ntla-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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: 001-37766

 

INTELLIA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-4785571

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

40 Erie Street, Suite 130, Cambridge, Massachusetts

02139

(Address of principal executive offices)

(Zip code)

857-285-6200

(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 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 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 outstanding of the registrant’s common stock as of April 27, 2018: 43,089,810 shares.

 

 

 


 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements.

 

 

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

3

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

5

 

 

Notes to Consolidated Financial Statements

6

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

27

 

 

Item 4. Controls and Procedures.

27

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1A. Risk Factors

28

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

Item 6. Exhibits

68

 

 

Signatures

69

 

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INTELLIA THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands except share and per share data)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

327,778

 

 

$

340,678

 

Accounts receivable

 

 

7,466

 

 

 

10,471

 

Prepaid expenses and other current assets

 

 

2,476

 

 

 

3,681

 

Total current assets

 

 

337,720

 

 

 

354,830

 

Property and equipment, net

 

 

16,010

 

 

 

15,272

 

Other assets

 

 

5,815

 

 

 

6,133

 

Total Assets

 

$

359,545

 

 

$

376,235

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,916

 

 

$

2,172

 

Accrued expenses

 

 

6,605

 

 

 

7,999

 

Current portion of deferred revenue

 

 

17,062

 

 

 

21,188

 

Total current liabilities

 

 

25,583

 

 

 

31,359

 

Deferred revenue, net of current portion

 

 

38,332

 

 

 

44,111

 

Other long-term liabilities

 

 

131

 

 

 

168

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 120,000,000 shares authorized,

   43,091,922 shares and 42,384,623 shares issued and outstanding,

   respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

432,533

 

 

 

421,706

 

Accumulated deficit

 

 

(137,038

)

 

 

(121,113

)

Total stockholders' equity

 

 

295,499

 

 

 

300,597

 

Total Liabilities and Stockholders' Equity

 

$

359,545

 

 

$

376,235

 

 

See notes to consolidated financial statements.

 

3


 

INTELLIA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

 

2018

 

 

2017

 

 

Collaboration revenue

 

$

7,469

 

 

$

6,215

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

22,493

 

 

 

13,431

 

 

General and administrative

 

 

7,406

 

 

 

5,732

 

 

Total operating expenses

 

 

29,899

 

 

 

19,163

 

 

Operating loss

 

 

(22,430

)

 

 

(12,948

)

 

Interest income

 

 

1,074

 

 

 

317

 

 

Net loss

 

$

(21,356

)

 

$

(12,631

)

 

Net loss per share attributable to common

   stockholders, basic and diluted

 

$

(0.51

)

 

$

(0.36

)

 

Weighted average shares outstanding, basic

   and diluted

 

 

42,043

 

 

 

34,723

 

 

 

See notes to consolidated financial statements.

 

4


 

INTELLIA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(21,356

)

 

$

(12,631

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,012

 

 

 

660

 

Equity-based compensation

 

 

4,107

 

 

 

2,630

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,005

 

 

 

4,011

 

Prepaid expenses and other current assets

 

 

1,205

 

 

 

704

 

Accounts payable

 

 

59

 

 

 

(954

)

Accrued expenses

 

 

(1,609

)

 

 

(1,893

)

Deferred revenue

 

 

(4,474

)

 

 

(4,278

)

Other assets

 

 

318

 

 

 

268

 

Other long-term liabilities

 

 

(37

)

 

 

85

 

Net cash used in operating activities

 

 

(17,770

)

 

 

(11,398

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,850

)

 

 

(4,162

)

Net cash used in investing activities

 

 

(1,850

)

 

 

(4,162

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from options exercised

 

 

6,720

 

 

 

47

 

Net cash provided by financing activities

 

 

6,720

 

 

 

47

 

Net decrease in cash and cash equivalents

 

 

(12,900

)

 

 

(15,513

)

Cash and cash equivalents, beginning of period

 

 

340,678

 

 

 

273,064

 

Cash and cash equivalents, end of period

 

$

327,778

 

 

$

257,551

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Purchases of property and equipment unpaid at period end

 

$

703

 

 

$

378

 

 

See notes to consolidated financial statements.

 

5


 

INTELLIA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.

Overview and Basis of Presentation

Intellia Therapeutics, Inc. (collectively referred to with its wholly owned, controlled subsidiary, Intellia Securities Corp., as “Intellia” or the “Company”) is a genome editing company focused on developing curative therapeutics utilizing a biological tool known as CRISPR/Cas9.

The 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 (“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 (“U.S. GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these 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 year ended December 31, 2017.

The unaudited consolidated financial statements include the accounts of Intellia Therapeutics, Inc. and its wholly-owned, controlled subsidiary, Intellia Securities Corp. All intercompany balances and transactions have been eliminated in consolidation. The only item comprising comprehensive loss is net loss.

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.  

2.

Summary of Significant Accounting Policies

Revenue Recognition

 

In May 2014, the Financing Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded existing revenue recognition guidance. The Company adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”) on January 1, 2018 using the modified retrospective method. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605” or “legacy GAAP”). The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s goods and services and will provide financial statement readers with enhanced disclosures.

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods and services. To achieve this core principle, the Company applies the following five steps:

 

1) Identify the contract with the customer

 

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s intent and ability to pay, which is based on a variety of factors including the customer’s historical payment experience, or in the case of a new customer, published credit and financial information pertaining to the customer.

 


6


 

2) Identify the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, the Company must apply judgment to determine whether promised goods and services are both capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.

 

3) Determine the transaction price

 

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes. Determining the transaction price requires significant judgment, which is discussed in further detail for each of the Company’s collaboration agreements in Note 5. In addition, neither of the Company’s contracts as of March 31, 2018 contained a significant financing component.

 

4) Allocate the transaction price to performance obligations in the contract

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices. The Company typically determines standalone selling prices using an adjusted market assessment approach model.

 

5) Recognize revenue when or as the Company satisfies a performance obligation

 

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized over time if either (i) the customer simultaneously receives and consumes the benefits provided by the entity’s performance, (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer. Examples of control are using the asset to produce goods or services, enhance the value of other assets, or settle liabilities, and holding or selling the asset.

 

As of March 31, 2018, the Company’s only revenue recognized is related to collaboration agreements with third parties. As discussed in further detail in Note 5, the Company enters into out-licensing agreements which are within the scope of ASC 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: nonrefundable, upfront fees; development, regulatory, and commercial milestone payments; research and development funding payments; and royalties on the net sales of licensed products. Each of these payments results in collaboration revenues, except for revenues from royalties on the net sales of licensed products, which are classified as royalty revenues.

 

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from consideration allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the licenses. For

7


 

licenses that are combined with 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 for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

 

Milestone payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates the probability of reaching the milestones and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur in the future, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received and therefore revenue recognized is constrained as management is unable to assert that a reversal of revenue would not be possible. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment.

 

Royalties: For arrangements that include sales-based royalties, including milestone payments based on levels 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 its collaboration agreements.

 

The Company receives payments from its customers based on billing schedules established in each contract. The Company’s contract liabilities consist of deferred revenue. Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements.  

 

The following table presents changes in the Company’s contract liabilities during the three months ended March 31, 2018 (in thousands):

 

 

 

Balance at Beginning of Period

 

 

Additions

 

 

Deductions

 

 

Balance at End of Period

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Deferred revenue

 

$

59,868

 

 

$

1,000

 

 

$

(5,474

)

 

$

55,394

 

 

During the three months ended March 31, 2018, the Company recognized the following revenues as a result of changes in the contract liability balance (in thousands):

 

Revenue recognized in the period from:

 

Three Months Ended March 31, 2018

 

Amounts included in the contract liability at the beginning of the period

 

$

5,474

 


8


 

The following table shows the impact of adoption to our consolidated statement of income and balance sheet:

 

 

 

Three Months Ended March 31, 2018

 

 

 

Impact of changes in accounting policies

 

 

 

As Reported

 

 

Balances without adoption of ASC 606

 

 

Effect of Change Higher/(Lower)

 

Collaboration revenue

 

$

7,469

 

 

$

7,674

 

 

$

(205

)

Operating loss

 

 

(22,430

)

 

 

(22,225

)

 

 

(205

)

Net loss

 

$

(21,356

)

 

$

(21,151

)

 

$

(205

)

Net loss per share, basic and diluted

 

$

(0.51

)

 

$

(0.50

)

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

Impact of changes in accounting policies

 

 

 

As Reported

 

 

Balances without adoption of ASC 606

 

 

Effect of Change Higher/(Lower)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue - current

 

$

17,062

 

 

$

20,404

 

 

$

(3,342

)

Deferred revenue - noncurrent

 

 

38,332

 

 

 

40,216

 

 

 

(1,884

)

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(137,038

)

 

$

(142,264

)

 

$

5,226

 

 

Costs to obtain and fulfill a contract

 

The Company did not incur any expenses to obtain collaboration agreements and costs to fulfill those contracts do not generate or enhance resources of the Company. As such, no costs to obtain or fulfill a contract have been capitalized in any period.

 

The Company has applied the new standard to all of its contracts.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASC 606, which superseded existing revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company adopted ASC 606 effective on January 1, 2018 using the modified retrospective method. Please see the above “Revenue Recognition” section for a discussion of the Company’s updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.

Impact of Adoption

The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new guidance, the following adjustments were made to accounts on the consolidated balance sheet as of January 1, 2018:

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2018 (in thousands)

 

 

 

Pre-Adoption

 

 

ASC 606 Adjustment

 

 

Post-Adoption

 

Current portion of deferred revenue

 

$

21,188

 

 

$

(2,769

)

 

$

18,419

 

Deferred revenue, net of current portion

 

 

44,111

 

 

 

(2,662

)

 

 

41,449

 

Accumulated deficit

 

 

(121,113

)

 

 

5,431

 

 

 

(115,682

)

 

9


 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends ASC 840, Leases, by introducing a lessee model that requires balance sheet recognition of most leases. The Company is the lessee under certain leases that are accounted for as operating leases. The proposed changes would require that substantially all of the Company’s operating leases be recognized as assets and liabilities on the Company’s balance sheet. ASU 2016-02 will be effective for the Company for annual periods, and interim periods within those annual periods, beginning January 1, 2019. The Company is evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements but expects that the Company will recognize a significant lease obligation upon adoption.

3.

Fair Value Measurements

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

The Company’s financial instruments as of March 31, 2018 and December 31, 2017 consisted primarily of cash and cash equivalents, accounts receivable and accounts payable. As of March 31, 2018 and December 31, 2017, the Company’s financial assets recognized at fair value on a recurring basis consisted of the following:

 

 

 

Fair Value as of March 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Cash equivalents

 

$

313,960

 

 

$

313,960

 

 

$

 

 

$

 

Total

 

$

313,960

 

 

$

313,960

 

 

$

 

 

$

 

 

 

 

Fair Value as of December 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Cash equivalents

 

$

330,896

 

 

$

330,896

 

 

$

 

 

$

 

Total

 

$

330,896

 

 

$

330,896

 

 

$

 

 

$

 

 

The Company estimates the fair value of its cash equivalents using quoted market prices in active markets. Other financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximate fair value due to the short duration and term to maturity.

 

4.

Accrued Expenses

Accrued expenses consisted of the following:  

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Employee compensation and benefits

 

$

2,760

 

 

$

4,773

 

Research and development and professional expenses

 

 

3,845

 

 

 

3,226

 

Accrued expenses

 

$

6,605

 

 

$

7,999

 

 

10


 

5.

Collaborations

Novartis Institutes for BioMedical Research

In December 2014, the Company entered into a strategic collaboration agreement (the “Novartis Agreement”) with Novartis Institutes for Biomedical Research, Inc. (“Novartis”), primarily focused on the development of new ex vivo CRISPR/Cas9-based therapies using chimeric antigen receptor T cells (“CAR-T cells”) and hematopoietic stem cells (“HSCs”).

Agreement Structure

Under the terms of the collaboration, the Company and Novartis may research potential therapeutic, prophylactic and palliative ex vivo applications of the CRISPR/Cas9 technology in HSCs and CAR-T cells. The Company and Novartis agreed to conduct research of HSC targets under a research plan agreed upon by both parties. Within the HSC therapeutic space, Novartis may obtain exclusive rights to a limited number of these HSC targets, to be selected by Novartis in a series of selection windows, the last of which closes 90 days before the fifth anniversary of the effective date of the Novartis Agreement. The Company has the right to choose a limited number of HSC targets for its exclusive development and commercialization per the specified selection schedule. Following these selections by Novartis and the Company, Novartis may obtain rights to research an additional limited number of HSC targets on a non-exclusive basis. If Novartis does not exercise its selection rights within each selection window, any such rights will be deemed forfeited by Novartis. Novartis is required to use commercially reasonable efforts to research, develop and commercialize a specified number of HSC products directed to each of their selected HSC targets.

The Company also agreed to collaborate with Novartis on research activities for CAR-T cell targets pursuant to a CAR-T cell program research plan approved by the CAR-T cell subcommittee of the collaboration’s joint steering committee. After completion of the activities contemplated by the CAR-T cell program research plan, Novartis will assume sole responsibility for developing any products arising from that research plan and will be responsible for additional costs and expenses of developing, manufacturing and commercializing its selected research targets. Novartis is required to use commercially reasonable efforts to research, develop or commercialize at least one CAR-T cell product directed to each of its selected CAR-T cell targets. In the last two years of the five-year collaboration term, Novartis will have the option to select a limited number of targets for research, development and commercialization of in vivo therapies using the Company’s CRISPR/Cas9 platform, on a non-exclusive basis. Following Novartis’ selection of each in vivo target, Novartis may offer the Company the right to participate in the research and development of such targets, in which case an in vivo program research plan for such target will be entered into between the Company and Novartis. Novartis is required to use commercially reasonable efforts to research, develop or commercialize at least one in vivo product directed to each of its selected targets. Novartis’ in vivo target selections are subject to certain restrictions, including that the targets, or all targets within a limited number of organs: (i) have not already been reserved by the Company pursuant to our limited right to do so under the agreement; (ii) are not the subject of a collaboration or pending collaboration with a third party; and (iii) are not the subject of ongoing or planned research and development by the Company.

The Company received an upfront technology access payment from Novartis of $10.0 million in January 2015 and is entitled to additional technology access fees of $20.0 million and quarterly research payments of $1.0 million, or up to $20.0 million in the aggregate, during the five-year research term. For each product under the collaboration, subject to certain conditions, the Company may be eligible to receive (i) up to $30.3 million in development milestones, including for the filing of an investigational new drug (“IND”) application and for the dosing of the first patient in each of Phase IIa, Phase IIb and Phase III clinical trials, (ii) up to $50.0 million in regulatory milestones for the product’s first indication, including regulatory approvals in the U.S. and European Union (“EU”), (iii) up to $50.0 million in regulatory milestones for the product’s second indication, if any, including U.S. and EU regulatory approvals, (iv) royalties on net sales in the mid-single digits, and (v) net sales milestone payments of up to $100.0 million. The Company may also be eligible to receive payments for: (i) each additional HSC target selected by Novartis beyond its initial defined allocation, (ii) each in vivo target that Novartis selects and (iii) any exercise by Novartis of certain license options under the Novartis Agreement. Additionally, at the inception of the arrangement, Novartis invested $9.0 million to purchase the Company’s Class A-1 and Class A-2 Preferred Units under a Unit Purchase Agreement (the “Unit Purchase Agreement”). The Company considered whether the Unit Purchase Agreement would be subject to combination with the Novartis Agreement and determined that they should be combined because the terms of these arrangements are closely interrelated and were negotiated contemporaneously. The Unit Purchase Agreement and the Novartis Agreement are collectively referred to herein as the “Novartis Arrangement”.

11


 

The Company assessed the Novartis Arrangement in accordance with ASC 606. The Company evaluated the promised goods and services under the Novartis Arrangement and determined that the Novartis Arrangement included two performance obligations: (1) a combined performance obligation representing a series of distinct goods and services including the licenses to research, develop and commercialize HSC products and their associated research activities and the licenses to research, develop and commercialize CAR-T cell products and their associated research activities; and (2) the preferred units.

Under the Novartis Arrangement, the Company determined that the transaction price was $59.0 million consisting of the following consideration: (1) the upfront technology access payment of $10.0 million; (2) the additional technology access fees of $20.0 million; (3) the Company’s estimate of variable consideration of $20.0 million related to the quarterly research payments; and (4) the payment for the preferred units of $9.0 million. None of the clinical or regulatory milestones were included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon future regulatory progress and the licensee’s efforts. Any consideration related to sales-based milestones and royalties will be recognized when the related sales occur as they were determined to relate predominantly to the licenses granted to Novartis and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.

The Company first allocated $11.6 million of the transaction price to the preferred units to record the preferred units purchased by Novartis at fair value. The Company then allocated the remaining $47.4 million of the transaction price to the remaining combined performance obligation of the licenses and associated research activities for HSC and CAR-T cell products. Revenue allocated to the combined performance obligation of the licenses and associated research activities for HSC and CAR-T cell products is being recognized on a straight-line basis over a period of five years, which, in management’s judgment, is the best measure of progress towards satisfying the performance obligation and represents the Company’s best estimate of the period of the obligation.

Collaboration Revenue

Through March 31, 2018, excluding amounts allocated to Novartis’ purchase of the Company’s Class A-1 and Class A-2 Preferred Units, the Company had recorded a total of $35.4 million in cash and accounts receivable under the Novartis Arrangement. Through March 31, 2018, the Company has recognized $30.9 million of collaboration revenue, including $2.4 million and $2.2 million during the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was approximately $16.4 million of the aggregate transaction price remaining to be recognized, which will be recognized through December 2019.

As of March 31, 2018 and December 31, 2017, the Company had accounts receivable of $1.0 million and $6.0 million, respectively, related to this agreement. As of March 31, 2018 and December 31, 2017, the Company had deferred revenue of $4.4 million and $11.2 million, respectively, related to this agreement. Amounts for 2018 are reflective of accounting under ASC 606 and amounts for 2017 are reflective of accounting under ASC 605 and therefore may not be comparable.

Regeneron Pharmaceuticals, Inc.

In April 2016, the Company entered into a license and collaboration agreement (the “Regeneron Agreement”) with Regeneron Pharmaceuticals, Inc. (“Regeneron”). The agreement includes a product component to research, develop and commercialize CRISPR/Cas-based therapeutic products primarily focused on genome editing in the liver as well as a technology collaboration component, pursuant to which the Company and Regeneron will engage in research and development activities aimed at discovering and developing novel technologies and improvements to CRISPR/Cas technology to enhance the Company’s gene editing platform. Under this agreement, the Company also may access the Regeneron Genetics Center and proprietary mouse models to be provided by Regeneron for a limited number of the Company’s liver programs.

Agreement Structure

Under the terms of the collaboration, the Company and Regeneron have agreed to a target selection process, whereby Regeneron may obtain exclusive rights for up to 10 targets to be chosen by Regeneron during the collaboration term, subject to various adjustments and limitations set forth in the agreement. Of these 10 total targets, Regeneron may select up to five non-liver targets, while the remaining targets must be focused in the liver. At the inception of the agreement, Regeneron selected the first of its 10 targets, which will be subject to a co-development and co-commercialization arrangement between the Company and Regeneron.

12


 

The Company retains the exclusive right to solely develop products for certain indications. During the target selection process, the Company has the right to choose additional liver targets for its own development using commercially reasonable efforts. Certain targets that either the Company or Regeneron select may be subject to further co-development and co-commercialization arrangements at the Company’s or Regeneron’s option, as applicable, which either can exercise pursuant to defined conditions. In addition, subject to certain restrictions, Regeneron will be able to replace a limited number of targets with substitute targets upon the payment of a specified replacement fee, in which case exclusive rights to the replaced target revert to the Company. Regeneron’s target selections are subject to certain additional restrictions, including that non-liver targets are not the subject of ongoing or planned research and development by the Company or are not the subject of a collaboration or pending collaboration with a third party.

Research activities under the collaboration will be governed by evaluation and research and development plans that will outline the parties’ responsibilities under, anticipated timelines of and budgets for, the various programs. The Company will assist Regeneron with the preliminary evaluation of liver targets, and Regeneron will be responsible for preclinical research and the conduct of clinical development, manufacturing and commercialization of products directed to each of its exclusive targets under the oversight of a joint steering committee. The Company may assist, as requested by Regeneron, with the later discovery and research of product candidates directed to any selected target. For each selected target, Regeneron is required to use commercially reasonable efforts to submit regulatory filings necessary to achieve IND acceptance for at least one product directed to each applicable target, and following IND acceptance for at least one product, to develop and commercialize such product.

In connection with this collaboration, Regeneron agreed to purchase $50.0 million of the Company’s common stock in a private placement under a Stock Purchase Agreement (the “Stock Purchase Agreement”) concurrent with the Company’s initial public offering, and the Company received a nonrefundable upfront payment of $75.0 million. In addition, the Company is eligible to earn, on a per-licensed target basis, (i) up to $25.0 million in development milestones, including for the dosing of the first patient in each of Phase I, Phase II and Phase III clinical trials, (ii) up to $110.0 million in regulatory milestones, including for the acceptance of a regulatory filing in the U.S., and U.S. and ex-U.S. regulatory approvals, and (iii) up to $185.0 million in sales-based milestone payments. The Company is also eligible to earn royalties ranging from the high single digits to low teens, in each case, on a per-product basis, which royalties are potentially subject to various reductions and offsets and are further subject to the Company’s existing low- to mid-single-digit royalty obligations under a license agreement with Caribou Biosciences, Inc. (“Caribou”). In addition, Regeneron is obligated to fund 50.0 percent of the research and development costs for the transthyretin amyloidosis program, the first target selected by Regeneron, which will be subject to a co-development and co-commercialization arrangement between the Company and Regeneron.

The Company considered whether the Stock Purchase Agreement would be subject to combination with the Regeneron Agreement and determined that they should be combined because the terms of these arrangements are closely interrelated and were negotiated contemporaneously. The Stock Purchase Agreement and the Regeneron Agreement are collectively referred to herein as the “Regeneron Arrangement”.

The Company assessed the Regeneron Arrangement in accordance with ASC 606. The Company evaluated the promised goods and services under the Regeneron Arrangement and determined that the Regeneron Arrangement included three performance obligations: (1) a combined performance obligation including the licenses to targets and the associated research activities and evaluation plans; (2) a combined performance obligation including the technology collaboration and associated research activities; and (3) the common stock.

Under the Regeneron Arrangement, the Company determined that the transaction price was $125.0 million, consisting of the following consideration: (1) the nonrefundable upfront payment of $75.0 million; and (2) the payment for the common stock of $50.0 million. None of the clinical or regulatory milestones were included in the transaction price, as all milestone amounts were fully constrained. As part its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future regulatory progress and the licensee’s efforts. Any consideration related to sales-based milestones and royalties will be recognized when the related sales occur as they were determined to relate predominantly to the licenses granted to Regeneron and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and when events whose outcome are resolved or other changes in circumstances occur.  

13


 

The Company first allocated $50.0 million of the transaction price to the common stock. The common stock was sold at its standalone selling price and the Company concluded that the total discount inherent in the arrangement is entirely attributable to the combined performance obligation including the licenses to targets and associated research activities and evaluation plans and the combined performance obligation including the technology collaboration and associated research activities. As such, the remaining $75.0 million of the transaction price was allocated to the combined performance obligation including the licenses to targets and associated research activities and evaluation plans and the combined performance obligation including the technology collaboration and associated research activities on a relative standalone selling price basis. The Company estimated the standalone selling price of each combined performance obligation by taking into consideration internal estimates of research and development personnel needed to perform the research and development services, estimates of expected cash outflows to third parties for services and supplies, selling prices of comparable transactions and typical gross profit margins. As a result of this evaluation, the Company allocated $63.8 million to the combined performance obligation including the licenses to targets and associated research activities and evaluation plans and $11.2 million to the combined performance obligation including the technology collaboration and associated research activities. The $63.8 million allocated to the combined performance obligation including the licenses to targets and associated research activities and evaluation plans is being recognized on a straight-line basis over the six-year performance period of the arrangement, which, in management’s judgment, is the best measure of progress towards satisfying the performance obligation and represents the Company’s best estimate of the period of the obligation. The $11.2 million allocated to the combined performance obligation including the technology collaboration and associated research activities is being recognized on a straight-line basis over a period beginning with the inception of the technology collaboration in September 2016 through the end of the arrangement, which, in management’s judgment, is the best measure of progress towards satisfying the performance obligation and represents the Company’s best estimate of the period of the obligation.

Collaboration Revenue

Through March 31, 2018, excluding the amounts allocated to Regeneron’s purchase of common stock, the Company recorded a $75.0 million upfront payment and $6.6 million for research and development services under the Regeneron Arrangement. Through March 31, 2018, the Company has recognized $30.6 million of collaboration revenue, including $5.1 million and $4.1 million during the three months ended March 31, 2018 and 2017, respectively, in the consolidated statements of operations related to this arrangement. As of March 31, 2018, there was approximately $51.0 million of the aggregate transaction price remaining to be recognized, which will be recognized ratably through April 2022.

As of March 31, 2018 and December 31, 2017, the Company had deferred revenue of $51.0 million and $54.1 million, respectively, and accounts receivable of $6.5 million and $4.5 million, respectively, related to this arrangement.

Agreement Termination Rights

The collaboration term ends in April 2022, except that Regeneron may make a one-time payment of $25.0 million to extend the term for an additional two-year period. The agreement will continue until the date when no royalty or other payment obligations are due, unless earlier terminated in accordance with the terms of the agreement. Regeneron’s royalty payment obligations expire on a country-by-country and product-by-product basis upon the later of (i) the expiration of the last valid claim of the royalty-bearing patents covering such product in such country, (ii) 12 years from the first commercial sale of such product in such country, or (iii) the expiration of regulatory exclusivity for such product. The Company may terminate the agreement on a target-by-target basis if Regeneron or any of its affiliates institutes a patent challenge against the Company’s CRISPR/Cas or certain other background patent rights. The Company may also terminate the agreement on a target-by-target basis if Regeneron does not proceed with the development of a product directed to a selected target within specified periods of time. Regeneron may terminate the agreement, without cause, upon 180 days written notice to the Company, either in its entirety or on a target-by-target basis, in which event, certain rights in the terminated targets and associated intellectual property revert to the Company, as described in the agreement. Following such termination, the Company may owe Regeneron royalties, in certain circumstances, up to mid-single digits on any terminated targets that the Company subsequently commercializes on a product-by-product basis for a period of 12 years after the first commercial sale of any such products. Either party may terminate the agreement either in its entirety or with respect to the technology collaboration or one or more of the targets selected by Regeneron, in the event of the other party’s uncured material breach.

14


 

6.

Equity-Based Compensation

Equity-based compensation expense is classified in the consolidated statements of operations as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Research and development

 

$

2,393

 

 

$

1,503

 

General and administrative

 

 

1,714

 

 

 

1,127

 

Total

 

$

4,107

 

 

$

2,630

 

 

Restricted Stock

The following table summarizes the Company’s restricted stock activity for the three months ended March 31, 2018:

 

 

 

Number of

Shares

 

 

Weighted

Average Grant

Date Fair

Value per

Share

 

Unvested restricted stock as of January 1, 2018

 

 

479,822

 

 

$

0.90

 

Granted

 

 

71,875

 

 

 

23.46

 

Vested

 

 

(149,846

)

 

 

0.78

 

Cancelled

 

 

(2,022

)

 

 

1.34

 

Unvested restricted stock as of March 31, 2018

 

 

399,829

 

 

$

5.02

 

 

As of March 31, 2018, there was $3.3 million of unrecognized equity-based compensation expense related to restricted stock that is expected to vest. These costs are expected to be recognized over a weighted average remaining vesting period of 1.7 years.  

Stock Options

The weighted average grant date fair value of options, estimated as of the grant date using the Black-Scholes option pricing model, was $18.28 per option and $10.38 per option for those options granted during the three months ended March 31, 2018 and 2017, respectively. Key assumptions used to apply this pricing model were as follows:

 

 

 

Three Months Ended

March 31, 2018

 

 

Three Months Ended

March 31, 2017

 

Risk-free interest rate

 

 

2.5

%

 

 

1.9

%

Expected life of options

 

6.0 years

 

 

6.0 years

 

Expected volatility of underlying stock

 

 

89.4

%

 

 

92.6

%

Expected dividend yield

 

 

0.0

%

 

 

0.0

%

 

15


 

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

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise Price

per Share

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding at January 1, 2018

 

 

4,705,448

 

 

$

12.09

 

 

 

 

 

 

 

 

 

Granted

 

 

792,414

 

 

 

24.44

 

 

 

 

 

 

 

 

 

Exercised

 

 

(709,321

)

 

 

9.47

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(17,224

)

 

 

14.62

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2018

 

 

4,771,317

 

 

$

14.52

 

 

 

8.68

 

 

$

35,070

 

Exercisable at March 31, 2018

 

 

1,343,841

 

 

$

9.64

 

 

 

7.95

 

 

$

15,420

 

 

As of March 31, 2018, there was $39.2 million of unrecognized compensation cost related to stock options that are expected to vest. These costs are expected to be recognized over a weighted average remaining vesting period of 3.1 years.

7.

Loss Per Share

The Company calculates basic (loss) earnings per share by dividing (loss) income allocable to common stockholders by the weighted average number of common shares outstanding. The Company computes diluted (loss) earnings per share after giving consideration to the dilutive effect of stock options and unvested restricted stock that are outstanding during the period, except where such securities would be anti-dilutive.

Basic and diluted loss per share attributable to common stockholders was calculated as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Net loss

 

$

(21,356

)

 

$

(12,631

)

Weighted average shares outstanding, basic

   and diluted

 

 

42,043

 

 

 

34,723

 

Net loss per share attributable to common

   stockholders, basic and diluted

 

$

(0.51

)

 

$

(0.36

)

 

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

 

 

 

Periods Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Unvested restricted stock

 

 

400

 

 

 

1,175

 

Stock options

 

 

4,771

 

 

 

4,373

 

Total

 

 

5,171

 

 

 

5,548

 

 

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8.

Related Party Transactions

Caribou Therapeutics

In July 2014, the Company issued Caribou Therapeutics Holdco, LLC, a wholly-owned subsidiary of Caribou, 8,110,599 Junior Preferred Units. As a result of this and related transactions, Caribou owned 9.3 percent of the Company’s voting interests as of March 31, 2018.

The Company recognized general and administrative expense of $0.2 million during the three months ended March 31, 2018, and a de minimis amount during the three months ended March 31, 2017, related to the Company’s obligation to pay 30.0 percent of Caribou’s patent prosecution, filing and maintenance costs.

Novartis Institutes for BioMedical Research

In connection with its entry into the collaboration and license agreement and related equity transactions with Novartis, the Company issued Novartis 4,761,905 Class A-1 Preferred Units and 2,666,666 Class A-2 Preferred Units. In August 2015, Novartis acquired 761,905 shares of the Company’s Series B Preferred Stock, and in May 2016, Novartis acquired 277,777 shares of the Company’s common stock in a private placement transaction concurrent with the Company’s IPO. As a result of these and subsequent transactions, Novartis collectively owned 9.9% of the Company’s voting interests as of March 31, 2018.

The Company recognized collaboration revenue of $2.4 million and $2.2 million during the three months ended March 31, 2018 and 2017, respectively, in the consolidated statements of operations related to this agreement. As of March 31, 2018 and December 31, 2017, the Company had recorded accounts receivable of $1.0 million and $6.0 million and deferred revenue of $4.4 million and $11.2 million, respectively, related to this collaboration. Refer to Note 5, Collaborations, for additional information regarding this collaboration agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

 

the initiation, timing, progress and results of our research and development programs and future preclinical and clinical studies;

 

our ability to apply a risk-mitigated strategy to efficiently discover and develop product candidates, including by applying learnings from one program to other programs;

 

our ability to create or maintain a pipeline of product candidates;

 

our ability to manufacture or obtain material for our product candidates;

 

our ability to advance any product candidates into, and successfully complete, clinical studies;

 

our ability to advance our therapeutic delivery capabilities;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

 

our ability to operate, including commercializing products, without infringing the proprietary rights of others;

 

the issuance of regulatory guidance regarding preclinical and clinical studies for genome editing products;

 

the timing or likelihood of regulatory filings and approvals;

 

the commercialization of our product candidates, if approved;

 

the pricing and reimbursement of our product candidates, if approved;

 

the implementation of our business model, strategic plans for our business, product candidates and technology;

 

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;

 

our ability to maintain and establish collaborations and licenses or obtain additional funding;

 

our financial performance;

 

developments relating to our competitors and our industry; and

 

other risks and uncertainties, including those listed under the caption “Risk Factors.”

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All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission (the SEC) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

Management Overview

Intellia Therapeutics, Inc. (“we,” “us,” “our,” “Intellia,” or the “Company”) was formed in 2014 and is a leading genome editing company focused on the development of proprietary, curative therapeutics utilizing a biological tool known as CRISPR/Cas9. We believe that the CRISPR/Cas9 technology has the potential to transform medicine by permanently editing disease-associated genes or genetic material in the human body with a single treatment course, and via cell therapies that can replace a patient’s diseased cells or by using engineered immune cells to better treat cancer and immunological diseases. We intend to leverage our leading scientific expertise, clinical development experience and intellectual property (“IP”) position to unlock broad therapeutic applications of CRISPR/Cas9 genome editing and develop new therapeutic products.

Our management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q as well as in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

We commenced active operations in mid-2014, and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking preclinical research and studies and evaluating a clinical path for our pipeline programs. To date, we have financed our operations primarily through our collaborations with Novartis Institutes for BioMedical Research, Inc., (“Novartis”), and Regeneron Pharmaceuticals, Inc., (“Regeneron”), our initial public offering and private placements of our common and preferred stock. All of our revenue to date has been collaboration revenue. Since our inception and through March 31, 2018, we have raised an aggregate of approximately $508.6 million to fund our operations, of which $112.1 million was through our collaboration agreements, $170.5 million was from our initial public offering and concurrent private placements, $141.0 million was from a secondary offering and $85.0 million was from the sale of convertible preferred stock.

We believe our product focus, therapeutic discovery and development strength, delivery expertise and intellectual property portfolio make us well-positioned to translate the potential of the CRISPR/Cas9 system into clinically meaningful genome editing-based therapeutics. To maximize our opportunity to rapidly develop clinically successful products, we are applying a risk-mitigating approach with our initial indications. Our approach is defined by four primary criteria: (i) the type of edit—knockout, repair or insertion; (ii) the delivery modality for in vivo and ex vivo applications; (iii) the presence of established therapeutic endpoints; and (iv) the potential for the CRISPR/Cas9 system to provide therapeutic benefits when compared to existing therapeutic modalities. Our initial indications include in vivo programs focused on diseases attributable to genes expressed in the liver that have significant unmet medical needs – transthyretin amyloidosis, which we are co-developing with Regeneron, alpha-1 antitrypsin deficiency, inborn errors of metabolism, including primary hyperoxaluria, and chronic hepatitis B infection – as well as ex vivo applications of the technology in chimeric antigen receptor T cell (“CAR-T cell”) and hematopoietic stem cell (“HSC”), product candidates which are selectively partnered with our collaborator Novartis.

19


 

The following table illustrates our discovery programs and opportunities as of February 28, 2018:

 

 

 

In September 2017, we presented data from our completed long-term, 52-week mouse study, to evaluate the durability of in vivo genome editing following a single, intravenous administration of CRISPR/Cas9. With a single dose, we achieved and maintained an approximately 97 percent reduction in serum transthyretin amyloidosis target gene (“TTR”) protein levels through 12 months. This sustained TTR reduction was caused by approximately 70 percent editing at the target DNA site in the liver. The treatment was well-tolerated at the time of administration and no adverse events were noted throughout the 52 weeks of follow-up study. These mouse durability results followed our presentation in August 2017 of initial data from rat studies demonstrating in vivo genome editing after a single, intravenous administration of CRISPR/Cas9. Across other studies we confirmed that our lipid nanoparticle (“LNP”) system is transiently present with 99 percent clearance of messenger RNA (“mRNA”) within 6 hours and of single guide RNA (“sgRNA”) within 24 hours in the liver. In our August 2017 presentation, we reported that, using our LNP system in rats, we had observed up to 91 percent reduction in serum TTR protein levels and up to 66 percent editing at the target DNA site in the subject animals.

In October 2017, we released interim top-line data regarding our in vivo non-human primate (“NHP”) exploratory pre-clinical studies. Specifically, based on preliminary studies currently at varying points of progress, liver genome editing rates using CRISPR/Cas9 delivered via our proprietary LNP system have ranged from 0.10 percent up to 32 percent after a single dose with various exploratory NHP guide RNAs (“gRNA”), LNP formulations and dosing regimens as well as with exploratory human cross-reactive gRNAs. In NHPs redosed with a subsequent application of our LNP formulations, we observed further editing that surpassed those levels achieved after a single dose, with multiple animals achieving a total of over 20 percent liver genome editing after a second dose.

These NHP results were similar to the results we observed in our initial rodent studies. We are conducting further optimization of our delivery system and proceeding to human guide selection. We expect to achieve higher levels of editing and reductions in serum levels of TTR protein as we achieved when we optimized the delivery system and CRISPR/Cas9 cargo used in our rodent models. We have begun investigational new drug (“IND”)-enabling activities for a human therapeutic and we plan to initiate IND-enabling studies in mid-2018. We anticipate submitting an IND application for our lead indication, transthyretin amyloidosis, by the end of 2019.

To date, in both single and repeat dose experiments, our proprietary LNP delivery system has been well-tolerated with both NHP-specific gRNA and exploratory human cross-reactive gRNAs, as assessed by gross observation of the animals, clinical chemistry, hematology, and cytokine and complement levels. We are also encouraged by the reduction in serum TTR protein levels shown to date in animals with the highest levels of editing. We are conducting additional studies in multiple animal models to maximize editing rates through repeat dosing and formulation optimization.

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In October 2017, we presented data from an in vivo mouse study showing, after a single intracerebral injection, delivery to the brain of one of our proprietary LNP formulations as demonstrated by the expression of tdTomato protein.  Additionally, we presented data from another in vivo mouse study showing genome editing in brain tissue following single intracerebral injections of several proprietary LNP formulations. Editing was assessed under various dosing regimens with six different proprietary LNP formulations following a single intracerebral injection targeting the striatum and cerebellum. Under these various conditions, editing levels from less than 1 percent up to 28 percent were achieved in the striatal and cerebellar tissue. The injections were well tolerated and the mice did not display any behavioral changes post dosing.

In December 2017, we and our collaborator Novartis shared initial data from our research collaboration on genome-edited human HSCs. These data showed successful ex vivo editing of the erythroid specific enhancer region of BCL11A, a gene associated with ameliorating sickle cell disease, and the ability of these cells to steadily engraft in mice while maintaining their desired properties. Specifically, the data showed that greater than 80 percent target site modification in HSCs and progenitor CD34+ cells was achieved following electroporation of ribonucleoprotein (“RNP”) composed of Cas9 and a gRNA selected for efficacy and potency. In addition, we demonstrated an approximately 40 percent reduction in BCL11A mRNA with a corresponding two-fold increase in γ-globin transcript and 30-40 percent more fetal hemoglobin-positive cells above background. Editing of CD34+ cells from patient donors resulted in similar decreases in BCL11A mRNA and increases in γ-globin transcript. We also showed engraftment over 16 weeks following transplantation of edited human bone marrow CD34+ cells into immune compromised mice, while maintaining editing levels in engrafted cells. We did not observe any off-target events in CD34+ cells edited with the selected gRNA, as measured by targeted next generation sequencing of sites identified through in silico prediction and based on an unbiased, genome-wide, oligo-insertion detection method.

Collaborations

Novartis

In December 2014, we entered into a strategic collaboration agreement with Novartis, primarily focused on the development of new ex vivo CRISPR/Cas9-based therapies using CAR-T cells and HSCs.

Agreement Structure

Under the terms of the collaboration, we and Novartis may research potential therapeutic, prophylactic and palliative ex vivo applications of our CRISPR/Cas9 technology in HSCs and CAR-T cells. We and Novartis agreed to conduct research of HSC targets under a research plan agreed upon by both parties. Within the HSC therapeutic space, Novartis may obtain exclusive rights to a limited number of these HSC targets, to be selected by Novartis in a series of selection windows. We have the right to choose a limited number of HSC targets for our exclusive development and commercialization per the specified selection schedule. Following these selections by Novartis and us, Novartis may obtain rights to research an additional limited number of HSC targets on a non-exclusive basis. Novartis is required to use commercially reasonable efforts to research, develop, and commercialize a specified number of HSC products directed to each of their selected HSC targets.

We have also agreed to collaborate with Novartis on research activities for CAR-T cell targets pursuant to the CAR-T cell program research plan approved by the CAR-T cell subcommittee of the collaboration’s joint steering committee. After completion of the activities contemplated by the CAR-T cell program research plan, Novartis will assume sole responsibility for developing any products arising from that research plan and the costs and expenses of developing, manufacturing and commercializing its selected research targets. Novartis is required to use commercially reasonable efforts to research, develop or commercialize at least one CAR-T cell product directed to each of its selected CAR-T cell targets.

Starting in December 2017 and through the end of the collaboration in December 2019, Novartis has the option to select a limited number of targets for research, development and commercialization of in vivo therapies using our CRISPR/Cas9 platform, on a non-exclusive basis. Following Novartis’ selection of each in vivo target, Novartis may offer us the right to participate in the research and development of such targets, in which case an in vivo program research plan for such target will be entered into between us and Novartis. Novartis is required to use commercially reasonable efforts to research, develop and commercialize at least one in vivo product directed to each of its selected in vivo targets. Novartis’ in vivo target selections are subject to certain restrictions, including that the targets, or all targets within a limited number of organs: (i) have not already been reserved by us pursuant to our limited right to do so under the agreement; (ii) are not the subject of a collaboration or pending collaboration with a third party; and (iii) are not the subject of ongoing or planned research and development by us.

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Under the agreement, we received an upfront technology access payment of $10.0 million and are entitled to additional technology access fees of $20.0 million and quarterly research payments of $1.0 million, or up to $20.0 million in the aggregate, during the five-year research term. In addition, for each product under the collaboration, subject to certain conditions, we may be eligible to receive (i) up to $30.3 million in development milestones, including for the filing of an IND application and for the dosing of the first patient in each of Phase IIa, Phase IIb and Phase III clinical trials, (ii) up to $50.0 million in regulatory milestones for the product’s first indication, including regulatory approvals in the U.S., and the European Union (EU), (iii) up to $50.0 million in regulatory milestones for the product’s second indication, if any, including U.S. and EU regulatory approvals, (iv) royalties on net sales in the mid-single digits, and (v) net sales milestone payments of up to $100.0 million. We may also be eligible to receive payments for: (i) each additional HSC target selected by Novartis beyond its initial defined allocation, (ii) each in vivo target that Novartis selects and (iii) any exercise by Novartis of certain license options under the agreement. Additionally, at the inception of the arrangement, Novartis invested $9.0 million to purchase our Class A-1 and Class A-2 Preferred Units. The difference between the cash proceeds received from Novartis for the units and the $11.6 million estimated fair value of those units at the date of issuance was determined to be $2.6 million. Accordingly, $2.6 million of the upfront technology access payment was allocated to record the preferred units purchased by Novartis at fair value.

Collaboration Revenue

Through March 31, 2018, excluding amounts allocated to Novartis’ purchase of our Class A-1 and Class A-2 Preferred Units, we had recorded a total of $35.4 million in cash and accounts receivable under the Novartis agreement. Through March 31, 2018, we have recognized $30.9 million of collaboration revenue, including $2.4 million and $2.2 million during the three months ended March 31, 2018 and 2017, respectively, in the consolidated statements of operations related to this agreement. As of March 31, 2018 and December 31, 2017, we had accounts receivable of $1.0 million and $6.0 million, respectively, related to this agreement. As of March 31, 2018 and December 31, 2017, we had deferred revenue of $4.4 million and $11.2 million, respectively, related to this agreement.

Regeneron

In April 2016, we entered into a license and collaboration agreement with Regeneron. The agreement includes a product component to research, develop and commercialize CRISPR/Cas-based therapeutic products primarily focused on genome editing in the liver as well as a technology collaboration component, pursuant to which we and Regeneron will engage in research and development activities aimed at discovering and developing novel technologies and improvements to CRISPR/Cas-based technology to enhance our genome editing platform. Under this agreement, we may access the Regeneron Genetics Center and proprietary mouse models to be provided by Regeneron for a limited number of our liver programs.

Agreement Structure

Under the terms of our collaboration, we and Regeneron have agreed to a target selection process, whereby Regeneron may obtain exclusive rights for up to 10 targets to be chosen by Regeneron during the collaboration term, subject to various adjustments and limitations set forth in the agreement. Of these 10 total targets, Regeneron may select up to five non-liver targets, while the remaining targets must be focused in the liver.

At the inception of the agreement, Regeneron selected the first of its 10 targets, which will be subject to a co-development and co-commercialization arrangement between us and Regeneron. We retain the exclusive right to solely develop products for the treatment of certain indications, including the genetic diseases primary hyperoxaluria (“PH-1”) and alpha-1 antitrypsin deficiency (“AATD”). During the target selection process, we have the right to choose additional liver targets for our own development using commercially reasonable efforts. Certain targets that either we or Regeneron select may be subject to further co-development and co-commercialization arrangements at our or Regeneron’s option, as applicable, which either can exercise pursuant to defined conditions. In addition, subject to certain restrictions, Regeneron will be able to replace a limited number of targets with substitute targets upon the payment of a specified replacement fee, in which case exclusive rights to the replaced target revert to us. Regeneron’s target selections are subject to certain additional restrictions, including that non-liver targets are not the subject of ongoing or planned research and development by us or are not the subject of a collaboration or pending collaboration with a third party.

Research activities under the collaboration will be governed by evaluation and research and development plans that will outline the parties’ responsibilities under, anticipated timelines of and budgets for, the various programs. We will assist Regeneron with the preliminary evaluation of liver targets, and Regeneron will be responsible for preclinical research and the conduct of

22


 

clinical development, manufacturing and commercialization of products directed to each of its exclusive targets under the oversight of a joint steering committee. We may assist, as requested by Regeneron, with the later discovery and research of product candidates directed to any selected target. For each selected target, Regeneron is required to use commercially reasonable efforts to submit regulatory filings necessary to achieve initial IND acceptance for at least one product directed to each applicable target, and following IND acceptance for at least one product, to develop and commercialize such product.

In connection with this collaboration, Regeneron agreed to purchase $50.0 million of our common stock in a private placement concurrent with our initial public offering, and we received a nonrefundable upfront payment of $75.0 million. In addition, we are eligible to earn, on a per-licensed target basis, up to $25.0 million, $110.0 million and $185.0 million in development, regulatory and sales-based milestone payments, respectively. We are also eligible to earn royalties ranging from the high single digits to low teens, in each case, on a per-product basis, which royalties are potentially subject to various reductions and offsets and are further subject to our existing low- to mid-single-digit royalty obligations under a license agreement with Caribou Biosciences, Inc. (“Caribou”). In addition, Regeneron is obligated to fund 50.0 percent of certain research and development costs for the TTR program, the first target selected by Regeneron, which will be subject to a co-development and co-commercialization arrangement between us and Regeneron.

Collaboration Revenue

Through March 31, 2018, we recorded a $75.0 million upfront payment and $6.6 million for research and development services under the Regeneron agreement. Through March 31, 2018, we have recognized $30.6 million of collaboration revenue, including $5.1 million and $4.1 million during the three months ended March 31, 2018 and 2017, respectively, in the consolidated statements of operations related to this agreement. As of March 31, 2018 and December 31, 2017, we had deferred revenue of $51.0 million and $54.1 million, and accounts receivable of $6.5 million and $4.5 million, respectively, related to this agreement.

Results of Operations

The following table summarizes our results of operations for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase / (decrease)

 

 

 

 

(In thousands)

 

 

Collaboration revenue

 

$

7,469

 

 

$

6,215

 

 

$

1,254

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

22,493

 

 

 

13,431

 

 

 

9,062

 

 

General and administrative

 

 

7,406

 

 

 

5,732

 

 

 

1,674

 

 

Total operating expenses

 

 

29,899

 

 

 

19,163

 

 

 

10,736

 

 

Operating loss

 

 

(22,430

)

 

 

(12,948

)

 

 

(9,482

)

 

Interest income

 

 

1,074

 

 

 

317

 

 

 

757

 

 

Net loss

 

$

(21,356

)

 

$

(12,631

)

 

$

(8,725

)

 

 

Collaboration Revenue

Collaboration revenue increased $1.3 million to $7.5 million during the three months ended March 31, 2018, as compared to $6.2 million during the three months ended March 31, 2017. The increase in collaboration revenue during the quarter ended March 31, 2018 is primarily related to the recognition of amounts under the Regeneron collaboration. The specific Regeneron related increase is driven by increased research and development services related to our TTR program, increasing to $2.0 million during the three months ended March 31, 2018 as compared to $0.9 million during the three months ended March 31, 2017.

Our revenue consists of collaboration revenue, including amounts recognized related to upfront technology access payments for licenses, technology access fees, research funding and milestone payments earned under our collaboration and license agreements with Novartis and Regeneron.

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Research and Development

 

Research and development expenses increased $9.1 million to $22.5 million during the three months ended March 31, 2018, as compared to $13.4 million during the three months ended March 31, 2017. This increase is primarily related to an increase in research and development expenses of $5.3 million related to laboratory supplies, research materials and services for the further advancement of our early-stage research programs; and an increase in personnel-related costs of $3.7 million, which includes equity-based compensation expense, driven by our growth to 151 research and development employees as of March 31, 2018 from 88 research and development employees as of March 31, 2017.

 

Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits, which includes equity-based compensation, for full-time research and development employees, facility-related expenses, overhead expenses, lab supplies and contract research services.

Through 2018, we expect research and development expenses to increase as we continue to grow our research and development team and advance our research plans.

General and Administrative

 

General and administrative expenses increased $1.7 million to $7.4 million during the three months ended March 31, 2018, compared to $5.7 million during the three months ended March 31, 2017. This increase was primarily related to an increase of $1.6 million in personnel-related costs, which includes equity-based compensation expense, as we grew to 46 general and administrative employees as of March 31, 2018 from 31 general and administrative employees as of March 31, 2017. 

 

General and administrative expenses consist primarily of salaries and benefits, including equity-based compensation, for our executive, finance, legal, business development and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property-related legal services, and other consulting fees and expenses.

Through 2018, we expect general and administrative expenses to increase as we continue to support the research and development team and advance our research plans.

Interest Income

Interest income increased by $0.8 million to $1.1 million during the three months ended March 31, 2018 as compared to $0.3 million during the three months ended March 31, 2017. This increase was caused by an increase in our average cash balance compared to the same period in the prior year.

Interest income is income earned on our cash equivalents. The increase in interest income is due to the increase in interest-bearing money market accounts, commercial paper and U.S. treasury securities, as compared to the same period in the prior year.

Liquidity and Capital Resources

Since our inception through March 31, 2018, we have raised an aggregate of $508.6 million to fund our operations, of which $112.1 million was through our collaboration agreements, $170.5 million was from our initial public offering and concurrent private placements, $141.0 million was from a secondary offering and $85.0 million was from the sale of convertible preferred stock. As of March 31, 2018, we had $327.8 million in cash and cash equivalents.

In addition, we are entitled to receive technology access fees and research payments under our collaboration with Novartis and are also eligible to earn a significant amount of milestone payments and royalties, in each case, on a per-product basis under our collaboration with Novartis and on a per-target basis under our collaboration with Regeneron. Our ability to earn these milestones and the timing of achieving these milestones is dependent upon the outcome of our research and development activities and is uncertain at this time. Our rights to payments under our collaboration agreements are our only committed external source of funds.

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Funding Requirements

Our primary uses of capital are, and we expect will continue to be, research and development services, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses, patent prosecution filing and maintenance costs for our licensed intellectual property and general overhead costs. During 2018, we expect our expenses to increase compared to prior periods in connection with our ongoing activities, particularly as we continue research and development and preclinical activities.

Because our research programs are still in preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any future product candidates or whether, or when, we may achieve profitability. Until such time as we can generate substantial product revenues, if ever, we expect to finance our ongoing cash needs through equity financings and collaboration arrangements. We are entitled to technology access fees and research payments under our collaboration with Novartis. Additionally, we are eligible to earn milestone payments and royalties, in each case, on a per-product basis under our collaboration with Novartis and on a per-target basis under our collaboration with Regeneron. Except for these sources of funding, we will not have any committed external source of liquidity. To the extent that we raise additional capital through the future sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Outlook

Based on our research and development plans and our expectations related to the progress of our programs, we expect that our cash and cash equivalents as of March 31, 2018, as well as technology access and research funding from Novartis and Regeneron, will enable us to fund our ongoing operating expenses and capital expenditures through mid-2020, excluding any potential milestone payments or extension fees that could be earned and distributed under the collaboration agreements with Novartis and Regeneron or any strategic use of capital not currently in the base case planning assumptions. We have based this estimate on current assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

Our ability to generate revenue and achieve profitability depends significantly on our success in many areas, including: developing our delivery technologies and our CRISPR/Cas9 technology platform; selecting appropriate product candidates to develop; completing research and preclinical and clinical development of selected product candidates; obtaining regulatory approvals and marketing authorizations for product candidates for which we complete clinical trials; developing a sustainable and scalable manufacturing process for product candidates; launching and commercializing product candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor; obtaining market acceptance of our product candidates; addressing any competing technological and market developments; negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter; maintaining good relationships with our collaborators and licensors; maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents, trade secrets, and know-how; and attracting, hiring, and retaining qualified personnel.

Cash Flows

The following is a summary of cash flows for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Net cash used in operating activities

 

$

(17.8

)

 

$

(11.4

)

Net cash used in investing activities

 

 

(1.9

)

 

 

(4.2

)

Net cash provided by financing activities

 

 

6.7

 

 

 

 

 

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Net cash used in operating activities

Net cash used in operating activities of $17.8 million during the three months ended March 31, 2018 primarily reflects increased spend in our research and development and general and administrative activities, offset in part by the receipt of $6.0 million from Novartis. Net cash used in operating activities of $11.4 million during the three months ended March 31, 2017 primarily reflects spend in our research and development and general and administrative activities, offset in part by the receipt of $6.0 million from Novartis.

Net cash used in investing activities

Net cash used in investing activities during the three months ended March 31, 2018 and 2017 relate to purchases of property and equipment as we grow our operations and build out our office and laboratory facilities.

Net cash provided by financing activities

Net cash provided by financing activities during the three months ended March 31, 2018 is made up of $6.7 million in cash received from the exercise of stock options.

Critical Accounting Policies

Our critical accounting policies require the most significant judgments and estimates in the preparation of our consolidated financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition and equity-based compensation. As discussed in Note 2 to our consolidated financial statements, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) effective January 1, 2018. There have been no other significant changes to our critical accounting policies from those which were discussed in our Annual Report on Form 10-K for the year ended December 31, 2017. 

Recent Accounting Pronouncements

Please read Note 2 to our consolidated financial statements included in Part I, Item 1, “Notes to Consolidated Financial Statements,” of this quarterly report on Form 10-Q for a description of recent accounting pronouncements applicable to our business.

Contractual Obligations  

There were no material changes to our contractual obligations during the three months ended March 31, 2018. For a complete discussion of our contractual obligations, please refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk  

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of March 31, 2018, we had cash equivalents of $314.0 million consisting of interest-bearing money market accounts, commercial paper and U.S. treasury securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.

We do not have any foreign currency or other derivative financial instruments, and we do not believe that inflation had a material effect on our results of operations during the three months ended March 31, 2018. Inflation generally affects us by increasing our cost of labor and clinical trial costs.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer (our “Chief Executive Officer”) and principal financial and accounting officer (our “Chief Financial Officer”), to allow timely decisions regarding required disclosure.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2018.

Changes in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation related to intellectual property, commercial arrangements and other matters. “Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 includes discussions of our current legal proceedings. There have been no material changes to those disclosures as of the date of this filing.

 

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2017 and in other documents that we file with the SEC, in evaluating the Company and our business. If any of the following risks and uncertainties actually occurs, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks described below are not intended to be exhaustive and are not the only risks facing the Company. New risk factors can emerge from time to time, and it is not possible to predict the impact that any factor or combination of factors may have on our business, prospects, financial condition and results of operations.

Risks Related to Our Business, Technology and Industry

CRISPR/Cas9 genome editing technology is not yet clinically validated for human therapeutic use. The approaches we are taking to discover and develop novel therapeutics using CRISPR/Cas9 systems are unproven and may never lead to marketable products. If we are unable to develop viable product candidates, achieve regulatory approval for any such product candidate or market and sell any product candidates, we may never achieve profitability.

We are focused on developing curative medicines utilizing the CRISPR/Cas9 genome editing technology. Although there have been significant advances in the fields of gene therapy, which typically involves introducing a copy of a gene into a patient’s cell, and genome editing in recent years, CRISPR-based genome editing technologies are relatively new, and their therapeutic utility is largely unproven. The CRISPR/Cas9 technologies that we intend to develop have not yet been clinically tested by us, and we are not aware of any clinical trials for safety or efficacy having been completed by third parties involving these technologies. The scientific evidence to support the feasibility of developing products based on these technologies is both preliminary and limited. Successful development of products by us will require solving a number of issues, including developing or obtaining technologies to safely deliver a therapeutic agent into target cells within the human body or modify human cells while outside of the body such that the modified cells can have a therapeutic effect when delivered to the patient, optimizing the efficacy and specificity of such products, and ensuring the therapeutic selectivity and efficacy of such products. There can be no assurance we will be successful in solving any or all of these issues.

We have principally concentrated our research efforts to date on bringing CRISPR/Cas9-based therapeutics to the clinic for various initial indications, and our future success is highly dependent on the successful development of CRISPR-based genome editing technologies, cellular delivery methods and therapeutic applications for these indications. These indications are the principal focus of our initial development efforts, and we may decide to alter or abandon these programs as new data become available and we gain experience in developing CRISPR/Cas9-based therapeutics. We cannot be sure that our CRISPR/Cas9 technologies will yield satisfactory products that are safe and effective, scalable or profitable in our selected indications or any other indication we pursue.

Public perception and related media coverage of potential therapy-related efficacy or safety issues, including adoption of new therapeutics or novel approaches to treatment, as well as ethical concerns related specifically to genome editing and CRISPR/Cas9, may adversely influence the willingness of subjects to participate in clinical trials, or if any therapeutic is approved, of physicians and patients to accept these novel and personalized treatments. Physicians, health care providers and third-party payors often are slow to adopt new products, technologies and treatment practices, particularly those that may also require additional upfront costs and training. Physicians may not be willing to undergo training to adopt these novel and personalized therapies, may decide the particular therapy is too complex or potentially risky to adopt without appropriate training, and may choose not to administer the therapy. Further, due to health conditions, genetic profile or other reasons, certain patients may not be candidates for the therapies. In addition, responses by the U.S., state or foreign governments to

28


 

negative public perception, ethical concerns or financial considerations may result in new legislation, regulations, or medical standards, that could limit our ability to develop or commercialize any product candidates, obtain or maintain regulatory approval or otherwise achieve profitability. Based on these and other factors, health care providers and payors may decide that the benefits of these new therapies do not or will not outweigh their costs.

Our ability to generate product revenue is dependent on the success of our application of CRISPR/Cas9 technology for human therapeutic use, which is at an early stage of development and will require significant additional discovery efforts, preclinical testing and clinical studies, as well as applicable regulatory guidance for preclinical testing and clinical studies from the Food and Drug Administration (“FDA”) and other regulatory authorities, before we can seek regulatory approval and begin commercial sales of any potential product candidates.

Our ability to generate product revenue is highly dependent on our ability to obtain regulatory approval of and successfully commercialize one or more of our product candidates. Any product candidates we discover will require preclinical, clinical and regulatory review and approval in each jurisdiction in which we intend to market the products, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. Before obtaining marketing approval from regulatory authorities for the sale of a product candidate, we must conduct extensive clinical trials to demonstrate the safety, purity and potency, as well as the effectiveness of the product candidates in humans. We cannot be certain that any of our product candidates will be successful in clinical trials and, even if successful, they may not receive regulatory approval.

Our approach to developing therapies for genetic and viral-based diseases centers on using the CRISPR/Cas9 technology to introduce or remove genetic information in vivo to treat various disorders, or to modify human cells ex vivo to create therapeutic cells that can be introduced into the human body to address the underlying disease. Because these are new therapeutic approaches, discovering, developing and commercializing our product candidates subject us to a number of challenges, including:

 

obtaining regulatory approval from the FDA and other regulatory authorities that have very limited or no experience with the clinical development of CRISPR/Cas9 therapeutics;

 

seeking and obtaining regulatory approval from the FDA and other regulatory authorities in light of no formal guidance regarding potential regulatory pathways for this category of in vivo therapeutics, including preclinical and clinical requirements for approval of an IND;

 

educating medical personnel regarding the potential benefits and side effect profile of each of our product candidates;

 

developing processes for the safe administration of these products, including long-term follow-up for all patients who receive treatment with any of our product candidates;

 

sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process our product candidates;

 

developing a manufacturing process and distribution network with a cost of goods that allows for an attractive return on investment; and

 

establishing sales and marketing capabilities in anticipation of and after obtaining any regulatory approval to gain market acceptance.

Additionally, because our in vivo technology involves genome editing across multiple cell and tissue types, we are subject to many of the challenges and risks that gene therapies face, including:

 

regulatory guidance regarding the requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. To date, only a limited number of products that involve the in vivo genetic modification of patient cells have been approved globally;

 

improper insertion of a gene sequence into a patient’s chromosome could lead to cancer, other aberrantly functioning cells or other diseases, including death;

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the FDA recommends a follow-up observation period of 15 years or longer for all patients who receive treatment using gene therapies, and we may need to adopt such an observation period for our product candidates; and

 

clinical trials using therapies that genetically modify cells conducted at institutions that receive funding for recombinant DNA research from the NIH, may be subject to review by the RAC. Although the FDA decides whether individual protocols may proceed, the RAC review process can impede the initiation of a clinical trial, even if the FDA has reviewed the study and it has become effective under an IND.

Further, because our ex vivo product candidates involve gene editing human cells and then manufacturing and delivering modified cells to patients, we are subject to many of the challenges and risks that cell therapies face, including:

 

clinical trials using genetically modified cells conducted at institutions that receive funding for recombinant DNA research from the National Institutes of Health (“NIH”), may be subject to review by the Recombinant DNA Advisory Committee (“RAC”). Although the FDA decides whether individual protocols may proceed, the RAC review process can impede the initiation of a clinical trial, even if the FDA has reviewed the study and it has become effective under an IND; and

 

clinical trials using engineered cell therapies require unique products to be created for each patient and such individualistic manufacturing may be both inefficient and cost-prohibitive.

To date, although human clinical trials for other in vivo genome editing-based therapeutics have been authorized by the FDA, neither we nor any other company has received regulatory approval in the U.S. or EU to commence human clinical trials utilizing in vivo CRISPR/Cas9-based therapeutics or to market in vivo therapeutics utilizing any genome editing technology, including CRISPR/Cas9. There is no certainty that the FDA or European Medicines Agency (“EMA”) will apply to CRISPR/Cas9 product candidates the same regulatory pathway and requirements it is applying to other in vivo genome editing-based therapeutics; and the FDA and other regulatory authorities have not yet provided written guidance regarding preclinical or clinical studies or regulatory approval pathways specific for in vivo genome editing-based therapeutics. In addition, if any product candidates encounter safety or efficacy problems, developmental delays, regulatory issues or other problems, our development plans and business could be significantly harmed. Further, competitors that are developing in vivo products with similar technology may experience problems with their product candidates or programs that could in turn cause us to identify problems with our product candidates and programs that would potentially harm our business.

Further, significant uncertainty exists regarding the future scope and effect of the FDA’s regulatory framework, in particular relating to the review and approval of human therapeutic products because the current U.S. administration and federal legislators have publicly declared their intention to significantly modify the current legal framework governing the FDA. Any such changes to the FDA requirements could impact our ability to obtain approval for our products or sell them profitably. In addition, in the EU, the decision of the United Kingdom to withdraw from the EU has required the EMA to relocate to the Netherlands, and recruit and retain new personnel to review and approve our submissions for regulatory approval in Europe. EMA’s relocation could result in delays and other changes that may impact the timing and our ability to obtain approval for our products. Also, upon exiting the EU, the United Kingdom may enact legislation related to the approval and oversight of human therapeutics in that nation. Until any such legislation is enacted, we will be uncertain as to its effects on our business, including our ability to seek and obtain approval for our products in the United Kingdom.

In addition, during fiscal year 2017, non-commercial entities have commenced human trials involving in vivo CRISPR/Cas9-based therapeutics in China. Neither these entities nor the Chinese regulatory agencies have shared publicly any information on the regulatory process for clinical trial approval including specific protocol requirements. Any specific requirement from the Chinese regulatory agencies may impact our ability to submit or obtain approval for our products in China. Further, if these human trials are unsuccessful, or if they result in significant adverse events, including deaths, there could be a significant impact to the evaluation of our product candidates globally, as well as an increase in negative public opinion.

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Even if we obtain regulatory approval of any product candidates, such candidates may not gain market acceptance among physicians, patients, hospitals, third-party payors and others in the medical community.

The use of the CRISPR/Cas9 system as a framework for developing gene editing-based therapies is a recent development and may not become broadly accepted by physicians, patients, hospitals, third-party payors and others in the medical community. A variety of factors will influence whether our product candidates are accepted in the market, including, for example:

 

the clinical indications for which our product candidates are approved;

 

the potential and perceived advantages of our product candidates over alternative treatments;

 

the incidence and severity of any side effects, including off-target editing or immunogenicity;

 

product labeling or product insert requirements of the FDA or other regulatory authorities;

 

limitations or warnings contained in the labeling approved by the FDA or other regulatory authorities;

 

the timing of market introduction of our product candidates;

 

availability or existence of competitive products;

 

the cost of treatment in relation to alternative treatments;

 

the amount of upfront costs or training required for health care providers to administer our product candidates;

 

the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities;

 

patients’ ability to access physicians and medical centers capable of delivering any therapies that we develop;

 

the willingness of patients to pay out of pocket in the absence of coverage and reimbursement by third-party payors and government authorities;

 

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies;

 

any restrictions on the use of our product candidates together with other medications;

 

interactions of our product candidates with other medicines patients are taking;

 

potential adverse events for any products developed, or negative interactions with regulatory agencies, by us or others in the gene therapy and gene editing fields; and

 

the effectiveness of our sales and marketing efforts and distribution support.

Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our products, are more cost effective or render our products obsolete. In addition, adverse publicity due to the ethical and social controversies surrounding the therapeutic in vivo use of CRISPR/Cas9, gene edited modified cells, or other therapeutics mediums, such as viral vectors that we may use in our clinical trials may limit market acceptance of our product candidates. If our product candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, third-party payors or others in the medical community, we will not be able to generate significant revenue.

Negative public opinion and increased regulatory scrutiny of in vivo CRISPR/Cas9 use, gene editing or gene therapy generally may damage public perception of the safety of any product candidates that we develop and adversely affect our ability to conduct our business or obtain regulatory approvals for such product candidates.

Gene therapy in general, and gene editing in particular, remain novel technologies, with only a limited number of gene therapy products approved to date in the U.S. and EU. Public perception may be influenced by claims that gene therapy or gene editing, including the use of CRISPR/Cas9, is unsafe or unethical, and gene therapy or gene editing may not gain the acceptance of the public or the medical community. In particular, our success will depend upon physicians who specialize in the treatment of diseases targeted by our product candidates prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical data may be available. In

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addition, responses by the U.S., state or foreign governments to negative public perception or ethical concerns may result in new legislation or regulations that could limit our ability to develop or commercialize any product candidates, obtain or maintain regulatory approval or otherwise achieve profitability. More restrictive statutory regimes, government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop. For example, earlier gene therapy trials led to several well-publicized adverse events, including cases of leukemia and death, and the FDA has previously initiated a clinical hold on a CAR-T cell therapy clinical trial due to patient deaths, and the company developing the therapy ultimately decided to stop the program. Serious adverse events in our clinical trials, or other clinical trials involving gene therapy or gene editing products or our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidate.

Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, if approved, which could make it difficult for us to sell any product candidates or therapies profitably.

The success of our product candidates, if approved, depends on the availability of adequate coverage and reimbursement from third-party payors, including government agencies. In addition, because our product candidates represent new approaches to the treatment of genetic-based diseases, we cannot be sure that coverage and reimbursement will be available for, or accurately estimate the potential revenue from, our product candidates or assure that coverage and reimbursement will be available for any product that we may develop.

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors are critical to new product acceptance.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

a covered benefit under its health plan;

 

safe, effective and medically necessary;

 

appropriate for the specific patient;

 

cost-effective; and

 

neither experimental nor investigational.

In the U.S., no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our products on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of our gene-modifying products. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Because our product candidates may have a higher cost of goods than conventional therapies, and may require long-term follow up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.

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Moreover, increasing efforts by governmental and third-party payors in the U.S. and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, cost containment initiatives and additional legislative changes.

We intend to seek approval to market our product candidates in both the U.S. and in selected foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions for our product candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the EU, the pricing of pharmaceutical products, including biologics, is subject to governmental control and other market regulations which could put pressure on the pricing and usage of our product candidates. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval of a product candidate. In addition, market acceptance and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our product candidates and may be affected by existing and future health care reform measures.

Research and development of biopharmaceutical products is inherently risky. We may not be successful in our efforts to use and enhance our gene editing technology to create a pipeline of product candidates, obtain regulatory approval and develop commercially successful products, or we may expend our limited resources on programs that do not yield a successful product candidate and fail to capitalize on potential product candidates or diseases that may be more profitable or for which there is a greater likelihood of success. If we fail to develop product candidates, our commercial opportunity, if any, will be limited.

We have not currently selected any particular product candidates for clinical development. We are at an early stage of development and our technology and approach has not yet led, and may never lead, to any product candidate appropriate for clinical development or any approved or commercially successful products. Even if we are successful in building our pipeline of product candidates, completing clinical development, obtaining regulatory approvals and commercializing product candidates will require substantial additional funding and are prone to the risks of failure inherent in therapeutic product development. Investment in biopharmaceutical product development involves significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory approval, or become commercially viable.

We cannot provide any assurance that we will be able to successfully advance any product candidates that we discover through the research process. Our research programs may initially show promise, yet fail to yield product candidates for clinical development or commercialization for many reasons, including the following:

 

our technology and approach may not be successful in identifying product candidates for clinical development and commercialization;

 

we may not be able or willing to assemble sufficient resources to acquire or discover product candidates for clinical development and commercialization;

 

animal or other non-human models for the targeted disease may not be appropriate or available to conduct preclinical testing;

 

testing in preclinical models may not be predictive of human clinical testing results because species have distinct genomic sequences that may require the use of species-specific guides and reagents;

 

our product candidates may not succeed in preclinical or clinical testing;

 

our planned risk mitigation strategy for selecting our initial indications may fail or we may not be able to efficiently apply learnings from our initial development programs to future development programs;

 

we may be unable to optimize the therapeutic efficiency, specificity, or selectivity of our future product candidates;

 

our therapeutic delivery systems may fail so that even a product candidate with therapeutic activity might not demonstrate a clinically meaningful therapeutic effect;

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a product candidate may not demonstrate in patients the biological, chemical and pharmacological properties identified in laboratory and preclinical studies, or they may interact with human biological systems in unforeseen, ineffective or even harmful ways;

 

a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

the therapeutic effect of a product candidate may not be permanent and may diminish over time;

 

a single treatment course may not be sufficient for a cure or therapeutic benefit, and it may take several treatment courses for the product to be effective;

 

a well-defined and achievable pathway to regulatory approval may never materialize for a specific product candidate;

 

competitors may develop alternatives that render our product candidates obsolete, redundant or less attractive;

 

product candidates we develop may be covered by third-party or other exclusive rights or may not receive desired regulatory exclusivity, and we may be unable to maintain, expand or protect our intellectual property rights;

 

the market for a product candidate may change during our program so that the continued development of that product candidate is no longer reasonable;

 

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;

 

we may be unable to successfully maintain existing collaborations or licensing arrangements or enter into new ones throughout the development process as appropriate; and

 

a product candidate may not be accepted as safe and effective by physicians, patients, hospitals, third-party payors and others in the medical community.

If any of these events occur, we may be forced to abandon our development efforts for a product candidate, program or programs, or we may not be able to identify, discover, develop or commercialize product candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations.

Because we have limited financial and managerial resources, we are initially focused on specific research programs. As a result, we may fail to capitalize on other viable commercial products or profitable market opportunities, be required to forego or delay pursuit of opportunities with other product candidates or other diseases that may later prove to have greater commercial potential, or relinquish valuable rights to such product candidates through collaboration, licensing or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights. For additional information regarding the factors that will affect our ability to achieve revenue from product sales, see the risk factor entitled “We have never generated any revenue from product sales and our ability to generate revenue from product sales and become profitable depends significantly on our success in a number of factors.”

If we do not successfully develop and commercialize product candidates based upon our approach, we will not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price. Further, our current focus on CRISPR/Cas9 technology for developing products as opposed to multiple, more proven technologies for product development increases the risk associated with our business. If we are not successful in developing a product candidate using CRISPR/Cas9 technology, we may not be able to successfully implement an alternative product development strategy.

Results, including positive results, from our initial pre-clinical studies are not necessarily predictive of our other ongoing and future pre-clinical and clinical studies, and they do not guarantee or indicate the likelihood of approval of any potential product candidate by the FDA, EMA or any other regulatory agency. If we cannot replicate the positive results from any of our pre-clinical or clinical studies, we may be unable to successfully develop, obtain regulatory approval for and commercialize any potential product candidate.

There is a high failure rate for product candidates progressing through pre-clinical and clinical studies. Even if we are able to successfully complete our ongoing and future pre-clinical studies for any potential product candidate, we may not be able to replicate any positive results from these or any other studies in any of our future pre-clinical and clinical trials, and they do not guarantee approval of any potential product candidate by the FDA, EMA or any other necessary regulatory authorities in a

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timely manner or at all. Companies in the pharmaceutical and biotechnology industries have commonly suffered significant setbacks in clinical studies after achieving positive results in early stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made before, during and after clinical studies were underway, or observations regarding the lack of safety or efficacy made in clinical studies, which could include new or previously unreported adverse events. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in the relevant laws, regulations or regulatory policy during the period of product development.

Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in such studies nonetheless failed to obtain FDA, EMA or other necessary regulatory agency approval. If we fail to obtain results in our on-going, planned and future pre-clinical and clinical studies sufficient to meet the requirements of the relevant regulatory agencies, the development timeline and regulatory approval and commercialization prospects for any potential product candidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.

The reported results of our NHP studies are based on top-line interim data and may ultimately differ from actual results once additional data are received and fully evaluated.

The reported results of the NHP studies that we have publicly disclosed, and that are discussed herein and in documents we incorporated by reference, consist of top-line interim data. Top-line interim data are based on a preliminary analysis of currently-available data from an ongoing series of studies, and therefore the reported results, findings and conclusions related to these data are subject to change following a comprehensive review of the more extensive data that we expect to receive related to the studies. Our reported results and related top-line interim data are based on assumptions, estimations, calculations and information currently available to us, and we have not received or had an opportunity to fully evaluate all of the data related to the studies. As a result, the top-line interim data results that we have reported may differ from future results, or different conclusions or considerations may qualify such results, once the current data or additional data have been received and fully evaluated. In addition, third parties, including regulatory agencies, may not accept or agree with our assumptions, estimations, calculations or analyses, or may interpret or weigh the importance of data differently, which could impact the value of our technology, the approvability or commercialization of product candidates and our business in general. If the top-line interim data that we have reported related to NHP differ from actual results or is perceived as insufficient or faulty, our ability to obtain approval for, and commercialize, our products may be harmed, which could harm our business, financial condition, operating results or prospects.

Clinical development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any product candidates.

All of our lead programs are still in the discovery or preclinical stage, and their risk of failure is high. It is impossible to predict when or if any of our programs will prove effective and safe in humans or will receive regulatory approval. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of any of our future product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. We may be unable to establish clinical endpoints that applicable regulatory authorities would consider clinically meaningful, and a clinical trial can fail at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

Successful completion of clinical trials is a prerequisite to submitting a New Drug Application (“NDA”) or Biologics License Application (“BLA”) to the FDA, a Marketing Authorization Application to the EMA and similar filings to comparable foreign regulatory authorities, for each product candidate and, consequently, the ultimate approval and commercial marketing of any product candidates. We do not know whether any of our clinical trials will begin or be completed on schedule, if at all.

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We may experience delays in completing our preclinical studies and initiating or completing clinical trials. We also may experience numerous unforeseen events during, or as a result of, any future clinical trials that we could conduct, which could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

 

regulators, institutional review boards (“IRB”s) or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective contract research organizations (“CRO”s), the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

clinical trials of any product candidates may fail to show safety or efficacy, produce negative or inconclusive results and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials or we may decide to abandon product development programs;

 

the number of patients required for clinical trials of any product candidates may be larger than we anticipate, enrollment in these clinical trials may be lower than required by the regulatory agencies or slower than we anticipate, or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;

 

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators;

 

we may elect to, or regulators, IRBs or ethics committees may require that we or our investigators, suspend or terminate clinical research or trials for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

the cost of preclinical studies and clinical trials of any product candidates may be greater than we anticipate;

 

the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate;

 

our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, IRBs or ethics committees to suspend or terminate the trials, or reports may arise from preclinical or clinical testing of other gene therapies or gene editing-based therapies that raise safety or efficacy concerns about our product candidates; and

 

the FDA or other regulatory authorities may require us to submit additional data, such as long-term toxicology studies, or impose other requirements before permitting us to initiate or rely on a clinical trial.

We could also encounter delays if a clinical trial is suspended or terminated by us, the IRBs of the institutions in which such trials are being conducted, the Data Safety Monitoring Board (“DSMB”) for such trial or FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by FDA or other regulatory authorities resulting in the imposition of a clinical hold, manufacturing or quality control issues, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product or treatment, failure to establish or achieve clinically meaningful trial endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Further, the FDA or other regulatory authorities may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after they have reviewed and commented on the design for our clinical trials.

Our product development costs will increase if we experience delays in clinical testing or marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates and may allow our competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates and harming our business and results of operations. Any delays in our preclinical or future clinical development programs may harm our business, financial condition and prospects significantly.

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Inconclusive results, lack of efficacy, adverse events or additional safety concerns in clinical trials that we or others conduct may impede the regulatory approval process or overall market acceptance of our future product candidates.

Therapeutic applications of gene editing technologies, and CRISPR/Cas9 in particular, for both in vivo products and in engineered cell therapies, are unproven and must undergo rigorous clinical trials and regulatory review before receiving marketing authorization. If the results of our clinical studies or those of any other third parties, including with respect to gene editing technology or engineered cell therapies, are inconclusive, fail to show efficacy or if such clinical trials give rise to safety concerns or adverse events, we may:

 

be delayed in obtaining marketing approval for our future product candidates, if at all;

 

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

 

be subject to the addition of labeling statements, such as warnings or contraindications, or other types of regulatory restrictions or scrutiny;

 

be subject to changes in the way the product is administered;

 

be required to perform additional clinical studies to support approval or be subject to additional post-marketing testing requirements;

 

have regulatory authorities modify or withdraw their legal requirements or written guidance, if any, regarding the applicable regulatory approval pathway or any approval of the product in question, or impose restrictions on its distribution in the form of a modified REMS;

 

be sued; or

 

experience damage to our reputation.

Additionally, our future product candidates could potentially cause other adverse events that have not yet been predicted and the potentially permanent nature of gene editing effects, including CRISPR/Cas9’s effects, on genes or novel cell therapies in the organs of the human body may make these adverse events irreversible. The inclusion of critically ill patients in our clinical studies or those of our competitors may result in deaths or other adverse medical events, including those due to other therapies or medications that such patients may be using. Any of these events could prevent us from achieving or maintaining regulatory approval or market acceptance of our future product candidates and impair our ability to achieve profitability.

We have never generated any revenue from product sales and our ability to generate revenue from product sales and become profitable depends significantly on our success in a number of areas.

We have no products approved for commercial sale, have not generated any revenue from product sales, and do not anticipate generating any revenue from product sales until sometime after we have received regulatory approval for the commercial sale of a product candidate that we discover. Our ability to generate revenue and achieve and retain profitability depends significantly on our success in many areas, including:

 

selecting commercially viable product candidates and effective delivery methods;

 

completing research, preclinical and clinical development of product candidates;

 

obtaining regulatory approvals and marketing authorizations for product candidates for which we complete clinical trials;

 

developing a sustainable and scalable manufacturing process for product candidates, including establishing and maintaining commercially viable supply relationships with third parties and potentially establishing our own manufacturing capabilities and infrastructure;

 

launching and commercializing product candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;

 

accurately assessing the size and addressability of potential patient populations;

 

obtaining market acceptance of our product candidates as viable treatment options;

 

addressing any competing technological and market developments;

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negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter or which may be necessary for us to develop, manufacture or commercialize our product candidates;

 

maintaining good relationships with our collaborators and licensors;

 

maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;

 

avoiding infringement of or obtaining licenses to any valid intellectual property owned or controlled by third parties; and

 

attracting, hiring and retaining qualified personnel.

Even if one or more product candidates that we discover and develop are approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate and the timing of such costs may be out of our control. Our expenses could increase beyond expectations if we are required by the FDA or other regulatory agencies, domestic or foreign, to change our manufacturing processes or assays, or to perform clinical, nonclinical or other types of additional studies. If we are successful in obtaining regulatory approvals to market one or more product candidates, our revenue will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product, the ability to get reimbursement at any price and whether we own the commercial rights for that territory. If the number of our addressable disease patients is not as significant as we estimate, the indication approved by regulatory authorities is narrower than we expect or the reasonably accepted population for treatment is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of such products, even if approved. If we are not able to generate revenue from the sale of any approved products, we may never become profitable.

We face significant competition in an environment of rapid technological change. The possibility that our competitors may achieve regulatory approval before we do or develop therapies that are more advanced or effective than ours may harm our business and financial condition or our ability to successfully market or commercialize our product candidates.

The biotechnology and pharmaceutical industries, including the gene editing field and cell therapies, are characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. We face substantial competition from many different sources, including large and specialty pharmaceutical and biotechnology companies, academic research institutions, government agencies and public and private research institutions.

Competitors in our efforts to provide genetic therapies to patients can be grouped into at least three sets based on their product discovery platforms:

 

genome editing companies focused on CRISPR/Cas9 including: Casebia Therapeutics, LLC, CRISPR Therapeutics, Inc., Editas Medicine, Inc., ToolGen, Inc. and Tracr Hematology Limited;

 

other genome editing companies including: bluebird bio, Inc., Cellectis S.A., Homology Medicines, Inc., Poseida, Inc., Precision BioSciences, Inc. and Sangamo Therapeutics, Inc.; and

 

genome therapy companies developing in vivo or ex vivo therapies, such as cell therapies, including: bluebird bio, Inc., Cellectis S.A., Celgene Corporation (which acquired Juno Therapeutics, Inc.), Gilead Sciences, Inc. (which acquired Kite Pharma, Inc.), Novartis A.G. and Spark Therapeutics, Inc.

Our competitors will also include companies that are or will be developing other genome editing methods as well as small molecules, biologics, in vivo gene therapies, ex vivo cell therapies and nucleic acid-based therapies for the same indications that we are targeting with our CRISPR/Cas9-based therapeutics.

Any advances in gene therapy, cell therapies or gene editing technology made by a competitor may be used to develop therapies that could compete against any of our product candidates. Many of these competitors have substantially greater research and development capabilities and financial, scientific, technical, intellectual property, manufacturing, marketing, distribution and other resources than we do, and we may not be able to successfully compete with them.

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To become and remain profitable, we must discover, develop and eventually commercialize product candidates with significant market potential, which will require us to be successful in a range of challenging activities. These activities can include completing preclinical studies and clinical trials of product candidates, obtaining marketing approval for product candidates, manufacturing, marketing and selling products that are approved and satisfying any post-marketing requirements. Even if we are successful in selecting and developing any product candidates, in order to compete successfully we may need to be first-to-market or demonstrate that our CRISPR/Cas9-based products are superior to therapies based on the same or different treatment methods. If we are not first-to-market or are unable to demonstrate such superiority, any products for which we are able to obtain approval may not be successful. Furthermore, in certain jurisdictions, if a competitor has orphan drug status for a product and if our product candidate is determined to be contained within the scope of a competitor’s orphan drug exclusivity, then approval of our product for that indication or disease could potentially be blocked, for example, for up to seven years in the U.S. and 10 years in the EU.

We may never succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the Company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations.

We have a very limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

We are very early in our development efforts and all of our lead programs are still in the discovery stage. We were formed in May 2014, have no products approved for commercial sale and have not generated any revenue from product sales. Our ability to generate product revenue or profits, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. We may never be able to develop or commercialize a marketable product.

Each of our programs may require additional discovery research and then preclinical and clinical development, regulatory approval in multiple jurisdictions, obtaining manufacturing supply, capacity and expertise, building of a commercial organization, substantial investment and significant marketing efforts before we generate any revenue from product sales. In addition, our product candidates must be approved for marketing by the FDA or certain other foreign regulatory agencies, including the EMA, before we may commercialize any product.

Our limited operating history, particularly in light of the rapidly evolving gene editing field, may make it difficult to evaluate our current business and predict our future performance. Our very short history as an operating company makes any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by very early stage companies in rapidly evolving fields. If we do not address these risks successfully, our business will suffer.

We have incurred net losses in each period since our inception, anticipate that we will continue to incur net losses in the future and may never achieve profitability.

We are not profitable and have incurred losses in each period since our inception. Our net loss was $21.4 million for the three months ended March 31, 2018. As of March 31, 2018, we had an accumulated deficit of $137.0 million. We expect these losses to increase as we continue to incur significant research and development and other expenses related to our ongoing operations, seek regulatory approvals for our future product candidates, scale-up manufacturing capabilities, maintain, expand and protect our intellectual property portfolio and hire additional personnel to support the development of our product candidates and to enhance our operational, financial and information management systems.

A critical aspect of our strategy is to invest significantly in our technology to improve the efficacy and safety of potential product candidates that we discover. Even if we succeed in discovering, developing and ultimately commercializing one or more of these product candidates, we will continue to incur losses for the foreseeable future relating to our substantial research and development expenditures to develop our technologies. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Further, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.

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We may need to raise substantial additional funding to fund our operations. If we fail to obtain additional financing, we may be unable to complete the development and commercialization of any product candidates.

Our operations have required substantial amounts of cash since inception, and we expect to spend substantial amounts of our financial resources on our discovery programs going forward and future development efforts. If we are able to identify product candidates that are eventually approved, we will require significant additional amounts in order to launch and commercialize our product candidates. For the foreseeable future, we expect to continue to rely on additional financing to achieve our business objectives.

We will require additional capital for the further development and commercialization of any product candidates and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate or due to other unanticipated factors.

We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or other research and development initiatives. Our collaboration and license agreements may also be terminated if we are unable to meet the payment or other obligations under the agreements. We could be required to seek collaborators for product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves.

Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.

Raising additional capital may cause dilution to our stockholders and restrict our operations.

We will need additional capital in the future to continue our planned operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we experience delays or difficulties in the enrollment of patients in clinical trials, our ability to complete clinical trials or our receipt of necessary regulatory approvals could be delayed or prevented.