10-Q 1 edit-20180331x10q.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, 2018

 

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.)

 

 

 

11 Hurley Street
Cambridge, Massachusetts
(Address of principal executive offices)

 

02141
(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer 

 

 

 

 

Non‑accelerated filer

☐  (Do not check if a smaller reporting company)

Smaller reporting company

 

Emerging growth company  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

The number of shares of the Common Stock outstanding as of April 27, 2018 was 47,204,376.

 

 

 


 

 

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, 2018 and December 31, 2017

 

3

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017

 

4

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017

 

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2. 

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

 

31

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4. 

Controls and Procedures

 

43

 

 

 

 

PART II. OTHER INFORMATION 

 

44

 

 

 

 

Item 1. 

Legal Proceedings

 

44

Item 1A. 

Risk Factors

 

45

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

98

Item 5. 

Other Information

 

98

Item 6. 

Exhibits

 

100

 

 

 

 

Signatures 

 

101

 

 

 

 

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, 

 

 

2018

 

2017

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

217,671

 

$

146,630

Marketable securities

 

 

141,150

 

 

182,509

Accounts receivable

 

 

931

 

 

679

Prepaid expenses and other current assets

 

 

3,060

 

 

2,381

Total current assets

 

 

362,812

 

 

332,199

Property and equipment, net

 

 

39,551

 

 

39,442

Restricted cash and other non-current assets

 

 

1,619

 

 

1,619

Total assets

 

$

403,982

 

$

373,260

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,996

 

$

4,020

Accrued expenses

 

 

7,767

 

 

11,049

Notes payable

 

 

 —

 

 

7,500

Deferred revenue, current

 

 

13,323

 

 

13,238

Other current liabilities

 

 

908

 

 

900

Total current liabilities

 

 

30,994

 

 

36,707

Deferred revenue, net of current portion

 

 

91,972

 

 

94,725

Construction financing lease obligation, net of current portion

 

 

33,190

 

 

33,431

Other non-current liabilities

 

 

311

 

 

317

Total liabilities

 

 

156,467

 

 

165,180

Commitments and contingencies (see note 7)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share: 5,000,000 shares authorized; no shares issued or outstanding

 

 

 —

 

 

 —

Common stock, $0.0001 par value per share: 195,000,000 shares authorized; 47,119,176 and 45,025,448 shares issued, and 46,711,695 and 44,507,960 shares outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

 4

 

 

 4

Additional paid-in capital

 

 

584,825

 

 

514,002

Accumulated other comprehensive loss

 

 

(52)

 

 

(76)

Accumulated deficit

 

 

(337,262)

 

 

(305,850)

Total stockholders’ equity

 

 

247,515

 

 

208,080

Total liabilities and stockholders’ equity

 

$

403,982

 

$

373,260

 

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

 

 

3


 

 

Editas Medicine, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

 

2017

Collaboration and other research and development revenues

 

$

3,927

 

$

682

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

21,300

 

 

19,021

General and administrative

 

 

14,186

 

 

12,288

Total operating expenses

 

 

35,486

 

 

31,309

Operating loss

 

 

(31,559)

 

 

(30,627)

Other income (expense), net

 

 

 

 

 

 

Other income, net

 

 

182

 

 

140

Interest income (expense), net

 

 

438

 

 

(610)

Total other income (expense), net

 

 

620

 

 

(470)

Net loss

 

$

(30,939)

 

$

(31,097)

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

 

$

(0.67)

 

$

(0.85)

Weighted-average common shares outstanding, basic and diluted

 

 

45,992,008

 

 

36,485,421

 

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

 

4


 

Editas Medicine, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

 

2017

Net loss

 

$

(30,939)

 

$

(31,097)

Other comprehensive loss:

 

 

 

 

 

 

Unrealized loss on marketable debt securities

 

 

(52)

 

 

 —

Comprehensive loss

 

$

(30,991)

 

$

(31,097)

 

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

 

 

 

 

 

5


 

Editas Medicine, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

    

2017

Cash flow from operating activities

 

 

 

 

 

 

Net loss

 

$

(30,939)

 

$

(31,097)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Stock-based compensation expense

 

 

6,528

 

 

5,804

Depreciation

 

 

751

 

 

631

Non-cash research and development expense

 

 

1,942

 

 

5,000

Other non-cash items, net

 

 

(430)

 

 

69

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(252)

 

 

(857)

Prepaid expenses and other current assets

 

 

(761)

 

 

486

Other non-current assets

 

 

 —

 

 

 2

Accounts payable

 

 

5,095

 

 

10,078

Accrued expenses

 

 

(1,252)

 

 

(10,539)

Deferred revenue

 

 

(3,142)

 

 

90,214

Net cash (used in) provided by operating activities

 

 

(22,460)

 

 

69,791

Cash flow from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,011)

 

 

(656)

Proceeds from the sale of equipment

 

 

 5

 

 

 —

Purchases of marketable securities

 

 

(52,674)

 

 

 —

Proceeds from maturities of marketable securities

 

 

94,500

 

 

 —

Net cash provided by (used in) investing activities

 

 

40,820

 

 

(656)

Cash flow from financing activities

 

 

 

 

 

 

Proceeds from offering of common stock, net of issuance costs

 

 

48,474

 

 

97,102

Proceeds from exercise of stock options

 

 

4,410

 

 

435

Payments on construction financing lease obligation

 

 

(203)

 

 

(443)

Net cash provided by financing activities

 

 

52,681

 

 

97,094

Net increase in cash and cash equivalents

 

 

71,041

 

 

166,229

Cash, cash equivalents and restricted cash, beginning of period

 

 

148,249

 

 

186,942

Cash, cash equivalents and restricted cash, end of period

 

$

219,290

 

$

353,171

Supplemental disclosure of cash and non-cash activities:

 

 

 

 

 

 

Fixed asset additions included in accounts payable and accrued expenses

 

$

129

 

$

 7

Reclassification of liability for common stock subject to repurchase

 

 

 3

 

 

 3

Issuance of common stock for settlement of success payments (see note 8)

 

 

9,530

 

 

 —

Adjustment to deferred revenue for revenue adoption

 

 

474

 

 

 —

Offering costs included in accounts payable and accrued expenses

 

 

19

 

 

397

 

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

 

6


 

 

 

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. The Company has primarily financed its operations through various equity and debt financings, including the initial public offering of its common stock (the “IPO”), its follow-on public offerings of its common stock in March 2017 and December 2017, its at-the-market offering of its common stock in January 2018, and private placements of preferred stock, payments received under a research collaboration with Juno Therapeutics, Inc., a Celgene company that is a wholly-owned subsidiary of Celgene Corporation (“Juno Therapeutics”), and from an upfront payment paid under a strategic alliance and option agreement with Allergan Pharmaceuticals International Limited (“Allergan”). 

 

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.

 

Liquidity

 

In February 2016, the Company completed its IPO and received aggregate net proceeds of approximately $97.5 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In March 2017, the Company completed a follow-on offering and received net proceeds of approximately $96.7 million (the “March Offering”), after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In December 2017, the Company completed another follow-on offering and received net proceeds of approximately $57.2 million, after deducting underwriting discounts and other offering expenses payable by the Company. During January 2018, the Company completed at-the-market offerings and received net proceeds of approximately $48.5 million (the “January Offering”).

 

The Company has incurred annual net operating losses in every year since its inception. The Company expects that its existing cash, cash equivalents and marketable securities at March 31, 2018, anticipated interest income, and anticipated research support under the Company’s collaboration agreement with Juno Therapeutics will enable it to fund its operating expenses and capital expenditure requirements for at least the next 24 months following the date of this Quarterly Report on Form 10-Q. The Company had an accumulated deficit of $337.3 million at March 31, 2018, and will require substantial additional capital to fund its operations. The Company has never generated any product revenue. 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.

 

7


 

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 (“GAAP”) have been condensed or omitted from this report, as is permitted by 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, 2017 (the “Annual Report”).

 

The unaudited condensed consolidated financial statements include the accounts of Editas Medicine, Inc. and its wholly owned subsidiary, Editas Securities Corporation. 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, 2018 and 2017 are referred to as the first quarter of 2018 and 2017, 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 consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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 and deferred tax valuation allowances. 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,” to the Consolidated Financial Statements included in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report other than as noted below.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, the Company recorded the cumulative effect of initially applying the new standard to all contracts as of the date of adoption.

 

The Company enters into collaboration agreements and certain other agreements that are within the scope of ASC 606, under which the Company licenses, may license or grants an option to license rights to certain of the Company’s product candidates and performs research and development services in connection with such arrangements. The terms of these arrangements typically include payment of one or more of the following: non-refundable, up-front fees; reimbursement of research and development costs; development, clinical, regulatory and commercial sales milestone payments, and royalties on net sales of licensed products.

 

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

8


 

To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer.

 

The promised good or services in the Company’s arrangements typically consist of a license, or option to license, rights to the Company’s intellectual property or research and development services. The Company provides options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer and are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on its own or whether the required expertise is readily available and whether the goods or services are integral or dependent to other goods or services in the contract.

 

The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration or variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of potential payment and the likelihood that the payments will be received. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration that is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

 

The Company’s contracts often include development and regulatory milestone payments that are as assessed under the most likely amount method and constrained if it is probable that a significant revenue reversal would occur. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of such development and clinical milestones and any related constraint, and if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and other research and development revenues in the period of adjustment.

 

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of the Company’s collaboration or strategic alliance arrangements.

 

The Company allocates the transaction price based on the estimated standalone selling price. The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated are consistent with the amounts the Company would expect to receive for the satisfaction of each performance obligation.

 

9


 

The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

 

The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

 

Recent Accounting Pronouncements –Adopted

 

In October 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. Therefore, amounts described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for fiscal years beginning after December 15, 2017, and interim periods within those years. The guidance is effective on a retrospective basis. The Company adopted this guidance as of October 1, 2017. The Company reclassified restricted cash in the statements of cash flows to be included in the cash and cash equivalents balance. The reclassification was not material to the periods presented. The following table presents cash, cash equivalents and restricted cash as reported on the condensed consolidated balance sheets that equal the total amounts on the condensed consolidated statements of cash flows (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

 

2017

Cash and cash equivalents

 

$

217,671

 

$

351,552

Restricted cash included in "Restricted cash and other non-current assets"

 

 

1,619

 

 

1,619

Total

 

$

219,290

 

$

353,171

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition (“ASC 605”), and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Thereafter a series of clarifying ASU’s, narrow scope improvements and practical expedients were issued. This collective guidance resulted in the new revenue standards under ASC 606 and numerous updates have been issued subsequent to the initial guidance that provide clarification on a number of specific issues and require additional disclosures. ASC 606 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.

 

The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. As part of the adoption, the Company reviewed all contracts that were not yet completed as of the date of initial application in determining the cumulative-effect impact related to the adoption of Topic 606. The adoption of ASC 606 resulted in the changes to (i) the allocation of arrangement consideration; including the determination of estimated selling price and the allocation of variable consideration to specific performance obligations for the Company’s collaboration agreement with Juno Therapeutics and (ii) the application of proportional performance as a measure of progress on service related deliverables for the Company’s strategic alliance with Allergan.

10


 

 

Effective January 1, 2018, the Company’s adoption of ASC 606 resulted in increases of $0.5 million in deferred revenue and accumulated deficit, which was primarily due to an adjustment for two milestone payments previously earned that will now be recognized over time, partially offset by acceleration of proportional performance revenue. For the three months ended March 31, 2018, revenue increased by $0.1 million and net loss decreased by $0.1 million, which did not have a material impact on the Company’s basic and diluted earnings per share.

 

The following table presents changes in the Company’s deferred revenue balance as of January 1, 2018 resulting from adoption of ASC 606 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

Adjustments

 

Balance at January 1, 2018

Contract liabilities:

 

 

 

 

 

 

 

 

Deferred revenue

$

(107,963)

 

$

(474)

 

$

(108,437)

 

 

During the three months ended March 31, 2018, the Company recognized the following revenue as a result of changes in its deferred revenue balance in the respective periods (in thousands):

 

 

 

 

Revenue recognized in the period from:

 

 

Amounts included in deferred revenue at the beginning of the period

$

2,895

 

In connection with its adoption of ASC 606, the Company has included the following financial statement line items for comparability purposes for the years ended March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

As reported under Topic 606

 

Balances without adoption of ASC 606

 

Effect of Change

Collaboration and other research and development revenues

$

3,927

 

$

3,853

 

$

74

Operating loss

 

(31,559)

 

 

(31,633)

 

 

74

Net loss attributable to common stockholders

 

(30,939)

 

 

(31,013)

 

 

74

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

$

(0.67)

 

$

(0.67)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

As reported under Topic 606

 

Balances without adoption of ASC 606

 

Effect of Change

Deferred revenue, current

$

(13,323)

 

$

(13,238)

 

$

(85)

Deferred revenue, net of current portion

 

(91,972)

 

 

(91,637)

 

 

(335)

Accumulated deficit

$

(337,262)

 

$

(337,336)

 

$

74

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (“ASU 2017-01”), which clarified the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard was effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption was permitted. The Company adopted this new standard as of January 1, 2017, with prospective application to any business development transactions

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (“ASU 2017-09”), which provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to

11


 

apply modification accounting. The new guidance requires modification accounting if the vesting condition, fair value or award classification is not the same both before and after a change to the terms and conditions of the award. This new standard was effective for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company adopted this new standard as of January 1, 2018 and it did not have a material impact to its condensed consolidated financial statements.

 

Recent Accounting Pronouncements – Issued

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to record most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Entities are required to use a modified retrospective approach of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the potential impact that the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.

 

3. Cash Equivalents & Marketable Securities

 

Cash equivalents and marketable securities consisted of the following at March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

March 31, 2018

 

Cost

 

Gains

 

Losses

 

Value

Cash equivalents and marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

164,950

 

$

 —

 

$

 —

 

$

164,950

U.S. Treasuries

 

 

163,711

 

 

 1

 

 

(30)

 

 

163,682

Government agency securities

 

 

29,963

 

 

 —

 

 

(23)

 

 

29,940

Total cash equivalents and marketable securities

 

$

358,624

 

$

 1

 

$

(53)

 

$

358,572

 

Cash equivalents and marketable securities consisted of the following at December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2017

 

Cost

 

Gains

 

Losses

 

Value

Cash equivalents and marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

134,635

 

$

 —

 

$

 —

 

$

134,635

U.S. Treasuries

 

 

135,601

 

 

 —

 

 

(47)

 

 

135,554

Government agency securities

 

 

58,979

 

 

 —

 

 

(29)

 

 

58,950

Total cash equivalents and marketable securities

 

$

329,215

 

$

 —

 

$

(76)

 

$

329,139

 

At March 31, 2018, the Company held 23 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position for less than 12 months at March 31, 2018 was $147.7 million, and there were no securities held by the Company in an unrealized loss position for more than 12 months. As of March 31, 2018, the Company did not intend to sell, and would not be more likely than not required to sell, the securities in an unrealized loss position before recovery of their amortized cost bases. Furthermore, the Company has determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any securities with any other-than-temporary impairment as of March 31, 2018.

 

There were no realized gains or losses on available-for-sale securities during the three months ended March 31, 2018 or 2017.

 

12


 

4. Fair Value Measurements

 

Assets measured at fair value on a recurring basis as of March 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

March 31, 

 

Identical Assets

 

Inputs

 

Inputs

Financial Assets

 

2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

164,950

 

$

164,950

 

$

 —

 

$

 —

U.S. Treasuries

 

 

52,472

 

 

52,472

 

 

 —

 

 

 —

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

 

111,210

 

 

111,210

 

 

 —

 

 

 —

Government agency securities

 

 

29,940

 

 

29,940

 

 

 —

 

 

 —

Money market funds, included in restricted cash

 

 

1,619

 

 

1,619

 

 

 —

 

 

 —

Total financial assets

 

$

360,191

 

$

360,191

 

$

 —

 

$

 —

 

Assets measured at fair value on a recurring basis as of December 31, 2017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

December 31, 

 

Identical Assets

 

Inputs

 

Inputs

Financial Assets

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

134,635

 

$

134,635

 

$

 —

 

$

 —

U.S. Treasuries

 

 

11,995

 

 

11,995

 

 

 —

 

 

 —

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

 

123,559

 

 

123,559

 

 

 —

 

 

 —

Government agency securities

 

 

58,950

 

 

58,950

 

 

 —

 

 

 —

Money market funds, included in restricted cash

 

 

1,619

 

 

1,619

 

 

 —

 

 

 —

Total financial assets

 

$

330,758

 

$

330,758

 

$

 —

 

$

 

There were no transfers between fair value measurement levels during the three months ended March 31, 2018.

 

 

5. Accrued Expenses

 

Accrued expenses consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 

 

December 31, 

 

    

2018

    

2017

Employee related expenses

 

$

2,799

 

$

3,708

Process and platform development expenses

 

 

2,179

 

 

2,301

Intellectual property and patent related fees

 

 

2,007

 

 

2,370

Professional service expenses

 

 

618

 

 

487

Other expenses

 

 

164

 

 

183

Success payment expenses

 

 

 —

 

 

2,000

Total

 

$

7,767

 

$

11,049

 

 

13


 

6. Property and Equipment, net

 

Property and equipment, net consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

    

As of

 

 

March 31, 

 

December 31, 

 

    

2018

    

2017

Building

 

$

35,167

 

$

35,167

Laboratory equipment

 

 

8,169

 

 

7,415

Computer equipment

 

 

480

 

 

550

Leasehold improvements

 

 

177

 

 

177

Software

 

 

113

 

 

96

Furniture and office equipment

 

 

95

 

 

95

Total property and equipment

 

 

44,201

 

 

43,500

Less: accumulated depreciation

 

 

(4,650)

 

 

(4,058)

Property and equipment, net

 

$

39,551

 

$

39,442

 

 

7. Commitments and Contingencies

 

Hurley Street Lease

 

In February 2016, the Company entered into a lease agreement for 59,783 square feet of office and laboratory space located on Hurley Street in Cambridge, Massachusetts. The term of the lease began on October 1, 2016. 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 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 statements as of March 31, 2018 and December 31, 2017.

 

In connection with this lease, the landlord provided a tenant improvement allowance for costs associated with the design, engineering, and construction of tenant improvements for the leased facility. For accounting purposes, the Company was deemed the owner of the building during the construction period due to the fact that the Company was involved in the construction project, including having responsibilities for cost overruns for planned tenant improvements that did not qualify as “normal tenant improvements” under the lease accounting guidance. Throughout the construction period, the Company recorded the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on its balance sheet for the total amount of the project costs incurred whether funded by the Company or the landlord.

 

Construction was completed in October 2016, and the Company considered the requirements for sale-leaseback accounting treatment, which included an evaluation of whether all risks of ownership had transferred back to the landlord, as evidenced by a lack of continuing involvement in the leased property. The Company determined that the arrangement did not qualify for sale-leaseback accounting treatment, the building asset would remain on the Company’s balance sheet at its historical cost, and such asset would be depreciated over its estimated useful life of 30 years.

 

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 did not begin making lease payments pursuant to the Hurley Street lease until November 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.

 

The lease will continue until October 2023. The Company has the option to extend the lease for an additional five year term at market-based rates. The Company began using this space as its headquarters in October 2016 and rental payments for this property began in November 2016. The base rent is subject to increases over the term of the lease.

 

In February 2017, the Company subleased approximately 10,000 square feet of the Hurley Street premises

14


 

pursuant to a sublease (the “Sublease”). The Sublease commenced in February 2017 and will expire on the eighteen month anniversary thereof, unless it is extended for an additional eighteen month term by the subtenant. If the subtenant elects to extend the term of the lease, the base rent is subject to a minimal increase for the subsequent eighteen month period. The total minimum rental revenue to be received in the future is $0.3 million as of March 31, 2018.

 

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 the license agreement, and other license agreements between the Company and Broad. 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 $4.6 million and $4.0 million in expense for reimbursement under such license agreements during the three months ended March 31, 2018 and 2017, respectively.

 

Success Payments

 

In 2016, the Company entered into patent license agreements with each of The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”), and Broad (collectively, the “2016 License Agreements”). Pursuant to the terms of the 2016 License Agreements, the Company is required to make certain success payments to MGH, Broad and Wageningen University (“Wageningen” and such payments, collectively, the “Success Payments”), payable in cash or, at the Company’s election common stock in the case of MGH or, in the case of Broad and Wageningen, promissory notes payable in cash or, at the Company’s election subject to certain conditions, common stock of the Company. The Success Payments are payable, if and when, the Company’s market capitalization reaches specified thresholds for a specific period of time or upon a sale of the Company for consideration in excess of those thresholds, as discussed more fully in Note 8 (collectively, the “Payment Conditions”).

 

The Success Payments were accounted for under the provisions of FASB ASC, Topic 505-50, Equity-Based Payments to Non-Employees. The Company has the right to terminate any of the 2016 License Agreements at will upon written notice. Absent any of the Payment Conditions being achieved prior to termination, the Company would not be obligated to pay any Success Payments. As such, the Company will recognize the expense and liability associated with each Success Payment upon achievement of the associated Payment Conditions, if ever. The Company records this expense as a research and development expense in its statements of operations.

 

The Company triggered the first Success Payment under one of the 2016 License Agreements during the first quarter of 2017 when the Company’s market capitalization reached $750 million. On March 28, 2017, the Company issued promissory notes for an aggregate principal amount of $5.0 million to Broad and Wageningen and the Company settled such notes in August 2017.The Company triggered the second Success Payment under one of the 2016 License Agreements during the fourth quarter of 2017 when the Company’s market capitalization reached $1.0 billion. On December 6, 2017, the Company issued promissory notes for an aggregate principal amount of $7.5 million to Broad and the Company settled such notes in January 2018.

 

The Company triggered the first Success Payment under the MGH license agreement during the fourth quarter of 2017 when the Company’s market capitalization reached $1.0 billion (the “First MGH Success Payment”). The Company accrued $2.0 million relating to the First MGH Success Payment owed to MGH which is included in accrued expense on the condensed consolidated balance sheet for the year ended December 31, 2017. The Company settled this liability in shares of common stock in January 2018.

 

The Success Payments issued to the Broad and Wageningen are discussed more fully within the Notes Payable section below.

 

15


 

Notes Payable

 

In December 2016, in connection with the Company’s entry into the Cpf1 license agreement with Broad (the “Cpf1 License Agreement”), one of the 2016 License Agreements, it issued promissory notes in an aggregate principal amount of $10.0 million to Broad and Wageningen (the “Initial Notes”). Outstanding principal and accrued interest on the Initial Notes were due and payable on the earlier of December 2017 or a specified period of time following a Company sale or change of control event. The Initial Notes accrued interest at a rate of 4.8% per annum. The Company fully settled the outstanding principal and accrued interest on the Initial Notes by paying $0.2 million in cash to Wageningen in August 2017 and issuing 108,104 shares and 371,166 shares of common stock to Broad in August 2017 and September 2017, respectively.

 

In March 2017, a $5.0 million Success Payment under the Cpf1 License Agreement became due upon the market capitalization of the Company’s common stock reaching $750 million. The Company issued a promissory note to each of Broad and Wageningen in an aggregate original principal amount of $5.0 million (collectively, the “March Success Payment Notes”). Outstanding principal and accrued interest on the March Success Payment Notes were due and payable in August 2017. The March Success Payment Notes were subject to the same interest and terms as the Initial Notes, other than the maturity date. The Company settled the outstanding principal and accrued interest on the March Success Payment Notes in August 2017 by paying $0.4 million in cash to Wageningen and issuing 271,347 shares of common stock to Broad in August 2017. In September 2017, Wageningen designated Broad as the recipient of any future promissory notes that are owed to Wageningen pursuant to the Cpf1 License Agreement.

 

In December 2017, $7.5 million in Success Payments under the Cpf1 License Agreement and the Cas9-II license agreement with Broad (the “Cas9-II License Agreement”), one of the 2016 License Agreements, became due upon the Company’s market capitalization reaching $1.0 billion. The Company issued promissory notes to Broad in an aggregate original principal amount of $7.5 million (collectively, the “December Success Payment Notes”). Outstanding principal and accrued interest on the December Success Payment Notes were due and payable in May 2018. The December Success Payment Notes were subject to the same interest and terms as the Initial Notes, other than the maturity date. The Company fully settled the outstanding principal and accrued interest on the December Success Payment Notes by issuing 225,909 shares of common stock to Broad in January 2018.

 

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, 2018 or December 31, 2017.

 

8. 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. 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

16


 

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 the following 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 investigational new drug (“IND”) application 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 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 is obligated to pay to the Company an aggregate of up to $22.0 million in research and development funding over the Initial Research Program Term 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 Research Program Term 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

17


 

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. The Company achieved $2.5 million development milestones under the Collaboration Agreement resulting from technical progress in a research program in each of May 2016 (the “First Milestone”) and July 2017 (the “Second Milestone”). Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, no additional milestone or royalty payments may ever be received from Juno Therapeutics. As of March 31, 2018, the next potential milestone payment that the Company may be entitled to receive under the Collaboration 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 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

18


 

Collaboration Agreement as a result of Juno Therapeutics’ uncured material breach or default, then the licenses conveyed to Juno Therapeutics will terminate.

 

Accounting Analysis

 

The Company has identified the following performance obligations: (i) Research License and the related research and development services during the Initial Research Program Term (the “Research License and Related Services”), (ii) three material rights related to the first Development and Commercialization Licenses related to each of the three research areas (each, a “First Development and Commercialization License Material Right”), (iii) six material rights related to the option to purchase up to three additional Development and Commercialization Licenses for two of the research areas (each, an “Additional License Material Right”) and (iv) JRC services during the Initial Research Program Term (the “JRC Services”).

 

The Company has concluded that the Research License is not distinct from the research and development services during the Initial Research Program Term as Juno Therapeutics cannot obtain the benefit of the Research License without the Company performing the research and development services. The services incorporate proprietary technology and unique skills and specialized expertise, particularly as it relates to genome editing technology that is not available in the marketplace. As a result, the Research License has been combined with the research and development services into a combined performance obligation. The Company has concluded that the First Development and Commercialization License Material Rights for each respective research area and the Additional License Material Right with the two research areas to which it relate are a separate performance obligation under ASC 606 as Juno Therapeutics is provided incremental licenses for additional consideration that represents a significant discount from amounts that would otherwise would be offered outside the context of the contract. These material rights, of which there are nine in total, are distinct from the other performance obligations in the arrangement as they are options in the contract that are not required for Juno Therapeutics to obtain the benefit of the other promised goods or services in the arrangement. Similarly, the Company has concluded the JRC Services performance obligation is distinct from the other obligations in the arrangement as the other performance obligations are not dependent upon the JRC Services.

 

As of January 1, 2018, the date of the initial application of ASC 606 by the Company, the total transaction price was determined to be $52.0 million, consisting of the $25.0 million upfront non-refundable, non-creditable cash payment, $22.0 million of research and development funding and $5.0 million of milestone payments received by the Company. The research and development funding is being provided based on the costs that are incurred to conduct the research and development services. The Company utilizes the most likely amount method to determine the amount of research and development funding to be received. The Company also utilized the most likely amount method to estimate any development and regulatory milestone payments to be received. As of January 1, 2018, there were no milestones that had not been received included in the transaction price. The Company considered the stage of development and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Juno Therapeutics. The outstanding milestone payments were fully constrained, as a result of the uncertainty whether any of the milestones would be achieved. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. There were no changes to the transaction price during the three months ended March 31, 2018.

 

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The transaction price was allocated to the performance obligations based on the relative estimated standalone selling prices of each performance obligation or, in the case of certain variable consideration, to one or more performance obligations. The estimated standalone selling prices for the Research License and Related Services is primarily based on the nature of the services to be performed and estimates of the associated effort and costs of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company developed the estimated standalone selling price for the materials rights based on the difference between the value of license granted and any additional consideration to be received upon exercise of the underlying option, adjusted for the probability of exercise. The value of the license granted was determined 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 transaction price allocated to each performance obligation was as follows: (i) Research License and Related Services: $27.0 million, (ii) Development and Commercialization License Material Right related to the first research area: $7.7 million, (iii) Development and Commercialization License Material Right related to the second research area: $12.8 million, (iv) Development and Commercialization License Material Right related to the third research area: $0.1 million, (v) the first Additional License Material Right for the first research area: $0.6 million, (vi) the second Additional License Material Right for the first research area: $0.3 million, (vii) the third Additional License Material Right for the first research area: $0.1 million, (viii) the first Additional License Material Right for the second research area: $1.7 million, (ix) the second Additional License Material Right for the second research area: $1.1 million, and (x) the third Additional License Material Right for the second research area: $0.6 million. No amounts were allocated to the JRC Services because the associated estimated standalone selling price was determined to be de minimis.

 

The Company will recognize revenue related to amounts allocated to the Research License and Related Services as the underlying services are performed using a proportional performance model. The Company measures proportional performance based on the costs incurred relative to the total estimated costs of the research. Revenue related to the material rights will be recognized when the options are exercised and the Company transfers control of the related exclusive license or when the options lapse. 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, control is deemed to be transferred upon the designation by Juno Therapeutics of the specific target or product, as applicable, whereupon the license becomes effective.

 

During the three months ended March 31, 2018 and 2017, the Company recognized revenue under the Collaboration Agreement totaling approximately $1.0 million and $0.7 million, respectively.

 

The revenue is classified as collaboration and other research and development revenue in the accompanying condensed consolidated statement of operations. As of March 31, 2018 and December 31, 2017, there was approximately $27.1 million and $26.4 million of deferred revenue related to the Collaboration Agreement, respectively, all of which is classified as long term in the accompanying condensed consolidated balance sheet. In addition, as of March 31, 2018 and December 31, 2017, the Company has recorded accounts receivable of $0.8 million and $0.5 million related to reimbursable research and development costs under the Collaboration Agreement for activities performed during the first quarter of 2018 and fourth quarter of 2017, respectively.

 

Allergan Pharmaceuticals Strategic Alliance and Option Agreement

 

Summary of Agreement

 

In March 2017, the Company entered into a Strategic Alliance and Option Agreement with Allergan to discover, develop, and commercialize new gene editing medicines for a range of ocular disorders (the “Allergan Agreement”). Over a seven-year research term, Allergan will have an exclusive option to exclusively license from the Company up to five collaboration development programs for the treatment of ocular disorders (each a “CDP”), including the Company’s Leber Congenital Amaurosis type 10 program (the “LCA10 Program”).

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Under the Allergan Agreement, the Company will use commercially reasonable efforts to develop at least five CDPs and deliver preclinical results and data meeting specified criteria with respect to each CDP (each, an “Option Package” and such criteria, the “Option Package Criteria”) to Allergan. The list of proposed targets that may be subject to a CDP may be amended from time to time by mutual agreement of the Company and Allergan. The Company is responsible for the preparation and delivery of a written development plan for each particular CDP setting forth the discovery and research activities to be conducted which is subject to the approval of the alliance steering committee that was formed under the Allergan Agreement, comprised of three members from each of the Company and Allergan (the “Steering Committee”). The Company will maintain primary responsibility for the development efforts under each CDP. The Company is responsible for all research and development costs prior to the achievement of the Option Package Criteria. Upon achievement of the Option Package Criteria, as determined by the Steering Committee, Allergan will have the ability, for a defined period of time (“Initial Option Period”) to exercise an option (each, an “Option”) to obtain a world-wide right and license to the Company’s background intellectual property and the Company’s interest in the CDP intellectual property to develop, commercialize, make, have made, use, offer for sale, sell, and import any gene editing therapy product that results from such CDP during the term of the Allergan Agreement (a “Licensed Product”) in any category of human diseases and conditions other than the diagnosis, treatment or prevention of any cancer in humans through the use of engineered T-cells and subject to specified other limitations. Allergan has the option to extend the Initial Option Period and require the Company to perform additional research and development services, subject to the payment of additional consideration. After exercise of an Option with respect to a CDP, with the exception of any CDP’s where the Company has exercised its profit-sharing option, Allergan will be responsible for all development, manufacturing, and commercialization activities in connection with licensed products arising from such CDP, other than with respect to the LCA10 Program, if LCA10 is designated as a CDP, for which the Company has retained the right to develop that program through the acceptance for filing of the first IND with respect to the LCA10 Program. Upon achievement of IND approval for LCA10, unless the Company has exercised its profit sharing option on LCA10, Allergan will be responsible for all development, manufacturing, and commercialization activities.

The initial term of the Allergan Agreement commenced on March 14, 2017 (the “Effective Date”) and continues for seven years ending on March 14, 2024 (the “Research Term”). If the Company has not delivered an Option Package, which includes the results and data from the CDP, for five CDPs that satisfy the Option Package Criteria, then the Research Term will automatically extend by one-year increments until such obligation is satisfied, up to a maximum of ten years from the Effective Date.

 

 The activities under the Allergan Agreement during the Research Term will be governed by the Steering Committee. The Steering Committee will review and monitor the direction of the development plan, evaluate and determine which targets are selected to become CDP, establish the Option Package Criteria for each CDP and evaluate the achievement of such criteria as well as oversee the development and commercialization activities after Allergan has licensed a CDP.

 

 Under the terms of the Allergan Agreement, the Company received a $90.0 million up‑front, non‑refundable, non‑creditable cash payment (the “Allergan Upfront”) related to the Company’s research and development costs for Option Packages for at least five CDPs and for reimbursement of the Company’s past out of pocket costs with respect to the prosecution and defense of patents that it owns and in-licenses. Allergan has the option to purchase at least five development and commercialization licenses associated CDP that have satisfied the Option Package Criteria. The option exercise fee during the Initial Option Period is $15.0 million per CDP. If Allergan elects to extend the Initial Option Period, Allergan is required to pay an additional fee of $5.0 million to extend the option, at which point the Company is required to perform additional research services. If Allergan elects to exercise its option to a development and commercialization license after extending the Initial Option Period, Allergan must pay the Company the option exercise fee of $22.5 million, plus specified costs incurred by the Company in connection with the additional development work.

 

Following the exercise by Allergan of an Option with respect to a CDP, Allergan would be required to make certain milestone payments to the Company upon the achievement of specified development, product approval and launch and commercial events, on a CDP by CDP basis. On a CDP by CDP basis, for the first product in the first field to achieve the associated event, the Company is eligible to receive up to an aggregate of $42 million for development milestone payments and $75.0 million for product approval and launch milestone payments, in each case, for an

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indication in the field per CDP. In addition, the Company is eligible to receive additional development and product approval and launch milestone payments for subsequent products developed within two additional fields. The Company is also eligible for up to $90 million in sales milestone payments on a CDP by CDP basis, associated with aggregate worldwide sales. Certain product approval milestones are subject to certain reductions under specified circumstances, including for payments required to be made by Allergan to obtain certain third party intellectual property rights. In addition, within 45 days of the acceptance by the applicable regulatory authority of the Company’s submission of an IND application with respect to the LCA10 Program, Allergan is required to pay the Company a one-time payment of $25.0 million (the “LCA10 IND Payment”), whether or not Allergan exercises its option under the Allergan Agreement to acquire an exclusive license with respect to the LCA10 Program. As of March 31, 2018, the next potential milestone payment that the Company may be entitled to receive under the Allergan Agreement is a substantive milestone payment of $8.0 million for the achievement of certain development criteria.

 

With respect to the LCA10 Program and up to one other CDP of the Company’s choosing, following the exercise by Allergan of its Option to such programs, the Company will have the right to elect to participate in a profit-sharing arrangement with Allergan in the United States, on terms mutually agreed by the Company and Allergan and subject to a right of Allergan to reject such election under certain circumstances, under which the Company and Allergan would share equally in net profits and losses on specific terms to be agreed between the Company and Allergan, in lieu of Allergan paying royalties on net sales of any applicable Licensed Products in the United States, and in such event Allergan’s milestone payment obligations would be reduced, with the Company being eligible to receive development and product approval and launch milestone payments up to a low nine-digit amount in the aggregate and further sales milestone payments up to a high-eight digit amount in the aggregate, subject to reduction under certain circumstances. If the Company elects to participate in a profit-sharing arrangement, the Company is obligated to reimburse Allergan for half of the development costs incurred by Allergan with respect to the applicable CDP, and Allergan will retain control of all development and commercialization activities for the applicable Licensed Products. 

 

In addition, to the extent there is any Licensed Product, the Company would be entitled to receive tiered royalty payments of high single digits based on a percentage of net sales of such Licensed Product, subject to certain reductions under specified circumstances, and the Company will remain obligated to pay all license fees, milestone payments, and royalties due to its upstream licensors based on Allergan’s exercise of its license rights with respect to Licensed Products. However, if a Licensed Product is subject to a profit sharing agreement the royalties will only be paid on ex-US net sales. 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 Licensed Product in a country until the later of: (i) the tenth anniversary of the first commercial sale of such Licensed Product in such country (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 and (iii) the expiration of an exclusive legal right granted by the regulatory authority in such country to market and sell such Licensed Product.

 

Unless earlier terminated, the Allergan Agreement will terminate upon (i) the expiration of the Research Term, if Allergan does not exercise an Option, (ii) on a Licensed Product-by-Licensed Product and country-by-country basis, on the date of the expiration of all payment obligations under the Allergan Agreement with respect to such Licensed Product in such country or (iii) in its entirety upon the expiration of all payment obligations with respect to the last Licensed Product in all countries, unless terminated earlier due to the early termination provisions. Either party may terminate the Allergan 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. During the Research Term, Allergan will have the right to terminate the Allergan Agreement on a CDP by CDP basis in the event of a change in control of the Company or for all CDPs, provided that Allergan will not have any right to exercise an Option for any CDPs following such termination. After the exercise of an Option, Allergan will have the right, at its sole discretion, to terminate the Allergan Agreement, on a CDP by CDP basis, upon 90 days’ written notice. The Company may terminate the Allergan Agreement in the event that Allergan 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. Lastly, Allergan may terminate the Allergan Agreement with respect to a CDP if a safety concern, as specified in the Allergan Agreement, arises.

 

 Termination of the Allergan Agreement for any reason will not release either party from any liability which, at

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the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination. In addition, termination of the Allergan Agreement will not 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 Allergan Agreement. If Allergan terminates the Allergan Agreement as a result of the Company’s uncured material breach or default, then: (i) the licenses and rights conveyed to Allergan will continue as set forth in the agreement for any CDP Allergan has already licensed and (ii) Allergan’s obligations related to milestones and royalties will continue as set forth in the agreement. If the Allergan Agreement is terminated for any other reason, then the options and licenses conveyed to Allergan under the agreement will terminate.

 

Accounting Analysis

 

Under the Allergan Agreement, the Company has identified a single performance obligation that includes (i) the research and development services during the Research Term (the “Allergan R&D Services”), and (ii) Steering Committee services during the Research Term (the “ASC Services”). The Company has concluded that the Allergan R&D Services is not distinct from the ASC Services during the Research Term. The Steering Committee provides oversight and management of the overall Allergan Agreement, and the members of the Steering Committee from the Company have specialized industry knowledge, particularly as it relates to genome editing technology. The Steering Committee is meant to facilitate the early stage research being performed and coordinate the activities of both the Company and Allergan. Further, the Steering Committee services are critical to the selection of a CDP, the ongoing evaluation of a CDP and the development and evaluation of the Option Package Criteria. Accordingly, the Company’s participation on the Steering Committee is essential to Allergan receiving value from the Allergan R&D Services and as such, the ASC Services along with the Allergan R&D Services are considered one performance obligation (the “CDP Services”).

 

As of January 1, 2018, the date of the initial application of ASC 606 by the Company, the total transaction price was determined to be $90.0 million, consisting solely of the upfront non-refundable, non-creditable cash payment. The Company also utilized the most likely amount method to estimate any development and regulatory milestone payments to be received. As of January 1, 2018, there were no milestones included in the transaction price. The Company considered the stage of development and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Allergan. The LCA10 IND Payment and outstanding milestone payments were fully constrained, as a result of the uncertainty whether any of the milestones would be achieved. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. There were no changes to the transaction price during the three months ended March 31, 2018.

 

The Company will recognize revenue related to the CDP Services as the underlying services are performed using a proportional performance model. The Company measures proportional performance based on full time employee hours relative to projected full time employee hours to complete the research service.

 

During the three months ended March 31, 2018, the Company recognized revenue totaling approximately $2.9 million with respect to the Allergan Agreement. During the three months ended March 31, 2017, the Company recognized no revenue with respect to the Allergan Agreement as it had not commenced providing services related to the CDP Services. As of March 31, 2018 and 2017, there was $77.8 million and $90.0 million of deferred revenue related to the Allergan Agreement, respectively, of which $64.9 million and $77.9 million is classified as long-term on the condensed consolidated balance sheet, respectively.

 

During the three months ended March 31, 2017, the Company paid $2.3 million in sublicense fees that were owed to certain of the Company’s licensors in connection with the Allergan Upfront, which the Company recorded as research and development expenses during such period. The Company did not pay any sublicense fees during the three months ended March 31, 2018.

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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 its business:

 

Massachusetts General Hospital Agreements

 

In August 2014, the Company entered into an agreement to license certain patent rights owned or co‑owned by 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 (i.e. anti‑dilution protection liability), which was settled in June 2015. MGH is entitled to receive nominal annual license fees and future clinical, regulatory and commercial milestone payments in an aggregate maximum amount of $3.7 million and an aggregate amount 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 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.

 

In August 2016, the Company entered into a license agreement with MGH (the “2016 MGH Agreement”) to license certain patent rights owned or co-owned by MGH (the “Additional MGH Patent Rights”). Consideration for granting the license included the payment of an upfront nonrefundable license fee of $0.8 million, which the Company recorded as research and development expense in 2016. Under the 2016 MGH Agreement, MGH is entitled to nominal annual license fees, clinical and regulatory milestone payments totaling less than $1.0 million in the aggregate per licensed product up to four licensed products or processes to achieve the specified clinical and regulatory milestones, and commercial sales milestone payments totaling up to $4.9 million in the aggregate, consisting of milestone payments due upon the first commercial sales for up to four licensed products or processes and milestone payments due upon annual net sales of products or processes meeting specified thresholds. The Company is also obligated to pay MGH royalties of less than 1% on net sales of products and processes for the prevention or treatment of human disease, and royalties of a low single-digit percentage on net sales of products and processes for the prevention or treatment of a non-human animal disease, made by the Company, its affiliates, or its sublicensees. The royalty percentages that the Company is obligated to pay are subject to reduction if at the time of sale the applicable product or process is not covered by a valid claim within the Additional MGH Patent Rights. Under the 2016 MGH Agreement, the Company is obligated to reimburse MGH for all patent costs and future reasonable costs associated with the prosecution, filing, and maintenance of the licensed patents.

 

MGH is also entitled under the 2016 MGH Agreement to receive payments of up to $6.0 million in the event the Company’s market capitalization reaches specified thresholds meeting or exceeding $1.0 billion, on or prior to the expiration or termination of the 2016 MGH Agreement (or if earlier, a Company sale) (“MGH Market Cap Success Payments”) or a Company sale for consideration in excess of those thresholds (“MGH Company Sale Success Payments”). Additional MGH Market Cap Success Payments become payable, and the amount of potential MGH Company Sale Success Payments would increase further, if the Company’s market capitalization reaches additional higher thresholds and the Company has at least one product candidate that is covered by a claim of an Additional MGH Patent Right and that (i) is the subject of a Phase 1 clinical trial of which the Company or an affiliate or sublicensee of the Company is the sponsor, (ii) was the subject of a Phase 1 clinical trial of which the Company or an affiliate or sublicensee of the Company was the sponsor with the Company having determined to conduct a subsequent clinical trial with respect to such product candidate, or (iii) has been approved for sale in either the United States or European Union. MGH Market Cap Success Payments are payable in cash or shares of Company common stock at the Company’s

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discretion, and MGH Company Sale Success Payments are payable solely in cash. The Company triggered the first MGH Market Cap Success Payment under the 2016 MGH Agreement during the fourth quarter of 2017 when the Company’s market capitalization reached $1.0 billion, as discussed more fully in Note 7.

 

The Broad Agreements

 

In October 2014, the Company entered into an agreement (the “Cas9-I License Agreement”) with Broad and Harvard to license certain patent rights owned or co‑owned by, or among, Broad, the Massachusetts Institute of Technology (“MIT”), and Harvard (collectively, the “Institutions”). Consideration for the granting of the license included the payment of an upfront license issuance fee of $0.2 million and the issuance of 561,531 shares of the Company’s common stock. 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.

 

In December 2016, the Company entered into the Cpf1 License Agreement with Broad, for specified patent rights (the “Cpf1 Patent Rights”) related primarily to Cpf1 compositions of matter and their use for gene editing. Concurrently with entering into the Cpf1 License Agreement, the Company, Broad, and Harvard amended and restated the Cas9-I License Agreement as described below. Concurrently, the Company and Broad also entered into the Cas9‑II License Agreement for specified patent rights (the “Cas9-II Patent Rights”) related primarily to certain Cas9 compositions of matter and their use for genome editing. The Company paid an upfront fee in aggregate of $16.5 million, which included the Initial Notes, under these agreements which was recorded in research and development expenses during 2016.

Cpf1 License Agreement

 

Pursuant to the Cpf1 License Agreement, Broad, on behalf of itself, Harvard, MIT, Wageningen, and the University of Tokyo (“UTokyo” and, together with Broad, Harvard, MIT, and Wageningen, the “Cpf1 Institutions”) granted the Company an exclusive, worldwide, royalty‑bearing, sublicensable license to the Cpf1 Patent Rights, to make, have made, use, have used, sell, offer for sale, have sold, export and import products in the field of the prevention or treatment of human disease using gene therapy, editing of genetic material, or targeting of genetic material, subject to certain limitations and retained rights (collectively, the “Cpf1 Exclusive Field”), as well as a non‑exclusive, worldwide, royalty‑bearing sublicensable license to the Cpf1 Patent Rights for all other purposes, subject to certain limitations and retained rights. The Company is obligated to use commercially reasonable efforts to research, develop, and commercialize products in the Cpf1 Exclusive Field. The Company is also required to achieve certain development milestones within specified time periods for products covered by the Cpf1 Patent Rights, with Broad having the right to terminate the Cpf1 License Agreement if the Company fails to achieve these milestones within the required time periods.

Broad and Wageningen are collectively entitled to receive clinical and regulatory milestone payments totaling up to $20.0 million in the aggregate per licensed product approved in the United States, European Union, and Japan for

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the prevention or treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. The Company is also obligated to make additional payments to Broad and Wageningen, collectively, of up to an aggregate of $54.0 million upon the occurrence of certain sales milestones per licensed product for the prevention or treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. Broad and Wageningen are collectively entitled to receive clinical and regulatory milestone payments totaling up to $6.0 million in the aggregate per licensed product approved in the United States, European Union and Japan for the prevention or treatment of a human disease that afflicts fewer than a specified number of patients in the aggregate in the United States or a specified number of patients per year in the United States (an “Ultra‑Orphan Disease”). The Company is also obligated to make additional payments to Broad and Wageningen, collectively, of up to an aggregate of $36.0 million upon the occurrence of certain sales milestones per licensed product for the prevention or treatment of an Ultra‑Orphan Disease.

Broad and Wageningen, collectively, are entitled to receive, on a product‑by‑product and country‑by‑country basis, mid single‑digit percentage royalty on net sales of licensed products for the prevention or treatment of human disease, and royalties on net sales of other licensed products and licensed 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 Cpf1 Patent Rights. If the Company is legally required to pay royalties to a third party on net sales of the Company’s products because such third party holds patent rights that cover such licensed product, then the Company can credit up to a specified percentage of the amount paid to such third party against the royalties due to Broad and Wageningen in the same period. Such credit may not exceed 50% of the applicable royalties paid by the Company to the applicable third party. The Company’s obligation to pay royalties will expire on a product‑by‑product and country‑by‑country basis upon the later of the expiration of the last to expire valid claim of the Cpf1 Patent Rights that covers each licensed product or service in each country or the tenth anniversary of the date of the first commercial sale of the licensed product or licensed service. If the Company sublicenses any of the Cpf1 Patent Rights to a third party, Broad and Wageningen, collectively, have the right to receive sublicense income, depending on the stage of development of the products or services in question at the time of the sublicense.

Under the Cpf1 License Agreement, Broad and Wageningen are also entitled, collectively, to receive success payments in the event the Company’s market capitalization reaches specified thresholds (the “Cpf1 Market Cap Success Payments”) or a Company sale for consideration in excess of those thresholds (the “Cpf1 Company Sale Success Payments” and, collectively with the Cpf1 Market Cap Success Payments, the “Cpf1 Success Payments”). The Cpf1 Success Payments payable to Broad and Wageningen are triggered when the Company’s market capitalization reaches certain amounts ranging from $750.0 million to $10.0 billion for a specified period of time, and collectively the Cpf1 Success Payments will not exceed, in aggregate, $125.0 million, which maximum amount would be payable only if the Company reaches a market capitalization threshold of $10.0 billion and has at least one product candidate covered by a claim of a patent right licensed to the Company under either the Cpf1 License Agreement or the Cas9‑I License Agreement that is or was the subject of a clinical trial pursuant to development efforts by the Company or any Company affiliate or sublicensee. The Cpf1 Market Cap Success Payments are payable by the Company in cash or in the form of promissory notes on substantially the same terms and conditions as the Initial Notes, as described more fully in Note 7, except that the maturity date of such notes will, subject to certain exceptions, be 150 days following issuance. Following a change in control of the Company, Cpf1 Market Cap Success Payments are required to be made in cash. Cpf1 Company Sale Success Payments are payable solely in cash. The Company triggered the first and second Cpf1 Success Payments during 2017 when the Company’s market capitalization reached $750 million and $1.0 billion, respectively, as described more fully in Note 7.

Unless terminated earlier, the term of the Cpf1 License Agreement will expire on a country‑by‑country basis, upon the expiration of the last to expire valid claim of the Cpf1 Patent Rights in such country. The Company has the right to terminate the Cpf1 License Agreement at will upon four months’ written notice to Broad. Either party may terminate the Cpf1 License Agreement upon a specified period of notice in the event of the other party’s uncured material breach of a material obligation, such notice period varying depending on the nature of the breach. Broad may terminate the Cpf1 License Agreement immediately if the Company challenges the enforceability, validity, or scope of any Cpf1 Patent Right or assist a third party to do so, or in the event of the Company’s bankruptcy or insolvency.

Amendment and Restatement of Cas9-I License Agreement

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In December 2016, the Company amended and restated the Cas9‑I License Agreement (such agreement, as amended, the “Amended and Restated Cas9-I License Agreement”) to exclude additional fields from the scope of the exclusive license previously granted to the Company, to make the exclusive license to three targets become non‑exclusive, subject to the limitation that each of Broad and Harvard would only be permitted to grant a license to only one third party at a time with respect to each such target within the field of the exclusive license, and to revise certain provisions relating to the rights of Harvard and Broad to grant further licenses under specified circumstances to third parties that wish to develop and commercialize products that target a particular gene and that otherwise would fall within the scope of the exclusive license under this agreement, so that Harvard and Broad together would have rights substantially similar to the equivalent rights possessed by Broad under the Cpf1 License Agreement to designate gene targets for which the designating institution, whether alone or together with an affiliate or third party, has an interest in researching and developing products that would otherwise be covered by rights licensed by Harvard and/or Broad to the Company under this agreement, the Cpf1 License Agreement or the Cas9‑II Agreement. In March 2017, the Company and Harvard and Broad further amended the Amended and Restated Cas9-I License Agreement to (i) grant an exclusive license from Broad to the Company with respect to certain patent rights that The Rockefeller University (“Rockefeller”) has or may have rights in and to and for which Rockefeller has, under a certain inter-institutional agreement that Broad and Rockefeller entered into in February 2017, appointed Broad as sole and exclusive agent for the purposes of licensing and (ii) provide to Rockefeller certain rights, including with respect to patent enforcement, indemnification, insurance, confidentiality, reservation of certain rights, and publicity, that are generally consistent with those granted to Broad, Harvard, MIT and the Howard Hughes Medical Institute under the Amended and Restated Cas9-I License Agreement.

Cas9‑II License Agreement

 

Pursuant to the Cas9‑II License Agreement, Broad, on behalf of itself, MIT, Harvard, and the University of Iowa Research Foundation, granted the Company an exclusive, worldwide, royalty bearing sublicensable license to certain of the Cas9‑II Patent Rights as well as a non‑exclusive, worldwide, royalty‑bearing sublicensable license to all of the Cas9‑II Patent Rights, in each case on terms substantially similar to the licenses granted to the Company under the Cpf1 License Agreement except, among other things, for the following commitment amounts. Under the Cas9‑II License Agreement, the Company will pay an upfront license fee in a low seven digit dollar amount and will have to pay an annual license maintenance fee. The Company is obligated to pay clinical and regulatory milestone payments per licensed product approved in the United States, European Union and Japan for the prevention or treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States totaling up to $3.7 million in the aggregate, and sales milestone payments for any such licensed product totaling up to $13.5 million in the aggregate. In addition, the Company is obligated to pay clinical and regulatory milestone payments totaling up to $1.1 million in the aggregate per licensed product approved in the United States and the European Union or Japan for the prevention or treatment of a human disease that afflicts fewer than a specified number of patients in the United States, plus sales milestone payments of up to $9.0 million for any such licensed product. Consistent with the Cpf1 License Agreement, the licensors are entitled to royalties on net sales of products for the prevention or treatment of human disease and other products and services made by the Company, its affiliates, or its sublicensees. Royalties due under other license agreements are creditable against these royalties up to a specified amount in the same period. Lastly, Broad is entitled to receive success payments if the Company’s market capitalization reaches specified thresholds ascending from $1.0 billion to $9.0 billion or upon a sale of the Company for consideration in excess of those thresholds. The potential success payments range from a low seven digit dollar amount to a low eight digit dollar amount and will not exceed, in aggregate, $30.0 million, which maximum amount would be owed only if the Company reaches a market capitalization threshold of $9.0 billion and has at least one product candidate covered by a claim of a patent right licensed to the Company under either the Cas9-I License Agreement or the Cas9-II License Agreement that is or was the subject of a clinical trial pursuant to development efforts by the Company or any Company affiliate or sublicensee. The Company triggered the first Success Payment under the Cas9-II Agreement during the fourth quarter of 2017 when the Company’s market capitalization reached $1.0 billion, which the Company settled in January 2018, as more fully described in Note 7.

 

27


 

9.  Stock‑based Compensation

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

 

2017

Research and development

 

$

3,910

 

$

3,614

General and administrative

 

 

2,618

 

 

2,190

Total stock-compensation expense

 

$

6,528

 

$

5,804

 

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 liability. The restricted stock liability is reclassified into stockholders’ equity as the restricted stock vests. A summary of the status of and changes in unvested restricted stock as of December 31, 2017 and March 31, 2018 is as follows:

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average

 

 

 

 

Grant Date

 

 

 

 

Fair Value

 

 

Shares

 

Per Share

Unvested Restricted Common Stock as of December 31, 2017

 

513,225

 

$

18.70

Issued

 

 —

 

 

 —

Vested

 

(104,025)

 

$

4.88

Forfeited

 

 —

 

 

 —

Unvested Restricted Common Stock as of March 31, 2018

 

409,200

 

$

22.22

 

For the three months ended March 31, 2018, the expense for restricted stock awards related to non‑employees was $0.7 million. For the three months ended March 31, 2018, there was no expense for restricted stock awards related to employees.

 

As of March 31, 2018, the Company had no unrecognized stock‑based compensation expense related to its employee unvested restricted stock awards and $10.5 million in unrecognized stock-based compensation expense related to its non-employee unvested restricted stock awards.

 

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. The liability for unvested common stock subject to repurchase is reclassified into stockholders’ equity as the shares vest.

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The following is a summary of stock option activity for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

    

Remaining

    

Aggregate Intrinsic

 

 

Shares

 

Exercise Price

 

Contractual Life (years)

 

Value (in thousands)

Outstanding at December 31, 2017

 

4,372,136

 

$

17.28

 

8.5

 

$

60,591

Granted

 

1,469,881

 

$

36.48

 

 —

 

 

 —

Exercised

 

(308,497)

 

$

14.17

 

 —

 

 

 —

Cancelled

 

(229,945)

 

$

21.54

 

 —

 

 

 —

Outstanding at March 31, 2018

 

5,303,575

 

$

22.61

 

8.7

 

$

61,944

Vested and expected to vest at March 31, 2018

 

5,303,575

 

$

22.61

 

8.7

 

$

61,944

Exercisable at March 31, 2018

 

1,553,297

 

$

15.83

 

7.5

 

$

27,662

 

The table above reflects restricted stock issued upon exercise of unvested stock options as exercised on the dates that the shares are no longer subject to repurchase. The Company had 281 and 4,572 shares of unvested restricted common stock outstanding at March 31, 2018 and December 31, 2017, 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, 2018 and 2017 was $25.82 and $16.73, respectively. The expense related to options granted to employees and directors was $4.6 million and $3.1 million for the three months ended March 31, 2018 and 2017, 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, 

 

 

2018

 

2017

Risk free interest rate

 

2.6

%  

 

2.1

%

Expected dividend yield

 

 —

 

 

 —

 

Expected term (in years)

 

6.25

 

 

6.25

 

Expected volatility

 

80.0

%  

 

78.0

%

 

There were no options issued to persons other than employees and directors during the three months ended March 31, 2018. As of March 31, 2018, the Company had unrecognized stock‑based compensation expense related to its employee stock options of $63.5 million which the Company expects to recognize over the remaining weighted average vesting period of 2.86 years.

 

10. 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 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. Contingently issuable shares are included in the calculation of basic loss per share as of the beginning of the period in which all the necessary conditions have been satisfied. Contingently issuable shares are included in diluted loss per share based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, if the results are dilutive.

 

For purposes of the diluted net loss per share calculation, stock options 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.

29


 

 

Upon the closing of the January Offering, the Company sold 1,429,205 shares of common 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, 2018 and is expected to continue to impact the year-over-year comparability of the Company’s net loss per share calculations for the next nine 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, 

 

    

 

2018

    

2017

Unvested restricted common stock

 

 

409,200

 

614,345

Outstanding stock options

 

 

5,303,575

 

4,309,750

Estimated number of shares issuable for convertible notes (1)

 

 

 —

 

678,349

Total

 

 

5,712,775

 

5,602,444

 

1)

Represents the number of shares that would have been issued if the Company had elected to pay the Initial Notes and March Success Payment Notes, as discussed more fully in Note 7, in shares of the Company’s common stock, based on the closing price of the common stock on March 31, 2017. The number of shares issued, for purposes of this presentation, is calculated by dividing the principal of the notes payable, including accrued interest, by such closing price.

 

The table above reflects restricted stock issued upon exercise of unvested stock options as exercised on the dates that the shares are no longer subject to repurchase.

 

 

 

 

 

11. Related‑Party Transactions

 

The Company received $0.2 million in rent and facility-related fees from a related party in the three months ended March 31, 2018 in connection with the Sublease and no rent or facility-related payments were received from this related party during the three months ended March 31, 2017.

 

12. Subsequent Events

 

In May 2018, the Company entered into an amended and restated collaboration agreement with Juno Therapeutics. Such amended and restated collaboration agreement is more fully described in “Other Information” in Part II, Item 5 of this Quarterly Report on Form 10-Q.

 

30


 

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, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2018 (the “2017 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 developing transformative genomic medicines with the aim to treat a broad range of serious diseases. The promise of genomic medicines is supported by the advancing knowledge of the human genome, and harnessing the progress in technologies for cell therapy, gene therapy, and, most recently, genome editing. We believe this progress sets the stage for us to create unprecedented medicines with the potential to have a durable benefit for patients. At Editas Medicine, our core capability in genome editing uses the technology known as CRISPR (clustered, regularly interspaced, short palindromic repeats) with which we can create molecules that efficiently and specifically edit DNA. Our mission is to translate the promise of this science into a broad class of medicines to help people living with serious diseases around the world. To this end, we have developed a proprietary genome editing platform based on CRISPR technology and we continue to expand its capabilities. Our initial product development strategy is to primarily target genetically defined diseases with a focus on debilitating illnesses where there are poor or no approved treatments and where the genetic basis of disease is well understood. A genetically defined disease may be treated by correcting a disease causing gene, whereas a genetically treatable disease is a disease that does not necessarily have a single, disease causing gene, but which nonetheless may be treated by editing genes to ameliorate or eliminate the signs or symptoms of that disease.  While our discovery efforts have ranged across several different diseases and therapeutic areas, the two areas where our programs are more mature are ocular diseases and engineered cell medicines. Our most advanced program is designed to address a specific genetic form of retinal degeneration called Leber Congenital Amaurosis type 10 (“LCA10”), a disease for which we are not aware of any available therapies and which we are aware of only one potential treatment in clinical trials in the United States and Europe.  We aim to file an investigational new drug (“IND”) application by mid-2018 for our LCA10 program. As part of our long term strategy, we have developed and articulated goals for our pipeline of experimental medicines and our company that we are working to achieve by the end of 2022. These goals, which we call “EM22,” include having at least three experimental medicines in early stage clinical trials and at least two additional experimental medicines in or ready for late stage clinical trials. In addition, we aim to have a pipeline characterized by potential best-in-class medicines and to be a company with the leading genome editing platform and organizational culture.

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In May 2015, we entered into a collaboration with Juno Therapeutics, Inc., a Celgene company that is a wholly-owned subsidiary of Celgene Corporation (“Juno Therapeutics”), a leader in the emerging field of immuno‑oncology, to develop novel engineered T cell therapies for cancer and, in March 2017, we entered into a strategic alliance and option agreement with Allergan Pharmaceuticals International Limited (“Allergan”), a wholly-owned subsidiary of Allergan plc, a leading global pharmaceutical company, to discover, develop, and commercialize new gene editing medicines for a range of ocular disorders.  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 (the “IPO”), follow-on public offerings of our common stock including through an at-the-market offering, private placements of our preferred stock, payments received under our collaboration with Juno Therapeutics and the upfront payment that we received under our strategic alliance with Allergan. From inception through March 31, 2018, we raised an aggregate of $594.5 million to fund our operations.

 

Since inception, we have incurred significant operating losses. Our net losses were $30.9 million and $31.1 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we had an accumulated deficit of $337.3 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, including reimbursing our licensors for such expenses related to the intellectual property that we in-license from such licensors; 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, 2018 or the foreseeable future.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenue from product sales and we 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, and in each of May 2016 and July 2017, we received a milestone payment of $2.5 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. Through March 31, 2018, we had recognized an aggregate of $12.3 million of research support from Juno Therapeutics since entering into the collaboration. During the three months ended March 31, 2018, we recognized $1.0 million of research support from Juno Therapeutics. In connection with entering into our strategic alliance with Allergan in March 2017, we received an upfront payment of $90.0 million from Allergan (such payment, the “Allergan Upfront”). During the three months ended March 31, 2018, we recognized $2.9 million in revenue in connection with the Allergan Upfront. As of March 31, 2018, we recorded $77.8 million of deferred revenue, $64.9 million of which is classified as long-term on the condensed consolidated balance sheet.

For the foreseeable future, we expect substantially all of our revenue will be generated from our collaboration with Juno Therapeutics, our strategic research alliance with Allergan to the extent Allergan exercises any of its options, any other collaborations or agreements we may enter into and anticipated interest income.

32


 

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;

 

·

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 acquiring and maintaining licenses under our third‑party licensing agreements, including any sublicensing or success payments made to our licensors.

 

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, IND‑enabling studies and natural history 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 a product, if and when approved, whether alone or in collaboration with others;

 

·

acceptance of a 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.

33


 

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.

 

We do not track research and development costs on a program‑by‑program basis.

 

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 and prepare for the clinical development for our LCA10 program as well as our other research programs.

 

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, investor relations, business development, legal, corporate affairs, information technology, facilities 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 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 expenses associated with operating as 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”) as described in more detail in Part II, Item 1A “Risk Factors—Risks Related to Our Intellectual Property,” we anticipate general and administrative expenses will continue to be significant. Some of our in‑licensed patents under our license agreement with Broad and Harvard are subject to priority disputes, and we anticipate that our obligation to reimburse Broad and Harvard for expenses related to these interference and opposition proceedings during future periods will be substantial until such proceedings are resolved.

 

Other Income (Expense), Net

 

For the three months ended March 31, 2018, other income (expense), net consisted primarily of interest income, accretion of discounts associated with marketable securities, and rental income from our subtenant, partially offset by interest expense on our construction financing lease obligation.

 

For the three months ended March 31, 2017, other income (expense), net consisted primarily of interest expense on our construction financing lease obligation and certain promissory notes issued by us in the aggregate original principal amount of $15.0 million, partially offset by rental income from our subtenant and interest income.

 

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 United States 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