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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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OVERVIEW
Abeona Therapeutics
Inc. (together with our subsidiaries, “we”, “our”, “Abeona” or the “Company”)
is a Delaware corporation. We are a clinical stage biopharmaceutical company developing gene therapies for life-threatening rare
genetic diseases. Our lead programs are ABO-102 (AAV-SGSH), an adeno-associated virus (AAV) based gene therapies for Sanfilippo
syndrome type A, and EB-101 (gene-corrected skin transplantations) for recessive dystrophic epidermolysis bullosa (RDEB). We are
also developing ABO-101 (AAV NAGLU), an AAV gene therapy for Sanfilippo syndrome type B, , EB-201 for epidermolysis bullosa (EB),
ABO-201 (AAV-CLN3) gene therapy for juvenile Batten disease (JNCL), ABO-202 (AAV-CLN1) gene therapy for treatment of infantile
Batten disease (INCL), and ABO-301 (AAV-FANCC) for Fanconi anemia (FA) disorder and ABO-302 using a novel CRISPR/Cas9-based gene
editing approach to gene therapy for rare blood diseases. Our principal executive office is located at 3333 Lee Parkway, Suite
600, Dallas, Texas 75219. Our website address is
www.abeonatherapeutics.com
.
Recent Developments
On March 8, 2017, we announced that the European
Medicines Agency (EMA) Committee for Orphan Medicinal Products granted Orphan Drug Designation for our EB-101 gene therapy program
for patients with recessive dystrophic epidermolysis bullosa (RDEB).
On February 17, 2017, we announced an update
on clinical results in the ongoing Phase 1/2 trial for ABO-102 (AAV-SGSH) at the 13
th
Annual WORLD
Symposium
™
2017 lysosomal storage disorders conference in San Diego. The ongoing Phase 1/2 study is designed to evaluate safety and preliminary
indications of efficacy of ABO-102 in subjects suffering from Mucopolysaccharidosis Type A (MPS IIIA or Sanfilippo syndrome type
A). Observations demonstrated:
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ABO-102 gene therapy was well tolerated
in 4 subjects (N=3 low dose, N=1 high dose) through 650 days follow up with no Serious Adverse Events.
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63% +/- 0.5% central nervous system reduction
of heparan sulfate GAG 6 months post-injection (N=2).
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Continued evidence of biopotency including
reduced liver and spleen volumes and decreased urinary GAGs.
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Two subjects assessed at the 6-month time
point showed evidence for stabilization or improvement (average 60% over 2 subjects) in several Mullen subdomains.
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Adaptive behavior ratings on the Vineland
stabilized.
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Subjects showed an improved ability to
complete individual items on the Leiter-R non-verbal IQ assessment resulting in improved raw scores.
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On February 1, 2017, we announced that the
first high-dose subject was enrolled in the ongoing Phase 1/2 trial for ABO-102 (AAV-SGSH).
On January 25, 2017, we received written notice
from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) that due to the resignation of
Mark J. Ahn, an independent director, the Company no longer complied with Nasdaq’s majority independent director requirement
as set forth in Listing Rule 5605. We have a cure period until July 10, 2017 in order to regain compliance. The Company is actively
looking for an independent director and plans to submit the required Nasdaq information before compliance deadlines and regain
Nasdaq compliance.
On January 3, 2017, we announced that the EMA
Committee for Orphan Medicinal Products granted Orphan Drug Designation for our ABO-201 program (AAV-CLN3), the AAV-based single
intravenous gene therapy program for juvenile Batten disease, a fatal lysosomal storage disease of the central nervous system caused
by autosomal-recessive mutations in the CLN3 gene.
Product Development Strategy
Abeona is focused on developing
and delivering gene therapy and plasma-based products for severe and life-threatening rare diseases. A rare disease is one that
affects fewer than 200,000 people in the U.S. There are nearly 7,000 rare diseases, which may involve chronic illness, disability,
and often, premature death. More than 25 million Americans and 30 million Europeans have a severe, life-threating disease. While
rare diseases can affect any age group, about 50% of people affected are children (15 million) and rare diseases account for 35%
of deaths in the first year of life. These rare diseases are often poorly diagnosed, very complex, and have no treatment or not
very effective treatment - over 95% of rare diseases do not have a single FDA or EMA approved drug treatment. However, most rare
diseases are often caused by changes in genes - approximately 80% are genetic in origin and can present at any stage of life. We
believe emerging insights in genetics and advances in biotechnology, as well as new approaches and collaboration between researchers,
industry, regulators and patient groups, provide significant opportunities to develop breakthrough treatments for rare diseases.
Developing Next Generation Gene Therapy
Gene therapy is the use of
DNA as a potential therapy to treat a disease. In many disorders, particularly genetic diseases caused by a single genetic defect,
gene therapy aims to treat a disease by delivering the correct copy of DNA into a patient’s cells. The healthy, functional
copy of the therapeutic gene then helps the cell function correctly. In gene therapy, DNA that encodes a therapeutic protein is
packaged within a “vector,” often a “naked” virus, which is used to transfer the DNA to the inside of cells
within the body. Gene therapy can be delivered by a direct injection, either intravenously (IV) or directly into a specific tissue
in the body, where it is taken up by individual cells. Once inside cells, the correct DNA is expressed by the cell machinery, resulting
in the production of missing or defective protein, which in turn is proposed to treat the patient’s underlying disease and
can provide long-term benefit.
Abeona is developing next-generation
adeno-associated virus (AAV) gene therapies. Viruses such as AAV are utilized because they have evolved a way of encapsulating
and delivering one or more genes of the size needed for clinical application, and can be purified in large quantities at high concentration.
Unlike AAV vectors found in nature, the AAV vectors used by Abeona have been genetically-modified such that they do not replicate.
Although the preclinical studies in animal models of disease demonstrate the promising impact of AAV-mediated gene expression to
affected tissues such as the heart, liver and muscle, our programs use a specific virus that is capable of delivering therapeutic
DNA across the blood brain barrier and into the central nervous system (CNS) and the somatic system (body), making them attractive
for addressing lysosomal storage diseases which have severe CNS manifestations of the disease.
Lysosomal storage diseases
(LSDs) are a group of rare inborn errors of metabolism resulting from deficiency in normal lysosomal function. These diseases are
characterized by progressive accumulation of storage material within the lysosomes of affected cells, ultimately leading to cellular
dysfunction. Multiple tissues ranging from musculoskeletal and visceral to tissues of the CNS are typically involved in disease
pathology. Since the advent of enzyme replacement therapy (ERT) to manage some LSDs, general clinical outcomes have significantly
improved; however, treatment with infused protein is lifelong and continued disease progression is still evident in patients. Thus,
AAV-based gene therapy may provide a viable alternative or adjunctive therapy to current management strategies for LSDs.
Our initial programs are focused
on LSDs such as Mucopolysaccharidosis (MPS) IIIA and IIIB. MPSIII, also known as Sanfilippo syndromes type A and type B, is a progressive
neuromuscular disease with profound CNS involvement. Our lead product candidates, ABO-101 and ABO-102, have been developed to replace
the damaged, malfunctioning enzymes within target cells with the normal, functioning version. ABO-201 is a similar product, using
an AAV to deliver the correct lysosomal gene that is defective in juvenile neuronal ceroid lipofuscinosis. Delivered via a single
injection, these drugs are only given once to a patient.
ABO-101 for MPS III B and ABO-102 for
MPS III A (Sanfilippo syndrome)
MPS type III (Sanfilippo syndrome) is a group
of four inherited genetic diseases, described as type A, B, C or D, which cause enzyme deficiencies that result in the abnormal
accumulation of glycosaminoglycans (sugars) in body tissues. MPS III is a lysosomal storage disease, a group of rare inborn errors
of metabolism resulting from deficiency in normal lysosomal function. The incidence of MPS III (all four types combined) is estimated
to be 1 in 70,000 births.
Mucopolysaccharides are long chains of sugar
molecules used in the building of connective tissues in the body. There is a continuous process in the body of replacing used materials
and breaking them down for disposal. Children with MPS III are missing an enzyme which is essential in breaking down used mucopolysaccharides.
The partially broken down mucopolysaccharides remain stored in cells in the body causing progressive damage. Babies may show little
sign of the disease, but as more and more cells become damaged, symptoms start to appear.
In MPS III, the predominant symptoms occur
due to accumulation within the central nervous system (CNS), including the brain and spinal cord, resulting in cognitive decline,
motor dysfunction, and eventual death. To date, there is no cure for MPS III and treatments are largely supportive.
Abeona is developing next-generation AAV-based
gene therapies for MPS III, which involves a one-time delivery of a normal copy of the defective gene to cells of the CNS with
the aim of reversing the effects of the genetic errors that cause the disease.
After a single dose in Sanfilippo preclinical
models, ABO-101 and ABO-102 induced cells in the CNS and peripheral organs to produce the missing enzymes which helped repair the
damage caused to the cells. Preclinical
in vivo
efficacy studies in Sanfilippo syndrome have demonstrated functional benefits
that remain for months after treatment. A single dose of ABO-101 or ABO-102 significantly restored normal cell and organ function,
corrected cognitive defects that remained months after drug administration, increased neuromuscular control and increased the lifespan
of animals with MPS III over 100% one year after treatment compared to untreated control animals. These results are consistent
with studies from several laboratories suggesting AAV treatment could potentially benefit patients with Sanfilippo Syndrome Type
A and B. In addition, safety studies conducted in animal models of Sanfilippo syndromes have demonstrated that delivery of AB0-101
or AB0-102 are well tolerated with minimal side effects.
EB-101 for the Treatment of Recessive
Dystrophic Epidermolysis Bullosa and EB-201 for the Correction of Gene Mutations in Skin Cells (Keratinocytes)
EB-101 (LZRSE-Col7A1 Engineered Autologous
Epidermal Sheets (LEAES)), is an ex vivo gene therapy for the treatment of recessive dystrophic epidermolysis bullosa (RDEB). EB-201
(AAV DJ COL7A1) is a pre-clinical candidate targeting a novel, AAV-mediated gene editing and delivery approach to correct gene
mutations in skin cells (Keratinocytes). We entered into an agreement (the ‘‘EB Agreement’’) with EB Research
Partnership (‘‘EBRP’’) and Epidermolysis Bullosa Medical Research Foundation (‘‘EBMRF’’)
to collaborate on gene therapy treatments for EB. The EB Agreement became effective August 3, 2016, on the execution of two licensing
agreements with The Board of Trustees of Leland Stanford Junior University (‘‘Stanford’’) described below.
EBRP and EBMRF have the contractual right to
license from Stanford EB-101 (LZRSE-Col7A1 Engineered Autologous Epidermal Sheets (LEAES)), and authorized us to exercise such
rights and enter into a license with Stanford for such technology, and to perform preclinical development and perform clinical
trials of a gene therapy treatment for Epidermolysis Bullosa based upon such in-licensed technology.
We also entered into a license with Stanford
for the AAV-based gene therapy EB-201 (AAV DJ COL7A1) technology, and we shall perform preclinical development and perform clinical
trials of a gene therapy treatment for EB based upon such in-licensed technology. EB-201 (AAV DJ COL7A1) is a pre-clinical candidate
targeting a novel, AAV-mediated gene editing and delivery approach (known as homologous recombination) to correct gene mutations
in skin cells (keratinocytes) for patients with recessive dystrophic epidermolysis bullosa (RDEB).
ABO-201 for Juvenile Neuronal Ceroid
Lipofuscinoses (JNCL) (or Juvenile Batten Disease (JBD)) and ABO-202 (AAV-CLN1) gene therapy for treatment of infantile Batten
disease (INCL)
ABO-201 (AAV CLN3) is an AAV-based gene therapy
which has shown promising preclinical efficacy in delivery of a normal copy of the defective CLN3 gene to cells of the CNS with
the aim of reversing the effects of the genetic errors that cause JNCL. JNCL is a rare, fatal, autosomal recessive (inherited)
disorder of the nervous system that typically begins in children between 4 and 8 years of age. Often the first noticeable sign
of JNCL is vision impairment, which tends to progress rapidly and eventually result in blindness. As the disease progresses, children
experience loss of previously acquired skills (developmental regression). This regression usually begins with the loss of the ability
to speak in complete sentences. Children then lose motor skills, such as the ability to walk or sit. They also develop movement
abnormalities that include rigidity or stiffness, slow or diminished movements (hypokinesia), and stooped posture. Beginning in
mid- to late childhood, affected children may have recurrent seizures (epilepsy), heart problems, behavioral problems, and difficulty
sleeping. Life expectancy is greatly reduced. Most people with juvenile Batten disease live into their twenties or thirties. As
yet, no specific treatment is known that can halt or reverse the symptoms of JNCL.
JNCL is the most common form of a group of
disorders known as neuronal ceroid lipofuscinoses (NCLs). Collectively, all forms of NCL affect an estimated 2 to 4 in 100,000
live births in the United States. NCLs are more common in Finland, where approximately 1 in 12,500 individuals are affected, as
well as Sweden, other parts of northern Europe, and Newfoundland, Canada.
Most cases of JNCL are caused by mutations
in the CLN3 gene, which is the focus of our AAV-based gene therapy approach. These mutations disrupt the function of cellular structures
called lysosomes. Lysosomes are compartments in the cell that normally digest and recycle different types of molecules. Lysosome
malfunction leads to a buildup of fatty substances called lipopigments and proteins within these cell structures. These accumulations
occur in cells throughout the body, but neurons in the brain seem to be particularly vulnerable to damage. The progressive death
of cells, especially in the brain, leads to vision loss, seizures, and intellectual decline in children with JNCL.
ABO-202 (AAV9 CLN1) is an AAV-based gene therapy
which has shown promising preclinical efficacy in delivery of a normal copy of the defective CLN1 gene to cells of the central
nervous system with the aim of reversing the effects of the genetic errors that cause an infantile form of Batten disease (also
known as infantile neuronal ceroid lipofuscinosis).
ABO-301 for Fanconi Anemia (FA) and ABO-302
for rare blood diseases using a novel CRISPR/Cas9-based gene editing approach to gene therapy for rare blood diseases
ABO-301 (AAV FANCC) is an AAV-based gene therapy
which has shown promising preclinical efficacy in delivery of a normal copy of the defective gene to cells of the hematopoietic
or blood system with the aim of reversing the effects of the genetic errors that cause FA. FA is a rare (1 in 160,000) pediatric,
autosomal recessive (inherited) disease characterized by multiple physical abnormalities, organ defects, bone marrow failure, and
a higher than normal risk of cancer. The average lifespan for people with FA is 20 to 30 years.
The major function of bone marrow is to produce
new blood cells. In FA, a DNA mutation renders the FANCC gene nonfunctional. Loss of FANCC causes skeletal abnormalities and leads
to bone marrow failure. FA patients also have much higher rates of hematological diseases, such as acute myeloid leukemia (AML)
or tumors of the head, neck, skin, gastrointestinal system, or genital tract. The likelihood of developing one of these cancers
in people with FA is between 10 and 30 percent. Aside from bone marrow transplantation (BMT), there are no specific treatments
known that can halt or reverse the symptoms of FA. Repairing fibroblast cells in FA patients with a functional FANCC gene is the
focus of our AAV-based gene therapy approach.
Using a novel CRISPR (clustered, regularly
interspaced short palindromic repeats)-Cas9 (CRISPR associated protein 9) system, researchers used a protein-RNA complex composed
of an enzyme known as Cas9 bound to a guide RNA molecule that has been designed to recognize a particular DNA sequence. The RNA
molecules guide the Cas9 complex to the location in the genome that requires repair. CRISPR-Cas9 uniquely enables surgically efficient
knock-out, knock-down or selective editing of defective genes in the context of their natural promoters, unlocking the potential
to treat both recessive and dominant forms of genetic diseases. Most importantly, this approach has the potential to allow for
more precise gene modification.
Polymer Hydrogel Technology (PHT™)
MuGard
®
(mucoadhesive
oral wound rinse) approved for mucositis, stomatitis, aphthous ulcers, and traumatic ulcers
MuGard is our marketed product for the management
of oral mucositis, a frequent side-effect of cancer therapy for which there is no other established treatment. MuGard, a proprietary
nanopolymer formulation, received marketing clearance from the FDA in the U.S. as well as Europe, China, Australia, New Zealand
and Korea. We launched MuGard in the U.S. in 2010 and licensed MuGard for commercialization in the U.S. to AMAG Pharmaceuticals,
Inc. (AMAG) in 2013. We licensed MuGard to RHEI Pharmaceuticals, N.V. (RHEI) for China and other Southeast Asian countries in 2010;
Hanmi Pharmaceutical Co. Ltd. (Hanmi) for South Korea in 2014; and Norgine B.V. (Norgine) for the European Union, Switzerland,
Norway, Iceland, Lichtenstein, Australia and New Zealand in 2014.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations
primarily through public and private sales of common stock, preferred stock, convertible notes and through licensing agreements.
Our principal source of liquidity is cash and cash equivalents. Licensing payments and royalty revenues provided limited funding
for operations during the period ended March 31, 2017. As of March 31, 2017, our cash and cash equivalents were $63,212,000.
As of March 31, 2017, our working capital was
$57,758,000. Our working capital at March 31, 2017 represented a decrease of $3,367,000 as compared to our working capital of $61,125,000
as of December 31, 2016. The decrease in working capital at March 31, 2017 reflects three months of net operating costs and changes
in current assets and liabilities.
Net cash used in operating activities for the
three months ended March 31, 2017 was $5,857,000 as compared to $2,516,000 for the same period in 2016, an increase of $3,341,000.
The increase was primarily due to higher research and development spending for clinical trials and planned upcoming additional
clinical trial centers for the first three months of 2017.
If we raise additional funds by selling additional
equity securities, the relative equity ownership of our existing investors will be diluted and the new investors could obtain terms
more favorable than previous investors.
We have incurred negative cash flows from operations
since inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product
development efforts. Since inception, our expenses have significantly exceeded revenues, resulting in an accumulated deficit as
of March 31, 2017 of $337,720,000. We cannot provide assurance that we will ever be able to generate sufficient product sales or
royalty revenue to achieve profitability on a sustained basis, or at all.
Since our inception, we have devoted our resources
primarily to fund our research and development programs. We have been unprofitable since inception and to date have received limited
revenues from the sale of products. We expect to incur losses for the next several years as we continue to invest in product research
and development, preclinical studies, clinical trials and regulatory compliance.
FIRST QUARTER 2017 COMPARED TO FIRST QUARTER 2016
Our licensing revenue for the first quarter
of 2017 and 2016 was $151,000. We recognize licensing revenue over the period of the performance obligation under our licensing
agreements.
We recorded royalty revenue for MuGard of $35,000
for first quarter of 2017 and $84,000 for the same period of 2016, a decrease of $49,000. We licensed MuGard to AMAG and Norgine
and receive quarterly reports under our agreements.
Total research and development spending for
the first quarter of 2017 was $2,198,000, as compared to $1,855,000 for the same period of 2016, an increase of $343,000. The increase
in expenses was primarily due to:
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increased clinical and development work
for the manufactured product for ABO-102 and other gene therapy products ($283,000);
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increased salary and related costs ($88,000)
from the hiring of scientific staff;
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increased rent expense for additional
laboratory space ($50,000); and
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offset by other net decreases in research
spending ($78,000).
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Total general and administrative expenses were
$3,022,000 for the first quarter of 2017, as compared to $4,366,000 for the same period of 2016, a decrease of $1,344,000. The
decrease in expenses was due primarily to the following:
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decreased restricted common stock based
compensation expense ($1,468,000) and decreased stock option compensation expense ($115,000);
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offset by increased salary and related
costs ($84,000); and
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increases in net other general and administrative
expenses ($155,000).
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Depreciation and amortization was $250,000
for the first quarter of 2017 as compared to $174,000 for the same period in 2016, an increase of $76,000. We are amortizing the
licenses for SDF Alpha, ABO-101 and ABO-201, and EB-102 over the life of the patents. The increase is due to amortization of licensed
technology ($58,000) and depreciation ($18,000).
Total operating expenses for the first quarter
of 2017 were $5,470,000 as compared to total operating expenses of $6,395,000 for the same period of 2016, a decrease of $925,000
for the reasons listed above.
Interest and miscellaneous income was $39,000
for the first quarter of 2017 as compared to $618,000 for the same period of 2016, a decrease of $579,000. Most of the decrease
was due to the change in the fair value of our contingent consideration liability resulting in miscellaneous income in 2016 ($591,000)
and offset by interest and other miscellaneous income ($12,000).
Interest and other expense for the first quarter
of 2017 and 2016 was $2,000 for each period.
Net loss for the first quarter of 2017 was
$5,247,000, or a $0.13 basic and diluted loss per common share as compared to a net loss of $5,544,000, or a $0.17 basic and diluted
loss per common share, for the same period in 2016, a decreased loss of $297,000.
OFF-BALANCE SHEET ARRANGEMENTS
None.