

 

 

236

 

 

380

 

Total

 

$

7,251

 

$

5,456

 

 

 

5. Income Taxes

 

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. There were no significant income tax provisions or benefits for the three months ended March 31, 2016 and 2015. Due to uncertainty surrounding the realization of its favorable tax attributes in future tax returns, the Company has recorded a full valuation allowance against the Company’s otherwise recognizable net deferred tax assets.

 

 

6. Commitments and contingencies

 

Facility leases

 

In December 2013, the Company entered into an agreement to sublease its facility under a non‑cancelable operating lease that expires in September 2016. Pursuant to the sublease agreement, the Company maintains restricted cash of $0.3 million in a collateral account to be held until the expiration or termination of the Company’s obligations under the agreement. The sublease agreement cannot be extended beyond the expiration date of the sublease. The lease contains escalating rent clauses which require higher rent payments in future years. The Company expenses rent on a straight‑line basis over the term of the lease, including any rent‑free periods. The deposit is recorded in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of March 31, 2016 and December 31, 2015, respectively.

 

In November 2015, the Company entered into a real estate license agreement to sublease from the licensor additional laboratory space in Cambridge, Massachusetts. The term of the lease is from December 1, 2015 to November 30, 2016. The Company’s contractual obligation related to lease payments over the term of the sublease is approximately $1.9 million. The sublease is cancelable upon no less than 30 days written notice, provided that the Company will remain liable to continue to pay the monthly rental fee for the remainder of the term unless the licensor can sublease the space. If the licensor can sublease the space to another party, the Company will be credited the lesser of (i) the rental fee paid by such party corresponding to the remainder of the term and (ii) 50% of the rental for the remainder of the term.

 

Hurley Street, Cambridge, MA

 

On February 12, 2016, the Company entered into a lease agreement for approximately 59,783 square feet of office and laboratory space located on Hurley Street in Cambridge, Massachusetts. The term of the lease will begin on September 1, 2016, unless the Company earlier occupies the premises, the renovations are completed later than September 1, 2016, or certain other events specified in the lease agreement occur. In connection with the lease and as a security deposit, the Company deposited with the landlord a letter of credit in the amount of approximately $1.6 million. Subject to the terms of the lease and certain reduction requirements specified therein, the $1.6 million security deposit

9


 

may decrease over time. The letter of credit, which is collateralized by the Company with cash held in a money market account, is recorded in restricted cash and other non-current assets in the accompanying condensed consolidated financial statement as of March 31, 2016. 

 

In connection with this lease, the landlord is providing a tenant improvement allowance for costs associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be in accordance with the Company’s plans and include fit out of the building to construct laboratory and office space. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to fund all costs incurred in excess of the tenant allowance. For accounting purposes, the Company is deemed the owner of the building during the construction period due to the fact that the Company is involved in the construction project, including having responsibilities for cost overruns for planned tenant improvements that do not qualify as “normal tenant improvements” under the lease accounting guidance.

 

As construction progresses, the Company records the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on the condensed consolidated balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the building, the Company will determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the appropriate accounting guidance. As of March 31, 2016, the Company has recorded construction in progress of $11.6 million, which was included in property and equipment, net, and a corresponding facility lease obligation of $11.6 million. No cash was paid to the landlord related to the building for the three months ended March 31, 2016.

 

The Company bifurcates its future lease payments pursuant to the Hurley Street lease into (i) a portion that is allocated to the building and (ii) a portion that is allocated to the land on which the building is located, which is recorded as rental expense. Although the Company estimates that it will not begin making lease payments pursuant to the Hurley Street lease until fall 2016, the portion of the lease obligation allocated to the land is treated for accounting purposes as an operating lease that commenced upon execution of the Hurley Street lease in February 2016. During the three months ended March 31, 2016, the Company recognized $0.1 million of non-cash rental expense attributable to the land.

 

The lease will continue until the end of the 84th full calendar month following the first day of the first full month immediately following the date on which the term of the lease begins. The Company has the option to extend the lease for an additional five-year term at market-based rates. The base rent is subject to increases over the term of the lease. The non-cancelable minimum annual lease payments for the annual periods beginning upon commencement of the lease are $3.9 million, $4.0 million, $4.1 million, $4.2 million and $4.3 million in the first five years of the lease, respectively, and $9.2 million in total thereafter, plus the Company’s share of the facility operating expenses and other costs that are reimbursable to the landlord under the lease. The Company expects to commence these rental payments upon completion of the building, estimated to be in fall 2016.

 

Licensor Expense Reimbursement

 

The Company is obligated to reimburse The Broad Institute Inc. (“Broad”), and the President and Fellows of Harvard College (“Harvard”), for expenses incurred by each of them associated with the prosecution and maintenance of the patent rights that the Company licenses from them pursuant to the license agreement by and among the Company, Broad and Harvard, including the interference and opposition proceedings involving patents licensed to the Company under this agreement. As such, the Company anticipates that it has a substantial commitment in connection with these proceedings until such time as these proceedings have been resolved, but the amount of such commitment is not determinable. The Company incurred an aggregate of $4.5 million and $3.3 million in expense for such reimbursement during the three months ended March 31, 2016 and 2015, respectively.

 

Litigation

 

The Company is not a party to any litigation and did not have contingency reserves established for any litigation liabilities as of March 31, 2016 or December 31, 2015.

 

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7. Significant Agreements

 

Juno Therapeutics Collaboration Agreement

 

Summary of Agreement

 

In May 2015, the Company entered into a Collaboration and License Agreement (the “Collaboration Agreement”) with Juno Therapeutics, Inc. (“Juno Therapeutics”). The collaboration is focused on the research and development of engineered T cells with chimeric antigen receptors (“CARs”) and T cell receptors (“TCRs”) that have been genetically modified to recognize and kill other cells. The parties will pursue the research and development of CAR and TCR engineered T cell products utilizing the Company’s genome editing technologies with Juno Therapeutics’ CAR and TCR technologies across three research areas.

 

The collaborative program of research to be undertaken by the parties pursuant to the Collaboration Agreement will be conducted in accordance with a mutually agreed upon research plan which outlines each party’s research and development responsibilities across the three research areas. The Company’s research and development responsibilities under the research plan are related to generating genome editing reagents that modify gene targets selected by Juno Therapeutics. Juno Therapeutics is responsible for evaluating and selecting for further research and development CAR and TCR engineered T cell products modified with the Company’s genome editing reagents. Except with respect to the Company’s obligations under the mutually agreed upon research plan, Juno Therapeutics has sole responsibility, at its own cost, for the worldwide research, development, manufacturing and commercialization of products within each of the three research areas for the diagnosis, treatment or prevention of any cancer in humans through the use of engineered T cells, excluding the diagnosis, treatment or prevention of medullary cystic kidney disease 1 (the “Exclusive Field”).

 

The initial term of the research program commenced on May 26, 2015 and continues for five years ending on May 26, 2020 (the “Initial Research Program Term”). Juno Therapeutics may extend the Initial Research Program Term for up to two additional one year periods upon the payment of extension fees for each one year extension period, assuming the Company has agreed to the extension request(s) (together, the initial term and any extension period(s) are referred to as the “Research Program Term”).

 

Under the terms of the Collaboration Agreement, the Company granted to Juno Therapeutics during the Research Program Term a nonexclusive, worldwide, royalty‑free, sublicensable (subject to certain conditions) license under certain of the intellectual property controlled by the Company solely for the purpose of conducting activities required under the specified research under the Collaboration Agreement: (i) conduct activities assigned to Juno Therapeutics under the research plan, (ii) conduct activities assigned to the Company under the research plan that the Company fails or refuses to conduct in a timely manner, (iii) use certain genome editing reagents generated under the research program to research, evaluate and conduct preclinical testing and development of certain engineered T cells and (iv) evaluate the data developed in the conduct of activities under the research plan (the “Research License”). Additionally, as it relates to two of the three research areas, the Company granted to Juno Therapeutics an exclusive, milestone and royalty‑bearing, sublicensable license under certain of the intellectual property controlled by the Company to research, develop, make and have made, use, offer for sale, sell, import and export selected CAR and TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain targets selected by Juno Therapeutics pursuant to the research program. Furthermore, as it relates to the same two research areas, the Company granted to Juno Therapeutics a non‑exclusive, milestone and royalty‑bearing, sub licensable license under certain of the intellectual property controlled by the Company to use genome editing reagents generated under the research program that are used in the creation of certain CAR or TCR engineered T cell products on which Juno Therapeutics has filed an IND in the Exclusive Field for the treatment or prevention of a cancer in humans to research, develop, make and have made, use, offer for sale, sell, import and export those CAR or TCR engineered T cell products in all fields outside of the Exclusive Field (the “Non‑Exclusive Field”) on a worldwide basis, specifically as it relates to certain targets selected by Juno Therapeutics pursuant to the research program (together, the license in the Exclusive Field and the license in the Non‑Exclusive Field are referred to as the “Development and Commercialization License” for each particular research area). Lastly, as it relates to the third research area, the Company granted to Juno Therapeutics a milestone and royalty‑bearing, sublicensable license under certain of the intellectual property controlled by the Company to use the genome editing reagents generated under the research program that are associated with certain CAR or TCR engineered T cell products to research, develop, make and have made, use, offer for sale, sell, import or export those CAR or TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain to certain

11


 

products selected by Juno Therapeutics pursuant to the research program. The license associated with the third research area is exclusive as it relates to CAR or TCR engineered T cell products directed to certain targets as selected by Juno Therapeutics, but is otherwise non‑exclusive (referred to as the “Development and Commercialization License” for the third research area).

 

The Collaboration Agreement will be managed on an overall basis by a project leader from each of the Company and Juno Therapeutics. The project leaders will serve as the contact point between the parties with respect to the research program and will be primarily responsible for facilitating the flow of information, interaction, and collaboration between the parties. In addition, the activities under the Collaboration Agreement during the Research Program Term will be governed by a joint research committee (“JRC”) formed by an equal number of representatives from the Company and Juno Therapeutics. The JRC will oversee, review and recommend direction of the research program. Among other responsibilities, the JRC will monitor and report research progress and ensure open and frequent exchange between the parties regarding research program activities.

 

Under the terms of the Collaboration Agreement, the Company received a $25.0 million up‑front, non‑refundable, non‑creditable cash payment. In addition, Juno Therapeutics will pay to the Company an aggregate of up to $22.0 million in research and development funding over the initial five year term of the research program across the three research areas consisting primarily of funding for up to a specified maximum number of full time equivalents personnel each year over the initial five year term of the research program across three research areas. Under the terms of the Collaboration Agreement, there is no incremental compensation due to the Company with respect to the Development and Commercialization License granted to Juno Therapeutics associated with the first target or product, as applicable, designated by Juno Therapeutics within each of the three research areas. However, for two of the three research areas, Juno Therapeutics has the option to purchase up to three additional Development and Commercialization Licenses associated with other gene targets for an additional fee of approximately $2.5 million per target. In addition, Juno Therapeutics would be required to make certain milestone payments to the Company upon the achievement of specified development, regulatory and commercial events. More specifically, for the first product to achieve the associated event in each of the three research areas, the Company is eligible to receive up to a $77.5 million in development milestone payments and up to $80 million in regulatory milestone payments. In addition, the Company is eligible to receive additional development and regulatory milestone payments for subsequent products developed within each of the three research areas. Moreover, the Company is eligible for up to $75.0 million in commercial milestone payments associated with aggregate sales of all products within each of the three research areas. Development milestone payments are triggered upon the achievement of certain specified development criteria or upon initiation of a defined phase of clinical research for a product candidate. Regulatory milestone payments are triggered upon approval to market a product candidate by the United States Food and Drug Administration (“FDA”) or other global regulatory authorities. Commercial milestone payments are triggered when an approved pharmaceutical product reaches certain defined levels of net sales by the licensee.

 

In addition, to the extent any of the product candidates covered by the licenses conveyed to Juno Therapeutics are commercialized, the Company would be entitled to receive tiered royalty payments of low double digits based on a percentage of net sales. Royalty payments are subject to certain reductions, including for any royalty payments required to be made by Juno Therapeutics related to a third‑party’s intellectual property rights, subject to an aggregate minimum floor. Royalties are due on a licensed product‑by‑licensed product and country‑by‑country basis from the date of the first commercial sale of each product in a country until the later of: (i) the tenth anniversary of the first commercial sale of such licensed product in such country and (ii) the expiration date in such country of the last to expire valid claim within the licensed intellectual property covering the manufacture, use or sale of such licensed product in such country. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, no milestone or royalty payments may ever be received from Juno Therapeutics. As of March 31, 2016, the next potential milestone payment that the Company may be entitled to receive under the agreement is a substantive milestone payment of $2.5 million for the achievement of certain development criteria. The Company would recognize the milestone payment as revenue upon achievement. There are no cancellation, termination or refund provisions in the Collaboration Agreement that contain material financial consequences to the Company.

 

Unless earlier terminated, the Collaboration Agreement will continue in full force and effect, on a product‑by‑product and country‑by‑country basis until the date no further payments are due to the Company from

12


 

Juno Therapeutics. Either party may terminate the Collaboration Agreement if the other party has materially breached or defaulted in the performance of any of its material obligations and such breach or default continues after the specified cure period. Either party may terminate the Collaboration Agreement in the event of the commencement of any proceeding in or for bankruptcy, insolvency, dissolution or winding up by or against the other party that is not dismissed or otherwise disposed of within a specified time period. Juno Therapeutics may terminate the Collaboration Agreement for convenience upon not less than six months prior written notice to the Company. The Company may terminate the Collaboration Agreement in the event that Juno Therapeutics brings, assumes, or participates in, or knowingly, willfully or recklessly assists in bringing a dispute or challenge against the Company related to its intellectual property.

 

Termination of the Collaboration Agreement for any reason does not release either party from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination nor preclude either party from pursuing any rights and remedies it may have under the agreement or at law or in equity with respect to any breach of the Collaboration Agreement. If Juno Therapeutics terminates the Collaboration Agreement as a result of the Company’s uncured material breach or default, then: (i) the licenses and rights conveyed to Juno Therapeutics will continue as set forth in the agreement, (ii) Juno Therapeutics’ obligations related to milestones and royalties will continue as set forth in the agreement and (iii) Juno Therapeutics’ rights to prosecute, maintain and enforce certain intellectual property rights will continue as set forth in the agreement. If Juno Therapeutics terminates the Collaboration Agreement for convenience or if the Company terminates the Collaboration Agreement as a result of Juno Therapeutics’ uncured material breach or default, then the licenses conveyed to Juno will terminate.

 

Accounting Analysis

 

The Company evaluated the Collaboration Agreement in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification (“ASC”), Topic 605-25Revenue Recognition—Multiple Element Arrangements. The Company’s arrangement with Juno Therapeutics contains the following deliverables: (i) research and development services during the Initial Research Program Term (the “R&D Services Deliverable”), (ii) the Research License, (iii) the Development and Commercialization Licenses related to each of the three research areas (each, the “Development and Commercialization License Deliverable” for the respective research area), (iv) significant and incremental discount related to the option to purchase up to three additional Development and Commercialization Licenses for two of the research areas (each, the “Discount Deliverable” for the associated option) and (v) JRC services during the Initial Research Program Term (the “JRC Deliverable”).

 

The Company has determined that the options to purchase additional development and commercialization licenses within two of the research program areas related to other gene targets are substantive options. Juno Therapeutics is not contractually obligated to exercise the options. Moreover, as a result of the uncertain outcome of the discovery, research and development activities, there is significant uncertainty as to whether Juno Therapeutics will decide to exercise its option for any additional gene targets within either of the two applicable research areas. Consequently, the Company is at risk with regard to whether Juno Therapeutics will exercise the options. However, the Company has determined that the options to purchase additional development and commercialization licenses with respect to other gene targets within the two applicable research program areas are priced at a significant and incremental discount. As a result, the Company has concluded that the discounts to purchase development and commercialization licenses for up to three additional gene targets within both of the research areas represent separate elements in the arrangement at inception. Accordingly, the deliverables identified at inception of the arrangement include six separate deliverables related to the significant and incremental discount inherent in the pricing of the option to purchase up to three additional development and commercialization licenses for two of the research areas included within the research program.

 

The Company has concluded that the Research License deliverable does not qualify for separation from the R&D Services Deliverable. As it relates to the assessment of standalone value, the Company has determined that Juno Therapeutics cannot fully exploit the value of the Research License deliverable without receipt of the R&D Services Deliverable. This is primarily due to the fact that Juno Therapeutics must rely upon the Company to provide the research and development services included in the research plan because the services incorporate technology that is proprietary to the Company. The services to be provided by the Company involve unique skills and specialized expertise, particularly as it relates to genome editing technology that is not available in the marketplace. Accordingly,

13


 

Juno Therapeutics must obtain the research and development services from the Company which significantly limits the ability for Juno Therapeutics to utilize the Research License for its intended purpose on a standalone basis. Therefore, the Research License deliverable does not have standalone value from the R&D Services Deliverable. As a result, the Research License deliverable and the R&D Services Deliverable have been combined as a single unit of accounting (the “R&D Services Unit of Accounting”). Conversely, the Company has concluded that each of the other deliverables identified at the inception of the arrangement has standalone value from each of the other elements based on their nature. Factors considered in this determination included, among other things, the capabilities of the collaboration partner, whether any other vendor sells the item separately, whether the value of the deliverable is dependent on the other elements in the arrangement, whether there are other vendors that can provide the items and if the customer could use the item for its intended purpose without the other deliverables in the arrangement. Additionally, the Collaboration Agreement does not include a general right of return. Accordingly, each of the other deliverables included in the Juno Therapeutics arrangement qualifies as a separate unit of accounting.

 

Therefore, the Company has identified eleven units of accounting in connection with its obligations under the collaboration arrangement with Juno Therapeutics as follows: (i) the R&D Services Unit of Accounting, (ii) three units of accounting related to the Development and Commercialization Licenses for each of the three research areas, (iii) six units of accounting related to each of the Discount Deliverables, and (iv) the JRC Deliverable.

 

The Company has determined that neither vendor specific objective evidence of selling price nor third-party evidence of selling price is available for any of the units of accounting identified at inception of the arrangement with Juno Therapeutics. Accordingly, the selling price of each unit of accounting was determined based on the Company’s best estimate of selling price (“BESP”). The Company developed the BESP for all of the units of accounting included in the Collaboration Agreement with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company developed the BESP for the R&D Services Unit of Accounting and the JRC Deliverable primarily based on the nature of the services to be performed and estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company developed the BESP for each of the Development and Commercialization License units of accounting based on the probability‑weighted present value of expected future cash flows associated with each license related to each specific research area. In developing such estimate, the Company also considered applicable market conditions and relevant entity‑specific factors, including those factors contemplated in negotiating the agreement, probability of success and the time needed to commercialize a product candidate pursuant to the associated license. The Company developed the BESP for each of the Discount Deliverables based on the estimated value of the associated in‑the‑money options. In developing such estimate, the Company considered the period to exercise the option, an appropriate discount rate and the likelihood that a market participant who was entitled to the discount would exercise the option.

 

Allocable arrangement consideration at inception is comprised of: (i) the up‑front payment of $25.0 million, (ii) the research support of $20.0 million and (iii) payments related to specialized materials costs of $2.0 million. The research support of $20.0 million and payments related to specialized materials costs of $2.0 million represent contingent revenue features because the Company’s retention of the associated arrangement consideration is dependent upon its future performance of research support services and development of specialized materials. The aggregate allocable arrangement consideration of $47.0 million was allocated among the separate units of accounting using the relative selling price method as follows: (i) R&D Services Unit of Accounting: $16.7 million, (ii) Development and Commercialization License for the first research area: $9.3 million, (iii) Development and Commercialization License for the second research area: $15.4 million, (iv) Development and Commercialization License for the third research area: $0.2 million, (v) the first Discount Deliverable for the first research area: $0.7 million, (vi) the second Discount Deliverable for the first research area: $0.4 million, (vii) the third Discount Deliverable for the first research area: $0.2 million, (viii) the first Discount Deliverable for the second research area: $2.0 million, (ix) the second Discount Deliverable for the second research area: $1.3 million, and (x) the third Discount Deliverable for the second research area: $0.8 million. No amounts were allocated to the JRC Deliverable because the associated BESP was determined to be de minimis. The amounts allocated to each of the development and commercialization licenses are based on the respective BESP calculations, which reflect the level of risk and expected probability of success inherent in the nature of the associated research area.

 

14


 

The Company will recognize revenue related to amounts allocated to the R&D Services Unit of Accounting as the underlying services are performed. The Company will recognize revenue related to amounts allocated to each of the Development and Commercialization Licenses upon delivery of the associated license, assuming the research services are substantially complete at the time the license is delivered. The rights to be conveyed to Juno Therapeutics pursuant to each of the Development and Commercialization Licenses extend exclusively to an individual target or product, as applicable; therefore, delivery is deemed to occur upon the designation by Juno Therapeutics of the specific target or product, as applicable, whereupon the license becomes effective. The Company will recognize revenue related to amounts allocated to each of the Discount Deliverables upon the earlier of exercise of the associated option or upon lapsing of the underlying right, if the respective option expires unexercised.

 

The Company has evaluated all of the milestones that may be received in connection with the Juno Therapeutics arrangement. In evaluating if a milestone is substantive, the Company assesses whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. All development and regulatory milestones are considered substantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All commercial milestones will be accounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.

 

During the three months ended March 31, 2016, the Company recognized revenue totaling approximately $0.8 million with respect to the collaboration with Juno Therapeutics. The revenue is classified as collaboration revenue in the accompanying condensed consolidated statement of operations. As of March 31, 2016, there is approximately $25.5 million of deferred revenue related to the Company’s collaboration with Juno Therapeutics, all of which is classified as long‑term in the accompanying condensed consolidated balance sheet. In addition, as of March 31, 2016, the Company has recorded accounts receivable of $1.0 million related to reimbursable research and development costs under the Collaboration Agreement for activities performed during the first quarter of 2016.

 

Other Agreements

 

Licensing Agreements

 

The Company is a party to a number of license agreements under which the Company licenses patents, patent applications and other intellectual property from third parties. The Company anticipates entering into these types of license agreements in the future. The Company believes the following agreements are significant to the business:

 

The General Hospital Corporation License Agreement—In August 2014, the Company entered into an agreement to license certain patent rights owned or co‑owned by The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”). Consideration for the granting of the license included the payment of an upfront license fee of $0.1 million, the issuance of 66,848 shares of the Company’s common stock, which was based on 0.5% of the Company’s outstanding stock on a fully diluted basis, and the right to receive future issuances of shares of common stock to maintain MGH’s ownership following the third tranche of the Company’s Series A redeemable convertible preferred stock financing (e.g. anti‑dilution protection liability), which was settled in June 2015. MGH is entitled to nominal annual license fees and to receive future clinical, regulatory and commercial milestone payments aggregating to a maximum of $3.7 million and aggregate of $1.8 million upon the occurrence of certain sales milestones. The Company is also obligated to pay MGH low single digit percentage royalties on net sales of products for the prevention or treatment of human disease, and ranging from low single digit to low double digit percentage royalties on net sales of other products and services made by the Company, its affiliates or its sublicenses. The royalty percentage depends on the

15


 

product and service, and whether such licensed product or licensed service is covered by a valid claim within the certain patent rights that the Company licenses from MGH.

 

The Broad Institute, Inc., The President and Fellows of Harvard College, and Massachusetts Institute of Technology License Agreement—In October 2014, the Company entered into an agreement with Harvard and Broad to license certain patent rights owned or co‑owned by, or among, Harvard, Massachusetts Institute of Technology (“MIT”), and the Broad (collectively, the “Institutions”). Consideration for the granting of the license included the payment of an upfront license issuance fee of $0.2 million, the issuance of 561,531 shares of the Company’s common stock, which was equal to 4.2% of the Company’s outstanding stock on a fully diluted basis and, the right to receive future issuances of shares of common stock to maintain the Institutions’ ownership following the third tranche of the Series A Preferred Stock financing (e.g. anti‑dilution protection liability), which was settled in June 2015. The Institutions are collectively entitled to receive clinical and regulatory milestone payments totaling up to $14.8 million in the aggregate per licensed product approved in the United States, European Union, and Japan for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. If the Company undergoes a change of control during the term of the license agreement, the clinical and regulatory milestone payments will be increased by a certain percentage in the mid‑double digits. The Company is also obligated to make additional payments to the Institutions, collectively, of up to an aggregate of $54.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. The Institutions are collectively entitled to receive clinical and regulatory milestone payments totaling up to $4.1 million in the aggregate per licensed product approved in the U.S. and at least one jurisdiction outside the U.S. for the treatment of a human disease based on certain criteria. The Company is also obligated to make additional payments to the Institutions, collectively, of up to an aggregate of $36.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a rare disease meeting certain criteria. The Institutions are entitled to receive from the Company nominal annual license fees and a mid‑single digit percentage royalties on net sales of products for the prevention or treatment of human disease, and ranging from low single digit to high single digit percentage royalties on net sales of other products and services, made by the Company, its affiliates, or its sublicensees. The royalty percentage depends on the product and service, and whether such licensed product or licensed service is covered by a valid claim within the certain patent rights that the Company licenses from the Institutions.

 

Duke University License Agreement—In October 2014, the Company entered into an exclusive license agreement with Duke University (“Duke”) to access intellectual property and technology related to the CRISPR/Cas9 and TALEN genome editing systems. In consideration for the granting of the license, the Company paid Duke an upfront fee of $0.1 million. Duke is entitled to receive clinical, regulatory, and commercial milestone payments totaling up to $0.6 million in the aggregate per licensed product. The Company is also obligated to pay to Duke nominal annual license fees and low single digit royalties based on annual net sales of licensed products and licensed services by the Company and its affiliates and sublicensees.

 

Each of the above license agreements obligates the Company to use commercially reasonable efforts to research, develop, and commercialize products for the prevention or treatment of human disease. The Company is also required to achieve certain development milestones within specific time periods. Each licensor has the right to terminate the license if the Company fails to achieve the development milestones. Each license agreement requires the Company to pay an annual license maintenance fee and reimburse the licensor for expenses associated with the prosecution and maintenance of the licensed patent rights.

 

The Company recorded the upfront issuance fees and the fair value of the common stock issued to the licensors as research and development expense (as the licenses do not have alternative future use) in accordance with ASC Topic 730, Research and Development. The anti‑dilutive protection obligation was classified as a liability and was recorded at its grant date fair value on the effective date of the respective agreements with the initial fair value being recorded to research and development expense as it represented additional consideration paid to the licensor in connection with the license agreement. The anit-dilution liability was settled in June 2015.

 

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8. Stock‑based compensation

 

Total compensation cost recognized for all stock‑based compensation awards in the condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Research and development

 

$

3,458

 

$

64

 

General and administrative

 

 

752

 

 

1

 

Total stock-compensation expense

 

$

4,210

 

$

65

 

 

Restricted Stock

 

From time to time, upon approval by the Company’s board of directors, certain employees and advisors have been granted restricted shares of common stock. These shares of restricted stock are subject to repurchase rights. Accordingly, the Company has recorded the proceeds from the issuance of restricted stock as a liability in the condensed consolidated balance sheets included as a component of accrued expenses or other long term liabilities based on the scheduled vesting dates. The restricted stock liability is reclassified into stockholders’ equity (deficit) as the restricted stock vests. A summary of the status of and changes in unvested restricted stock as of March 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

 

 

Fair Value

 

 

 

Shares

 

Per Share

 

Unvested Restricted Common Stock as of December 31, 2015

 

1,596,853

 

$

0.0188

 

Issued

 

 

 

 —

 

Vested

 

(193,551)

 

$

0.0162

 

Unvested Restricted Common Stock as of March 31, 2016

 

1,403,302

 

$

0.0192

 

 

The expense related to restricted stock awards granted to employees and non‑employees was $0 and $2.4 million, respectively, for the three months ended March 31, 2016. The expense related to restricted stock awards granted to employees and non‑employees was $0 and $59,000, respectively, for the three months ended March 31, 2015.

 

As of March 31, 2016, the Company had no unrecognized stock‑based compensation expense related to its employee unvested restricted stock awards. As of March 31, 2016, the Company had unrecognized stock‑based compensation expense related to its non‑employee unvested restricted stock awards of $16.6 million which is expected to be recognized over the remaining weighted average vesting period of 1.3 years.

 

Stock Options

 

Certain of the Company’s stock option agreements allow for the exercise of unvested awards. During 2014, options to purchase 75,304 shares of common stock for $0.03 per share were exercised prior to their vesting. The unvested shares are subject to repurchase by the Company if the employees cease to provide service to the Company, with or without cause. As such, the Company does not treat the exercise of unvested options as a substantive exercise. The Company has recorded the proceeds from the exercise of unvested stock options as a liability in the condensed consolidated balance sheets as a component of accrued expenses or other long term liabilities based on the scheduled vesting dates. The liability for unvested common stock subject to repurchase is reclassified into stockholders’ equity (deficit) as the shares vest.

17


 

 

The following is a summary of stock option activity for the three months ended March 31, 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

    

Remaining

    

Aggregate Intrinsic

 

 

 

Shares

 

Exercise Price

 

Contractual Life

 

Value (in thousands)

 

Outstanding at December 31, 2015

 

1,713,385

 

$

6.31

 

9.6

 

$

15,580

 

Granted

 

695,312

 

$

18.68

 

 

 

 

 

 

Exercised

 

(8,673)

 

$

3.85

 

 

 

 

 

 

Cancelled

 

 —

 

 

 —

 

 

 

 

 

 

Outstanding at March 31, 2016

 

2,400,024

 

$

9.90

 

9.4

 

$

59,134

 

Vested and expected to vest at March 31, 2016

 

2,360,999

 

$

9.90

 

9.4

 

$

58,172

 

Exercisable at March 31, 2016

 

113,801

 

$

4.88

 

9.1

 

$

3,376

 

 

The table above reflects unvested stock options as exercised on the dates that the shares are no longer subject to repurchase. The Company had 34,992 and 39,338 shares of unvested restricted common stock outstanding at March 31, 2016 and December 31, 2015, respectively, resulting from the exercise of unvested stock options.

 

Using the Black‑Scholes option pricing model, the weighted average fair value of options granted to employees and directors during the three months ended March 31, 2016 and 2015 was $13.03 and $0.47, respectively. The expense related to options granted to employees was $0.9 million and $3,000 for the three months ended March 31, 2016 and 2015, respectively.

 

The fair value of each option issued to employees and directors was estimated at the date of grant using the Black‑Scholes option pricing model with the following weighted‑average assumptions:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Risk free interest rate

 

1.5

%  

1.6

%

Expected dividend yield

 

 

 

Expected term (in years)

 

6.25

 

6.25

 

Expected volatility

 

80.0

%  

83.7

%

 

There were no options granted to persons other than employees and directors during the three months ended March 31, 2016. For the three months ended March 31, 2015, the fair value of each option issued to persons other than employees was estimated at the date of grant using the Black‑Scholes option pricing model with the following weighted‑average assumptions:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Risk free interest rate

 

 —

 

1.9

%

Expected dividend yield

 

 

 

Expected term (in years)

 

 —

 

10.0

 

Expected volatility

 

 —

 

80.0

%

 

As of March 31, 2016, the Company had unrecognized stock‑based compensation expense related to its employee stock options of $14.8 million which the Company expects to recognize over the remaining weighted average vesting period of 3.4 years.

 

9. Net loss per share

 

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders

18


 

by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if converted methods.

 

For purposes of the diluted net loss per share calculation, stock options and warrants are considered to be common stock equivalents, but they were excluded from the Company’s calculation of diluted net loss per share allocable to common stockholders because their inclusion would have been anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders was the same for all periods presented.

 

Upon the closing of the Company’s IPO in February 2016, the Company sold 6,785,000 shares of common stock and issued an additional 24,929,709 shares of common stock in connection with the automatic conversion of its redeemable convertible preferred stock. The issuance of these shares resulted in a significant increase in the Company’s weighted-average shares outstanding for the three months ended March 31, 2016 when compared to the comparable prior year period and is expected to continue to impact the year-over-year comparability of the Company’s net loss per share calculations for the next twelve months.

 

The following common stock equivalents were excluded from the calculation of diluted net loss per share allocable to common stockholders because their inclusion would have been anti-dilutive:

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

    

2016

    

2015

 

Redeemable convertible preferred stock

 

 —

 

8,176,900

 

Warrant to purchase redeemable convertible preferred stock

 

 —

 

23,076

 

Unvested restricted common stock

 

1,403,302

 

2,452,304

 

Outstanding stock options

 

2,400,024

 

138,170

 

Total

 

3,803,326

 

10,790,450

 

 

 

 

10. Related‑party transactions

 

During the three months ended March 31, 2016 and 2015, the Company paid one of its investors $0 and $30,000, respectively, in professional fees in the aggregate.

 

11. Subsequent events

 

Pursuant to the Collaboration Agreement, on May 2, 2016, the Company achieved its first milestone of $2.5 million, payable by Juno Therapeutics within 30 days of achievement, associated with technical progress in a research program in its collaboration to create engineered T cells with chimeric antigen receptors and T cell receptors to treat cancer.

 

In May 2016, the Company entered into an award agreement with the Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”). Under the terms of the agreement, CFFT has agreed to pay the Company up to $5.0 million over the agreement’s three year term to support the Company’s cystic fibrosis development program and related technology research and development. Pursuant to the agreement, the Company is required to contribute additional funds to the program in an amount equal to the funds contributed by CFFT under the agreement. Following the first year anniversary of the effective date of the agreement, either party can terminate the agreement without cause by providing 90 days’ notice. Under the terms of the agreement, the Company is required to pay certain amounts to CFFT upon the achievement of specified events.

 

 

 

19


 

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 together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission on March 30, 2016 (the “2015 10-K”).

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” in Part II, Item 1A that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

 

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q,and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

 

Overview

 

We are a leading genome editing company dedicated to treating patients with genetically defined diseases by correcting their disease‑causing genes. Our mission is to translate the promise of genome editing science into a broad class of transformative genomic medicines to benefit the greatest number of patients. To this end, we are developing a proprietary genome editing platform based on CRISPR/Cas9 technology. Our product development strategy is to target genetically defined diseases with an initial focus on debilitating illnesses where there are no approved treatments and where the genetic basis of disease is well understood. We are advancing over a dozen discovery research programs, including programs to address genetic, infectious, and oncologic diseases of the liver, lung, blood, eye, and muscle. Our most advanced program is designed to address a specific genetic form of retinal degeneration called Leber Congenital Amaurosis type 10 (“LCA10”), a disease with no available therapies or potential treatments in clinical trials in either the United States or European Union. We aim to initiate a clinical trial in this program in 2017. In May 2015, we entered into a collaboration with Juno Therapeutics, Inc. (“Juno Therapeutics”), a leader in the emerging field of immuno‑oncology, to develop novel engineered T cell therapies for cancer.

 

Since our inception in September 2013, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, assembling our core capabilities in genome editing, seeking to identify potential product candidates, and undertaking preclinical studies. All of our research programs are still in the preclinical or research stage of development and their risk of failure is high. We have not generated any revenue from product sales. We have funded our operations primarily through the initial public offering of our common stock (“IPO”), private placements of our preferred stock, an equipment loan and our collaboration with Juno Therapeutics. From inception through March 31, 2016, we raised an aggregate of $288.0 million to fund our operations.

 

On February 8, 2016, we completed our IPO and sold 6,785,000 shares of our common stock, including 885,000 shares of our common stock pursuant to the full exercise by the underwriters of an option to purchase additional shares, at a public offering price of $16.00 per share for an aggregate offering of approximately $108.6 million. We

20


 

received aggregate net proceeds from the IPO of approximately $97.7 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.

 

Since inception, we have incurred significant operating losses. We incurred a net loss of $17.7 million for the three months ended March 31, 2016. As of March 31, 2016, we had an accumulated deficit of $106.1 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase substantially as we continue our current research programs and our preclinical development activities; seek to identify additional research programs and additional product candidates; initiate preclinical testing and clinical trials for any product candidates we identify and develop; maintain, expand, and protect our intellectual property portfolio; further develop our genome editing platform; hire additional clinical, quality control, and scientific personnel; and incur additional costs associated with operating as a public company. We do not expect to be profitable for the year ending December 31, 2016 or the foreseeable future.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. In connection with entering into our collaboration with Juno Therapeutics in May 2015, we received an upfront payment of $25.0 million. In addition, we will receive up to $22.0 million in research support over the five years of the collaboration and across the three programs under the collaboration, subject to adjustment in accordance with the terms of the agreement.

 

For the three month period ended March 31, 2016, we recognized $0.8 million of collaboration revenue related to our collaboration with Juno Therapeutics. As of March 31, 2016, we had not received any milestone or royalty payments under the collaboration. On May 2, 2016, we achieved our first milestone of $2.5 million associated with technical progress in a research program in the collaboration. As a result of the achievement of the milestone, we are entitled to a payment of $2.5 million payable by Juno Therapeutics within 30 days of such achievement. For additional information about our revenue recognition policy related to the Juno Therapeutics collaboration, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue” in our 2015 10-K.

 

In May 2016, we entered into an award agreement with Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”), pursuant to which CFFT has agreed to pay us up to $5.0 million over the agreement’s three year term to support our cystic fibrosis development program and related technology research and development. Under the terms of the agreement, we are required to contribute additional funds to the program in an amount equal to the funds contributed by CFFT and to pay certain amounts to CFFT upon the achievement of specified events.

 

For the foreseeable future, we expect substantially all of our revenue will be generated from our collaboration with Juno Therapeutics and any other collaborations we may enter into and our agreement with CFFT.

 

Expenses

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and preclinical studies under our research programs, which include:

 

·

employee‑related expenses including salaries, benefits, and stock‑based compensation expense;

 

·

costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;

 

21


 

·

costs of purchasing lab supplies and non‑capital equipment used in our preclinical activities and in manufacturing preclinical study materials;

 

·

consultant fees;

 

·

facility costs including rent, depreciation, and maintenance expenses; and

 

·

fees for maintaining licenses under our third‑party licensing agreements.

 

Research and development costs are expensed as incurred. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of any product candidates we may identify and develop. This is due to the numerous risks and uncertainties associated with developing such product candidates, including the uncertainty of:

 

·

successful completion of preclinical studies and Investigational New Drug‑enabling studies;

 

·

successful enrollment in, and completion of, clinical trials;

 

·

receipt of marketing approvals from applicable regulatory authorities;

 

·

establishing commercial manufacturing capabilities or making arrangements with third‑party manufacturers;

 

·

obtaining and maintaining patent and trade secret protection and non‑patent exclusivity;

 

·

launching commercial sales of the product, if and when approved, whether alone or in collaboration with others;

 

·

acceptance of the product, if and when approved, by patients, the medical community, and third‑party payors;

 

·

effectively competing with other therapies and treatment options;

 

·

a continued acceptable safety profile following approval;

 

·

enforcing and defending intellectual property and proprietary rights and claims; and

 

·

achieving desirable medicinal properties for the intended indications.

 

A change in the outcome of any of these variables with respect to the development of any product candidates we may develop would significantly change the costs, timing, and viability associated with the development of that product candidate.

 

Other than in connection with our collaboration with Juno Therapeutics, we do not track research and development costs on a program‑by‑program basis as we have not yet identified a product candidate for advancement into clinical trials. We plan to track research and development costs for any individual development program when we identify a product candidate from the program that we believe we can advance into clinical trials.

 

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our development programs progress, including as we continue to support the preclinical studies for our LCA10 program as well as our other research programs.

 

22


 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and other related costs, including stock‑based compensation for personnel in executive, finance, accounting, business development, legal, and human resource functions. Other significant costs include corporate facility costs not otherwise included in research and development expenses, legal fees related to patent and corporate matters, and fees for accounting and consulting services.

 

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities and potential commercialization of any product candidates we identify and develop. These increases will include increased costs associated with the lease of a new facility for our headquarters and will likely include increased costs related to the hiring of additional personnel, and fees to outside consultants. We also anticipate increased expenses related to reimbursement of third‑party patent‑related expenses and increased expenses associated with being a public company, including costs for audit, legal, regulatory, and tax‑related services, director and officer insurance premiums, and investor relations costs. With respect to reimbursement of third-party patent-related expenses specifically, given the ongoing nature of the interference and opposition proceedings involving the patents licensed to us under our license agreement with The Broad Institute, Inc. (“Broad”) and the President and Fellows of Harvard College (“Harvard”) (described in more detail in Part II, Item 1. Legal Proceedings), we anticipate that our obligation to reimburse Broad and Harvard for expenses related to these proceedings during future periods will increase substantially until such interference and opposition proceedings are resolved.

Other Income (Expense), Net

 

For the three months ended March 31, 2016, other income (expense), net consisted primarily of interest income earned on our cash equivalents and government grant income, net of re-measurement losses associated with changes in the fair value of our liability for a warrant to purchase preferred stock. Upon the completion of the IPO, our outstanding warrant to purchase preferred stock converted into a warrant to purchase common stock and we reclassified the fair value of the warrant as of February 8, 2016 to additional paid-in capital. As a result, we will not recognize further re-measurement gains or losses associated with the warrant following the first quarter of 2016.

 

For the three months ended March 31, 2015, other income (expense), net consists primarily of re‑measurement losses associated with changes in the fair value of tranche rights associated with our Series A‑1 preferred stock and the anti‑dilutive protection liability associated with our issuance of common stock to certain licensors, net of interest income earned on our cash equivalents and amortization of deferred financing costs associated with our equipment loan. As a result of the settlement of the tranche rights and anti-dilutive protection rights in June 2015, we ceased recognizing re-measurement gains and losses associated with those rights after the second quarter of 2015.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the condensed consolidated financial statements prospectively from the date of change in estimates.

 

In the first quarter of 2016, we began recording certain estimated construction costs incurred and reported to us by a landlord as an asset and corresponding construction financing lease obligation on our condensed consolidated balance sheets. For additional information, see Note 6 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to our critical accounting policies from those

23


 

described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 10-K.

 

 

Results of Operations

 

Comparison of the Three Months ended March 31, 2016 and 2015

 

The following table summarizes our results of operations for the three months ended March 31, 2016 and 2015, together with the changes in those items in dollars (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

 

 

 

 

    

2016

    

2015

    

Dollar Change

 

Collaboration revenue

 

$

805

 

$

 —

 

$

805

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,882

 

 

1,888

 

 

6,994

 

General and administrative

 

 

9,762

 

 

3,273

 

 

6,489

 

Total operating expenses

 

 

18,644

 

 

5,161

 

 

13,483

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

 

(30)

 

 

(99)

 

 

69

 

Interest income (expense), net

 

 

124

 

 

(31)

 

 

155

 

Total other income (expense), net

 

 

94

 

 

(130)

 

 

224

 

Net loss

 

$

(17,745)

 

$

(5,291)

 

$

(12,454)

 

 

Collaboration Revenue

 

Collaboration revenue was $0.8 million for the three months ended March 31, 2016 and represented revenue recognized pursuant to our collaboration with Juno Therapeutics. We did not recognize any collaboration revenue in the three months ended March 31, 2015.

 

Research and Development Expenses

 

Research and development expenses increased by $7.0 million, to $8.9 million for the three months ended March 31, 2016 from $1.9 million for the three months ended March 31, 2015. The $7.0 million increase was due to a $4.8 million increase in employee and non-employee related expenses, including stock-based compensation, due to an increase in the size of our workforce, a $1.5 million increase in our process and platform development expenses due to increased research activity, and a $0.7 million increase in facility related costs as a result of additional office and laboratory space.

 

The following table summarizes our research and development expenses for the three months ended March 31, 2016 and March 31, 2015, together with the changes in those items in dollars (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

 

 

 

 

    

2016

    

2015

    

Dollar Change

 

Employee and non-employee related expenses

 

$

5,662

 

$

904

 

$

4,758

 

Process and platform development expenses

 

 

2,015

 

 

539

 

 

1,476

 

License fees and expenses

 

 

 —

 

 

25

 

 

(25)

 

Facility expenses

 

 

1,055

 

 

388

 

 

667

 

Other expenses

 

 

150

 

 

32

 

 

118

 

Total research and development expenses

 

$

8,882

 

$

1,888

 

$

6,994

 

 

 

24


 

General and Administrative Expenses

 

General and administrative expenses increased by $6.5 million, to $9.8 million for the three months ended March 31, 2016 from $3.3 million for the three months ended March 31, 2015. The $6.5 million increase in general and administrative expenses was primarily attributable to increases of $3.0 million in legal fees to support our patents, including costs for the prosecution and maintenance of our patents as well as to procure the application for and issuance of additional patents in the United States and other jurisdictions, $1.6 million in employee compensation cost, $0.7 million in legal fees incurred for corporate matters, $0.6 million in consulting fees, and $0.6 million in other general and administrative expenses.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

From inception through March 31, 2016, we funded our operations primarily through proceeds from private placements of our preferred stock of $163.3 million, net proceeds of $97.7 million from our IPO, an up‑front payment under our collaboration with Juno Therapeutics of $25.0 million, and $2.0 million of gross proceeds from an equipment loan financing. As of March 31, 2016, we had cash and cash equivalents of $229.2 million.

 

Cash Flows

 

The following table provides information regarding our cash flows for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(9,629)

 

$

(5,943)

 

 

Investing activities

 

 

(2,562)

 

 

(305)

 

 

Financing activities

 

 

98,215

 

 

791

 

 

Net increase (decrease) in cash and cash equivalents

 

$

86,024

 

$

(5,457)

 

 

 

Net Cash Used in Operating Activities

 

The use of cash in all periods resulted primarily from our net losses adjusted for non‑cash charges and changes in components of working capital.

 

Net cash used in operating activities was $9.6 million for the three months ended March 31, 2016 compared to $5.9 million of net cash used in operating activities for the three months ended March 31, 2015. The increase of $3.7 million in cash used in operating activities was primarily due to our increase in net loss for the three months ended March 31, 2016 as compared to the prior year. The increase in net loss was attributable to increased spending on our pre-clinical stage programs and an increase in our legal fees to support our patents, including third‑party costs for the prosecution and maintenance of our patents as well as to procure the application for and issuance of additional patents in the United States and other jurisdictions. Also contributing to the increase in cash used in operating activities was an increase of $0.9 million in cash flows used for prepaid expenses and other current assets. These increases were partially offset by increases of $4.1 million in non-cash stock-based compensation, $2.2 million in cash flows attributable to other non-current assets, $2.2 million in cash flows attributable to accounts payable, and $1.0 million increase in accrued expenses.

 

25


 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $2.5 million for the three months ended March 31, 2016 compared to $0.3 million for the three months ended March 31, 2015. The increase in cash used in investing activities was primarily attributable to the expenditures for the acquisition of property, plant and equipment and an increase in restricted cash related to our letter of credit for our new facility lease at Hurley Street.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was $98.2 million for the three months ended March 31, 2016, compared to $0.8 million for the three months ended March 31, 2015. The increase of $97.4 million was primarily related to the proceeds received from our IPO during the three months ended March 31, 2016, net of issuance costs, which was partially offset by a decrease in proceeds received from an equipment loan, net of issuance costs. 

 

Funding Requirements

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we further advance our current research programs and our preclinical development activities; seek to identify product candidates and additional research programs; initiate preclinical testing and clinical trials for any product candidates we identify and develop; maintain, expand, and protect our intellectual property portfolio; hire additional clinical, quality control, and scientific personnel; and incur additional costs associated with operating as a public company. In addition, if we obtain marketing approval for any product candidate that we identify and develop, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution to the extent that such sales, marketing, and distribution are not the responsibility of a collaborator. We do not expect to generate significant recurring revenue unless and until we obtain regulatory approval for and commercialize a product candidate. Furthermore, following the closing of our IPO, we have begun to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts.

 

We expect that our existing cash and cash equivalents at March 31, 2016, anticipated interest income, anticipated research support under our collaboration agreement with Juno Therapeutics, and anticipated payments from CFFT, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months following the date of this Quarterly Report on Form 10-Q. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

 

·

the scope, progress, results, and costs of drug discovery, preclinical development, laboratory testing, and clinical trials for the product candidates we may develop;

 

·

the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property‑related claims;

 

·

the costs, timing, and outcome of regulatory review of the product candidates we may develop;

 

·

the costs of future activities, including product sales, medical affairs, marketing, manufacturing, and distribution, for any product candidates for which we receive regulatory approval;

 

·

the success of our collaboration with Juno Therapeutics;

 

·

whether Juno Therapeutics exercises either or both of its options to extend the research program term under our collaboration (each of which would trigger an extension payment to us);

 

·

our ability to establish and maintain additional collaborations on favorable terms, if at all;

26


 

 

·

the extent to which we acquire or in‑license other medicines and technologies; and

 

·

the costs of operating as a public company.

 

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time‑consuming, expensive, and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, any product candidate that we identify and develop, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of genomic medicines that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.

 

If we raise funds through additional collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Contractual Obligations

 

The following table summarizes our significant contractual obligations as of payment due date by period at March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Less Than

    

 

 

    

More than

 

 

 

Total

 

1 Year

 

1 to 3 Years

 

3 Years

 

Lease Agreements

 

$

31,314

 

$

2,255

 

$

12,167

 

$

16,892

 

Total

 

$

31,314

 

$

2,255

 

$

12,167

 

$

16,892

 

 

The lease agreement described in the table above consist of payments to be made on our building leases in Cambridge, Massachusetts including the laboratory and office space at the Hurley Street location that is currently under construction and is expected to be completed in fall 2016. We are deemed the owner of the Hurley street location for accounting purposes and have recognized a financing obligation associated with the costs incurred to date for the building. In addition to minimum lease payments, the lease agreements require us to pay additional amounts for our share of taxes, insurance, maintenance and operating expenses, which are not included in the above table.

 

The table above does not include potential milestone fees, sublicense fees, royalty fees, licensing maintenance fees, and reimbursement of patent maintenance costs that we may be required to pay under agreements we have entered into with certain institutions to license intellectual property. We have not included such potential obligations in the table above because they are contingent upon the occurrence of future events and the timing and likelihood of such potential obligations are not known with certainty. Pursuant to our license agreement with Broad and Harvard, we incurred an aggregate of $4.5 million during the three months ended March 31, 2016 for reimbursement of expenses associated with the prosecution and maintenance of the patents and patent applications licensed to us under such license agreement,

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including expenses associated with any interference proceedings in the United States Patent and Trademark Office, any opposition proceedings in the European Patent Office or any other inter partes or other post grant proceedings in these or other jurisdictions where we are seeking patent protection. Given the interference and opposition proceedings involving the patents licensed to us under this license agreement are ongoing (described in more detail in Part II, Item 1. Legal Proceedings), we anticipate that our obligation to reimburse Broad and Harvard for these expenses during future periods will increase substantially until such interference and opposition proceedings are resolved. 

 

Our agreements to license intellectual property include potential milestone payments that are dependent upon the development of products using the intellectual property licensed under the agreements and contingent upon the achievement of development or regulatory approval milestones, as well as commercial milestones. The maximum potential milestone payments under one of our licensing agreements are approximately $5.5 million. The maximum potential milestone payments under another of our licensing agreements are approximately $0.6 million in the aggregate per licensed product.

 

Under a license agreement with certain research institutions, we may also be obligated to pay clinical and regulatory milestones of up to $14.8 million per product approved in the United States, European Union, and Japan for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States, as well as potential commercial milestones of up to $54.0 million. In addition, we may be obligated to pay additional clinical and regulatory milestones of up to $4.1 million per product approved in the United States and at least one jurisdiction outside the Unites States for the treatment of human disease based on certain criteria, as well as potential commercial milestones of up to $36.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a rare disease meeting certain criteria.

 

We also may be obligated to pay royalties of low single digit to low double digits as a percentage of net product sales depending on the terms of the applicable agreement.

 

We enter into contracts in the normal course of business with contract research organizations to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.

 

Off‑Balance Sheet Arrangements

 

We did not have, during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined under applicable Securities and Exchange Commission rules.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to market risk related to changes in interest rates. As of March 31, 2016, we had cash and cash equivalents of $229.2 million, primarily held in money market mutual funds consisting of U.S. government-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in the form, or may be in the form of, money market funds or marketable securities and are or may be invested in U.S. Treasury and U.S. government agency obligations. Due to the short‑term maturities and low risk profiles of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our investments.

 

While we contract with certain vendors and institutions internationally, substantially all of our total liabilities as of March 31, 2016 were denominated in the United States dollar and we believe that we do not have any material exposure to foreign currency exchange rate risk.

 

Inflation would generally affect us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the three months ended March 31, 2016.

 

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Item 4.    Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29


 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

On January 11, 2016, the Patent Trial and Appeal Board (the “PTAB”) of the United States Patent and Trademark Office (the “USPTO”) declared an interference between a pending U.S. patent application (U.S. Serial No. 13/842,859) that is owned by the University of California, the University of Vienna, and Emmanuelle Charpentier and 12 U.S. patents (U.S. Patent Nos. 8,697,359; 8,771,945; 8,795,965; 8,865,406; 8,871,445; 8,889,356; 8,895,308; 8,906,616; 8,932,814; 8,945,839; 8,993,233; and 8,999,641) that are co‑owned by the Broad Institute, Inc. (the “Broad”) and the Massachusetts Institute of Technology (“MIT”), and in some cases the President and Fellows of Harvard College (“Harvard”), and in‑licensed by us. On March 17, 2016, the PTAB re-declared the interference to add a pending U.S. patent application (U.S. Serial No. 14/704,551) that is co-owned by Broad, MIT, and Harvard, and in-licensed by us. An interference is a proceeding within the USPTO to determine priority of invention of the subject matter of patent claims filed by different parties. In the declared interference, the University of California, acting on behalf of itself and the University of Vienna, and Emmanuelle Charpentier have been designated as the senior party and Broad has been designated as the junior party. Prior to the declaration of interference, the University of California, acting on behalf of itself and the University of Vienna, and Emmanuelle Charpentier filed a Suggestion of Interference in the USPTO on April 13, 2015 against 10 U.S. patents that we have in‑licensed from Broad, acting on behalf of itself, MIT, and Harvard. A Supplemental Suggestion of Interference was filed by the University of California and Emmanuelle Charpentier on November 5, 2015 against two additional U.S. patents and five pending U.S. patent applications (including U.S. Serial No. 14/704,551 which has now been added to the interference) that we have in‑licensed from Broad, acting on behalf of itself, MIT and Harvard. The 12 U.S. patents and one pending U.S. patent application referred to in the Suggestion of Interference and Supplemental Suggestion of Interference are the same as those referred to above and will be evaluated by the PTAB in the interference described above. Separately, ToolGen Inc. (“ToolGen”) also filed Suggestions of Interference in the USPTO on April 13, 2015, which became publicly available on November 12, 2015 and December 3, 2015, against five U.S. patents, which are among the 12 U.S. patents with respect to which the PTAB has declared an interference and which we have in‑licensed from Broad, acting on behalf of itself, MIT, and Harvard. On May 9, 2016, the USPTO granted a request for ex parte re-examination of U.S. Patent No. 8,771,945, which is among the 12 U.S. patents with respect to which the PTAB has declared an interference and which we have in‑licensed from Broad, acting on behalf of itself and MIT. On May 12, 2016, the PTAB suspended the re-examination of U.S. Patent No. 8,771,945 noting that it has jurisdiction over any file that involves a patent involved in the interference. In addition, we are aware that the Rockefeller University (“Rockefeller”) has independently filed a U.S. patent application as a continuation of a U.S. patent that we have in‑licensed from Broad, acting on behalf of itself and MIT, and added one of its employees as a co‑inventor on this patent application. In addition, the European Patent Office Opposition Division has initiated opposition proceedings in the European Patent Office against two European patents that we have in‑licensed from Broad, acting on behalf of itself, MIT and Harvard. We are also aware of an opposition that has been filed against a third European patent that we have in-licensed from Broad, acting on behalf of itself and MIT. There can be no assurance that any proceedings that result from these third‑party actions will be resolved in favor of Broad. In addition, if they are not resolved in favor of Broad, there can be no assurance that the result will not have a material adverse effect on our business, financial condition, results of operations, or prospects. For additional information regarding these matters, see “Part II. Other Information. Item 1A. Risk Factors—Risks Related to Our Intellectual Property—Some of our in‑licensed patents are subject to priority disputes.” below, and “Item 1. Business—Intellectual Property.” in our Annual Report on Form 10-K filed on March 30, 2016 with the Securities and Exchange Commission. Regardless of outcome, litigation or other legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

Item 1A.    Risk Factors.

 

Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Quarterly Report on Form 10-Q and other filings with the Securities and Exchange Commission (the “SEC”), press releases, communications with investors, and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

30


 

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

 

Since inception, we have incurred significant operating losses. Our net losses were $72.9 million, $13.7 million, and $1.8 million for the years ended December 31, 2015 and 2014 and the period ended December 31, 2013, respectively. Our net loss was $17.7 million for the three months ended March 31, 2016. As of March 31, 2016, we had an accumulated deficit of $106.1 million. We have financed our operations primarily through the public offering of our common stock, private placements of our preferred stock, an equipment loan, and our collaboration with Juno Therapeutics. We have devoted all of our efforts to research and development. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we:

 

·

continue our current research programs and our preclinical development of product candidates from our current research programs;

 

·

seek to identify additional research programs and additional product candidates;

 

·

initiate preclinical testing and clinical trials for any product candidates we identify and develop;

 

·

maintain, expand, and protect our intellectual property portfolio and provide reimbursement of third‑party expenses related to our patent portfolio;

 

·

seek marketing approvals for any of our product candidates that successfully complete clinical trials;

 

·

ultimately establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;

 

·

further develop our genome editing platform;

 

·

hire additional clinical, quality control, and scientific personnel;

 

·

add operational, financial, and management information systems and personnel, including personnel to support our product development;

 

·

acquire or in‑license other medicines and technologies;

 

·

validate a commercial‑scale current Good Manufacturing Practices (“cGMP”) manufacturing facility; and

 

·

operate as a public company.

 

We have not initiated clinical development of any product candidate and expect that it will be many years, if ever, before we have a product candidate ready for commercialization. To become and remain profitable, we must develop and eventually commercialize a medicine or medicines with significant market potential. This will require us to be successful in a range of challenging activities, including identifying product candidates, completing preclinical testing and clinical trials of product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing, and selling those medicines for which we may obtain marketing approval, and satisfying any post‑marketing requirements. We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. We are currently only in the preclinical testing stages for our most advanced research programs. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business, or continue

31


 

our operations. A decline in the value of our company could cause our stockholders to lose all or part of their investments in us.

 

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce, or eliminate our research and product development programs or commercialization efforts.

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we identify, continue the research and development of, initiate clinical trials of, and seek marketing approval for, product candidates. In addition, if we obtain marketing approval for any product candidates we may develop, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution to the extent that such sales, marketing, manufacturing, and distribution are not the responsibility of a collaborator. In addition, relative to previous years, when we were a private company, we expect to incur significant additional costs associated with operating as a public company in 2016 and future years. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and product development programs or future commercialization efforts.

 

We expect that our existing cash and cash equivalents at March 31, 2016, anticipated interest income, anticipated research support under our collaboration agreement with Juno Therapeutics, and anticipated payments from CFFT, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months following the date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including:

 

·

the scope, progress, results, and costs of drug discovery, preclinical development, laboratory testing, and clinical trials for the product candidates we may develop;

 

·

the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property‑related claims;

 

·

the costs, timing, and outcome of regulatory review of the product candidates we may develop;

 

·

the costs of future activities, including product sales, medical affairs, marketing, manufacturing, and distribution, for any product candidates for which we receive regulatory approval;

 

·

the success of our collaboration with Juno Therapeutics;

 

·

whether Juno Therapeutics exercises either or both of its options to extend the research program term under our collaboration (each of which would trigger an extension payment to us);

 

·

our ability to establish and maintain additional collaborations on favorable terms, if at all;

 

·

the extent to which we acquire or in‑license other medicines and technologies; and

 

·

the costs of operating as a public company.

 

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time‑consuming, expensive, and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, even if we successfully identify and develop product candidates and those are approved, we may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

32


 

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. We do not have any committed external source of funds, other than our collaboration with Juno Therapeutics and our agreement with CFFT, each of which is limited in scope and duration. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders may be materially diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.

 

If we raise funds through additional collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates, or we may have to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Our short operating history may make it difficult for our stockholders to evaluate the success of our business to date and to assess our future viability.

 

We are an early‑stage company. We were founded and commenced operations in the second half of 2013. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates, and undertaking preclinical studies. All of our research programs are still in the preclinical or research stage of development, and their risk of failure is high. We have not yet demonstrated an ability to initiate or successfully complete any clinical trials, including large‑scale, pivotal clinical trials, obtain marketing approvals, manufacture a commercial‑scale medicine, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. Typically, it takes about 10 to 15 years to develop a new medicine from the time it is discovered to when it is available for treating patients. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history.

 

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays, and other known and unknown factors. We will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

We expect that our financial condition and operating results will continue to fluctuate significantly from quarter-to-quarter and year-to-year due to a variety of factors, many of which are beyond our control. Accordingly, our stockholders should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

 

We have never generated revenue from product sales and may never be profitable.

 

Our ability to generate revenue from product sales and achieve profitability depends on our ability, alone or with collaborative partners, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, product candidates we may identify for development. We do not anticipate generating revenues from product sales for the next several years, if ever. Our ability to generate future revenues from product sales depends heavily on our, or our collaborators’, ability to successfully:

 

·

identify product candidates and complete research and preclinical and clinical development of any product candidates we may identify;

 

33


 

·

seek and obtain regulatory and marketing approvals for any of our product candidates for which we complete clinical trials;

 

·

launch and commercialize any of our product candidates for which we obtain regulatory and marketing approval by establishing a sales force, marketing, and distribution infrastructure or, alternatively, collaborating with a commercialization partner;

 

·

qualify for adequate coverage and reimbursement by government and third‑party payors for any our product candidates for which we obtain regulatory and marketing approval;

 

·

develop, maintain, and enhance a sustainable, scalable, reproducible, and transferable manufacturing process for the product candidates we may develop;

 

·

establish and maintain supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality, products and services to support clinical development and the market demand for any of our product candidates for which we obtain regulatory and marketing approval;

 

·

obtain market acceptance of any product candidates we may develop as viable treatment options;

 

·

address competing technological and market developments;

 

·

implement internal systems and infrastructure, as needed;

 

·

negotiate favorable terms in any collaboration, licensing, or other arrangements into which we may enter and performing our obligations in such collaborations;

 

·

maintain, protect, and expand our portfolio of intellectual property rights, including patents, trade secrets, and know‑how;

 

·

avoid and defend against third‑party interference or infringement claims; and

 

·

attract, hire, and retain qualified personnel.

 

Even if one or more of the product candidates we may develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the U.S. Food and Drug Administration (the “FDA”), the European Medicines Agency (the “EMA”), or other regulatory authorities to perform clinical and other studies in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

 

Risks Related to Discovery, Development, and Commercialization

 

We intend to identify and develop product candidates based on a novel genome editing technology, which makes it difficult to predict the time and cost of product candidate development. No products that utilize genome editing technology have been approved in the United States or in Europe, and there have only been a limited number of human clinical trials of a genome editing product candidate. Moreover, none of those trials has involved CRISPR/Cas9 technology.

 

We have concentrated our research and development efforts on our genome editing platform, which uses CRISPR/Cas9 technology. Our future success depends on the successful development of this novel genome editing therapeutic approach. To date, no product that utilizes genome editing has been approved in the United States or Europe. There have been a limited number of clinical trials of genome editing technologies, however no product candidates have been approved, and none of these clinical trials involved product candidates that utilize CRISPR/Cas9 genome editing technology. In addition, because our programs are all in the research or preclinical stage, we have not yet been able to

34


 

assess safety in humans, and there may be long‑term effects from treatment with any of our future product candidates that we cannot predict at this time. Any product candidates we may develop will act at the level of DNA, and, because animal DNA differs from human DNA, it will be difficult for us to test our future product candidates in animal models for either safety or efficacy. Also, animal models do not exist for some of the diseases we expect to pursue in our programs. As a result of these factors, it is more difficult for us to predict the time and cost of product candidate development, and we cannot predict whether the application of our genome editing platform, or any similar or competitive genome editing platforms, will result in the identification, development, and regulatory approval of any medicines. There can be no assurance that any development problems we experience in the future related to our genome editing platform or any of our research programs will not cause significant delays or unanticipated costs, or that such development problems can be solved. We may also experience delays in developing a sustainable, reproducible, and scalable manufacturing process or transferring that process to commercial partners. Any of these factors may prevent us from completing our preclinical studies or any clinical trials that we may initiate or commercializing any product candidates we may develop on a timely or profitable basis, if at all.

 

Because genome editing is novel and the regulatory landscape that will govern any product candidates we may develop is uncertain and may change, we cannot predict the time and cost of obtaining regulatory approval, if we receive it at all, for any product candidates we may develop.

 

The regulatory requirements that will govern any novel genome editing product candidates we develop are not entirely clear and may change. Within the broader genome medicine field, only one gene therapy product, uniQure N.V.’s Glybera, has received marketing authorization from the European Commission, and no gene therapy products have received marketing approval in the United States. Even with respect to more established products that fit into the categories of gene therapies or cell therapies, the regulatory landscape is still developing. Regulatory requirements governing gene therapy products and cell therapy products have changed frequently and will likely continue to change in the future. Moreover, there is substantial, and sometimes uncoordinated, overlap in those responsible for regulation of existing gene therapy products and cell therapy products. For example, in the United States, the FDA has established the Office of Cellular, Tissue and Gene Therapies within its Center for Biologics Evaluation and Research (the “CBER”) to consolidate the review of gene therapy and related products, and the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER on its review. Gene therapy clinical trials are also subject to review and oversight by an institutional biosafety committee (“IBC”), a local institutional committee that reviews and oversees basic and clinical research conducted at the institution participating in the clinical trial. Gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from the United States National Institutes of Health (the “NIH”) are also subject to review by the NIH Office of Biotechnology Activities’ Recombinant DNA Advisory Committee. Although the FDA decides whether individual gene therapy protocols may proceed, the review process and determinations of other reviewing bodies can impede or delay the initiation of a clinical trial, even if the FDA has reviewed the trial and approved its initiation. The same applies in the European Union. The EMA’s Committee for Advanced Therapies (the “CAT”) is responsible for assessing the quality, safety, and efficacy of advanced‑therapy medicinal products. The role of the CAT is to prepare a draft opinion on an application for marketing authorization for a gene therapy medicinal candidate that is submitted to the EMA. In the European Union, the development and evaluation of a gene therapy medicinal product must be considered in the context of the relevant European Union guidelines. The EMA may issue new guidelines concerning the development and marketing authorization for gene therapy medicinal products and require that we comply with these new guidelines. As a result, the procedures and standards applied to gene therapy products and cell therapy products may be applied to any CRISPR/Cas9 product candidates we may develop, but that remains uncertain at this point.

 

Adverse developments in clinical trials conducted by others of gene therapy products, cell therapy products, or products developed through the application of a CRISPR/Cas9 or other genome editing technology may cause the FDA, the EMA, and other regulatory bodies to revise the requirements for approval of any product candidates we may develop or limit the use of products utilizing genome editing technologies, either of which could materially harm our business. In addition, the clinical trial requirements of the FDA, the EMA, and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty, and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known, or more extensively studied pharmaceutical or other product candidates. Regulatory agencies administering existing or future regulations or

35


 

legislation may not allow production and marketing of products utilizing genome editing technology in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays, or other impediments to our research programs or the commercialization of resulting products.

 

The regulatory review committees and advisory groups described above and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these treatment candidates, or lead to significant post‑approval limitations or restrictions. As we advance our research programs and develop future product candidates, we will be required to consult with these regulatory and advisory groups and to comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of any product candidates we identify and develop.

 

Adverse public perception of genomic medicines, and genome editing in particular, may negatively impact regulatory approval of, or demand for, our potential products.

 

Our potential therapeutic products involve editing the human genome. The clinical and commercial success of our potential products will depend in part on public acceptance of the use of genome editing therapy for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that genome editing is unsafe, unethical, or immoral, and, consequently, our products may not gain the acceptance of the public or the medical community. Adverse public attitudes may adversely impact our ability to enroll clinical trials. Moreover, our success will depend upon physicians prescribing, and their patients being willing to receive, treatments that involve the use of product candidates we may develop in lieu of, or in addition to, existing treatments with which they are already familiar and for which greater clinical data may be available.

 

In addition, genome editing technology is subject to public debate and heightened regulatory scrutiny due to ethical concerns relating to the application of genome editing technology to human embryos or the human germline. For example, in April 2015, Chinese scientists reported on their attempts to edit the genome of human embryos to modify the gene for hemoglobin beta. This is the gene in which a mutation occurs in patients with the inherited blood disorder beta thalassemia. Although this research was purposefully conducted in embryos that were not viable, the work prompted calls for a moratorium or other types of restrictions on genome editing of human eggs, sperm, and embryos. The Alliance for Regenerative Medicine in Washington has called for a voluntary moratorium on the use of genome editing technologies, including CRISPR/Cas9, in research that involved altering human embryos or human germline cells. Similarly, the NIH has announced that it would not fund any use of genome editing technologies in human embryos, noting that there are multiple existing legislative and regulatory prohibitions against such work, including the Dickey‑Wicker Amendment, which prohibits the use of appropriated funds for the creation of human embryos for research purposes or for research in which human embryos are destroyed. Laws in the United Kingdom prohibit genetically modified embryos from being implanted into women, but embryos can be altered in research labs under license from the Human Fertilisation and Embryology Authority. Research on embryos is more tightly controlled in many other European countries.

 

Moreover, an annual worldwide threat assessment report delivered to the U.S. Congress in February 2016, the U.S. Director of National Intelligence stated that research into genome editing probably increases the risk of the creation of potentially harmful biological agents or products, including weapons of mass destruction. He noted that the broad distribution, low cost, and accelerated pace of development of genome editing technology could result in the deliberate or unintentional misuse of such technology.