Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”), our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions intended to identify statements about the future. These statements speak only as of the date of this Quarterly Report and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements include, without limitation, statements about the following:
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the timing, progress and results of preclinical studies and clinical trials for AVXS-101 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;
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the timing of and our ability to obtain and maintain regulatory approval of AVXS-101;
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the proposed clinical development pathway for AVXS-101, including the expected trial design for our proposed pivotal clinical trials, and the acceptability of the results of such trials for regulatory approval of AVXS-101 by the FDA or comparable foreign regulatory authorities;
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the proposed timing of filing investigational new drug applications with the FDA in connection with gene therapies we are developing for ALS and Rett syndrome in connection with the recent license agreements executed with REGENXBIO Inc.;
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our expectations regarding timing for meetings with regulatory agencies;
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our expectations regarding the size of the patient populations for our product candidates, if approved for commercial use;
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our manufacturing capabilities and strategy, including the scalability and commercial viability of our manufacturing methods and processes and our ability to establish a satisfactory potency assay for AVXS-101;
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our ability to successfully commercialize AVXS-101;
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our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for or ability to obtain additional financing;
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our ability to identify and develop new product candidates, including our planned new programs in Rett syndrome and ALS;
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our ability to identify, recruit and retain key personnel;
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our and our licensors’ ability to protect and enforce our intellectual property protection for AVXS-101, and the scope of such protection;
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our financial performance;
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the development of and projections relating to our competitors or our industry;
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our expectations about the outcome of litigation and controversies with third parties, including the lawsuit filed by Sophia’s Cure Foundation; and
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the impact of laws and regulations.
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You should refer to “Item 1A. Risk Factors” in our Annual Report, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed as exhibits to this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
We are a clinical-stage gene therapy company dedicated to developing and commercializing novel treatments for patients suffering from rare and life-threatening neurological genetic diseases. Our initial product candidate, AVXS-101, is our proprietary gene therapy product candidate. We recently completed our Phase 1 clinical trial for AVXS-101 for the treatment of spinal muscular atrophy Type 1, or SMA Type 1, the leading genetic cause of infant mortality. SMA Type 1 is a lethal genetic disorder characterized by motor neuron loss and associated muscle deterioration, resulting in mortality or the need for permanent ventilation support before the age of two for greater than 90% of patients. The survival motor neuron protein, or SMN, is a critical protein for normal motor neuron signaling and function. Patients with SMA Type 1 either have experienced a deletion of their SMN1 genes, which prevents them from producing adequate levels of functional SMN protein, or carry a mutation in their SMN1 gene. AVXS-101 is designed to deliver a fully functional human SMN gene into the nuclei of motor neurons that then generates an increase in SMN protein levels and we believe this will result in improved motor neuron function and patient outcomes.
In our fully enrolled Phase 1 clinical trial, we treated 15 SMA Type 1 patients, divided into two dosing cohorts, and observed a favorable safety profile and that AVXS-101 is generally well-tolerated. As of January 20, 2017, the trial evaluation date for which we reported top-line results, all patients in the study have survived, in contrast to the independent, peer-reviewed natural history study for patients with SMA Type 1. Additionally, we have observed improved motor function, including in some patients, the attainment of motor milestones such as the ability to sit unassisted, crawl, stand and walk — motor milestone achievements that are essentially never seen among untreated patients suffering from SMA Type 1. The open-label, dose-escalating study was designed to evaluate the safety and
tolerability of AVXS-101 in patients with SMA Type 1. The key measures of efficacy were the time from birth to an "event," which was defined as either death or at least 16 hours per day of required ventilation support for breathing for 14 consecutive days in the absence of acute reversible illness or perioperatively, and video confirmed achievement of ability to sit unassisted. Additionally, several exploratory objective measures were assessed, including a standard motor milestone development survey and Children's Hospital of Philadelphia Infant Test of Neuromuscular Disorders, or CHOP INTEND.
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Event-free Survival and Safety
: Data as of January 20, 2017, showed no new events, and 15 of 15 patients (100%) were event-free at 13.6 months of age. The expected event-free survival rate at 13.6 months based on the natural history of the disease is 25%. Based on these results, AVXS-101 appeared to have a favorable safety profile and to be generally well tolerated, with no new treatment related safety or tolerability concerns identified. The median age at last follow-up was 20.2 months and 30.8 months for patients who received a dose of AVXS-101 administered at 2.0 × 10
14
vector genomes per kilogram, or vg/kg, or the proposed therapeutic dose-cohort, and patients who received a dose of AVXS-101 administered at 6.7 × 10
13
vg/kg, or the low-dose cohort, respectively. Use of the term "proposed therapeutic dose" does not imply that we have established efficacy, but this one-time dose is the dosing level that we presently intend to evaluate in future trials.
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Motor Milestone Achievement
: As of January 20, 2017, 11 of 12 patients (92%) in the proposed therapeutic dose-cohort achieved head control, nine of 12 patients (75%) could roll a minimum of 180 degrees from back to both left and right, and 11 of 12 patients (92%) could sit with assistance.
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Nine of 12 patients (75%) in the proposed therapeutic dose-cohort could sit unassisted for at least five seconds, seven of 12 patients (58%) could sit unassisted for at least 10 seconds and five of 12 patients (42%) could sit unassisted for 30 seconds or more.
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As of April 25, 2017, three patients in the proposed therapeutic dose-cohort had achieved additional sitting unassisted milestones since the January 20, 2017 evaluation date. Ten of 12 patients (83%) in the proposed therapeutic dose-cohort could sit unassisted for at least five seconds, nine of 12 patients (75%) could sit unassisted for at least 10 seconds and eight of 12 patients (67%) could sit unassisted for 30 seconds or more in the post-January 20 analysis.
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As of January 20, 2017, two patients in the proposed therapeutic dose-cohort could crawl, pull to a stand, and stand and walk independently.
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Nutritional and Respiratory Support
: As of January 20, 2017, six of seven patients (86%) in the proposed therapeutic dose-cohort that did not require feeding support before treatment continued without feeding support after treatment; seven of 10 patients (70%) that did not require bi-level positive airway pressure, or BiPAP, support before treatment continued without any BiPAP after treatment.
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Further, as of January 20, 2017, 11 of 12 patients (92%) in the proposed therapeutic dose-cohort were fed orally, and six of 12 patients (50%) were exclusively fed orally, and eight of 12 patients (67%) were able to speak.
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The U.S. Food and Drug Administration, or FDA, and the European Medicines Agency, or EMA, have each granted AVXS-101 orphan drug designation for the treatment of SMA, and the FDA has granted AVXS-101 fast track designation for the treatment of SMA Type 1. The FDA granted breakthrough therapy designation for AVXS-101 for the treatment of SMA Type 1 in pediatric patients, and the EMA granted access into its PRIority MEdicines, or PRIME, program for AVXS-101 for the treatment of SMA Type 1. In addition to developing AVXS-101 to treat SMA Type 1, we plan to develop AVXS-101 to treat additional SMA types and develop other novel treatments for rare neurological genetic diseases.
Recent Developments
Clinical and Manufacturing Development Timeline
On June 14, 2017, we announced alignment with the FDA on our Good Manufacturing Practice, or GMP, commercial manufacturing process for AVXS-101 following the receipt of minutes from the Type B Chemistry Manufacturing and Controls, or CMC, meeting with the FDA. This alignment includes support for our proposed GMP commercial manufacturing process, our proposed analytical methods and corresponding qualification and validation plans — inclusive of key release assays such as potency, purity and identity — and our proposed comparability protocol, which helps assess how similar the product derived from the GMP process is to the original product used in the Phase 1 trial of AVXS-101 in patients with SMA Type 1.
Key components of our scalable, GMP commercial manufacturing process are as follows:
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we will continue to utilize HEK293 cells and an adherent cell line;
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our commercial-scale GMP process will utilize a novel adherent cell culture approach that can more reliably produce product and has greater surface area to potentially increase productivity relative to Hyperstacks;
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we have implemented additional upstream and downstream process development improvements to meet global regulatory GMP expectations as well as to meet projected patient demand, if approved; and
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we intend to utilize our GMP process for all clinical and commercial needs moving forward, including our new programs in Rett syndrome and genetic ALS described below.
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In response to a request from the FDA, we intend to complete the implementation of our potency assay qualification plan, including three independent runs, prior to initiation of upcoming clinical trials. This assay utilizes the Delta 7 mouse model, which has been used historically to assess AVXS-101 potency, but now incorporates additional elements to make it acceptable to global regulatory authorities. We have initiated the work necessary to meet that request and we expect to have the data from these production runs to submit to the FDA in August 2017. Pending agreement from the FDA that the data from these production runs are sufficient, we intend to initiate our pivotal trial of AVXS-101 in SMA Type 1 in the United States and a Phase 1/2a clinical trial of AVXS-101 in SMA Type 2 in the United States later in the third quarter of 2017. In addition, we intend to initiate a pivotal trial of AVXS-101 for the treatment of SMA Type 1 in Europe during the second half of 2017.
Additionally, we are currently conducting comparability work to assess the similarity of key characteristics of the AVXS-101 product used in our Phase 1 clinical trial in SMA Type 1, which was manufactured by Nationwide Children's Hospital, or NCH, to the product derived from our new GMP manufacturing process. Data from this comparability work will be incorporated into the data package, and will include the above-mentioned potency qualification work, along with the full Phase 1 clinical data, that will be reviewed and discussed at our end-of-Phase 1 meeting with the FDA. We expect that this meeting will help further inform the regulatory pathway for AVXS-101. We anticipate providing an update on the outcome of that meeting once the official minutes are available, which we anticipate to be in the fourth quarter of 2017.
License Agreement with REGENXBIO for Rett Syndrome and Genetic ALS
On June 7, 2017, we announced that we had entered into an exclusive, worldwide license agreement with REGENXBIO Inc., or REGENX, for the development and commercialization of gene therapy using the recombinant adeno-associated virus serotype 9, or NAV AAV9, vector to treat two rare neurological monogenic disorders: Rett syndrome and a genetic form of amyotrophic lateral sclerosis, or ALS, caused by mutations in the superoxide dismutase 1, or SOD1, gene, or genetic ALS. Preclinical data suggesting promising safety and efficacy of gene therapy treatments for these disorders using NAV AAV9, generated by our Chief Scientific Officer, Dr. Brian Kaspar, has been licensed from NCH by the Company. We expect to move forward with initiating investigational new drug application, or IND, enabling studies in both Rett syndrome and ALS and plan to provide more details on these programs in the second half of 2017.
To date, we have funded our research and development and operating activities primarily through public and private equity offerings totaling $597.5 million of net proceeds. We have not generated any revenue from sales of gene therapy
products to date. We have incurred significant annual net operating losses in every year since our inception and expect to continue to incur net operating losses for the foreseeable future. Our net operating losses were $38.5 million and $83.0 million for the years ended December 31, 2015 and 2016, respectively. As of June 30, 2017, we had an accumulated deficit of $229.3 million. We expect to continue to incur significant expenses and increasing operating losses for the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly if and as we continue to develop and conduct clinical trials with respect to AVXS-101; develop our planned new programs for Rett syndrome and ALS; maintain, expand and protect our intellectual property portfolio; establish a commercial infrastructure to support the manufacture, marketing and sale of AVXS-101 if it receives regulatory approval; and hire additional personnel, such as clinical, regulatory, manufacturing, quality control and scientific personnel.
Licensing Agreements
AVXS-101
To date, we have entered into three license agreements relating to the development of AVXS-101.
Nationwide Children’s Hospital
In October 2013, we entered into an exclusive, worldwide license agreement with Nationwide Children’s Hospital, or NCH, under certain patent applications, and a non-exclusive license under certain technical information, for the use of its scAAV9 technology for the treatment of SMA, of all types, or the NCH SMA License. In January 2016, we amended and restated the NCH SMA License in its entirety. Under the NCH SMA License, we initially issued NCH and The Ohio State University, or OSU, 331,053 shares of common stock. Until May 2015, when we had reached a market capitalization of $100.0 million, we were obligated to issue additional shares to NCH and OSU from time to time to maintain a 3% ownership of the company on a fully-diluted basis. We issued an aggregate of 124,990 additional shares of common stock between October 2013 and May 2015 pursuant to these anti-dilution obligations. With certain exceptions, we are required to make up to $0.1 million in development milestone based payments to NCH. In addition, we are responsible for all clinical trial costs that are not covered by grants or certain other sources.
Following the first commercial sale of a NCH SMA licensed product we must begin paying NCH an aggregate low-single digit royalty on net sales of any products covered by the NCH SMA License, subject to reduction in specified circumstances and annual minimum royalties that increase over time. In addition, we must pay NCH a portion of sublicensing revenue received from our sublicense of the licensed technology at percentages between low-double digits and low-teens.
On November 6, 2015, the FDA approved our sponsorship of the IND and the transfer of the associated regulatory filing from NCH.
ReGenX Biosciences, LLC
In March 2014, we entered into an exclusive license agreement with ReGenX Biosciences, LLC, or ReGenX Biosciences, predecessor to REGENX, under certain patent rights owned by the Trustees of the University of Pennsylvania and licensed to ReGenX Biosciences, for the development and commercialization of products to treat spinal muscular atrophy by
in vivo
gene therapy using AAV9, or the ReGenX SMA License. Under the ReGenX SMA License, we paid ReGenX Biosciences an initial licensing fee of $2.0 million. We are also required to pay ReGenX Biosciences: annual maintenance fees, up to $12.25 million in milestone fees for all products covered by the ReGenX SMA License, or ReGenX SMA licensed products; mid-single to low-double digit royalty percentages on net sales of ReGenX SMA licensed products, subject to reduction in specified circumstances; and lower mid-double digit percentages of any sublicense fees we receive from sublicensees for the licensed patent rights. As of June 30, 2017, we have paid $2.4 million under the ReGenX SMA License, which includes $0.3 million in aggregate milestone payments.
Asklepios Biopharmaceutical, Inc.
In May 2015, we entered into a non-exclusive, worldwide license agreement with Asklepios Biopharmaceutical, Inc., or AskBio, under certain patents and patent applications, for the use of AskBio’s self-complementary AAV genome technology for the treatment of SMA in humans, or the AskBio License. Under the AskBio License, we paid AskBio a one-time upfront license fee of $1.0 million, payable across stipulated milestones. We are also required to pay ongoing annual maintenance fees, up to a total of $0.6 million in clinical development milestone payments and up to a total of $9.0 million in commercial milestone payments. Under the terms of the AskBio License, we are required to pay AskBio annual tiered royalties on net sales of any products covered by the AskBio License, on a country-by-country basis, starting at percentages in the low-single digits and increasing to mid-single digits. These royalty rates are subject to potential reduction in specified circumstances, including, in the event we exercise our option to make a specified one-time royalty option fee payment to AskBio. We must also pay AskBio a low-double digit percentage of all consideration we receive from any sublicense of the licensed technology. Through June 30, 2017, we have paid the $1.0 million upfront license fee owed under the AskBio License.
Preclinical Programs for Rett Syndrome and ALS
We have also entered into three license agreements relating to our planned new programs for Rett syndrome and ALS.
REGENXBIO Inc.
Effective June 7, 2017, we entered into an exclusive license agreement with REGENX under certain patents and patent applications owned by the Trustees of the University of Pennsylvania and licensed to REGENX, for the development and commercialization of products to treat Rett syndrome and genetic ALS using the AAV 9 vector, or the REGENX Rett and ALS License. Under the REGENX Rett and ALS License, REGENX granted us an exclusive, worldwide license under the licensed patent rights to make, have made, use, import, sell and offer for sale any products covered by the REGENX Rett and ALS License, or the REGENX Rett and ALS licensed products, in the field of the treatment of (i) Rett syndrome in humans by in vivo gene therapy using AAV9 delivering the gene encoding for methyl CpG binding protein 2, and (ii) ALS caused by SOD1 mutation in humans by in vivo gene therapy using AAV9 delivering the gene encoding for SOD1, subject to certain rights reserved by REGENX and its licensors. The patent rights exclusively in-licensed include an issued United States patent, which expires in 2026. We have the right to sublicense the licensed technology to third parties subject to certain conditions as specified in the REGENX Rett and ALS License. Under the REGENX Rett and ALS License we grant a non-exclusive, worldwide, royalty-free, transferable, sublicenseable, irrevocable, perpetual license back to REGENX to (a) use any patentable modifications and improvements to the licensed technology that we or our affiliates or sublicensees develop, or licensed back improvements, and (b) practice the licensed back improvements in connection with AAV9 outside of our fields of use.
Under the terms of the REGENX Rett and ALS License, we have paid or are required to pay:
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an initial fee of $6.0 million;
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an annual maintenance fee;
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up to $36.0 million in total milestone fees for the REGENX Rett and ALS licensed products;
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a low double digit royalty percentage on net sales of REGENX Rett and ALS licensed products, subject to reduction in specified circumstances; and
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a lower mid-double digit percentage of any sublicense fees we receive from sublicensees for the licensed intellectual property rights.
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We are obligated to achieve certain development milestones with respect to the licensed disease indications. We do not have the right to control prosecution of the in-licensed patent applications nor the right to enforce the in-licensed patents. In addition, our rights under the REGENX Rett and ALS License are generally not assignable without the prior written consent of REGENX.
The REGENX Rett and ALS License will expire upon the later of (i) the expiration, lapse, abandonment or invalidation of the last valid claim of the licensed intellectual property to expire, lapse or become abandoned or unenforceable in all
the countries of the world or (ii) seven years from the first commercial sale of each REGENX Rett and ALS licensed product. Upon expiration of the REGENX Rett and ALS License, the license granted to us becomes irrevocable, perpetual, royalty-free and fully paid-up. We have the right to terminate the REGENX Rett and ALS License upon a specified period of prior written notice. REGENX may terminate the REGENX Rett and ALS License if we or our affiliates become insolvent, if we are greater than a specified number of days late in paying money due under the REGENX Rett and ALS License, or, effective immediately, if we or our affiliates, or sublicensees commence any action against REGENX or its licensors to declare or render any claim of the licensed patent rights invalid or unenforceable. Either party may terminate the REGENX Rett and ALS License for material breach if such breach is not cured within a specified number of days. Upon termination of the REGENX Rett and ALS License, other than for REGENX’s material breach, we grant to REGENX a non-exclusive, perpetual, irrevocable, worldwide, royalty-free, transferable, sublicenseable license under patentable modifications and improvements to any vector claimed by the licensed patents for use by REGENX for the research, development and commercialization of products in any therapeutic indication.
Nationwide Children’s Hospital
In September 2016, we entered into exclusive license agreements with NCH, pursuant to which NCH granted us exclusive, worldwide licenses under certain patent rights to make, have made, use, sell, offer for sale and import any products covered by each license, or NCH licensed products, and a non-exclusive, worldwide license under certain technical information to develop and manufacture the NCH licensed products, in the field of therapies and treatments of Rett syndrome and ALS in human use, respectively. We refer to each of the Rett syndrome and ALS in human use licenses individually as a NCH License. The patent rights exclusively in-licensed from NCH and relevant to our contemplated Rett syndrome product are a currently pending patent application being pursued only in the United States. The patent application covers the use of the aaV9 vector delivered intrathecally for the treatment of Rett syndrome. If a patent issues from this patent application, it is expected to expire in 2029. The patent rights exclusively in-licensed from NCH and relevant to our contemplated ALS product are a currently pending patent application being pursued in the United States, Canada and Europe. The patent application claims the use of the AAV9 vector as a composition of matter and its use for the treatment of ALS. If a patent issues from this patent application, it is expected to expire in 2035. We have the right to subcontract the manufacturing of products using the licensed rights under each NCH License. We also have the right to sublicense the licensed technology under each NCH License to third parties through multiple tiers.
Each NCH License sets forth a development plan for our development of the licensed technology to make and sell NCH licensed products, including for the treatment of Rett syndrome and ALS in humans, as applicable, throughout the world. We are required, if commercially reasonable, to market NCH licensed products after regulatory approval, satisfy the market demand for such products in those countries in which we have obtained regulatory approval and where it is commercially reasonable to do so and continue to develop additional NCH licensed products within the applicable field. In the event we fail to comply with such obligations, subject to certain conditions, NCH has the right to either terminate the applicable NCH License or convert our license into a non-exclusive license with respect to the applicable NCH licensed product in the applicable country. We are responsible for all clinical trial costs under each NCH License.
We paid an initial fee of $0.2 million to NCH in connection with the NCH License for Rett syndrome and $0.1 million in connection with the NCH License for ALS in human use. We also must pay NCH an annual maintenance fee under each NCH License. Following the first commercial sale of an NCH licensed product under an applicable NCH License, we must begin paying NCH an aggregate low-single digit royalty on net sales of NCH licensed products by us, our affiliates and sublicensees during the term of such license. If we unsuccessfully challenge any of the licensed patents, the royalty rate increases from low single digits to mid-single digits, in the case of the NCH License for Rett syndrome, and to high-single digits, in the case of the NCH License for ALS in human use.
With certain exceptions, we are required to make certain development milestone-based payments to NCH under each NCH License. In addition, we must also pay NCH a portion of sublicensing revenue received from our sublicense of the rights to licensed technology at a mid-single digits percentage.
We do not have the right to control prosecution of the in-licensed patent rights under either NCH License, however NCH shall consult with us on material matters regarding the prosecution of such patent rights, and NCH has the first right to enforce any patents issuing from the in-licensed patent rights and if NCH does not enforce the rights within a certain
time frame, then we have the right to enforce. In addition, our rights under each NCH License are not assignable without the prior written consent of NCH, except to our affiliates, subsidiaries or any successor in interest in connection with a merger, acquisition, consolidation or sale, provided that our assignee assumes our obligations under the applicable NCH License in writing.
Unless terminated earlier, each agreement will expire on a NCH licensed product-by-NCH licensed product and country-by-country basis upon the expiration of the royalty term for such NCH licensed product in such country. The royalty term will expire on the later of (i) the date on which the last relevant patent underlying the relevant NCH licensed product expires or (ii) the expiration of any orphan drug-based exclusive marketing rights conferred by any regulatory authority with respect to a NCH licensed product in a licensed territory. Upon expiration of the agreement with respect to a particular NCH licensed product in a particular country, the license to us will survive and as a fully-paid up license. Each NCH License may be terminated prior to its expiration:
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By us at any time after the second anniversary of the effective date of the applicable NCH License by providing six months' prior written notice to NCH;
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By either party upon the other party's material breach of the applicable NCH License that is not cured within 90 days after receiving written notice of such breach, except in certain cases in which we may request a longer cure period;
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By NCH in the event of our bankruptcy, insolvency or certain similar occurrences; or
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By NCH if we or any of our affiliates bring any action or proceeding against NCH, other than a suit brought in response to any suit brought by NCH.
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Certain accrued payments that we are required to make to NCH will become due in the event of termination as specified in the applicable agreement.
Financial Operations Overview
Revenue
To date, we have not generated any revenue from the commercial sale of gene therapy products, and we do not expect to generate substantial revenue for at least the next few years. In the future, we will seek to generate revenue primarily from product sales and, potentially, collaborations with strategic partners.
Operating Expenses
We classify our operating expenses into two categories: research and development and general and administrative expenses. Personnel costs including salaries, benefits, bonuses and stock-based compensation expense, comprise a significant component of each of these expense categories. We allocate expenses associated with personnel costs based on the nature of work associated with these resources.
Research and Development Expenses
Research and development expense consists of expenses incurred while performing research and development activities to discover and develop potential gene therapy treatments. This includes conducting preclinical studies and clinical trials, investment in our manufacturing facility, manufacturing equipment and manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Up-front fees incurred in obtaining technology licenses for research and development activities are expensed as incurred if the technology licensed has no alternative future use. Our research and development expense primarily consists of:
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salaries and personnel-related costs, including benefits and any employee stock-based compensation, for our scientific personnel performing research and development activities;
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stock-based compensation expense related to restricted common stock grants and stock warrant issuances to consultants assisting us in the research and development of our product candidate;
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costs related to executing preclinical studies and clinical trials;
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costs related to acquiring, developing and manufacturing materials for preclinical studies and clinical trials;
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costs related to developing processes and analytical methods to manufacture and test product from a significant number of small scale and full scale engineering runs;
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fees paid to consultants and other third parties who support our product candidate development;
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other costs incurred in seeking regulatory approval of our product candidates; and
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allocated facility-related costs and overhead.
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We typically utilize our employee, consultant and infrastructure resources across our development programs. To date, substantially all of our research and development expenses have been associated with AVXS-101.
We plan to increase our research and development expense for the foreseeable future as we continue our effort to develop and manufacture AVXS-101 and to advance the development of future product candidates, subject to the availability of sufficient funding.
The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of AVXS-101 or any future product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.
General and Administrative Expense
General and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation, for employees performing functions other than research and development. This includes personnel in executive, business operations, finance and administrative support functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, professional fees for auditing, tax and legal services, expenses associated with obtaining and maintaining patents and costs of our information systems.
We expect that our general and administrative expense will increase as we continue to operate as a public reporting company and continue to develop and potentially commercialize AVXS-101 and our future product candidates. We believe that these increases likely will include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to continue to incur increased costs to comply with corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public reporting companies.
Interest Income
Interest income primarily consists of any interest income earned on our cash and cash equivalents.
Income Taxes
To date, we have not been required to pay U.S. federal or state income taxes because we have not generated taxable income.
Critical Accounting Policies and Significant Judgments and Estimates
Our critical accounting policies are described in Note 2 to our consolidated financial statements for the year ended December 31, 2016, included in our Annual Report on Form 10-K. There were no material changes to our critical accounting policies during the six months ended June 30, 2017.
Emerging Growth Company Status
Under Section 107(b) of the JOBS Act, an “emerging growth company,” or EGC, can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
As an EGC, we rely on certain of exemptions and reduced reporting requirements under the JOBS Act, including exemptions from the requirement to provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an EGC until the earlier of: the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; December 31, 2021; the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC. Based on our public float as of the date of this report, we currently expect that we will become a large accelerated filer, and cease to be an EGC, as of December 31, 2017.
Recent Accounting Pronouncements
See Note 2 for disclosure of recent accounting pronouncements.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2017 and 2016
The following table summarizes our results of operations for the three and six months ended June 30, 2017 and 2016, together with the dollar increase or decrease in those items (in thousands):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2017
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2016
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Period-to-Period Change
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2017
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2016
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Period-to-Period Change
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Net revenue:
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Revenue
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$
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—
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$
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—
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$
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—
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$
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—
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$
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—
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$
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—
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Operating expenses:
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General and administrative
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13,154
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5,418
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7,736
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22,803
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10,242
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12,561
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Research and development
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45,206
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10,380
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34,826
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65,521
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26,445
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39,076
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Total operating expenses
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58,360
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15,798
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42,562
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88,324
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36,687
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51,637
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Interest income (net)
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331
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79
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252
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576
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132
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444
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Net loss
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$
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(58,029)
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$
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(15,719)
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$
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(42,310)
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$
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(87,748)
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$
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(36,555)
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$
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(51,193)
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General and Administrative Expense
General and administrative expense increased from $5.4 million for the three months ended June 30, 2016, to $13.2 million for the three months ended June 30, 2017. This $7.8 million increase included increases of $2.3 million in legal, professional and consulting fees, $2.1 million in salaries and personnel-related costs, $1.9 million in non-cash stock-
based compensation expense and $1.5 million in other administrative costs driven by increased headcount across all general and administrative functions to support our overall growth.
General and administrative expense increased from $10.2 million for the six months ended June 30, 2016, to $22.8 million for the six months ended June 30, 2017. This $12.6 million increase included increases of $4.1 million in salaries and personnel-related costs, $3.1 million in legal, professional and consulting fees, $2.7 million in non-cash stock-based compensation expense, and $2.7 million in other administrative costs driven by increased headcount across all general and administrative functions to support our overall growth.
Research and Development Expense
Research and development expense increased from $10.4 million for the three months ended June 30, 2016, to $45.2 million for the three months ended June 30, 2017. The $34.8 million increase was primarily attributable to product manufacturing expenses and associated accelerated spending, including increased headcount, in our product manufacturing facility, as well as expenses related to the conclusion of our Phase 1 clinical trial of AVXS-101 in SMA Type 1 and licensing fees related to our planned new programs in Rett syndrome and ALS. More specifically, this amount included increases of $16.4 million in third-party clinical and manufacturing research and development expense associated with product manufacturing, $6.1 million in research and development supplies and materials, $6.0 million attributable to the upfront license fee to REGENX for the REGENX Rett and ALS License, $2.9 million in salaries and personnel-related expenses, driven by increased headcount across all research and development and manufacturing functions from 39 employees as of June 30, 2016 to 100 employees as of June 30, 2017, $2.4 million in non-cash stock-based compensation expense and $1.0 million in other research and development expenses.
Research and development expense increased from $26.5 million for the six months ended June 30, 2016, to $65.5 million for the six months ended June 30, 2017. The $39.0 million increase was partially offset by a $6.8 million decrease in non-cash stock-based compensation expense. The decrease in non-cash stock-based compensation expense was primarily attributable to the recognition of $10.4 million of additional stock compensation expense upon the vesting in full of Dr. Kaspar’s restricted stock award during the year ended December 31, 2016. The balance of the $39.0 million increase was primarily attributable to product manufacturing expenses and associated accelerated spending, including increased headcount, in our product manufacturing facility as well as expenses related to the conclusion of our Phase 1 clinical trial of AVXS-101 in SMA Type 1. More specifically, this amount included increases of $20.7 million in third-party clinical and manufacturing research and development expense associated with product manufacturing, $10.7 million in research and development supplies and materials, $6.1 million in license fees, $5.0 million in salaries and personnel-related expenses, driven by increased headcount across all research and development and manufacturing functions, and $3.3 million in other research and development expenses.
We anticipate our research and development costs will continue to increase over the next several years due to increased spending on the development of AVXS-101 and future product candidates.
Interest Income
Interest income for the six months ended June 30, 2017 consists of interest earned on our cash and cash equivalents.
Liquidity and Capital Resources
Sources of Liquidity
To date, we have funded our research and development and operating activities primarily through equity financings, including $98.2 million, $149.1 million and $269.7 million of net proceeds from our initial public offering, our September 2016 public offering and our June 2017 public offering, respectively, and $80.5 million of aggregate net proceeds from private placements of stock prior to our initial public offering.
As of June 30, 2017, we had cash and cash equivalents of $417.6 million and had no debt outstanding.
Cash Flows
The following table provides information regarding our cash flows for the six months ended June 30, 2017 and 2016 (in thousands):
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Six Months Ended June 30,
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2017
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2016
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Net cash used in operating activities
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$
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(76,352)
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$
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(20,330)
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Net cash used in investing activities
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(16,758)
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(7,503)
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Net cash provided by financing activities
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270,300
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97,014
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Net increase in cash and cash equivalents
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$
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177,190
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$
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69,181
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Operating Activities
For the six months ended June 30, 2017, our net cash used in operating activities of $76.4 million primarily consisted of a net loss of $87.7 million, primarily attributable to our spending on research and development, manufacturing and general and administrative expenses and $2.6 million in net cash used in changes in working capital items, which was partially offset by $14.0 million in adjustments for non-cash items. The $2.6 million in net cash used in changes in working capital represents primarily a $5.5 million increase in prepaid expenses and other current assets and other long-term assets and a $2.9 million increase in accrued expenses and other current liabilities, accounts payable and the accrued indemnification obligation. Adjustments for non-cash items consisted of $13.3 million of stock-based compensation expense and $0.7 million of depreciation and amortization.
For the six months ended June 30, 2016, our net cash used in operating activities of $20.3 million primarily consisted of a net loss of $36.6 million, primarily attributable to our spending on research and development and general and administrative expenses, which was partially offset by $17.4 million in adjustments for non-cash items and $1.1 million in net cash used in changes in working capital items. Adjustments for non-cash items primarily consisted of $17.4 million of stock-based compensation expense, of which $10.4 million was associated with the vesting in full of the restricted stock grant to Dr. Kaspar. The change in working capital was primarily attributable to an increase in prepaid expenses and other long-term assets, partially offset by an increase in accounts payable and accrued expenses and other current liabilities.
Investing Activities
For the six months ended June 30, 2017, net cash used in investing activities consisted of $16.8 million of capital expenditures, primarily related to our manufacturing facility and purchases of property and equipment. For the six months ended June 30, 2016, net cash used in investing activities consisted of $7.5 million of capital expenditures, primarily related to our manufacturing facility and purchases of property and equipment.
Financing Activities
For the six months ended June 30, 2017, net cash provided by financing activities of $270.3 million consisted primarily of funds raised from our June 2017 underwritten public offering. For the six months ended June 30, 2016, net cash provided by financing activities consisted primarily of $97.0 million from our initial public offering closed in February 2016.
Future Funding Requirements
To date, we have not generated any revenues from the commercial sale of approved gene therapy products or drug therapies and we do not expect to generate substantial revenue for at least the next few years. If we fail to complete the development of our product candidates in a timely manner or fail to obtain their regulatory approval, our ability to generate future revenue will be compromised. We do not know when, or if, we will generate any revenue from our gene therapy core business. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize AVXS-101. In addition, we expect our expenses to increase in connection with our ongoing
development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, product candidates, including with respect to development of AVXS-101 for other types of SMA and other product candidates for other diseases. We also expect to continue to incur costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
Based upon our current operating plan, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into 2020. We intend to devote the majority of our capital resources for clinical development and regulatory approval of AVXS-101. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of product candidates.
Our future capital requirements will depend on many factors, including:
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the progress and results of our studies and clinical trials for AVXS-101;
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·
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the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates, including our planned new programs in Rett syndrome and ALS;
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·
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the number and development requirements of other product candidates that we may pursue;
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the costs, timing and outcome of regulatory review of our product candidates;
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the cost and timing of establishing and validating manufacturing processes and facilities, including our own, for development and commercialization of our product candidates, if approved;
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·
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the efforts necessary to institute post-approval regulatory compliance requirements;
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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
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the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval, which may be affected by market conditions, including obtaining coverage and adequate reimbursement of our product candidates from third-party payors, including government programs and managed care organizations, and competition within the therapeutic class to which our product candidates are assigned;
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·
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
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the extent to which we acquire or in-license other product candidates and technologies.
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Our future commercial revenue, if any, will be derived from sales of therapy products that we do not expect to be commercially available for several years, if at all. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the terms of these equity securities or this debt may restrict our ability to operate. Any future debt financing and equity financing, if available, may involve agreements that include covenants limiting and restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, entering into profit-sharing or other arrangements or
declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
Contractual Obligations, Commitments and Contingencies
We lease a 15,668 square foot facility for our corporate headquarters in Bannockburn, Illinois, pursuant to a lease that expires in July 2024. The lease agreement provides for annual escalation in rent payments during the lease term. We are amortizing the escalation in rental payments on a straight-line basis over the term of the lease. We also lease a 1,318 square foot facility in Columbus, Ohio for research and development activities, pursuant to a lease that expires in March 2019. In March 2016, we entered into a lease agreement, which expires in August 2026, for approximately 48,529 square feet of warehouse and office space in Libertyville, Illinois. A portion of the warehouse space is used for manufacturing space. The lease agreement provides for annual escalation in rent payments during the lease term. The lease agreement provides us with a one-time right to terminate the lease effective as of the last day of the ninety-sixth full calendar month of the lease subject to a termination fee. We are amortizing the escalation in rental payments on a straight-line basis over the term of the lease. In March 2014, we entered into a lease agreement, which expired in April 2017, for approximately 2,418 square feet of office space in Dallas, Texas. In May 2017, we entered into two month-to-month lease agreements to add an additional 4,582 square feet of office space in Libertyville, Illinois.
We may be required to make certain royalty payments under our licensing and supply agreements, as described in “-Licensing Agreements;” however, the amount and timing of when these payments will actually be made is uncertain, and the payments are contingent upon the initiation and completion of future activities.
During the three and six months ended June 30, 2017, there were no other material changes outside the ordinary course of our business to the contractual obligations specified in the table of contractual obligations included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of U.S interest rates. As of June 30, 2017, we had cash and cash equivalents totaling $417.6 million. Cash and cash equivalents consist of cash, deposits with banks and short term highly liquid money market instruments with remaining maturities at the date of purchase of 90 days or less. These instruments are exposed to the impact of interest rate changes which may result in fluctuations to our interest income. The primary objective of our investment activity is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality. We do not believe a sudden change in the interest rates would have a material impact on our financial condition or results of operations. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, 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 of June 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2017, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weaknesses discussed below. Notwithstanding these material weaknesses, our management has concluded that the financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”).
In connection with the preparation of our Annual Report on Form 10-K for the year ended December 31, 2016, our management concluded that, as of December 31, 2016, our internal control over financial reporting was not effective, as a result of material weaknesses in our control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified in our internal control over financial reporting related to our lack of sufficiently trained professionals with an appropriate level of accounting knowledge, lack of written policies regarding our accounting function and procedures to identify and appropriately account for complex debt and equity agreements or share-based compensation awards, lack of restricted access to key financial systems and records and appropriate segregation of duties.
Status of Remediation of Material Weaknesses
We have taken numerous steps to address these material weaknesses and believe we have made significant progress toward remediating them, primarily through the hiring of multiple additional full-time accounting and financial personnel. With the addition of these personnel and others, we believe we now have sufficient personnel with an appropriate level of accounting knowledge and experience commensurate with our financial reporting requirements.
Based on our risk assessments and ongoing reviews of our financial statements, we have implemented controls over key financial transaction areas, application of GAAP, SEC reporting and associated disclosures and are in the process of formally documenting our key accounting policies and procedures. We have also performed additional review procedures in areas subject to audit adjustments in prior periods and have identified key controls for our significant processes. In addition, effective January 1, 2017, we have converted to a new enterprise resource planning (“ERP”) financial system to support improved automation and control over our finance and accounting functions, including proper access and segregation of duties. Effective with our IPO, we no longer have complex debt and equity agreements. We have designed and implemented controls and procedures to identify and appropriately account for our share-based compensation awards.
During the remainder of 2017, we intend to continue our remediation efforts by completing the documentation of our key controls and testing the design and operating effectiveness of these controls. We are actively working to implement effective internal control over financial reporting, which includes remediation of these material weaknesses. However, such compliance is not guaranteed, and we cannot provide any assurance that our internal control over financial reporting will be effective as a result of these efforts.
Except as described above, there were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.