Attached files

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EX-32.2 - EX-32.2 - Sarepta Therapeutics, Inc.srpt-ex322_8.htm
EX-32.1 - EX-32.1 - Sarepta Therapeutics, Inc.srpt-ex321_6.htm
EX-31.2 - EX-31.2 - Sarepta Therapeutics, Inc.srpt-ex312_7.htm
EX-31.1 - EX-31.1 - Sarepta Therapeutics, Inc.srpt-ex311_9.htm
EX-10.2 - EX-10.2 - Sarepta Therapeutics, Inc.srpt-ex102_283.htm
EX-10.1 - EX-10.1 - Sarepta Therapeutics, Inc.srpt-ex101_282.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from                      to                     

Commission file number 001-14895

 

SAREPTA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

93-0797222

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

215 First Street, Suite 415

Cambridge, MA

 

02142

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (617) 274-4000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller Reporting Company

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock with $0.0001 par value

  

54,590,380

(Class)

  

(Outstanding as of November 3, 2016)

 

 

 

 


SAREPTA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — As of September 30, 2016 and December 31, 2015

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss — For the Three and Nine Months Ended September 30, 2016 and 2015

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2016
and 2015

 

5

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

26

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

47

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

47

 

 

 

 

 

Item 5.

 

Other Information

 

47

 

 

 

 

 

Item 6.

 

Exhibits

 

47

 

 

 

 

 

Signatures

 

48

 

 

 

 

 

Exhibits

 

49

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except shares and per share amounts)

 

 

 

As of

September 30,

2016

 

 

As of

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

395,140

 

 

$

80,304

 

Short-term investments

 

 

 

 

 

112,187

 

Accounts receivable

 

 

3,986

 

 

 

3,977

 

Restricted investment

 

 

10,695

 

 

 

10,695

 

Inventory

 

 

2,921

 

 

 

 

Other current assets

 

 

22,002

 

 

 

17,380

 

Total current assets

 

 

434,744

 

 

 

224,543

 

Restricted cash and investments

 

 

784

 

 

 

783

 

Property and equipment, net of accumulated depreciation of $28,426

   and $24,594 as of September 30, 2016 and December 31, 2015, respectively

 

 

35,620

 

 

 

37,344

 

Intangible assets, net of accumulated amortization of $3,054 and $2,620 as of

   September 30, 2016 and December 31, 2015, respectively

 

 

8,111

 

 

 

6,642

 

Other non-current assets

 

 

8,051

 

 

 

4,470

 

Total assets

 

$

487,310

 

 

$

273,782

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,684

 

 

$

20,234

 

Accrued expenses

 

 

29,539

 

 

 

29,053

 

Current portion of long-term debt

 

 

10,107

 

 

 

5,936

 

Current portion of notes payable

 

 

 

 

 

2,493

 

Deferred revenue

 

 

3,303

 

 

 

3,303

 

Other current liabilities

 

 

1,300

 

 

 

1,275

 

Total current liabilities

 

 

64,933

 

 

 

62,294

 

Long-term debt

 

 

8,491

 

 

 

14,969

 

Deferred rent and other

 

 

5,262

 

 

 

6,172

 

Total liabilities

 

 

78,686

 

 

 

83,435

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 3,333,333 shares authorized; none issued and

   outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value, 99,000,000 shares authorized; 54,351,725

   and 45,629,529 issued and outstanding at September 30, 2016 and

   December 31, 2015, respectively

 

 

5

 

 

 

5

 

Additional paid-in capital

 

 

1,486,487

 

 

 

1,089,508

 

Accumulated other comprehensive loss

 

 

 

 

 

(111

)

Accumulated deficit

 

 

(1,077,868

)

 

 

(899,055

)

Total stockholders’ equity

 

 

408,624

 

 

 

190,347

 

Total liabilities and stockholders’ equity

 

$

487,310

 

 

$

273,782

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share amounts)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

34,349

 

 

 

36,673

 

 

 

117,523

 

 

 

105,018

 

General and administrative

 

 

22,184

 

 

 

15,090

 

 

 

60,812

 

 

 

50,714

 

Total operating expenses

 

 

56,533

 

 

 

51,763

 

 

 

178,335

 

 

 

155,732

 

Operating loss

 

 

(56,533

)

 

 

(51,763

)

 

 

(178,335

)

 

 

(155,732

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense) income and other, net

 

 

(209

)

 

 

(176

)

 

 

(478

)

 

 

383

 

Total other (loss) income

 

 

(209

)

 

 

(176

)

 

 

(478

)

 

 

383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(56,742

)

 

$

(51,939

)

 

$

(178,813

)

 

$

(155,349

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on short-term

   securities - available-for-sale

 

 

(1

)

 

 

18

 

 

 

111

 

 

 

94

 

Total other comprehensive (loss) income

 

 

(1

)

 

 

18

 

 

 

111

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(56,743

)

 

$

(51,921

)

 

$

(178,702

)

 

$

(155,255

)

Net loss per share — basic and diluted

 

$

(1.18

)

 

$

(1.25

)

 

$

(3.83

)

 

$

(3.75

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock

outstanding for computing basic and diluted net loss per share

 

 

48,254

 

 

 

41,565

 

 

 

46,709

 

 

 

41,416

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(178,813

)

 

$

(155,349

)

Adjustments to reconcile net loss to cash flows from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,947

 

 

 

3,883

 

Amortization of premium on available-for-sale securities, loss from sale of available-for-sale securities and non-cash interest

 

 

473

 

 

 

805

 

Loss on abandonment of patents

 

 

45

 

 

 

180

 

Stock-based compensation

 

 

23,093

 

 

 

25,769

 

Non-cash restructuring expenses

 

 

504

 

 

 

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

 

 

 

Net increase in accounts receivable

 

 

(9

)

 

 

(317

)

Net increase in inventory

 

 

(2,921

)

 

 

 

Net (increase) decrease in other assets

 

 

(8,203

)

 

 

9,963

 

Net decrease in accounts payable, accrued expenses, deferred revenue and

    other liabilities

 

 

(2,703

)

 

 

(3,127

)

Net cash used in operating activities

 

 

(164,587

)

 

 

(118,193

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,427

)

 

 

(2,316

)

Purchase of intangible assets

 

 

(1,093

)

 

 

(982

)

Purchase of restricted investments

 

 

 

 

 

(10,695

)

Purchase of available-for-sale securities

 

 

 

 

 

(49,632

)

Sale and maturity of available-for-sale securities

 

 

112,101

 

 

 

141,854

 

Net cash provided by investing activities

 

 

108,581

 

 

 

78,229

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings, net of debt issuance costs

 

 

 

 

 

19,601

 

Repayments of long-term debt and notes payable

 

 

(5,076

)

 

 

(2,573

)

Proceeds from sales of common stock

 

 

364,951

 

 

 

 

Proceeds from exercise of options and purchase of stock under the Employee Stock

     Purchase Program

 

 

10,967

 

 

 

5,204

 

Net cash provided by financing activities

 

 

370,842

 

 

 

22,232

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

314,836

 

 

 

(17,732

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

80,304

 

 

 

73,551

 

End of period

 

 

395,140

 

 

 

55,819

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

1,199

 

 

$

359

 

Supplemental schedule of non-cash investing activities and financing activities:

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

$

1,955

 

 

$

 

Accrual for debt issuance costs related to the senior secured term loan

 

$

400

 

 

$

400

 

Intangible assets included in accrued expenses

 

$

1,230

 

 

$

105

 

Accrual for offering costs related to the equity offerings

 

$

222

 

 

$

135

 

Property and equipment included in accrued expenses

 

$

 

 

$

211

 

Capitalized interest

 

$

 

 

$

99

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


SAREPTA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. BUSINESS AND BASIS OF PRESENTATION

Business

Sarepta Therapeutics, Inc. (together with its wholly-owned subsidiaries, “Sarepta” or the “Company”) is a commercial-stage biopharmaceutical company focused on the discovery and development of unique RNA-targeted therapeutics for the treatment of rare neuromuscular diseases. Applying its proprietary, highly-differentiated and innovative platform technologies, the Company is able to target a broad range of diseases and disorders through distinct RNA-targeted mechanisms of action. The Company is primarily focused on rapidly advancing the development of its potentially disease-modifying Duchenne muscular dystrophy (“DMD”) drug candidates. On September 19, 2016, the United States Food and Drug Administration (“FDA”) granted accelerated approval for EXONDYS 51, indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 skipping. EXONDYS 51 is studied in clinical trials under the name of eteplirsen and is marketed in the U.S. under the trademarked name of EXONDYS 51TM (eteplirsen) Injection.

Through September 30, 2016, the Company had not generated any revenue from product sales, and the Company may never generate substantial revenue from product sales. Even if sales of EXONDYS 51 generate substantial revenue, the Company is likely to continue to incur operating losses in the near term.

As of September 30, 2016, the Company had approximately $406.6 million of cash, cash equivalents and restricted cash and investments, consisting of $395.1 million of cash and cash equivalents and $11.5 million of restricted cash and investments. The Company believes that its balance of cash, cash equivalents and investments as of September 30, 2016 is sufficient to fund its current operational plan for the next twelve months, though it may pursue additional cash resources through public or private financings, sell its Priority Review Voucher, seek additional government funding and establish collaborations with or license its technology to other companies.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), reflect the accounts of Sarepta Therapeutics, Inc. and its wholly-owned subsidiaries. All inter-company transactions between and among its consolidated subsidiaries have been eliminated. Management has determined that the Company operates in one segment: the development of pharmaceutical products. The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Estimates and Uncertainties

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the valuation of stock-based awards, research and development expenses and income taxes.

 

2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Significant Accounting Policies

         For details about the Company’s accounting policies, please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements of the Annual Report on Form 10-K for the year ended December 31, 2015. Related to the commercialization of EXONDYS 51, the Company updated its significant accounting policies as follows:

Revenue Recognition

       The Company recognizes revenue when all of the following criteria are met:

 

1)

persuasive evidence of an arrangement exists;

 

2)

delivery has occurred or services have been rendered;

 

3)

price to the customer is fixed or determinable; and

 

4)

collectability is reasonably assured.

6


Revenue from product sales is recognized when title and risk of loss have passed to the customer and is recorded net of applicable reserves for discounts and allowances.

The Company establishes reserves for various government rebate programs and co-payment assistance. Reserves established for these discounts and allowances are classified as either reductions of accounts receivable or a liability. These reserves are based on estimates of the amounts earned or to be claimed on the related sales.

Additionally, the Company also expects to maintain certain customer service contracts with distributors and other customers in the distribution channel that will provide inventory management, data and distribution services, which generally will be reflected as a reduction of revenue. To the extent the Company can demonstrate a separable benefit and fair value for these services, the Company will classify these payments in selling, general and administrative expenses.

Inventory

Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis. The Company capitalizes inventory costs associated with products upon regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. Drug products to be used in clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes.

The following table summarizes the components of the Company’s inventory for the period indicated:

 

 

 

As of

September 30,

2016

 

 

 

(in thousands)

 

Raw materials

 

$

2,712

 

Finished goods

 

 

209

 

Total inventory

 

$

2,921

 

 

 

 

 

 

The Company periodically reviews its inventories for excess amounts or obsolescence and writes down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Additionally, though the Company’s product is subject to strict quality control and monitoring which it performs throughout the manufacturing processes, certain batches or units of product may not meet quality specifications. As a result, the Company will record a charge to cost of sales to write down any unmarketable inventory to its estimated net realizable value.

Intangible Assets

 

The Company’s intangible assets consist of an in-licensed right and patent costs, which are stated in the Company’s consolidated balance sheets net of accumulated amortization and impairments, if applicable.

 

The in-licensed right relates to the license agreement with the University of Western Australia (“UWA”). As a result of the FDA approval and the subsequent commercial sale of EXONDYS 51, as defined in the Amended and Restated UWA License Agreement (defined in Note 3), the Company was obligated to pay a $1.0 million sales milestone to UWA and, accordingly, has recorded an in-licensed right.  The in-licensed right will be amortized on a straight-line basis over the remaining life of the related patent because the life of the related patent reflects the expected time period that the Company will benefit from the in-licensed right. The amortization of the in-licensed right will be recorded as cost of goods sold in the Company’s consolidated statements of operations and comprehensive loss.

 

The following table summarizes the components of intangible assets for the period indicated:

 

 

As of

September 30,

2016

 

 

 

(in thousands)

 

Patent costs

 

$

10,165

 

In-licensed right

 

 

1,000

 

Intangible assets, gross

 

$

11,165

 

Less: accumulated amortization

 

 

(3,054

)

Intangible assets, net

 

$

8,111

 

 

 

 

 

 

There have not been any other material changes to the Company’s accounting policies as of September 30, 2016.

7


 

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. The amendments in this update clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 will be effective for fiscal years beginning after December 15, 2017, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance and does not expect the adoption of this guidance to have any impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The amendments in this update simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU No. 2016-09 will be effective for fiscal years beginning after December 15, 2016, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance but determined that the adoption of this standard will not have any impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes Topic 840, “Leases”. Under the new guidance, a lessee should recognize assets and liabilities that arise from its leases and disclose qualitative and quantitative information about its leasing arrangements. ASU No. 2016-02 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance or determined the effect that the adoption of this guidance will have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016. As of September 30, 2016, the Company has not elected to early adopt this guidance but determined that the adoption of this standard will not have any impact on the Company’s financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued and to provide related disclosures. ASU No. 2014-15 will be effective for the fiscal years beginning after December 15, 2016, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance, and based on the Company's financial condition as of the date these financial statements were issued or available for issuance, the Company does not expect the adoption of this guidance to have any impact on the current period financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition. Under the new guidance, a company is required to recognize revenue when it transfers goods or renders services to customers at an amount that it expects to be entitled to in exchange for these goods or services. The new standard allows for either a full retrospective with or without practical expedients or a retrospective with a cumulative catch upon adoption transition method. This guidance is effective for the fiscal years beginning after December 15, 2016, with early adoption not permitted. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”, which states that the mandatory effective date of this new revenue standard will be delayed by one year, with early adoption only permitted in fiscal year 2017. During the second quarter of 2016, the FASB issued three amendments to the new revenue standard to address some application questions: ASU No. 2016-10, “Identifying Performance Obligations and Licensing”, ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09”, and ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients”. These three amendments will be effective upon adoption of Topic 606. As of September 30, 2016, the Company has not yet determined which adoption method it will utilize or the effect that the adoption of this guidance will have on its consolidated financial statements.

 

 

3. SIGNIFICANT AGREEMENTS

University of Western Australia

In April 2013, the Company and UWA entered into an agreement under which an existing exclusive license agreement between the Company and UWA was amended and restated (the “Amended and Restated UWA License Agreement”). The Amended and Restated UWA License Agreement grants the Company specific rights to the treatment of DMD by inducing the skipping of certain exons. EXONDYS 51 falls under the scope of the license agreement. Under the Amended and Restated UWA License Agreement, the

8


Company may be required to make payments of up to $6.0 million in aggregate to UWA based on the successful achievement of certain development and sales milestones relating to EXONDYS 51 and up to five additional product candidates. The Company may also be obligated to make payments to UWA of up to $20.0 million upon the achievement of certain sales milestones. Additionally, the Company may also be required to pay a low-single-digit percentage royalty on net sales of products covered by issued patents licensed from UWA during the term of the Amended and Restated UWA License Agreement. However, the Company has the option to purchase future royalties up-front. Under this option, prior to the First Amendment (defined below), the Company could be required to make a one-time royalty payment of $30.0 million to UWA.

In June 2016, the Company and UWA entered into the first amendment to the Amended and Restated UWA License Agreement (the “First Amendment”). Under the First Amendment, the Company was obligated to make an up-front payment of $7.0 million to UWA upon execution of the amendment. Under the terms of the First Amendment, UWA has waived certain rights and amended the timing of certain payments under the Amended and Restated UWA License Agreement, including lowering the up-front payment that is due by the Company upon exercise of the option to purchase future royalties up-front. Upon exercise of the option to purchase future royalties up-front, the Company would still be obligated to make up to $20.0 million in payments to UWA upon achievement of certain sales milestones.

For the three and nine months ended September 30, 2016, the Company recorded $0.3 million and $7.3 million, respectively, relating to the development milestone and up-front payments to UWA as research and development expense in the unaudited condensed consolidated statement of operations and comprehensive loss.

Additionally, corresponding to the FDA approval and the subsequent commercial sale of EXONDYS 51, as defined in the Amended and Restated UWA License Agreement, the Company recorded a $1.0 million milestone as an in-license right in the unaudited condensed consolidated balance sheets as of September 30, 2016.

 

 

4. FAIR VALUE MEASUREMENTS

The Company has certain financial assets that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

 

Level 1 — quoted prices for identical instruments in active markets;

 

Level 2 — quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

Level 3 — valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

The tables below present information about the Company’s financial assets that are measured and carried at fair value and indicate the level within the fair value hierarchy of valuation techniques it utilizes to determine such fair value:

 

 

 

Fair Value Measurement as of September 30, 2016

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

36,612

 

 

$

36,612

 

 

$

 

 

$

 

Certificates of deposit

 

 

11,343

 

 

 

11,343

 

 

 

 

 

 

 

Total assets

 

$

47,955

 

 

$

47,955

 

 

$

 

 

$

 

 

 

 

Fair Value Measurement as of December 31, 2015

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

32,850

 

 

$

32,850

 

 

$

 

 

$

 

Commercial paper

 

 

48,899

 

 

 

 

 

 

48,899

 

 

 

 

Government and government agency bonds

 

 

50,918

 

 

 

 

 

 

50,918

 

 

 

 

Corporate bonds

 

 

17,370

 

 

 

 

 

 

17,370

 

 

 

 

Certificates of deposit

 

 

11,343

 

 

 

11,343

 

 

 

 

 

 

 

Total assets

 

$

161,380

 

 

$

44,193

 

 

$

117,187

 

 

$

 

 

The Company’s assets with fair value categorized as Level 1 within the fair value hierarchy include money market funds and certificates of deposit. Money market funds are publicly traded mutual funds and are presented as cash equivalents in the unaudited condensed consolidated balance sheets as of September 30, 2016.

9


The Company’s assets with fair value categorized as Level 2 within the fair value hierarchy consist of commercial paper, government and government agency bonds and corporate bonds. These assets have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, through income-based approaches utilizing observable market data.

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts for long-term debt approximate fair value based on market activity for other debt instruments with similar characteristics and comparable risk.

 

5. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

It is the Company’s policy to mitigate credit risk in its financial assets by maintaining a well-diversified portfolio that limits the amount of exposure as to maturity and investment type. As of September 30, 2016, the Company did not hold any available-for-sale securities. The weighted average maturity of the Company’s available-for-sale securities as of December 31, 2015 was approximately four months.

The following tables summarize the Company’s cash, cash equivalents and short-term investments for each of the periods indicated; as of September 30, 2016, there were no short-term investments.

 

 

 

 

As of December 31, 2015

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

75,304

 

 

$

 

 

$

 

 

$

75,304

 

Commercial paper

 

 

48,936

 

 

 

 

 

 

(37

)

 

 

48,899

 

Government and government agency bonds

 

 

50,966

 

 

 

 

 

 

(48

)

 

 

50,918

 

Corporate bonds

 

 

17,396

 

 

 

 

 

 

(26

)

 

 

17,370

 

Total assets

 

$

192,602

 

 

$

 

 

$

(111

)

 

$

192,491

 

As reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,304

 

 

$

 

 

$

 

 

$

80,304

 

Short-term investments

 

 

112,298

 

 

 

 

 

 

(111

)

 

 

112,187

 

Total assets

 

$

192,602

 

 

$

 

 

$

(111

)

 

$

192,491

 

 

 

 

6. OTHER CURRENT ASSETS AND OTHER NON-CURRENT ASSETS

The following table summarizes the Company’s other current assets for each of the periods indicated:

 

 

 

As of

September 30,

2016

 

 

As of

December 31,

2015

 

 

 

(in thousands)

 

Manufacturing-related deposits

 

$

16,783

 

 

$

13,070

 

Prepaid expenses

 

 

3,663

 

 

 

3,109

 

Other

 

 

1,556

 

 

 

1,201

 

Total other current assets

 

$

22,002

 

 

$

17,380

 

 

The following table summarizes the Company’s other non-current assets for each of the periods indicated:

 

 

 

As of

September 30,

2016

 

 

As of

December 31,

2015

 

 

 

(in thousands)

 

Manufacturing-related deposits

 

$

4,084

 

 

 

 

Prepaid clinical expenses

 

 

3,725

 

 

 

4,228

 

Other

 

 

242

 

 

 

242

 

Total other non-current assets

 

$

8,051

 

 

$

4,470

 

10


 

 

 

7. ACCRUED EXPENSES

The following table summarizes the Company’s accrued expenses for each of the periods indicated: 

 

 

 

As of

September 30,

2016

 

 

As of

December 31,

2015

 

 

 

(in thousands)

 

Accrued clinical and preclinical costs

 

$

9,094

 

 

$

9,587

 

Accrued employee compensation costs

 

 

7,649

 

 

 

8,189

 

Accrued contract manufacturing costs

 

 

7,605

 

 

 

4,830

 

Accrued professional fees

 

 

2,280

 

 

 

4,258

 

Accrued research costs

 

 

1,746

 

 

 

629

 

Other

 

 

1,165

 

 

 

1,560

 

Total accrued expenses

 

$

29,539

 

 

$

29,053

 

 

 

 

8. EQUITY FINANCING

In September 2016, the Company sold approximately 5.8 million shares of common stock through an underwritten public offering at a price of $59.75 per share. As of the date of the issuance of this report, the Company received aggregate net proceeds of approximately $327.4 million from the offering net of commission and offering expenses of approximately $17.6 million.

In June 2016, the Company sold approximately 2.1 million shares of common stock through an underwritten public offering at a price of $17.84 per share. The implied underwriting discount and commission was $1.60 per share. The Company received aggregate net proceeds of approximately $37.3 million from the offering net of offering expense of approximately $0.2 million.

 

 

 

9. RESTRUCTURING

 

In March 2016, the Company announced a long-term plan (“Corvallis plan”) to consolidate all of the Company’s operations to Massachusetts and reduce its workforce by approximately 19% as part of a strategic plan to increase operational efficiency. During the remainder of the year, the Company plans to close its facility in Corvallis, Oregon, which primarily focused on early-stage research and research manufacturing. As part of the consolidation, research activities and some employees will transition to the Company’s facilities in Andover and Cambridge, Massachusetts. The consolidation efforts are planned to occur in four waves - May, October, November and December of 2016, with an estimated completion date of December 30, 2016. The restructuring costs of the Corvallis plan consist of costs associated with its workforce reduction and facility consolidation. The workforce reduction costs primarily relate to employee severance and benefits. Facility consolidation costs are primarily associated with non-cancellable lease obligations as well as accelerated depreciation for certain assets whose expected useful lives are shortened due to the consolidation. The Company has not determined the financial impact related to the non-cancellable lease obligation for the Corvallis facility but is currently obligated to make $4.3 million of lease payments after the estimated completion date of the consolidation plan. The Company estimates restructuring expenses of $1.8 million related to accelerated depreciation and workforce reduction costs, the latter of which will be accrued as earned over the service period for each employee.

 

In August 2016, the Company implemented a restructuring plan in Cambridge, Massachusetts (“Cambridge plan”) and reduced  its workforce by approximately 6%. The restructuring costs associated with the Cambridge plan consist of costs associated with workforce reduction totaling $0.7 million. The Cambridge plan was completed as of October 31, 2016.

11


For the three and nine months ended September 30, 2016, the Company recognized $1.3 million and $2.4 million of restructuring expenses, respectively,  $1.0 million and $2.1 million, respectively, of which related to workforce reduction.

The following table summarizes the restructuring costs by function for the periods indicated:

 

 

 

For the Three Months Ended

September 30, 2016

 

 

For the Nine Months Ended

September 30, 2016

 

 

 

(in thousands)

 

 

 

Cash

 

 

 

 

Non-cash (1)

 

 

 

 

Total

 

 

Cash

 

 

 

 

Non-cash (2)

 

 

 

 

Total

 

Research and development

 

$

628

 

 

 

 

$

143

 

 

 

 

$

771

 

 

$

1,448

 

 

 

 

$

336

 

 

 

 

$

1,784

 

General and administration

 

 

367

 

 

 

 

 

126

 

 

 

 

 

493

 

 

 

471

 

 

 

 

 

168

 

 

 

 

 

639

 

Total restructuring expenses

 

$

995

 

 

 

 

$

269

 

 

 

 

$

1,264

 

 

$

1,919

 

 

 

 

$

504

 

 

 

 

$

2,423

 

 

(1)

The non-cash restructuring expense relates to accelerated depreciation for certain assets.

 

(2)

The non-cash restructuring expense relates to acceleration of stock option vesting and accelerated depreciation for certain assets.

The following table summarizes the restructuring reserve for the periods indicated:

 

 

 

For the Three Months Ended

September 30, 2016

 

 

For the Nine Months Ended

September 30, 2016

 

 

 

(in thousands)

 

Restructuring reserve beginning balance

 

$

371

 

 

$

 

Restructuring expenses incurred during the period

 

 

990

 

 

 

1,919

 

Adjustments to prior period estimates, net

 

 

5

 

 

 

 

Amounts paid during the period

 

 

(458

)

 

 

(1,011

)

Restructuring reserve ending balance

 

$

908

 

 

$

908

 

 

 

10. STOCK-BASED COMPENSATION

The following table summarizes the Company’s stock awards granted for each of the periods indicated:

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Grants

 

 

Weighted Average Grant Date Fair Value

 

 

Grants

 

 

Weighted Average Grant Date Fair Value

 

 

Grants

 

 

Weighted Average Grant Date Fair Value

 

 

Grants

 

 

Weighted Average Grant Date Fair Value

 

Stock options

 

 

1,050

 

 

$

37.38

 

 

 

702,067

 

 

$

24.05

 

 

 

1,214,426

 

(1)

$

11.96

 

 

 

2,676,778

 

 

$

14.67

 

Restricted stock awards

 

 

91,778

 

(2)

$

48.94

 

 

 

65,000

 

 

$

33.81

 

 

 

117,553

 

(3)

$

41.22

 

 

 

181,783

 

 

$

20.80

 

 

(1)

Included in 2016 stock option grants are 287,500 options with performance conditions. As a result of the approval of EXONDYS 51, 25% of these performance grants vested immediately and another 25% were triggered to be eligible for vesting subject to the remaining service conditions of the awards. As of September 30, 2016, the performance conditions of the remaining 50% were not probable of being achieved. The remaining stock options granted during the periods presented in the table have only service-based criteria and vest over four years.

 

(2)

The Company granted certain employees 91,778 restricted stock awards (“RSA”) with certain sales targets. If and when deemed probable that such performance milestones may be achieved within the required time frame, the Company may recognize up to $4.5 million of stock-based compensation related to these grants.

 

(3)

Included in the 2016 RSA grants are 18,755 shares granted to certain employees in lieu of a portion of their 2015 annual bonus payments. These RSA grants were fully vested as of September 30, 2016. The remaining RSAs will be fully vested by June 2017.

Stock-based Compensation Expense

For the three months ended September 30, 2016 and 2015, total stock-based compensation expense was $9.6 million and $5.7 million, respectively. For the nine months ended September 30, 2016 and 2015, total stock-based compensation expense was $23.1 million and $25.8 million, respectively. As a result of the FDA approval of EXONDYS 51, certain performance criteria for options

12


with performance conditions were met during the quarter. The Company recognized approximately $3.7 million in stock-based compensation expense related to these options. Included in the amount for the nine months ended September 30, 2015 is $8.6 million of stock-based compensation expense incurred in connection with the resignation of the Company’s former Chief Executive Officer. The following table summarizes stock-based compensation expense by function included within the unaudited condensed consolidated statements of operations and comprehensive loss: 

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Research and development

 

$

2,674

 

 

$

2,631

 

 

$

7,527

 

 

$

7,639

 

General and administrative

 

 

6,899

 

 

 

3,052

 

 

 

15,566

 

 

 

18,130

 

Total stock-based compensation expense

 

$

9,573

 

 

$

5,683

 

 

$

23,093

 

 

$

25,769

 

 

 

The following table summarizes stock-based compensation expense by grant type included within the unaudited condensed consolidated statements of operations and comprehensive loss:

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands)