UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

For the fiscal year ended December 31, 2016

OR

Commission File Number 001-37601

 

DIMENSION THERAPEUTICS, INC.

(Exact name of Registrant as specified in its Charter)

 

 

 

Registrant’s telephone number, including area code: (617) 401-0011

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.0001 Per Share; Common stock traded on the NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ☐    NO  ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ☐    NO  ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

The aggregate market value of the common stock held by non‑affiliates of the registrant was approximately $103.7 million as of June 30, 2016 based upon the closing sale price on the NASDAQ Global Select Market reported for such date. Shares of common stock held by each executive officer and director and certain holders of more than 10% of the outstanding shares of the registrant’s common stock have been excluded in that such persons may be deemed to be affiliates. Shares of common stock held by other persons, including certain other holders of more than 10% of the outstanding shares of common stock, have not been excluded in that such persons are not deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of Registrant’s Common Stock outstanding as of March 2, 2017 was 25,043,506.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2017 annual meeting of stockholders, which the registrant intends to file pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of December 31, 2016, are incorporated by reference into Part II, Item 5 and Part III of this Form 10-K.

 

 

 

 

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Table of Contents

 

 

 

 

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This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements relating to historical matters should be considered forward-looking statements. When used in this report, the words “believe,” “expect,” “plan,” “anticipate,” “estimate,” “predict,” “may,” “could,” “should,” “intend,” “will,” “target,” “goal” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of important factors, including the factors discussed in this annual report on Form 10-K, including those discussed in Item 1A of this report under the heading “Risk Factors,” and the risks discussed in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We explicitly disclaim any obligation to update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

PART I

Item 1. Business.

BUSINESS

We are a leader in discovering and developing new therapeutic products for people living with devastating rare and metabolic diseases associated with the liver, based on the most advanced mammalian adeno-associated virus (AAV) gene delivery technology. The liver is a vital organ that plays an important role in human metabolism and key physiologic functions, and is the target organ for our programs: ornithine transcarbamylase (OTC) deficiency, glycogen storage disease type Ia (GSDIa), phenylketonuria (PKU), Wilson disease, citrullinemia type I, hemophilia B, and hemophilia A. We continue to advance our lead clinical programs in hemophilia B and OTC deficiency, our preclinical programs, and retain the global rights to all of our liver-directed programs, with the exception of our hemophilia A program, which is partnered with Bayer. We have developed a robust scientific platform that brings together deep expertise in rare genetic diseases, liver biology, AAV gene therapy, pharmaceutical development, and mammalian vector manufacturing. We believe our continued development of our manufacturing processes, methods and expertise will yield the most comprehensive and leading manufacturing platform developed to date, including our next generation HeLa 2.0 platform, for AAV-based gene therapy product candidates. We believe that by leveraging the expertise created by our platform we will be able to accelerate the research and development of our pipeline of programs while continuing to discover and develop the next generation of products in this field.

Over 400 described rare monogenic disorders are associated with the liver, many of which have severe or even fatal consequences for patients, and collectively represent a significant unmet medical need. Our product candidates are focused on a subset of these monogenic diseases that we believe are particularly well-suited to our gene therapy platform and are designed to achieve sustained efficacy with low toxicity.

Our gene therapy product candidates and programs are designed to provide a functional copy of an abnormal or missing gene using the most advanced AAV-based vector delivery technology, which has been optimized to potentially offer durable clinical benefit to patients while minimizing risk. We have selected our gene therapy vectors to take advantage of the unique anatomic properties of the liver to maximize clinical benefit with simple peripheral intravenous infusion. AAV vectors have been studied in over 120 clinical trials that suggest an initial favorable safety profile with early signals of efficacy. We have made and continue to make significant investments in order to develop manufacturing processes designed to reliably produce higher purity AAV vectors at commercial scale with a greater percentage of AAV capsids containing a therapeutic vector genome than other manufacturing approaches. We believe that our manufacturing processes, methods and expertise will ultimately give us the most comprehensive manufacturing platform developed to date for AAV-based gene therapy product candidates.

In selecting our portfolio, we start with a deep understanding of disease biology. We partner with key disease experts who have developed robust models of the relevant diseases we believe will allow us to more reliably predict the right dosing for the right patient populations. Each of our programs has a clear biomarker associated with disease progression that allows for straightforward, early and ongoing assessment of potential durable clinical benefit throughout the development process. To execute on this opportunity, we have assembled a team of seasoned biopharmaceutical executives, scientific advisory council members and key partners with broad and deep expertise in all areas of global drug discovery, development, manufacturing and commercialization. Our goal is to become a fully integrated biotechnology company that is a leader in gene therapy for all populations and ages that suffer from rare, inherited metabolic diseases associated with the liver.

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Our pipeline of programs is described below.

 

 

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These data suggest prolonged stabilization of FIX expression levels and are comparable to results published by Nathwani et al in the New England Journal of Medicine (2011), where patients have had measurable levels of FIX for 3-5 years or more at last follow-up. All patients in both cohorts 1 and 2 improved from moderate/severe-to-severe to either moderate or mild range in terms of factor levels based on WFH criteria. In addition, none of the patients in cohort 2 have required prophylactic or on-demand recombinant FIX transfusion for spontaneous bleeds post-dosing. According to the WFH, people with FIX levels of 5-40% usually bleed only as a result of surgery or major injury, do not bleed often and, in fact, may never have a bleeding problem (World Federation of Hemophilia). Elevations in alanine aminotransferase (ALT) were observed in 5 of 6 patients with patient 3 in cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L). All elevated liver enzymes were clinically asymptomatic with no elevations of gamma-glutamyl transferase (GGT), alkaline phosphatase or bilirubin, and no patients experienced a drug related serious adverse event (SAE) as of the February 28, 2017 data cutoff. Two patients in each cohort received a standard tapering course of corticosteroids to treat mild, asymptomatic elevations in ALTs (52-98 IU/L), similar to findings from multiple studies using other AAV serotypes, including AAV8 and AAV9. The third patient in cohort 2 also received a standard tapering course of corticosteroids and was at 116 IU/L at 11 weeks post-dosing, following a peak ALT of 914 IU/L.

 

Asymptomatic transient elevations in liver enzymes observed in patients 1 and 2 from cohort 2 were associated with a mild T-cell response to the capsid, corresponding to elevations in liver enzymes and declines in FIX activity. Samples from the third patient in cohort 2 were subject to substantial analyses to characterize and determine the potential immunological basis for the subclinical ALT elevation. There is no evidence that the elevation was caused by a peripheral immune response to the capsid or transgene. We have ongoing studies to explore additional causes for the ALT elevation in this patient, including other immune and non-immune causes, and the role of a rare HLA genotype present in this patient.

We expect that cohort 2 will continue to receive a standard tapering course of corticosteroid therapy and as of the February 28, 2017 data cutoff, 2 of 3 patients’ ALT levels were in the normal range, defined as ALT ≤40 IU/L. Cohort 1 patients were all clinically stable and off steroids with ALT levels in the normal range. As required by the trial protocol, we have reported the ALT levels for patient 3 in cohort 2 to the Data Safety Monitoring Committee (DSMC), the U.S. Food and Drug Administration (FDA), and the appropriate regulatory authorities and remain in ongoing communications, and will await their feedback prior to initiating dosing of cohort 3. DTX101 has received orphan drug designation from U.S. Food and Drug Administration and the European Commission for the treatment of hemophilia B.

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Our Team

To execute on this opportunity, we have assembled a team of seasoned biopharmaceutical executives, scientific advisory council members and key partners with broad and deep expertise in all aspects of gene therapy, global drug discovery, development, manufacturing and commercialization. Our chief executive officer, Annalisa Jenkins, M.B.B.S., M.R.C.P., is a biopharmaceutical leader with nearly 20 years of experience at Merck Serono and Bristol-Myers Squibb in developing and commercializing novel and innovative products. Our other management team members have successful track records in developing, manufacturing and commercializing drugs across a wide range of therapeutic areas, including rare genetic diseases, through previous experiences at Genzyme, Sanofi, Shire, Novartis, Cubist and Nationwide Children’s Hospital. Our AAV technology is the product of over 25 years of research conducted at University of Pennsylvania School of Medicine by James M. Wilson, M.D., Ph.D., the chair of our scientific advisory council, and his colleagues. We believe our team’s combined expertise in gene therapy, global rare disease clinical development and market access provides an advantage over our competitors in developing and commercializing liver-directed gene therapies for patients suffering from severe rare diseases.

Our Mission

We are dedicated to bringing hope to patients and their families living with rare genetic diseases associated with the liver, including hemophilia, OTC deficiency, GSDIa, Wilson disease, PKU and citrullinemia type 1, through our commitment to scientific innovation. We plan to focus on advancing the science of gene therapy in an innovative, energetic and ethical manner, by building our corporate culture and strengthening our team and community.

Our Culture

At Dimension, we focus on developing and delivering novel gene therapy treatments that improve health and quality of life for patients with hemophilia and rare diseases associated with the liver. Our team is aligned by core values that guide everything that we do:

We seek to foster a collaborative environment of diverse, ethical, committed, and highly accomplished people. Together, we live the Dimension values as we continue advancing novel treatments for patients.

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Strategy

Our goal is to utilize our gene therapy platform to transform the lives of patients suffering from severe and chronic genetic disorders associated with the liver by developing, manufacturing and commercializing gene therapies that have the potential to offer a durable and meaningful therapeutic benefit. We select and design our gene therapy programs to accelerate the generation of human proof of concept. Our strategy leverages well-described animal models, relevant biomarkers and relatively small clinical trials appropriate for therapies targeting monogenic diseases associated with the liver. To achieve our goal, we are pursuing the following key strategies:

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Our Focus — The Liver as a Central Organ for Rare Diseases

The liver is a vital organ and plays an important role in human metabolism and other key physiologic functions. Hepatocytes, the most common type of liver cell, synthesize and metabolize a large number of proteins, including intracellular and secreted proteins responsible for a diverse range of critical functions in the body. These functions include carbohydrate use and storage, lipid metabolism and the control of bleeding, or hemostasis. In addition, the liver plays an important role in detoxifying naturally occurring metabolites such as ammonia and bilirubin. Numerous inherited metabolic disorders have their origin in the liver, and disruption of key metabolic pathways modulated by the liver can lead to the accumulation of toxic products and subsequent liver damage or to the inappropriate or insufficient production of key proteins for proper metabolic function, both of which can have a range of deleterious systemic effects. There are over 400 described rare monogenic disorders associated with the liver.

The liver also possesses unique anatomic properties that we believe make it a preferred target for AAV-based gene therapy. The cells lining the blood vessels that supply blood to the liver have a unique characteristic in that they contain small pores known as fenestrae, as shown in the figure below. Fenestrae facilitate the rapid exchange of molecules between the blood vessels and hepatocytes and enable an open communication between the hepatocytes and the vasculature. However, they can also act as a sieve and mechanically restrict or prevent the transport of larger molecules to the liver. AAV-mediated gene transfer takes advantage of this unique feature of the liver and has an ideal size to penetrate the fenestrae to access hepatocytes, which are the target cells for our gene therapy programs and product candidates.

 

The ideal goal of treatment for liver-associated monogenic diseases, including inherited metabolic disorders, is to revert a harmful or disease-causing genetic trait to its normal state. Substantial progress has been made over the past six decades, beginning with the first report of dietary control of phenylketonuria in the early 1950s. Examples of treatments for monogenic diseases include

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dietary prescriptions, pharmacologic interventions to allow alternative pathway excretion of toxic metabolites, oral replacement of enzymatic cofactors and use of chelation to enhance excretion. Monogenic disorders caused by enzyme deficiency or dysfunction can be treated with enzyme replacement therapy, or ERT, if the enzyme can effectively reach its intended organ or cell of interest. However, many of these approaches are inadequate for liver-associated diseases due to the liver’s unique anatomic properties.

In a fully developed liver, under normal conditions, less than approximately 1% to 2% of hepatocytes are turning over at any given time while the rest remain in a quiet or resting state. In addition, turnover of mature hepatocytes occurs relatively slowly with the average life span of non-resting hepatocytes ranging from 200 to 300 days. Given the relative lack of hepatocyte turnover, we believe a gene therapy administered to these cells will experience minimal dilution effects due to new hepatocyte generation. In the Nathwani study, published in the New England Journal of Medicine, hemophilia B patients are experiencing durable FIX expression and clinical benefit beyond 4-6 years.

Our product candidates are focused on well-understood monogenic diseases associated with the liver that we believe are particularly well-suited to our gene therapy platform and are designed to achieve sustained efficacy with low toxicity. We target diseases with readily identifiable patient populations that allow us to pursue orphan drug designation for our product candidates, which we have obtained for DTX101 for the treatment of hemophilia B. Our initial focus is on diseases where restoration to 5% to 10% of normal activity should offer meaningful clinical benefit. In addition, the nature of these diseases permits us to leverage well-described, and often clinically validated, biomarkers and highly predictive preclinical models to shorten time to clinical proof of concept.

A biomarker is a characteristic that is objectively measured and evaluated as an indicator of normal biologic processes, pathogenic processes or pharmacologic responses to a therapeutic intervention. Because gene therapy aims to revert an abnormal genetic trait to the normal state, we can use well-understood biomarkers of each disorder we target to inform dose selection, evaluate each of our product candidate’s therapeutic efficacy, and serve as a surrogate for an early signal of clinical efficacy.

We believe our focus on the unique properties of the liver provides efficiencies as we select and pursue additional diseases associated with the liver. In addition, we will apply learnings from our near-term programs to future opportunities, which we believe will allow for rapid understanding and efficient drug development. We believe this will enable us to not only apply our gene therapy technology across multiple severe, genetic diseases today, but across many inherited metabolic diseases associated the liver we have not yet selected.

Gene Therapy

Genes are composed of sequences of deoxyribonucleic acid, or DNA, which code for proteins that perform a broad range of physiologic functions within all living organisms. Genes are passed on from generation to generation and genetic changes, also known as mutations, can occur. These changes can result in the lack of production of proteins or production of altered proteins with reduced or abnormal function, which can in turn result in disease.

Gene therapy is a therapeutic approach in which an isolated gene sequence or segment of DNA is administered to a patient, most commonly for the purpose of treating a genetic disease that is caused by mutations. Currently available therapies for genetic diseases focus on administration of large proteins or enzymes and typically address only the symptoms of the disease. Gene therapy aims to address the disease-causing effects of absent or dysfunctional genes by delivering functional copies of the gene to the patient’s cells, offering the potential for durable therapeutic benefit.

For the development of our gene therapy treatments, we are using a modified non-pathogenic virus. All of the viral genes are removed from the virus and replaced with a functional form of the applicable mutant gene that is the cause of the patient’s genetic disease. The functional form of a mutant gene is called a therapeutic gene, or transgene. Once a virus is modified by replacement of the viral genes with a transgene, it is called a viral vector. The viral vector delivers the transgene to the target organ, in our case the liver. We have based our viral vectors on a type of virus called AAV, where the resulting vector is called an AAV vector.

Over the past two decades, gene therapy has evolved from a research-focused tool into a therapeutic modality that we believe is poised to provide broad clinical benefit. A growing body of clinical data supports the development of efficacious and well-tolerated gene therapies for a variety of diseases. In addition, there have been advancements in vector design and manufacturing processes, and regulatory guidelines have been established for the development of a gene therapy product. These key developments support the potential for gene therapy to emerge as an important new therapeutic modality for patients with significant unmet medical needs.

Gene therapy has historically faced a number of significant challenges, mostly related to three key factors that drive the viability of a potential gene therapy product: efficacy, durability and safety. The efficacy of a gene therapy product is measured by its ability to introduce a gene of interest into target cells at a frequency sufficient to achieve expression of the desired protein at a level that results

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in a clinically meaningful therapeutic benefit. The durability of a gene therapy product is measured by the period of time over which the therapy is effective. Safety is evaluated based on the nature and severity of any side effects, complications, conditions or diseases that may result from introducing the gene therapy products. Prior gene therapy efforts have struggled to achieve sufficient durability and efficacy while maintaining adequate safety. In addition to these factors, another key challenge faced by the gene therapy industry is a relative lack of manufacturing infrastructure and expertise that would enable the production of these therapies in a reliable and reproducible manner and at a commercially viable scale.

We believe that our approach to gene therapy meaningfully addresses each of these key issues. AAV vectors, the viral vectors we have chosen as the foundation of our platform, may offer improved efficacy, durability and tolerability over other vectors used historically, which in some cases raised serious safety concerns. While we continue to believe AAV vectors offer improved durability over other vectors, in our Phase 1/2 clinical trial for DTX101, laboratory elevations in alanine aminotransferase (ALT) were observed in 5 of 6 patients with patient 3 in cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L) prior to the January 28, 2017 data cutoff. All elevated liver enzymes were clinically asymptomatic with no elevations of gamma-glutamyl transferase (GGT), alkaline phosphatase or bilirubin, and no patients experienced a drug related serious adverse event (SAE) as of the February 28, 2017 data cutoff. We have designed our transgenes to achieve targeted expression levels in our organ of choice, the liver, in an effort to improve safety and efficacy. Additionally, we have developed proprietary mammalian cell-based vector manufacturing processes and techniques that may produce an end product that is purer and more concentrated than comparable vectors for preclinical and clinical use. Further, we are investing heavily in developing internal process development capabilities and expertise to ensure that our programs and product candidates, if approved, will be able to be produced reliably and reproducibly at commercial scale.

Our Gene Therapy Technology and Industrialized Manufacturing Approach

Gene Therapy Technology

We engineer our AAV vectors to target hepatocytes and to produce the required therapeutic protein within the liver. To achieve this goal, our gene therapy approach consists of two key components:

 

Liver-Optimized Therapeutic Vector Genome

We design our gene therapy vectors to deliver into hepatocytes a transgene that encodes the expression of the missing or dysfunctional protein. The transgene is part of a vector genome, which contains the therapeutic gene copy and DNA promoter sequences that trigger the expression of the transgene in specific tissues. As part of our candidate selection process, we typically evaluate a variety of liver specific promoters in order to select those that drive robust liver-specific gene expression.

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AAV-Based Vector Delivery System

Over the past two decades researchers have learned that the success of gene therapy is highly dependent on the vector selected. We believe that AAV vectors are particularly well-suited for treating genetic diseases associated with the liver and have advantages over other viral vectors, such as adenovirus, herpes virus and lentivirus. These advantages include tolerability, durable expression, targeting of the liver, simplicity, stability and carrying capacity, as described below:

Research conducted by others has demonstrated that Clade E vectors AAV9 and AAV8 have higher liver transduction versus AAV5 and AAV6, which are not members of the Clade E family. The figure below shows the expression of luciferase, a light-generating enzyme, in certain organs after mouse tail vein injections of various AAV vectors developed by others containing the luciferase gene.

 

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We have also demonstrated similar results in mice with DTX101 using the AAVrh10 capsid serotype carrying a codon-optimized wild-type FIX gene. The figure below highlights the number of genome copies transduced in various mouse organs following injection with AAVrh10.

 

The diseases we have chosen to target with our initial product candidates and expanding pipeline represent just the beginning of what we believe will be successful application of our platform technology. Based on our analysis of opportunities for AAV gene therapy in the liver, we believe there are multiple indications for which the technical challenges are greater but for which the unmet need is greater as well. For example, these include diseases for which transduction efficiencies or expression levels may need to be higher than those we are targeting in our initial indications or further reductions in non-liver gene transfer might be needed. We intend to invest in and optimize our technology in order to address diseases that fall outside our initial target list.

Our Industrialized Manufacturing Approach

We have made and continue to make significant investments in order to develop manufacturing processes designed to allow us to reliably produce high quality AAV vectors at commercial scale if one or more of our product candidates is approved. We have developed a robust scientific platform that brings together deep expertise in rare genetic diseases, liver biology, AAV gene therapy, pharmaceutical development, and mammalian vector manufacturing. We believe our continued development of our manufacturing processes, methods and expertise will yield the most comprehensive and leading manufacturing platform developed to date, including our next generation HeLa 2.0 platform, for AAV-based gene therapy product candidates, this includes:

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Our Process

We have made significant investments, including expansion of our internal research and process development capabilities in Woburn, MA, in developing our proprietary process for manufacturing our AAV product candidates so that in each process step we can seek to maximize scalability, reliability and quality. We refer to the cell-based AAV vector assembly as the “upstream” portion of the manufacturing process. Once the AAV vector is assembled, it is subjected to purification steps, which we refer to as the “downstream” portion of the process. The following figure illustrates the steps in our process:

 

We use mammalian cells in our manufacturing approach for our AAV-based product candidates. In nature, AAV has evolved to grow and function most effectively in mammalian cells, and we believe using this setting in our manufacturing processes contributes to optimal capsid assembly, activity and genome packaging.

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Our AAV manufacturing is currently performed in three mammalian cell types, human embryonic kidney 293 cells, or HEK293 adherent cells, HEK293 suspension cells, and HeLa cells. Each of these manufacturing systems has specific advantages and is well-established for the manufacture of gene therapy vectors on small scales. Adherent and suspension HEK293 cells are straightforward to grow and transfect readily, and as a result, are used widely in the biotechnology industry to produce therapeutic proteins and viral vectors for gene therapy on a small scale. Vectors produced using HEK293 cells have been, or are being, used safely in multiple clinical trials, including trials conducted in the United States and the European Union by other biopharmaceutical companies and academic and government institutions. A key advantage of the HEK293 cell manufacturing system is flexibility and the relative speed with which AAV vectors can be manufactured for early Phase 1/2 clinical trials, allowing the establishment of early indications of therapeutic benefit in patients. Because of these reasons and the strong safety record of the HEK293 cell platform, we chose the HEK293 gene therapy manufacturing platform for the Phase 1/2 clinical trials of our initial internal clinical programs, DTX101, DTX301, and DTX401.

 

We have successfully transferred our entire HEK293 DTX101 and DTX301 manufacturing processes to a CMO, where they are currently being used to manufacture clinical materials pursuant to FDA’s current good manufacturing practices, or cGMP, requirements. Since the beginning of 2015, our CMO has successfully completed eight cGMP drug substance batches and three drug product batches of DTX101, and two cGMP drug substance batches and two drug product batches of DTX301. We are similarly undertaking manufacturing technology transfer with a CMO on DTX401 to supply material, HEK293 suspension, for our IND-enabling studies and subsequently for Phase 1/2 clinical trials.

Despite several beneficial characteristics, the adherent HEK293 process has limitations with respect to manufacturing at the scale required for Phase 3 clinical trials and commercial sale. These scaling limitations relate to the adherent nature of HEK293 cells, thus we are also utilizing the suspension HEK293 platform that we believe is designed to offer greater flexibility and scalability for Phase 1/2. In addition, there is a requirement to introduce multiple plasmid DNA components into HEK293 cells for each manufacturing run, additional steps that bring added risk and possible process variability that can be avoided with other production systems.

Given the limitations regarding the HEK293 adherent and suspension platform, we have elected to develop an additional upstream manufacturing platform with benefits related to scalability, quality and reliability, and that we believe is better suited for commercial scale. We believe the HeLa producer cell system we are developing, including our next generation HeLa 2.0 platform, is unique among AAV vector manufacturing platforms in that it uses a clonal cell platform. This HeLa clonal producer cell system is analogous to many standard and widely used recombinant protein and antibody manufacturing techniques in that a product-specific master cell bank is generated. By using a single cloned cell as the basis for a manufacturing process, we can select a clone with ideal attributes for production, including high vector yield and quality. In addition, the system does not require animal-derived products, which can be a limiting factor in process quality. Importantly, a similar or the same downstream purification steps that we have developed and optimized for the HEK293 cell platform can be used for our HeLa platform with minimal modification. This further enhances the scalability of the HeLa platform given the downstream processes employed in HeLa-based AAV vector manufacturing involve operations that are consistent with well-understood and widely used manufacturing processes used to make biologic and antibody drug therapies.

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In the downstream portion of the process, the AAV vector is subjected to rigorous purification steps for enrichment of the desired AAV vector and removal of contaminants. Key contaminants include DNA, proteins and incorrectly assembled AAV capsids that lack the proper capsid proteins or the AAV vector genome. AAV capsids that contain a therapeutic vector genome are referred to as full capsids and represent the active component of the overall AAV vector preparation. AAV capsids that lack a genome are referred to as empty capsids and are not therapeutically active.

A significant challenge in the manufacturing of AAV vectors is the inability to reliably produce high levels of full AAV vectors, which include all capsid proteins in the right configuration and a functional copy of the desired gene to be delivered. We believe it is critical to manufacture AAV vectors for clinical use that are as free from empty capsids as possible to reduce potential inflammatory and immune responses in patients and to minimize dose-limiting side effects, like elevated liver enzymes. Historically, AAV vector preparations, including some used in clinical trials, contain as little as and sometimes less than 10% full capsids. As compared to other manufacturing platforms, our HeLa clonal cell system and downstream purification processes are designed to enable us to routinely produce higher purity AAV vector products enriched for a substantially greater proportion of full versus empty capsids at clinical and commercial scales.

Our Plans for Clinical and Commercial Scale-Up

As we advance and scale up our processes for Phase 3 clinical and commercial scale manufacturing, we intend to transition from the HEK293 cell manufacturing scale used for our DTX101, DTX301 and DTX401 Phase 1/2 programs to a high volume HeLa cell-based suspension bioreactor format. We are currently using the HeLa platform for DTX201, our Hem A program partnered with Bayer, and plan to use the HeLa platform for the remaining programs, DTX501, DTX701, and DTX601. We significantly progressed the HeLa mammalian cell-based suspension platform for DTX201, locking the lab scale manufacturing process, successfully transferring the upstream process and initiating tech transfer for clinical supply at GMP scale at our CMO. We continue to build our internal capabilities to control and advance process development, routinely achieving 250 liter bioreactor scale with our HEK293 and HeLa suspension platforms at our Woburn facility. By leveraging our deep manufacturing expertise to address the complexities of process scale-up and ensure robust process development in viral manufacturing, we believe we will have the most comprehensive and leading manufacturing platform developed to date, including our next generation HeLa 2.0 platform, for AAV-based gene therapy product candidates.. This approach will also offer meaningful opportunities to generate unique know-how and enable generation of new intellectual property. We are partnering with CMOs for clinical and commercial scale production, which typically occurs at 1,000 to 2,000 liter scale. We believe that by focusing on internal process development from vector engineering through the 250-liter pilot scale, we can optimize the robustness of future process transfers to these organizations while maximally controlling our intellectual property.

 

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In connection with our transition from the HEK293 cell upstream platform to the HeLa cell upstream platform for the DTX101, DTX301, DTX401, and potentially other programs, we expect that FDA and the EMA will require us to assess the comparability of products produced in HEK293 cells against those produced in HeLa cells. Taking into account standard regulatory guidance on product comparability, we intend to assess comparability through validated analytical processes, in safety and efficacy animal studies, or, if necessary, by dosing a small number of patients at similar doses. We do not believe additional clinical testing, if we determine it is necessary, would significantly change our product development timelines.

We believe that the numerous benefits of our mammalian cell-based production technology, together with our team’s core competency and expertise in vector manufacturing, provide us with a significant competitive differentiation relative to our potential competitors and serve as a key aspect of our overall gene therapy portfolio.

Our Product Pipeline

DTX301

DTX301 consists of a Clade E AAV8 capsid containing an OTC gene, which is designed to preferentially express human OTC in the liver for the treatment of symptomatic patients with late-onset OTC deficiency. In November 2016, we submitted an IND for DTX301 with FDA, and in December 2016, we received notification allowing us to proceed with our Phase 1/2 open-label clinical trial of DTX301 and initiated the clinical trial. We have two sites open and expect to disclose initial data from our Phase 1/2 open-label clinical trial in the second half of 2017. In June 2016, our Phase 1/2 clinical trial protocol for DTX301 received unanimous approval by the National Institutes of Health's Recombinant DNA Advisory Committee (RAC). In addition, DTX301 was granted Orphan Drug Designation in the United States and Europe in January and March 2016, respectively. To evaluate therapeutic response of DTX301, we plan to measure ammonia levels and other biomarkers, including ¹³C-acetate, which are established measures of OTC deficiency disease status and hepatocyte (liver) ureagenesis capacity, respectively.

OTC Deficiency Overview

OTC is part of the urea cycle, an enzymatic pathway in the liver that converts excess nitrogen, in the form of ammonia, to urea for excretion. OTC deficiency is the most common urea cycle disorder and leads to increased levels of ammonia and irreversible neurocognitive damage if treatment is not initiated early during a metabolic crisis. Long-term elevations in ammonia put patients at risk for additional morbidities including seizures, learning disabilities, and speech disorders. The prevalence of OTC deficiency is estimated to be approximately 3,400 patients in the United States and approximately 10,000 patients worldwide, of which we estimate approximately 80% are classified as late-onset, our target population.

The gene that codes for OTC is X-linked and therefore the majority of patients with severe deficiency are male. Infants with early-onset OTC deficiency initially appear normal but with onset of metabolic crisis rapidly develop cerebral edema and the related signs of lethargy, anorexia, hyperventilation or hypoventilation, hypothermia, seizures, neurologic posturing, coma and death. As a result of the high mortality rate of neonatal OTC deficiency, the majority of patients have late-onset disease, which presents in patients beyond 30 days after birth. In late-onset OTC deficiency, ammonia accumulation may be triggered by illness or stress at almost any time in life, resulting in multiple mild to severe elevations of ammonia concentration and long-term neurocognitive and executive function changes.

The current treatments for patients with OTC deficiency are nitrogen scavenging drugs and severe limitations in dietary protein. Drug therapy includes sodium phenylbutyrate (Buphenyl) and glycerol phenylbutyrate (Ravicti), both nitrogen scavengers that help eliminate excess nitrogen, in the form of ammonia, by facilitating its excretion. During a metabolic crisis, patients routinely receive carbohydrate and lipid rich nutrition, including overnight feeding through a nasogastric tube, to limit bodily protein breakdown and ammonia production. In acute cases, ammonia must be removed by dialysis or hemofiltration.

While liver transplant may be a solution for OTC deficiency and other urea cycle disorders, a transplant carries significant risk, such as those associated with surgery and the requirement for long-term immunosuppression. Between 2002 and 2012, there were 186 liver transplants reported in children with urea cycle disorders. While the overall survival of these children was high, younger children fared worse than older children due to the complex nature of the surgical procedure and challenges arising from long-term immunosuppressive agents to prevent graft rejection. Long-term complications of liver transplants related to the regime of immunosuppressive medications include increased rates of infections, malignancy, and kidney toxicity. This has led to revised guidance to delay transplants in cases where patients may be sufficiently managed with diet and drug therapy. In patients where liver transplant is indicated, patients often die while waiting for transplant.

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Our Solution — DTX301

DTX301 is a gene therapy product candidate consisting of an AAV8 vector designed to preferentially express human OTC in the liver. We intend to develop DTX301 for the treatment of patients with moderate to severe OTC deficiency. In OTC deficiency, the enzyme deficiency and ammonia production occurs within liver hepatocytes. Significant reductions in overall ammonia levels can favorably impact disease symptoms, which can be achieved through the expression of as little as 3% of normal OTC activity. In November 2016, we submitted an IND for DTX301 with FDA, and in December 2016, we received notification allowing us to proceed with our Phase 1/2 open-label clinical trial of DTX301 and initiated the clinical trial. We have two sites open and expect to disclose initial data from our Phase 1/2 open-label clinical trial in the second half of 2017. In June 2016, our Phase 1/2 clinical trial protocol for DTX301 received unanimous approval by the National Institutes of Health's Recombinant DNA Advisory Committee (RAC). In addition, DTX301 was granted Orphan Drug Designation in the United States and Europe in January and March 2016, respectively. To evaluate therapeutic response of DTX301, we plan to measure ammonia levels and other biomarkers, including ¹³C-acetate, which are established measures of OTC deficiency disease status and hepatocyte (liver) ureagenesis capacity, respectively.

The hepatic (liver) urea cycle is the main metabolic pathway for the removal of ammonia that originates from the breakdown of proteins and amino acids. Six sequential enzymatic steps and two membrane transporters mediate the conversion of ammonia into urea that is excreted in the urine. Measuring flux through the urea cycle was historically challenging with traditional clinical or biochemical assays and in vitro analysis of OTC enzyme activity requires a liver biopsy potentially failing to accurately capture in liver metabolism. Instead, other approaches using non-radioactive stable or heavy isotopes such as ¹³C-acetate have been successfully developed to monitor the performance of the urea cycle. ¹³C-labeled precursors also have an advantage over other metabolites as no further ammonium salt is administered to potentially sensitive UCD patients. Determination of ¹³C-urea levels are assessed with mass spectrometry. Published academic studies of single case reports or small series have shown that this approach is potentially able to detect even small amounts of urea produced from the pathway, which is related to the amount of flux through the urea cycle. This includes early and late onset OTC deficiency, the broader UCD patient population, as well as in patients with other metabolic disorders, such as propionic academia. This methodology could offer an option to estimate changes in ureagenesis in response to novel interventions such as gene therapy and the delivery of DTX301.

The ability of DTX301 to direct durable expression of functional OTC was assessed in a mouse model of moderate OTC deficiency, the spf ash OTC mouse, that included three to five animals per group. In this study, DTX301 resulted in stable expression and activity of OTC and normalization of levels of urinary orotic acid, an easy-to-measure marker of ammonia production. These effects were also consistent for 40 weeks following treatment with a single intravenous infusion of DTX301 at 1×10 ¹⁰ GC or higher. The figure below illustrates normalization of urinary orotic acid in the weeks after administration of DTX301.

 

In a different study with DTX301 and one other vector, in collaboration with Dr. Wilson and colleagues, we also demonstrated a positive impact on survival with these vectors delivered to the livers of neonate OTC knockout mice. The study, shown in the below figure, investigated the relationship between therapeutic response and survival by testing different numbers of treatments in a mouse

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model where no OTC is present, or a knockout model. In this model, newborn untreated mice die within 24 hours, which is analogous to the early onset, severe human form of OTC deficiency. A single administration of DTX301 increased survival for up to 42 days. A second group of mice received a second administration of another vector at four weeks, which resulted in 40% of the mice surviving for at least one year. Dr. Wilson and colleagues later re-administered DTX301 to a third group of mice, which resulted in more than 60% survival for approximately 18 months.

 

Today, repeat administration of identical AAV vectors is often not possible in humans because of the development of neutralizing antibodies, immune system elements that render the vectors less effective or ineffective. We expect to focus initially on late-onset patients who represent the majority of cases of OTC deficiency as well as older patients who had previously been diagnosed with early onset disease in the hope of achieving durable benefit from a single administration.

Given that the data demonstrate rescue of a severe OTC deficient phenotype in mice, we believe AAV8 OTC can offer meaningful long-term clinical benefit to patients with late-onset disease. In a subsequent research program, we plan to further explore the potential utility of AAV8 OTC gene therapy in neonates, including the opportunity for re-dosing.

We plan to collaborate with the Urea Cycle Disorders Consortium, or the Consortium, for our work on OTC deficiency. The Consortium is a group of clinicians, nurses, and researchers in the United States focused on improving the lives of patients with OTC deficiency and other urea cycle disorders. The Consortium has established centers of clinical and scientific excellence across the United States and Europe and has established one of the largest national registries for patients with urea cycle disorders, including patients with OTC deficiency. The recent head of the Consortium, Mark Batshaw, M.D., serves as a clinical advisor on and chairman of our clinical advisory board for urea cycle disorders, participating with the current head of the Consortium, Mendel Tuchman, M.D., and our Chief Medical Officer, Eric Crombez, M.D., was an original member of the Consortium. Other than our clinical advisor agreement with Dr. Batshaw, we have no written or oral agreements governing our DTX301 collaborations. Our collaboration with the Consortium is informal and neither we nor the Consortium have any contractual obligation to continue working together.

DTX401

DTX401 consists of an AAV vector designed to preferentially express human G6Pase in the liver for the treatment of severe or uncontrolled cases of GSDIa. GSDIa is the most common glycogen storage disease and we estimate there are approximately 6,000 patients worldwide. We initiated IND-enabling activities in 2016 to support an IND filing for DTX401 by the end of 2017. In addition, DTX401 was granted Orphan Drug Designation in the United States and Europe in October and November 2016, respectively. To evaluate the therapeutic response to DTX401, we plan to measure fasting glucose, which is a well-established measure of GSDIa disease status.

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GSDIa Overview

GSDIa is an autosomal recessive inherited metabolic disorder in which a defect or deficiency in G6Pase prevents the formation and breakdown of glycogen, normally a key energy store required to maintain normal blood glucose levels. In GSDIa, the inability of patients to regulate glucose levels leads to hypoglycemia, or low glucose, and lactic acidemia, or high levels of lactic acid, during fasting. Patients are currently managed through a strict diet and frequent feedings that include overnight administration of uncooked cornstarch or a medical food called Glycosade, a slow release carbohydrate product. Delivery of both involves frequent oral administration or via a feeding or a nasogastric tube, the latter of which can also become disconnected or blocked during use. Any disruption in carbohydrate delivery may lead to low blood sugar levels, which can cause life-threatening results including coma and death. GSDIa patients also face chronic, long-term risks such as growth impairment, neuropathy, kidney stones and hepatocellular adenomas, growths that develop in 70% to 80% of patients over 25 years of age. Of those that develop hepatocellular adenomas, approximately 10% transform into life-threatening hepatocellular carcinoma. There are approximately 6,000 cases of GSDIa worldwide. Similar to OTC deficiency, a liver transplant is a potential solution for GSDIa, but bears significant short- and long-term risk, such as those associated with surgery and the requirement for long-term immunosuppression.

Our Solution — DTX401

DTX401 is an AAV gene therapy program that will use an AAV vector designed to preferentially express human G6Pase in the liver. We intend to initially focus our DTX401 clinical development program on adult or young adult patients with uncontrolled or poorly managed disease at risk for acute hypoglycemia. We expect to further our work in this area in collaboration with the Eunice Kennedy Shriver National Institute of Child Health and Human Development, or NICHD, an institute of the U.S. National Institutes of Health, through a cooperative research and development agreement, or CRADA, we have entered into and with David Weinstein, M.D., M.M.Sc., of the University of Florida in his role as a clinical advisor on and chairman of our clinical advisory board for GSD1a. In addition, we intend to work collaboratively with patient organizations, including The Children’s Fund for Glycogen Storage Disease Research. Other than our CRADA with the NICHD and our clinical advisor agreement with Dr. Weinstein, we have no written or oral agreements governing our DTX401 collaborations. We expect to evaluate the need for formal or informal arrangements on a case by case basis, but there is no legally binding continuing obligation to do any of the foregoing.

In a canine model of GSDIa that originated from a naturally occurring Maltese dog colony, neonatal administration of an AAV8 vector developed by others containing the G6Pase gene resulted in transient improvement in glucose and a reduction in blood levels of lactic acid as described by Dr. Weinstein and colleagues in 2010 in a peer reviewed article in the journal Human Gene Therapy. The effects of treatment seen in this study diminished by 4 weeks of age as the percent of cells expressing G6Pase decreased as new liver hepatocytes were created, because AAV vectors do not replicate in cells and the vector genomes are lost during rapid liver growth in the neonate period.

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In order to understand the efficacy of AAV administration after the liver has already grown closer to its adult size, Dr. Weinstein and colleagues delivered the G6Pase gene a second time with a different viral capsid serotype. An AAV1 capsid serotype was used to avoid potential inhibition from neutralizing antibodies that may have been elicited from the first dose of AAV8 vector. Addition of the second vector resulted in higher levels of G6Pase activity and at 11 months, the dog that had been treated twice remained healthy and able to be maintained without any supplemental glucose or carbohydrates. In addition, at this time point absolute hepatic G6Pase activity, which is required to maintain blood glucose levels, was 6.3% of normal levels. These data suggest that approximately 6% of wild-type activity provides a critical threshold for glucose metabolism and liver histology in this animal model. The figure below shows G6Pase activity following administration of the AAV8 vector and following redosing with the AAV1 vector, compared against the G6Pase activity in an untreated normal wild-type dog, an untreated heterozygous dog and an untreated dog with GSD1a. In unpublished studies, Dr. Weinstein and colleagues dosed an additional six dogs under a variety of treatment paradigms with AAV8 and other vectors, all of which have experienced improved survival for at least three years after dosing, with the oldest still alive after approximately eight years. Without treatment, the dogs would have had an expected survival period of four weeks.

 

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Development of hepatic adenomas, and subsequent hepatic carcinomas, is dependent on increased storage of glycogen in the livers of GSDIa patients, suggesting a durable benefit when these build ups can be reduced or eliminated. In this same study, gene therapy delivery of the G6Pase gene reduced glycogen stores in the liver of the GSDIa canine. Five months after delivery of the AAV8 vector, the glycogen peak was 56% less than that in the animal that did not receive gene therapy. Six months after being redosed with the AAV1 vector, levels of hepatic glycogen were further reduced to 26% of the levels in the untreated dog. The figure below shows the levels of glycogen stores in the heterozygous dog, the normal wild-type dog and the dog with untreated GSDIa, in contrast to those of the gene therapy-treated dog 20 weeks after administration of the AAV8 vector and six months after the redosing with the AAV1 vector.

 

Preclinical experiments performed by Janice Chou, Ph.D., and colleagues at the NICHD in a mouse model of GSDIa indicate that AAV encoded G6Pase, at levels of activity between 3% and 6%, can restore normal glucose metabolism under fasting conditions and prevent the formation of hepatic adenomas under fasting conditions. The fasting blood glucose profiles of AAV treated knockout mice with low (n=6), medium (n=9) or high (n=5) hepatic G6Pase activity paralleled those of wild-type control mice, although mice with low expression generally had lower blood glucose. In contrast, untreated knockout mice exhibited hypoglycemia within 60-75 minutes, an important hallmark of GSDIa in humans.

Thus, we believe that patients with GSDIa who are successfully treated with a G6Pase gene therapy can avoid both the acute and longer-term complications associated with abnormal glycogen metabolism.

 

DTX101

DTX101 consists of an AAV vector that uses the AAVrh10 capsid serotype and a codon-optimized FIX gene, which has been designed to preferentially transduce liver cells and express human FIX at therapeutic levels for the treatment of adults with

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moderate/severe to severe hemophilia B. We completed cohort 1 and cohort 2 dosing in our Phase 1/2 open-label clinical trial in adults with moderate/severe to severe hemophilia B and disclosed interim topline data from our Phase 1/2 clinical trial in January 2017 and are providing a data update on cohorts 1 and 2 as of February 28, 2017. DTX101 has received orphan drug designation from U.S. Food and Drug Administration and the European Commission for the treatment of hemophilia B, and fast track designation from FDA in September 2015.

Hemophilia B Overview

Hemophilia B is a rare, genetic bleeding disorder with X-linked inheritance mostly affecting male adults and children that results from a deficiency of FIX protein. In 2013, the World Federation of Hemophilia estimated there were approximately 28,000 hemophilia B patients worldwide, including approximately 4,000 in the United States.

Approximately half of hemophilia B cases are classified as severe based on levels of FIX activity that are less than 1% of normal. Disease severity is determined by circulating levels of FIX, with mild hemophilia B classified as a level of FIX in the blood greater than or equal to 5% of normal but less than 50% of normal. Patients with mild hemophilia B typically experience bleeding only after serious injury, trauma or surgery. Moderate disease is classified as FIX levels in the blood that are equal to or greater than 1% of normal but less than 5% of normal. These patients may have bleeds following trauma, or may have spontaneous bleeding episodes, but these will occur less frequently than in those with severe hemophilia B. Severe hemophilia B is classified as a level of FIX in the blood of less than 1% of normal. Patients with severe disease experience frequent spontaneous bleeding episodes, often into their joints and muscles, which can lead to edema, inflammation and debilitating pain.

The current standard of care for patients with hemophilia B involves chronic replacement of FIX protein through intravenous infusions. Exogenous FIX protein is administered both as prophylaxis as well as during acute bleeding episodes. While this factor was originally derived from plasma collected from healthy donors, FIX is routinely produced by recombinant methods. Before appropriate processing and testing of plasma was in place, many hemophilia patients developed HIV, hepatitis B or hepatitis C infections. While plasma-derived products have been free of the viruses that cause these infections for many years, there remain concerns for a potential risk of transmission of blood borne diseases. A number of virus-free FIX products made by recombinant methods have been approved by regulatory agencies and in the United States only approximately 20% of FIX comes from plasma, while in some other countries 100% is derived from plasma. The worldwide market for hemophilia B products is approximately $1.2 billion and sales of the leading product in this class, BeneFix from Pfizer, were $856 million in 2014. While considered effective, FIX protein replacement therapies are invasive, inconvenient, and not curative. In addition, annual cost per patient is between $100,000 and $300,000.

Until recently, hemophilia B therapy required intravenous infusions of FIX protein every two to three days. In March 2014, newer recombinant FIX products such as ALPROLIX from Biogen were approved that extend the treatment interval to seven to ten days. While this represents an improvement in convenience, it does not remedy key drawbacks of replacement therapy resulting from peak and trough levels of circulating FIX. We believe that treatment of hemophilia B with gene therapy addresses these issues. In particular, given its potential to provide constant levels of FIX, we believe a FIX gene therapy product will decrease the incidence of spontaneous bleeds, joint bleeds and the long-term damage resulting from them and therefore increase quality of life.

Our Solution — DTX101

DTX101 is a gene therapy product candidate designed to treat patients with hemophilia B in a durable fashion, possibly on the basis of a single infusion. We believe our research and development approach to DTX101 for hemophilia B is differentiated from other programs based on the combination of our choice of AAV capsid serotype, selected transgene and robust manufacturing process.

DTX101 utilizes the AAV capsid serotype AAVrh10 to deliver codon-optimized wild-type FIX preferentially to the liver. DTX101 contains a gene that has been optimized for expression of wild-type FIX protein and incorporates the gene into a conventional single-stranded vector genome architecture that includes a liver-specific promoter. We completed cohort 1 and cohort 2 dosing in our Phase 1/2 open-label clinical trial in adults with moderate/severe to severe hemophilia B and disclosed interim topline data from our Phase 1/2 clinical trial in January 2017. DTX101 has received orphan drug designation from U.S. Food and Drug Administration and the European Commission for the treatment of hemophilia B, and fast track designation from FDA in September 2015.

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Selection of Transgene

An advantage of a gene therapy for extracellular factors such as FIX is that the overall level of the protein in circulation is more important than the amount of protein synthesized by individual cells. Therefore, we believe it is possible to develop effective therapies based on several different properties of gene therapy vectors and vector genomes, including: engineering vectors to achieve highly efficient transduction of host cells; adding alternate cell-type-specific promoters in the vectors to increase the expression of the gene in the host cells; and engineering vector genomes, in this case the codon optimization of the FIX gene, to enhance expression of the therapeutic protein once it is produced by the host cells.

Previous AAV-directed gene therapy efforts have resulted in poor or inconsistent levels of gene transduction and low levels of FIX expression. Consequently, some have decided to use a mutant version of FIX protein called the Padua variant that has six- to eight-fold higher activity than normal FIX. This is a way to compensate for low liver transduction efficiency and a lower percentage of full capsids. However, the higher activity of the Padua FIX variant potentially puts patients at risk for hyper-coagulation, or blood clot development that may increase regulatory questions during clinical development. DTX101 incorporates a gene that expresses the normal sequence of FIX versus a mutant or foreign FIX and is designed to avoid exposing patients to the potential risks associated with long-term exposure to an altered gene product, including immune responses.

Clinical Trials

In January 2016, we initiated a Phase 1/2 open-label clinical trial of DTX101 in adult males with moderate/severe to severe hemophilia B (baseline FIX activity ≤2% of normal or documented history of FIX activity ≤2%). One goal of the study is to identify the dose needed to achieve durable factor levels that will have a clinically significant effect on the number of bleeding episodes. We are using a Bayesian statistical design that will offer the opportunity for dose escalation based upon the sequential accumulation of data. We completed cohort 1 and cohort 2 dosing in our Phase 1/2 open-label clinical trial in adults with moderate/severe to severe hemophilia B and disclosed interim topline data from our Phase 1/2 clinical trial in January 2017 and are providing a data update on cohorts 1 and 2 as of February 28, 2017.

In our Phase 1/2 study, up to 12 subjects in cohorts of 3 subjects each will be enrolled to receive a single intravenous infusion of DTX101 at doses ranging from 1.6 x 10 ¹² genome copies per kilogram to 1.0 x 10 ¹³ genome copies per kilogram. The primary goals of the trial are to evaluate the safety, dose and efficacy of DTX101 based on FIX blood levels, FIX activity and the change in annual bleed rate, which currently average a minimum of fifteen bleeding episodes per year for patients with severe hemophilia B and three or more bleeding episodes per year on prophylaxis. Efficacy is being assessed based on the number of bleeding episodes and dosing requirements for FIX protein replacement therapy. Our goal is to achieve FIX blood levels stabilized to ≥10% of normal within 6 weeks after IV administration, as we believe that targeting this range offers a meaningful clinical benefit to patients. Pharmacodynamics is being assessed based on FIX activity. Patients are being followed for a period of one year and then offered enrollment into a long-term, 5-year extension study for safety follow-up.

In a previous clinical trial described by Nathwani and colleagues in the New England Journal of Medicine in 2014, ten patients with severe hemophilia B in a Phase I dose escalation trial were treated with a codon-optimized wild-type FIX gene delivered using an AAV8 viral capsid at doses ranging from 2×10 ¹¹ to 2×10 ¹² genome copies per kilogram. The trial demonstrated a dose dependent elevation in FIX circulation to a level that was 1% to 6% of the normal level over a median period of 3.2 years, with one patient deriving clinical benefit beyond 4.5 years. In the year following the one-time dose of the AAV8 vector, on average these patients had a 92% decrease in the use of FIX protein therapy and a corresponding drop from an average of 15.5 bleeding episodes per year to 1.5 episodes. The majority of adverse events were mild in severity, with 86% unrelated to the drug, and no increase in the levels of neutralizing antibodies against FIX was observed in any of the ten study subjects. The most common adverse event was an asymptomatic elevation in liver enzymes, which occurred approximately 7 to 10 weeks after vector infusion. Each patient with elevated liver enzymes received a tapering dose of steroids that resulted in resolution of the elevated liver enzymes over a median period of 5 days. Given the results of this study, which used the Clade E AAV8 vector and a different codon-optimized wild-type FIX gene, we believe that DTX101 may also provide meaningful, durable clinical benefit.

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The figures below highlight two of the ten subjects from this study, each of which are representative of subjects that do or do not experience increases in liver enzymes. Each figure shows the FIX protein activity, as a percent of normal levels, and the number of annual bleeding episodes over the years following vector infusion.

 

Preclinical Data

In our experiments in preclinical mouse models, shown in the figure below, we demonstrated FIX expression similar to the expression demonstrated by the Nathwani vector published in the New England Journal of Medicine when we delivered both a vector that used AAVrh10, which is the viral capsid used in DTX101, and a vector that used AAV8 and the transgene from the Nathwani trial. We synthesized the same wild-type FIX gene as that published in the Nathwani paper and delivered it to normal mice via tail vein injection. Both vector preparations were produced by the same method to ensure comparability. At the times indicated in the figure below, human FIX protein levels were measured in the blood. All doses of each vector were well tolerated. A single intravenous injection of AAV8 or AAVrh10 led to expression of FIX for at least 32 weeks.

 

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Additional preclinical studies were carried out with the DTX101 product candidate in normal wild-type mice (10 mice per group) and in FIX knockout mice (6 mice per group). FIX knockout mice have a deletion of 164 amino acids in the FIX protein and exhibit less than 5% of normal FIX activity. The level of expression for intravenous administration of DTX101 was dose-dependent and we observed a minimal effective dose, or MED, between 1.6×10 ¹⁰ and 5×10 ¹⁰ gene copies per kg, which produces between 3% and 100% of FIX expression obtained in wild-type mice, respectively. Additionally, the FIX that is produced by DTX101 has functional activity as assessed in a blood coagulation assay. The figure below shows FIX expression on the left and activity on the right at the increasing doses evaluated two, four and six weeks after administration.

 

DTX101 Clinical Data

We completed cohort 1 and cohort 2 dosing in our Phase 1/2 open-label clinical trial in adults with moderate/severe to severe hemophilia B and disclosed interim topline data from our Phase 1/2 clinical trial in January 2017. We are providing a data update on both cohorts (Cohort 1: N=3, 1.6 x 10¹² GC/kg; Cohort 2: N=3, 5 x 10¹² GC/kg) as of February 28, 2017, which include additional details on patient 3 of cohort 2 that were not yet available when our interim topline data was disclosed in January 2017. Patients in the two cohorts have been in post-treatment follow-up ranging from 11 to 52 weeks. Patients received serotype AAVrh10 vector with a codon-optimized FIX gene expressing wild-type FIX protein. Evidence of efficient liver transduction of DTX101 was observed across the two patient cohorts. Patients in the second dose cohort achieved peak FIX expression of 13%, 20%, and 12% at weeks 4, 8, and 8, respectively. FIX activity was 5% and 10% in two patients at 16 weeks follow-up, and 10% for the third patient at 11 weeks. For the low-dose cohort, expression levels achieved 10-11% peak activity, stabilizing between 3-4% at last follow-up (weeks 28, 52, and 52).

 

 

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These data suggest prolonged stabilization of FIX expression levels and are comparable to results published by Nathwani et al in the New England Journal of Medicine (2011), where patients have had measurable levels of FIX for 3-5 years or more at last follow-up. All patients in both cohorts 1 and 2 improved from moderate/severe-to-severe to either moderate or mild range in terms of factor levels based on WFH criteria. In addition, none of the patients in cohort 2 have required prophylactic or on-demand recombinant FIX transfusion for spontaneous bleeds post-dosing. According to the WFH, people with FIX levels of 5-40% usually bleed only as a result of surgery or major injury, do not bleed often and, in fact, may never have a bleeding problem (World Federation of Hemophilia). Elevations in alanine aminotransferase (ALT) were observed in 5 of 6 patients with patient 3 in cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L). All elevated liver enzymes were clinically asymptomatic with no elevations of gamma-glutamyl transferase (GGT), alkaline phosphatase or bilirubin, and no patients experienced a drug related serious adverse event (SAE) as of the February 28, 2017 data cutoff. Two patients in each cohort received a standard tapering course of corticosteroids to treat mild, asymptomatic elevations in ALTs (52-98 IU/L), similar to findings from multiple studies using other AAV serotypes, including AAV8 and AAV9. The third patient in cohort 2 also received a standard tapering course of corticosteroids and was at 116 IU/L at 11 weeks post-dosing, following a peak ALT of 914 IU/L.

 

 

Asymptomatic transient elevations in liver enzymes observed in patients 1 and 2 from cohort 2 were associated with a mild T-cell response to the capsid, corresponding to elevations in liver enzymes and declines in FIX activity. Samples from the third patient in cohort 2 were subject to substantial analyses to characterize and determine the potential immunological basis for the subclinical ALT elevation. There is no evidence that the elevation was caused by a peripheral immune response to the capsid or transgene. We have ongoing studies to explore additional causes for the ALT elevation in this patient, including other immune and non-immune causes, and the role of a rare HLA genotype present in this patient.

 

We expect that cohort 2 will continue to receive a standard tapering course of corticosteroid therapy and as of the February 28, 2017 data cutoff, 2 of 3 patients’ ALT levels were in the normal range, defined as ALT ≤40 IU/L. Cohort 1 patients were all clinically stable and off steroids with ALT levels in the normal range. As required by the trial protocol, we have reported the ALT levels for patient 3 in cohort 2 to the Data Safety Monitoring Committee (DSMC), the U.S. Food and Drug Administration (FDA), and the appropriate regulatory authorities and remain in ongoing communications, and will await their feedback prior to initiating dosing of cohort 3. DTX101 has received orphan drug designation from U.S. Food and Drug Administration and the European Commission for the treatment of hemophilia B.

DTX201

DTX201 consists of an AAV vector that contains a gene that encodes B domain deleted human Factor VIII, or FVIII, which is the commonly used recombinant FVIII protein used in protein replacement therapy. DTX201 has been designed to preferentially express FVIII at therapeutic levels for the treatment of patients with hemophilia A. DTX201 is under development in collaboration with Bayer, a global leader in the development and commercialization of innovative therapeutics for treating patients with hemophilia. We selected a candidate in 2015 and initiated IND-enabling activities for DTX201 in the first quarter of 2016 to support an IND filing for DTX201 by the end of 2017. We significantly progressed the HeLa mammalian cell-based suspension platform for DTX201, locking the lab scale manufacturing process, successfully transferring the upstream process and initiating tech transfer for clinical supply at GMP scale at our CMO. In May and June 2016, we presented data at ASGCT and EHA, respectively, demonstrating that the selection and integration of specific product components – including the capsid, enhancer, and promoter – further optimized product performance, including long-term expression of Factor VIII (FVIII). To evaluate the therapeutic response of DTX201, we plan to assess clotting factor levels and annual bleeding rates, which are two well-established measures of hemophilia A disease status.

Hemophilia A Overview

Hemophilia A is a rare, genetic bleeding disorder and like hemophilia B, occurs in male adults and children due to its X-linked inheritance. Signs and symptoms of disease result from a deficiency of the blood coagulation protein FVIII and like hemophilia B,

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patients fall in to three levels of clinical severity: mild, moderate and severe. In addition to the risk for excessive bleeding during injury or trauma, hemophilia A patients also suffer from spontaneous bleeding into the large joints and soft tissue and are at risk of intracranial hemorrhage. Even a modest 1% absolute increase in FVIII protein levels with FVIII replacement therapy can markedly reduce spontaneous bleeds.

Hemophilia A is the most common form of hemophilia and in 2013, the World Federation of Hemophilia estimated that there were approximately 140,000 patients worldwide with hemophilia A, including approximately 13,000 patients in the United States.

Hemophilia A is currently treated by intravenous replacement of FVIII protein. Similar to FIX for treatment of patients with hemophilia B, FVIII has historically been isolated from human plasma and carried the same risk associated with the plasma-derived products. In the United States approximately 20% of FVIII comes from plasma, while in some other countries 100% is derived from plasma. The availability of gene therapy would avoid the potential risks associated with the use of plasma-derived factors.

FVIII has a half-life of approximately twelve hours, so it must be administered frequently until a bleeding episode subsides. In severe patients, the recommended dosing frequency for recombinant FVIII protein administered prophylactically is three times a week. The global market for FVIII therapy is approximately $5 billion and is dominated by FVIII products with relatively short half-lives. In addition, annual cost per patient is between $100,000 and $300,000.

In June 2014, a new recombinant FVIII product, ELOCTATE from Biogen, was approved that extends the treatment interval to five days. While this represents an improvement in convenience, it does not remedy key drawbacks of replacement therapy resulting from peak and trough levels of circulating FVIII. We believe that treatment of hemophilia A with gene therapy addresses these issues. In particular, given its potential to provide constant levels of FVIII, we believe a FVIII gene therapy product will decrease the incidence of spontaneous bleeds, joint bleeds and the long-term damage resulting from them, and therefore increase quality of life.

Our Solution — DTX201

DTX201 is a gene therapy program using an AAV vector designed to preferentially express human B domain deleted FVIII in the liver and we have entered into a global development and commercialization agreement with Bayer for this program. Bayer is a worldwide leader in the treatment of hemophilia and contributes valuable expertise in all aspects of the development of this product candidate. We are responsible for the development of DTX201 under the agreement through a proof-of-concept clinical trial including all activities associated with process development and manufacturing, with reimbursement from Bayer for all project costs in accordance with the mutually agreed upon research budget. Bayer is responsible operationally and will incur the costs of the conduct of the proof-of-concept clinical trial. Upon the successful demonstration of clinical proof of concept, the agreement requires that Bayer use commercially reasonable efforts to manage and fund any subsequent clinical trials and commercialization of gene therapy products for treatment of hemophilia A. Bayer will have worldwide rights to commercialize the potential future product. We also received an upfront payment of $20.0 million and are eligible for potential development and commercialization milestone payments of up to $232.0 million, as well as royalties on product sales. The relationship with Bayer brings non-dilutive financial benefits and allows us to leverage Bayer’s significant experience in the hemophilia market. We selected a candidate in 2015 and initiated IND-enabling activities for DTX201 in the first quarter of 2016 to support an IND filing for DTX201 by the end of 2017. We significantly progressed the HeLa mammalian cell-based suspension platform for DTX201, locking the lab scale manufacturing process, successfully transferring the upstream process and initiating tech transfer for clinical supply at GMP scale at our CMO. In May and June 2016, we presented data at ASGCT and EHA, respectively, demonstrating that the selection and integration of specific product components – including the capsid, enhancer, and promoter – further optimized product performance, including long-term expression of Factor VIII (FVIII). To evaluate the therapeutic response of DTX201, we plan to assess clotting factor levels and annual bleeding rates, which are two well-established measures of hemophilia A disease status.

The FVIII gene is larger than most other transgenes used in AAV gene therapy. As such, an important challenge for FVIII gene therapy development is the efficient packaging of the relevant gene into the AAV vector. We have undertaken extensive optimization of our vector and tested vectors in multiple animal species to select the transgene for DTX201, and have identified a product candidate with high specificity for transduction of the liver and high levels of FVIII expression. An additional challenge in conducting animal studies with human FVIII is that it is highly immunogenic in most animals, unlike human FIX. This finding is likely reflective of the fact that human recombinant FVIII in hemophilia A patients is immunogenic in approximately 25-30% of patients.

During the process of identifying and developing our DTX201 product candidate, we carried out several pilot studies in non-human primates with a research AAV FVIII vector prior to initiating more detailed and extensive studies with the final panel of potential DTX201 candidates. Based on published and unpublished studies, we expected delivery of an AAV vector encoding human FVIII into non-human primates would generate an immune response that would prevent direct measurements of the human FVIII protein in the blood. In order to assess human FVIII in the blood, we developed an assay to measure continued AAV FVIII gene

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expression in the liver at the transcriptional, or RNA, level to understand duration of gene and protein expression in the presence of antibodies.

In a non-human primate pilot study with these research AAV vectors, a single intravenous infusion with two different AAV capsids A or B led to expression of FVIII that continued for more than 50 weeks. FVIII antibodies developed in 3 out of the 4 animals. In the fourth animal, which was administered AAV capsid B, no FVIII antibodies were observed, allowing for a direct assessment of FVIII protein in its blood. AAV directed FVIII expression at the RNA level was demonstrated in each of the animals at similar levels regardless of whether FVIII antibodies were generated in the animals. The figure below shows FVIII activity as a percent of normal and antibody levels in the two out of the four animals that were administered AAV capsid B over a period of 60 weeks following dosing.

 

We also carried out animal studies with optimized vectors in FVIII knockout mice and demonstrated FVIII expression for more than 12 weeks after vector administration. AAV vectors were delivered via intravenous infusion at 10 ¹⁰ gene copies per mouse (equivalent to 5X10 ¹¹ GC/kg). The ten FVIII knockout mice we assessed also showed FVIII expression and low-to-no anti-FVIII antibody development, as shown in the graphs below.

 

 

Our Partners and Advisors

We have established relationships with key academic and commercial entities to provide us access to cutting edge technologies as well as streamline our product development. Our AAV technology is the product of over 25 years of research at University of Pennsylvania School of Medicine by Dr. Wilson and colleagues. Bayer, our partner in developing DTX201 for the treatment of patients with hemophilia A, has extensive experience in product development, clinical trial execution and marketing in this indication.

Our scientific and clinical advisors are key thought leaders in gene therapy, and rare and genetic diseases. In addition to Dr. Wilson, our scientific advisors include: Terence R. Flotte, M.D., of the University of Massachusetts Medical School; Emil D. Kakkis, M.D., Ph.D., CEO of Ultragenyx Pharmaceuticals; Ian Alexander, M.B.B.S., Ph.D., of the Sydney Children’s Hospitals

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Network; and Nicola Longo, M.D., Ph.D., of the University of Utah. Our clinical advisors are Mark L. Batshaw, M.D., of Children’s National Medical Center, a thought leader in the treatment of urea cycle disorders; and David A. Weinstein, M.D., M.M.Sc., of the University of Florida, a thought leader in the treatment of GSDIa.

Collaborations and License Agreements

Collaboration with Bayer

In June 2014, we entered into an agreement with Bayer to research, develop and commercialize AAV gene therapy products for treatment of hemophilia A. The research term of the agreement is 54 months. Under this agreement, Bayer has been granted an exclusive license to develop and commercialize one or more novel gene therapies for hemophilia A. We are responsible for the development of DTX201 under the agreement through a proof-of-concept clinical trial, with full reimbursement from Bayer for all project costs in accordance with the mutually agreed upon research budget. Bayer is responsible operationally and will incur the costs of the conduct of the proof-of-concept clinical trial. Upon the successful demonstration of clinical proof of concept, the agreement requires that Bayer use commercially reasonable efforts to manage and fund any subsequent clinical trials and commercialization of gene therapy products for treatment of hemophilia A. Bayer will have worldwide rights to commercialize the potential future product.

In addition to an upfront cash payment of $20.0 million, we are eligible to receive development and commercialization milestone payments of up to $232.0 million. Bayer is obligated to make payments to us upon achievement of such milestones, in addition to tiered royalties based on product sales. Our agreement with Bayer expires on a licensed treatment-by-licensed treatment and country-by-country basis until the later of ten years from the date of first commercial sale or when patent claims have expired, lapsed, been abandoned, or been invalidated in such country. Either party may terminate the agreement for any material breach by the other party that the breaching party fails to cure. Bayer may terminate the agreement upon prior notice to us, either in its entirety or with respect to certain territories subject to the agreement. Bayer may also terminate the agreement upon notice of a product’s failure to meet certain criteria or after the successful completion of certain Phase I trials in the event Bayer makes a good faith determination that there is a material safety issue with respect to such product. Either party may terminate the agreement upon bankruptcy or insolvency of the other party, and we may terminate the agreement if Bayer institutes certain actions. Under certain termination circumstances, we would have worldwide rights to the terminated program(s). The agreement also contains customary confidentiality, indemnification, insurance and non-assignment provisions. Under this agreement, Bayer was also granted a right of first notice for gene therapy treatments for hemophilia B, which it declined to exercise in July 2016.

REGENX License Agreements

2013 License Agreement

In October 2013, we entered into an exclusive license agreement with REGENX for the development and commercialization of products to treat hemophilia B, hemophilia A and up to two additional indications using REGENX’s technology. The 2013 license agreement was subsequently amended in June 2014 and September 2014. For further information regarding our relationship with REGENX, please see “Certain Relationships and Related Party Transactions — License Agreements and Related Agreements with REGENX” located elsewhere in this Annual Report. We elected OTC deficiency and GSD1a as the additional licensed disease indications in September 2014 and January 2015, respectively. Under the 2013 license agreement, REGENX granted us an exclusive worldwide license under certain intellectual property, subject to certain retained rights, to make, have made, use, import, sell, and offer to sell licensed products for the treatment of hemophilia B, hemophilia A, OTC deficiency and GSD1a using in vivo gene therapy. The intellectual property does not include manufacturing technology beyond know-how related to a triple-transfection method for making AAV vectors, for which our rights extend only through Phase II clinical trials and which we do not intend to use thereafter, and manufacturing technology developed under our 2014 side letter with REGENX, described below under “Business — Collaborations and License Agreements — Sponsored Research Agreements with Penn — 2014 Side Letter with REGENX.” Our exclusive license is subject to a number of exclusions, including rights regarding the treatment of hemophilia B or hemophilia A using AAV8; and rights to conduct commercial reagent and services businesses, or to provide services to third parties. We do not have the right to control prosecution of the in-licensed patent applications, and our rights to enforce the in-licensed patents are subject to certain limitations.

Under the terms of the 2013 license agreement, as consideration for the license, REGENX received shares of our common stock, an annual maintenance fee per disease indication licensed, low to mid single-digit royalty percentages on net sales of licensed products, and milestone fees, if any, owed by REGENX to GlaxoSmithKline, or GSK, or sublicense fees owed by REGENX to the University of Pennsylvania or GSK as a result of our activities under the 2013 license agreement.

We are required to develop licensed products in accordance with certain performance milestones, which include the receipt of certain financing and development milestones. In the event that we fail to meet a particular development performance milestone, we may extend the deadline to achieve such milestone for additional time in exchange for separate payments to REGENX.

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Our 2013 license agreement with REGENX will expire upon the expiration, lapse, abandonment, or invalidation of the last claim of the licensed intellectual property to expire, lapse, or become abandoned or unenforceable in all the countries of the world. Upon expiration, our know-how license will become non-exclusive, perpetual, irrevocable and royalty-free with respect to licensed know-how that REGENX owns in the field and will continue with respect to all of REGENX’s other know-how in the field under its GSK and/or the University of Pennsylvania licenses for so long as its rights from those licensors continue. Subject to certain obligations to Bayer, we may terminate the 2013 license agreement upon prior written notice to REGENX. REGENX may terminate the license agreement if we or our affiliates become insolvent, if we are greater than a specified number of days late in paying money due under the 2013 license agreement, or, effective immediately, if we or our affiliates commence certain actions relating to the licensed patents. Either party may terminate the 2013 license agreement for a material breach that is not cured within a specified number of days. If the 2013 license agreement is terminated with respect to an indication, we grant certain rights to REGENX, including transferring ownership of any applicable regulatory approvals and granting an exclusive license under certain of our intellectual property for use with respect to products covered by the intellectual property we had licensed from REGENX in that indication.

2015 Option and License Agreement

In March 2015, we entered into an option and license agreement with REGENX that grants us the option to exclusively license REGENX’s technology for the development and commercialization of products for additional disease indications. Under this agreement, REGENX granted us distinct options to obtain, with respect to up to four disease indications, an exclusive worldwide license under the licensed intellectual property, each to make, have made, use, import, sell, and offer for sale licensed products with respect to such disease indication. Any exclusive licenses under this 2015 option and license agreement are subject to a number of exclusions, including manufacturing technology; rights regarding the treatment of hemophilia B or hemophilia A using AAV8; the treatment of certain other conditions using AAV9; and rights to conduct commercial reagent and services businesses, or to provide services to third parties. Moreover, our exercise of any option is subject to availability, and it is possible that rights for indications for which we may be interested have been or will already be licensed, in whole or in part, to a third party before we elect to exercise our rights. We do not have the right to control prosecution of the in-licensed patent applications, and our rights to enforce the in-licensed patents are subject to certain limitations. We exercised options to exclusively license our first additional disease indication, PKU, in May 2015, our second additional disease indication, citrullinemia type 1, in August 2015, and our third additional disease indication, Wilson disease, in December 2015.

Upon our exercise of any or all of the commercial options, as consideration for each such option exercise, we are obligated to pay REGENX an upfront fee, an annual maintenance fee per option exercised, certain milestone fees per disease indication, mid to high single-digit royalty percentages on net sales of licensed products, and mid-single to low double-digit percentages of any sublicense fees we receive from sublicensees for the licensed intellectual property rights.

We are obligated to use diligent efforts to meet certain development and regulatory milestones for each optioned disease indication, which may be extended for additional time upon the payment of an additional sum.

The 2015 option and license agreement with REGENX will expire upon the expiration of the royalty obligations with respect to all licensed products for all licensed indications under all licenses granted under all exercised commercial options. Any options not exercised will automatically terminate in 2019 (which may extended for additional time for a fee). We may terminate the 2015 option and license agreement upon prior written notice. REGENX may terminate the 2015 option and license agreement if we or our controlling affiliates become insolvent, if we are greater than a specified number of days late in paying money due under the 2015 option and license agreement, or, effective immediately, if we or our affiliates commence certain actions relating to the licensed patents. Either party may terminate the 2015 option and license agreement for a material breach that is not cured within a specified number of days.

Sponsored Research Agreements with the University of Pennsylvania

2015 Agreement

In January 2015, we entered into an agreement with the University of Pennsylvania to sponsor certain research of Dr. Wilson at University of Pennsylvania School of Medicine related to liver gene therapy and hemophilia. The agreement was subsequently amended in August 2015, March 2016 and December 2016. In consideration for funding such research, the University of Pennsylvania granted us an option to obtain a worldwide, non-exclusive or exclusive, royalty-bearing license, with the right to sublicense, under certain patent rights conceived, created or reduced to practice in the conduct of the research. We are required to reimburse the University of Pennsylvania for filing, prosecuting and maintaining such patent rights unless and until we decline to exercise our option. Dr. Wilson is required to provide us with task-based, scientific reports of progress and results of the research, and the University of Pennsylvania granted us a royalty-free, nontransferable, non-exclusive right to copy and distribute any research reports

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furnished to us for any reasonable purpose, provided the results are not made publicly available until certain conditions are met, and the right to use, disclose and otherwise exploit the research results for any reasonable purpose, subject to similar restrictions on our public disclosure of the research results. Otherwise, the sponsored research agreement contains customary confidentiality provisions.

Our sponsored research agreement, as amended, with the University of Pennsylvania will expire on December 31, 2017 unless earlier terminated or we mutually agree to extend or renew the agreement. Either party may terminate the agreement if Dr. Wilson becomes unavailable and an acceptable substitute is not found within a certain period of time, or if we fail to mutually agree on an acceptable work plan and budget for the sponsored research. We may also terminate the sponsored research agreement upon written notice to the University of Pennsylvania, as long as we have met all of our payment and performance obligations to date. In the event of termination, we shall pay University of Pennsylvania the amount needed to cover costs through the effective termination date as well as allowable commitments, provided, however, payment for allowable commitments that extend beyond the effective termination date shall in no event exceed one fourth (1/4) of the total budget. Either party may terminate this agreement for a material breach that is not cured within a specified number of days.

 

2016 Agreement

In May 2016, we entered into a research, collaboration and license agreement with the University of Pennsylvania.  The agreement was subsequently amended in October 2016 and December 2016. The agreement provides the terms for us and the University of Pennsylvania to collaborate with respect to the pre-clinical development of gene therapy products for the treatment of citrullinemia type I (DTX601), phenylketonuria (DTX501) and Wilson disease (DTX701) (each, a “Subfield”).    

Under the agreement, the University of Pennsylvania granted us an exclusive, worldwide, royalty-bearing right and license to certain patent rights arising out of the research program, subject to certain retained rights, and a non-exclusive, worldwide, royalty-bearing right and license to certain University of Pennsylvania intellectual property, in each case to research, develop, make, have made, use, sell, offer for sale, commercialize and import licensed products in each Subfield for the term of the agreement.

In May 2016, we paid to the University of Pennsylvania immaterial one-time, non-refundable upfront payments recorded as research and development expense in exchange for the licenses.  We will fund the cost of the research program in accordance with a mutually agreed-upon research budget and will be responsible for clinical development, manufacturing and commercialization of each Subfield.  Research program costs will be recorded as research and development expense in the period the research services are performed.  

In addition, we would be required to make milestone payments if certain development and commercial milestones are achieved over time, as well as low to mid single-digit royalties percentages on net sales of each Subfield’s licensed products.  Should they be achieved, potential development milestones through U.S. and EU regulatory acceptance total up to a maximum of $5 million per Subfield and would be recorded as research and development expense in the periods they are achieved. As no milestones have been achieved and the agreement can be cancelled at our option, no future potential milestone payments have accrued as of December 31, 2016.

2014 Side Letter with REGENX

Prior to the sponsored research agreement described above, we had sponsored research with the University of Pennsylvania pursuant to a side letter with REGENX referencing REGENX’s sponsored research agreement with the University of Pennsylvania dated November 1, 2013. In accordance with the side letter and the sponsored research agreement, we submitted research plans to the University of Pennsylvania and made associated payments and cost reimbursements related to such research. The side letter provided that patent rights and know-how developed by University of Pennsylvania School of Medicine under the research plans, to which REGENX received rights under its license from the University of Pennsylvania, were included in the intellectual property REGENX licensed to us in our 2013 license agreement for our licensed disease indications. Our 2014 side letter with REGENX expired on December 31, 2014.

Intellectual Property

The proprietary nature of, and protection for, our gene therapy technology, our product candidates, and our production methods are an important part of our strategy to develop and commercialize novel medicines. We have in-licensed patents relating to certain of our product candidates, and will rely on trade secret protection to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

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We have in-licensed patents and patent applications owned by the University of Pennsylvania relating to various adeno-associated viruses and vectors utilizing the capsids of those viruses. These patents and patent applications are licensed or sublicensed to REGENX and sublicensed by REGENX to us. As described above under “Collaborations and License Agreements — REGENX License Agreements,” our sublicense is exclusive, but limited to particular fields, such as hemophilia B, hemophilia A, OTC deficiency, and GSDIa and is subject to certain retained rights. We do not control the prosecution of our in-licensed patents and patent applications, and our rights to enforce the patents are limited in certain ways. For additional detail regarding the risks associated with our license agreements see “Risk Factors — Risks Related to Intellectual Property.”

As of December 31, 2016, our in-licensed patent rights relating to our product candidates included the following:

DTX101 :    Our product candidate DTX101 utilizes an AAVrh10 capsid and a codon-optimized FIX gene. We have in-licensed one pending U.S. patent application currently directed to recombinant AAV having an AAVrh10 capsid. Related patents have granted in Australia and Europe and related patent applications are pending in other countries. These patents and patent applications, if granted, will expire in 2022.

DTX201 :    Our product candidate DTX201 utilizes one of the AAV capsids that are claimed in the patents and applications we have in-licensed and contain a B domain deleted Factor VIII gene. These patents and patent applications, if granted, will expire between 2022 and 2024.

DTX301 :    We expect that our product candidate DTX301 utilizes an AAV8 and a codon-optimized version of the OTC gene. Accordingly, depending on which capsid we utilize in DTX301, relevant in-licensed patents and patent applications, if granted, may expire in 2022.

Our in-license also includes a patent application filed this year under the Patent Cooperation Treaty, directed to the codon-optimized version of the OTC gene that we plan to use in DTX301. If counterparts of this patent application in the U.S. or elsewhere are pursued, and to the extent any such applications ultimately issue as patents, they will expire in 2035.

DTX401 :    We expect that our product candidate DTX401 will utilize one of the AAV capsids that are claimed in the patents and applications we have in-licensed and contain a version of the G6Pase gene. Accordingly, depending on which capsid we utilize in DTX401, relevant in-licensed patents and patent applications, if granted, may expire between 2022 and 2024.

The term of any given patent depends upon the legal term of patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the date of filing the application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-filed co-owned patent. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of FDA regulatory review period. However, the restoration period cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. In certain foreign jurisdictions similar extensions as compensation for regulatory delays are also available. The actual protection afforded by a patent varies on a claim by claim and country by country basis for each applicable product and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.

We rely, in some circumstances, on trade secrets and unpatented know-how that is either owned by or licensed to us to protect our technology. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors.

Government Regulation

Government authorities in the United States at the federal, state and local level and in other countries regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug and biological products, such as our product candidates. Generally, before a new drug or biologic can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific for each regulatory authority, submitted for review and approved by the regulatory authority.

U.S. drug development

In the United States, FDA regulates biologics under the Federal Food, Drug, and Cosmetic Act, or FDCA, the Public Health Service Act, or PHSA, and their implementing regulations. Biologics also are subject to other federal, state and local statutes and

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regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or post-market, may subject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, request for product recalls or market withdrawals, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.

Our product candidates must be approved by FDA through a BLA process before they may be legally marketed in the United States. The process generally involves the following:

The non-clinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, or at all. The data required to support a BLA are generated in two distinct development stages: non-clinical and clinical. The non-clinical development stage generally involves laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which support subsequent clinical testing. The sponsor must submit the results of the non-clinical studies, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to FDA as part of the IND. An IND is a request for authorization from FDA to administer an investigational product to humans, and must become effective before human clinical trials may begin.

The clinical stage of development involves the administration of the investigational product to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to FDA as part of the IND. Furthermore, each clinical trial must be reviewed and approved by an IRB for each institution at which the clinical trial will be conducted to ensure that the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative, and must monitor the clinical trial until completed. There also are requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.

Where a trial is conducted at, or sponsored by, institutions receiving funding from U.S. National Institutes of Health, or NIH, for recombinant DNA or synthetic nucleic acid molecule research, which we expect all our trials to be, prior to the submission of an IND to FDA, a protocol and related documentation is submitted to and the trial is registered with the NIH Office of Biotechnology Activities, or OBA, pursuant to the NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules, or NIH Guidelines. Compliance with the NIH Guidelines is mandatory for investigators at institutions receiving NIH funds for research involving recombinant DNA or synthetic nucleic acid molecules, but many companies and other institutions not otherwise subject to

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the NIH Guidelines voluntarily follow them and we expect any clinical trial we conduct will be subject to these guidelines. The NIH is responsible for convening the Recombinant DNA Advisory Committee, or RAC, a federal advisory committee that reviews research proposals involving human gene transfer research, and discusses protocols that raise novel or particularly important scientific, safety or ethical considerations at one of its public quarterly public meetings. The RAC decides whether a protocol raises issues that warrant discussion at its quarterly meetings, and the OBA will notify FDA of the RAC’s decision regarding the necessity for full public review of a gene therapy protocol. RAC proceedings and reports are posted to the OBA website and may be accessed by the public. The outcome of the RAC review is a series of recommendations and advice from the RAC. FDA, IRB and Institutional Biosafety Committee, or the IBC, will be notified of the recommendations. The RAC process must be completed and IBC approval (and other applicable regulatory authorizations) must be obtained before patient enrollment can begin.

A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to FDA in support of a BLA. FDA will accept a well-designed and well-conducted foreign clinical study not conducted under an IND if the study was conducted in accordance with GCPs, and FDA is able to validate the data through an onsite inspection if deemed necessary.

Clinical trials

Clinical trials generally are conducted in three sequential phases, known as Phase I, Phase II and Phase III, and may overlap.

Post-approval trials, sometimes referred to as Phase IV clinical trials, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, FDA may mandate the performance of Phase IV clinical trials as a condition of approval of a BLA.

Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to FDA and written IND safety reports must be submitted to FDA and the investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the drug, findings from animal or in vitro testing that suggest a significant risk for human subjects and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure.

Following the RAC review and within 20 working days of consenting the first research participant, investigators must submit documentation to the OBA, including, for example, a copy of the IRB-approved informed consent document, a copy of the protocol approved by the IBC and the IRB, and a copy of the final IBC approval from the clinical trial site. Investigators also have an ongoing responsibility to monitor the trial and to keep OBA (in addition to IRBs, IBCs, FDA, and any sponsoring NIH institutes or centers), informed of any adverse events in the trial. If there are serious adverse events that are unexpected and possibly associated with the gene transfer product, these must be submitted to OBA within 15 calendar days of sponsor notification, unless they are fatal or life threatening, in which case they must be reported within 7 calendar days. Investigators must also file an annual report with OBA and provide specific information about the trials. Any updated versions of the protocol must be filed with the annual report; if there is a significant amendment to the original protocol that was reviewed by the RAC, OBA may request that the investigator file a new protocol rather than an amendment. Investigators should also notify OBA of any additional sites that are conducting the trial, and submit relevant documents (such as the IBC and IRB approvals) for the new site.

Phase I, Phase II and Phase III clinical trials may not be completed successfully within any specified period, if at all. FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug or biologic has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of

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qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether a trial may move forward at designated check points based on access to certain data from the trial. Concurrent with clinical trials, companies usually complete additional animal studies and also must develop additional information about the chemistry and physical characteristics of the drug or biologic as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product; and, among other things, we must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidates do not undergo unacceptable deterioration over their shelf life.

BLA and FDA review process

Following completion of the clinical trials, data are analyzed to assess safety and efficacy. The results of non-clinical studies and clinical trials are then submitted to FDA as part of a BLA, along with proposed labeling, chemistry and manufacturing information to ensure product quality and other relevant data. In short, the BLA is a request for approval to market the biologic for one or more specified indications and must contain proof of safety, purity, potency and efficacy. The application may include both negative and ambiguous results of non-clinical studies and clinical trials as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and efficacy of a product’s use or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the investigational product to the satisfaction of FDA. FDA approval of a BLA must be obtained before a biologic may be marketed in the United States.

Under the Prescription Drug User Fee Act, or PDUFA, as amended, each BLA must be accompanied by a user fee. FDA adjusts the PDUFA user fees on an annual basis. According to FDA’s fee schedule, effective through September 2017, the user fee for an application requiring clinical data, such as a BLA, is approximately $2.3 million. PDUFA also imposes an annual product fee for human drugs and biologics (approximately $0.1 million) and an annual establishment fee (approximately $0.6 million) on facilities used to manufacture prescription drugs and biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on BLAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.

FDA reviews all submitted BLAs before it accepts them for filing, and may request additional information rather than accepting the BLA for filing. FDA must make a decision on accepting a BLA for filing within 60 days of receipt. Once the submission is accepted for filing, FDA begins an in-depth review of the BLA. Under the goals and policies agreed to by FDA under PDUFA, FDA has 10 months from the filing date in which to complete its initial review of an original BLA and respond to the applicant, and six months from the filing date for an original BLA designated for priority review. FDA does not always meet its PDUFA goal dates for standard and priority BLAs, and the review process is often extended by FDA requests for additional information or clarification.

Before approving a BLA, FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether they comply with cGMPs. FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. FDA also may audit data from clinical trials to ensure compliance with GCP requirements. Additionally, FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions, if any. FDA is not bound by recommendations of an advisory committee, but it considers such recommendations when making decisions on approval. FDA likely will re-analyze the clinical trial data, which could result in extensive discussions between FDA and the applicant during the review process. After FDA evaluates a BLA, it will issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application will not be approved in its present form. A Complete Response Letter usually describes all of the specific deficiencies in the BLA identified by FDA. The Complete Response Letter may require additional clinical data, additional pivotal Phase III clinical trial(s) and/or other significant and time-consuming requirements related to clinical trials, non-clinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, FDA may decide that the BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and FDA may interpret data differently than we interpret the same data.

Orphan drug designation

Under the Orphan Drug Act, FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than

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200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan drug designation must be requested before submitting a BLA. After FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means that FDA may not approve any other applications to market the same drug for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity by means of greater effectiveness, greater safety, by providing a major contribution to patient care or in instances of drug supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different indication but that could be used off-label in the orphan indication. Orphan drug exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval before we do of the same product, as defined by FDA, for the same indication we are seeking, or if our product candidate is determined to be contained within the scope of the competitor’s product for the same indication or disease. If one of our products designated as an orphan drug receives marketing approval for an indication broader than that which is designated, it may not be entitled to orphan drug exclusivity. Orphan drug status in the European Union has similar, but not identical, requirements and benefits.

Expedited development and review programs

FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs and biologics that meet certain criteria. Specifically, new drugs and biologics are eligible for fast track designation if they are intended to treat a serious or life threatening condition and non-clinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to both the product and the specific indication for which it is being studied. The sponsor can request FDA to designate the product for fast track status any time before receiving BLA approval, but ideally no later than the pre-BLA meeting.

Any product submitted to FDA for marketing, including under a fast track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it treats a serious or life-threatening condition and, if approved, would provide a significant improvement in safety and effectiveness compared to available therapies.

FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biologic designated for priority review in an effort to facilitate the review. A product also may be eligible for accelerated approval. An investigational drug may obtain accelerated approval if it treats a serious or life-threatening condition and generally provides a meaningful advantage over available therapies and demonstrates an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely to predict an effect on IMM or other clinical benefit. As a condition of approval, FDA may require that a sponsor of a drug or biologic receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. If FDA concludes that a drug or biologic shown to be effective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions, as it deems necessary to assure safe use of the product.

Additionally, a drug or biologic may be eligible for designation as a breakthrough therapy if the product is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The benefits of breakthrough therapy designation include the same benefits as fast track designation, plus intensive guidance from FDA to ensure an efficient drug development program. Fast track designation, priority review, accelerated approval and breakthrough therapy designation do not change the standards for approval, but may expedite the development or approval process.

Pediatric information

Under the Pediatric Research Equity Act, or PREA, a BLA or supplement to a BLA must contain data to assess the safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. FDA may grant deferrals for submission of pediatric data or full or partial waivers. The Food and Drug Administration Safety and Innovation Act, or FDASIA, amended the FDCA to require that a sponsor who is planning to submit a marketing application for a drug that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within sixty days of

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an end-of-Phase II meeting or, if there is no such meeting, as early as practicable before the initiation of the Phase III or Phase II/III study. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. FDA and the sponsor must reach an agreement on the PSP. A sponsor can submit amendments to an agreed upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from non-clinical studies, early phase clinical trials or other clinical development programs.

Post-marketing requirements

Following approval of a new product, the manufacturer and the approved product are subject to continuing regulation by FDA, including, among other things, monitoring and recordkeeping activities, reporting of adverse experiences, complying with promotion and advertising requirements, which include restrictions on promoting drugs for unapproved uses or patient populations (known as “off-label use”) and limitations on industry-sponsored scientific and educational activities. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such uses. Prescription drug promotional materials must be submitted to FDA in conjunction with their first use. Further, if there are any modifications to the drug or biologic, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new BLA or BLA supplement, which may require the applicant to develop additional data or conduct additional non-clinical studies and clinical trials.

FDA may also place other conditions on approvals including the requirement for a Risk Evaluation and Mitigation Strategy, or REMS, to assure the safe use of the product. If FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS. FDA will not approve the BLA without an approved REMS, if required. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following initial marketing.

FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMPs. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. These manufacturers must comply with cGMP regulations that require, among other things, quality control and quality assurance, the maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the manufacture and distribution of approved drugs or biologics are required to register their establishments with FDA and certain state agencies, and are subject to periodic unannounced inspections by FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. The discovery of violative conditions, including failure to conform to cGMPs, could result in enforcement actions, and the discovery of problems with a product after approval may result in restrictions on a product, manufacturer or holder of an approved BLA, including voluntary recall.

Companion diagnostics

For several of our product candidates, companion diagnostics will be needed to determine whether or not we can dose a particular patient with our product. Companion diagnostics can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. Companion diagnostics are regulated as medical devices by FDA, and we or our collaborators may need to obtain a 510(k) clearance or PMA approval for each companion diagnostic. The level of risk combined with available controls to mitigate risk determines whether a companion diagnostic device requires PMA approval or is cleared through the 510(k) premarket notification process. For a novel therapeutic product for which an IVD companion diagnostic device is essential for the safe and effective use of the product, the companion diagnostic device should be developed and approved or 510(k)-cleared contemporaneously with the therapeutic. The use of the companion diagnostic device will be stipulated in the labeling of the therapeutic product.

Other regulatory matters

Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in the United States in addition to FDA, including the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, the United States Department of Justice, the Drug Enforcement

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Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments.

For example, in the United States, sales, marketing and scientific and educational programs also must comply with state and federal fraud and abuse laws. These laws include the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce or reward referrals, including the purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs. In addition, the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act, among other things, amends the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statutes created by the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. Moreover, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

Although we would not submit claims directly to payors, manufacturers also can be held liable under the federal False Claims Act, which prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs or biologics, that are false or fraudulent, claims for items or services not provided as claimed or claims for medically unnecessary items or services. The government may deem manufacturers to have “caused” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim, the potential for exclusion from participation in federal healthcare programs and the potential implication of various federal criminal statutes.

Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the Affordable Care Act. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities also are potentially subject to federal and state consumer protection and unfair competition laws.

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

The failure to comply with any of these laws or regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, requests for recall, seizure of products, total or partial suspension of production, denial or withdrawal of product approvals or refusal to allow a firm to enter into supply contracts, including government contracts. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially affect our business in an adverse way.

Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.

U.S. patent-term restoration and marketing exclusivity

Depending upon the timing, duration and specifics of FDA approval of our product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a restoration of the patent term of up to five years as compensation for patent term lost during product development and FDA regulatory review process. Patent-term restoration, however, cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent-term restoration period is generally one-half the time between the effective date of an IND and the submission date of a BLA plus the time

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between the submission date of a BLA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. In addition, a patent may only be extended once and only based on a single approved product. Thus, even if a single patent is applicable to multiple products, it can only be extended based on one product. The U.S. PTO, in consultation with FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may apply for restoration of patent term for our currently licensed patents or any patents we may own or license in the future to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant BLA.

An abbreviated approval pathway for biological products shown to be similar to, or interchangeable with, an FDA-licensed reference biological product was created by the Biologics Price Competition and Innovation Act of 2009, or BPCI Act, as part of the Affordable Care Act. This amendment to the PHSA, in part, attempts to minimize duplicative testing. Biosimilarity, which requires that the biological product be highly similar to the reference product notwithstanding minor differences in clinically inactive components and that there be no clinically meaningful differences between the product and the reference product in terms of safety, purity and potency, can be shown through analytical studies, animal studies and a clinical trial or trials. Interchangeability requires that a biological product be biosimilar to the reference product and that the product can be expected to produce the same clinical results as the reference product in any given patient and, for products administered multiple times to an individual, that the product and the reference product may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biological product without such alternation or switch. Complexities associated with the larger, and often more complex, structure of biological products as compared to small molecule drugs, as well as the processes by which such products are manufactured, pose significant hurdles to implementation that are still being worked out by FDA.

A reference biological product is granted twelve years of data exclusivity from the time of first licensure of the product, and FDA will not accept an application for a biosimilar or interchangeable product based on the reference biological product until four years after the date of first licensure of the reference product. “First licensure” typically means the initial date the particular product at issue was licensed in the United States. Date of first licensure does not include the date of licensure of (and a new period of exclusivity is not available for) a biological product if the licensure is for a supplement for the biological product or for a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or other related entity) for a change (not including a modification to the structure of the biological product) that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device or strength, or for a modification to the structure of the biological product that does not result in a change in safety, purity, or potency. Therefore, one must determine whether a new product includes a modification to the structure of a previously licensed product that results in a change in safety, purity, or potency to assess whether the licensure of the new product is a first licensure that triggers its own period of exclusivity. Whether a subsequent application, if approved, warrants exclusivity as the “first licensure” of a biological product is determined on a case-by-case basis with data submitted by the sponsor.

Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing regulatory exclusivity periods. This six-month exclusivity, which attaches to both the twelve-year and four-year exclusivity periods for reference biologics, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial. Furthermore, a biological product seeking licensure as biosimilar to or interchangeable with a reference product indicated for a rare disease or condition and granted seven years of orphan drug exclusivity may not be licensed by FDA for the protected orphan indication until after the expiration of the seven-year orphan drug exclusivity period or the 12-year reference product exclusivity, whichever is later.

European Union drug development

In the European Union, our future products also may be subject to extensive regulatory requirements. As in the United States, medicinal products can be marketed only if a marketing authorization from the competent regulatory agencies has been obtained.

Similar to the United States, the various phases of non-clinical and clinical research in the European Union are subject to significant regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority, or NCA, and one or more Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.

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The EU clinical trials legislation currently is undergoing a transition process mainly aimed at harmonizing and streamlining clinical-trial authorization, simplifying adverse-event reporting procedures, improving the supervision of clinical trials and increasing their transparency. Recently enacted Clinical Trials Regulation EU No 536/2014 ensures that the rules for conducting clinical trials in the EU will be identical, but will not be effective until May 28, 2016. In the meantime, Clinical Trials Directive 2001/20/EC continues to govern all clinical trials performed in the EU.

European Union drug review and approval

In the European Economic Area, or EEA, (which is comprised of the 27 Member States of the European Union (excluding Croatia) plus Norway, Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:

The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the EMA and is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, advanced-therapy medicines such as gene-therapy, somatic cell-therapy or tissue-engineered medicines and medicinal products containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and other immune dysfunctions and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member State, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of the product characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in all the Member States (i.e., in the RMS and the Member States Concerned).

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

European Union new chemical entity exclusivity

In the European Union, new chemical entities, sometimes referred to as new active substances, qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. The data exclusivity, if granted, prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic application for eight years, after which generic marketing authorization can be submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum of 11 years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are determined to bring a significant clinical benefit in comparison with existing therapies.

European Union orphan designation and exclusivity

In the European Union, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in the European Union (or where it is unlikely that the development of the medicine would generate sufficient return to justify the investment) and for which no satisfactory method of diagnosis, prevention or treatment has been authorized (or, if a method exists, the product would be a significant benefit to those affected).

In the European Union, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity is granted following medicinal product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Orphan drug designation must be requested before submitting an application for marketing

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approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

Rest of the world regulation

For other countries outside of the European Union and the United States, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from jurisdiction to jurisdiction. Additionally, the clinical trials must be conducted in accordance with cGCP requirements and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Reimbursement

Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. In the United States no uniform policy of coverage and reimbursement for drug or biological products exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products will be made on a payor-by-payor basis. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.

The United States government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price-controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. For example, the Affordable Care Act contains provisions that may reduce the profitability of drug products through increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. Adoption of general controls and measures, coupled with the tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceutical drugs.

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, the Affordable Care Act made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The Affordable Care Act also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the population potentially eligible for Medicaid drug benefits, phased-in by 2014. The Centers for Medicare & Medicaid Services, or CMS, have proposed to expand Medicaid rebate liability to the territories of the United States as well.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the Medicare Part D program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. While all Medicare drug plans must give at least a standard level of coverage set by Medicare, Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan likely will be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

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For a drug product to receive federal reimbursement under the Medicaid or Medicare Part B programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. As of 2010, the Affordable Care Act expanded the types of entities eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.

As noted above, the marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. An increasing emphasis on cost containment measures in the United States has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

In addition, in most foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing and reimbursement vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the Company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly lower.

Employees

As of March 2, 2017, we had 74 full-time employees, 58 of which are engaged in research and development activities. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.

Facilities

We lease two facilities containing our research and development, laboratory and office spaces. This consists of approximately 15,000 square feet located at 840 Memorial Drive, Cambridge, Massachusetts and approximately 17,600 square feet of state-of-the-art laboratory and office space at 19 Presidential Way in Woburn, Massachusetts. We took occupancy in Woburn, MA in April 2016 and the facility was operational in June 2016. Our leases in Cambridge and Woburn expire in January 2018 and March 2021, respectively. We believe our current facilities are sufficient to meet our needs through the lease term.

Research and Development

We have dedicated a significant portion of our resources over the last several years to our efforts to develop our product candidates and disease programs. We incurred research and development expenses of $47.7 million, $34.0 million, and $13.0 million during 2016, 2015 and 2014, respectively.

Legal Proceedings

We are not currently a party to any material legal proceedings.

Corporate Information

We were incorporated under the laws of the State of Delaware in June 2013. Our principal offices are located at 840 Memorial Drive, Cambridge, MA 02139, and our telephone number is (617) 401-0011. Our website address is www.dimensiontx.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this Annual Report on Form 10-K. You should not rely on any such information in making your decision whether to purchase our common stock.

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Available Information

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.

Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K and all amendments to those reports, can be viewed and downloaded free of charge at our website, www.dimensiontx.com after the reports and amendments are electronically filed with, or otherwise furnished to, the SEC.

Our code of conduct, corporate governance guidelines and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available through our website at www.dimensiontx.com.

 

 

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our common stock could decline if one or more of these risks or uncertainties actually occur, causing you to lose all or part of the money you paid to buy our common stock. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.

Risks Related to Product Development and Regulatory Approval

We are very early in our development efforts. Two product candidates, DTX101 for hemophilia B and DTX301 for OTC deficiency, entered Phase 1/2 clinical development in January and December 2016, respectively, and the rest of our product candidates are still in preclinical development. If we are unable to advance our product candidates to and through clinical development, obtain regulatory approval and ultimately commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.

We have invested substantially all of our efforts and financial resources in the identification, clinical and preclinical development of our current and future product candidates, DTX301 for ornithine transcarbamylase, or OTC, deficiency, DTX401 for glycogen storage disease type Ia, or GSDIa, DTX601 for citrullinemia type I, DTX501 for phenylketonuria , or PKU, DTX701 for Wilson disease, DTX101 for hemophilia B, and DTX201 for hemophilia A. We are very early in our development efforts with two product candidates in Phase 1/2 clinical development and the rest of our product candidates still in preclinical development. In 2016, we completed product candidate selection for our DTX401 and DTX201 programs. Our ability to generate product revenue, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. We currently generate no revenue from sales of any product and we may never be able to develop or commercialize a marketable product.

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

The success of our product candidates will depend on several factors, including the following:

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If we do not succeed in one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. For example, in our Phase 1/2 clinical trial for DTX101, laboratory elevations in ALT levels were observed in 5 of 6 patients with patient 3 in Cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L). As required by the trial protocol, we have reported the ALT levels for patient 3 in Cohort 2 to the Data Safety Monitoring Committee, the FDA and the appropriate regulatory authorities and will await their feedback prior to initiating dosing of Cohort 3.

FDA, the NIH, Health Canada, and the EMA have demonstrated caution in their regulation of gene therapy treatments, and ethical and legal concerns about gene therapy and genetic testing may result in additional regulations or restrictions on the development and commercialization of our product candidates, which may be difficult to predict.

The clinical trial requirements of FDA, the NIH, Health Canada, the EMA and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the product candidate. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or more extensively studied product candidates. Only one AAV gene therapy product, Glybera from uniQure N.V., or uniQure, has received marketing authorization from the European Commission and no gene therapy product has yet been approved in the United States. Approvals by the European Commission may not be indicative of what FDA may require for approval and different or additional preclinical studies or clinical trials may be required to support regulatory approval in each respective jurisdiction.

Additionally, FDA, the U.S. National Institutes of Health, or NIH, Health Canada, and the EMA have each expressed interest in further regulating biotechnology, including gene therapy and genetic testing. For example, the EMA advocates a risk-based approach to the development of a gene therapy product. Agencies at both the federal and state level in the United States, as well as U.S. congressional committees and foreign governments, have also expressed interest in further regulating the biotechnology industry. Such action may delay or prevent commercialization of some or all of our product candidates. For example, in 1999, a patient suffering from OTC deficiency died during a gene therapy clinical trial that utilized an adenovirus vector. It was discovered, unfortunately, that adenoviruses could generate an extreme immune system reaction that can be life-threatening. Thereafter, in January 2000, FDA halted that trial and began investigating 69 other gene therapy trials underway in the United States. Eventually, 28 trials were reviewed, with 13 requiring remedial action. Subsequently, in 2003, FDA suspended 27 additional gene therapy trials involving several hundred patients after learning that a child treated in France had developed leukemia. Although FDA was not aware of any patients treated in these U.S. trials that had suffered illnesses similar to that of the child in France, it nevertheless took precautions. This temporary halt, the largest such action involving gene therapy trials, was a setback for the field.

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Regulatory requirements in the United States and abroad governing gene therapy products have changed frequently and may continue to change in the future. FDA has established the Office of Cellular, Tissue and Gene Therapies within its Center for Biologics Evaluation and Research to consolidate the review of gene therapy and related products, and has established the Cellular, Tissue and Gene Therapies Advisory Committee to advise this review. Prior to submitting an IND, our human gene therapy clinical trials are subject to review by the NIH Office of Biotechnology Activities’, or OBA’s, Recombinant DNA Advisory Committee, or the RAC. As of April 2016, the updated NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules, including gene therapy, provide the opportunity for one or more oversight bodies (institutional review board (“IRB”) or the institutional biosafety committee (“IBC”)) to request a public RAC review based on their own review of the protocol and NIH requirements.  Regardless of the request for public review, NIH RAC members make their own assessment as to whether the protocol would significantly benefit from a public RAC review. The RAC’s recommendations are shared with FDA and the oversight bodies. The RAC can delay the initiation of a clinical trial, even if FDA has reviewed the trial design and details and has not objected to its initiation or has notified the sponsor that the study may begin. Conversely, FDA can put an IND on a clinical hold even if the RAC has provided a favorable review or has recommended against an in-depth, public review. Moreover, under guidelines published by the NIH, patient enrollment in our gene therapy clinical trials cannot begin until, among other things, the investigator for that clinical trial has received a letter from the OBA indicating that the protocol registration process has been completed. Upon receipt of the letter from OBA confirming completion of protocol registration the investigator may obtain final approval from the oversight bodies and patient enrollment may begin if all other applicable regulatory authorizations have been obtained.

If there is a public RAC review, the receipt of the final recommendation letter concludes the protocol registration process and then oversight body, or bodies, approval can be issued. While the RAC completed its initial public review for DTX301, approving the protocol and issuing written recommendations, and its initial review of DTX101, determining that DTX101 does not require a public review, the RAC will continue to review DTX101 and DTX301, and may recommend a public review for DTX101 or additional public reviews in the future with respect to both products or any of our other product candidates. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause FDA or other oversight bodies to change the requirements for approval of any of our product candidates. Similarly, the EMA governs the development of gene therapies in the European Union and may issue new guidelines concerning the development and marketing authorization for gene therapy products and require that we comply with these new guidelines.

These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post- approval limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory and advisory groups and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of such product candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of our product candidates can be costly and could negatively impact our or our collaborators’ ability to complete clinical trials and commercialize our current and future product candidates in a timely manner, if at all.

We may never obtain FDA approval for any of our product candidates in the United States, and even if we do, we may never obtain approval for or commercialize any of our product candidates in any other jurisdiction, which would limit our ability to realize their full market potential.

In order to eventually market any of our product candidates in any particular foreign jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a jurisdiction-by-jurisdiction basis regarding safety and efficacy. Approval by FDA in the United States, if obtained, does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time-consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. The foreign regulatory approval process involves all of the risks associated with FDA approval. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be unrealized.

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If preclinical studies for DTX401 for GSDIa, DTX501 for PKU, DTX701 for Wilson disease, DTX601 for citrullinemia type I, and DTX201 for hemophilia A,  or all of our future product candidates do not result in the determination of a minimally effective dose range, we may not obtain the regulatory approvals required to initiate clinical testing.

As with any systemically delivered adeno-associated virus, or AAV, gene therapy, it is important that we accurately determine a minimally effective dose in order to successfully execute our clinical trial. Exposure to the AAV virus has been shown to induce the production of neutralizing antibodies, which can reduce or eliminate the therapeutic effect of subsequently administered intravenous AAV therapies such as our product candidates. Because of the potential for immune response producing neutralizing antibodies making patients ineligible for a second dose of that vector, clinical trials are required to determine the minimum effective dose and the maximum safe dose. If our preclinical studies fail to demonstrate a starting dose in the clinic that might be reasonably expected to result in a clinical benefit, regulatory agencies may not approve the start of our clinical trials. In addition, even if we start our clinical program, we may not be able to recruit patients who will seek assurance of a clinical benefit following administration of our therapy.

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

We have focused our research and development efforts to date on our ongoing Phase 1/2 open-label clinical trials of DTX101 in adults with moderate/severe to severe hemophilia B and DTX301 for OTC deficiency, which were initiated in January and December 2016, respectively, and our gene therapy platform, identifying our targeted disease indications and our initial product candidates, and our future success depends on our successful development of viable AAV, gene therapy product candidates. These product candidates are based on a relatively new technology that has been exposed to a limited number of patients in the clinic, which makes it difficult to predict the time and cost of development.

In addition to our Phase 1/2 clinical trials of DTX101 and DTX301, we have initiated, completed, or are completing IND-enabling activities on several of our other programs. Commencing each of these clinical trials is subject to acceptance by FDA of our IND and finalizing the trial design based on discussions with FDA and other regulatory authorities. In the event that FDA requires us to complete additional preclinical studies or we are required to satisfy other FDA requests, the start of subsequent clinical trials of DTX101 or our other product candidates may be delayed. Even after we receive and incorporate guidance from these regulatory authorities, FDA or other regulatory authorities could disagree that we have satisfied their requirements to commence our clinical trials or change their position on the acceptability of our trial designs or the clinical endpoints selected, which may require us to complete additional preclinical studies or clinical trials or impose stricter approval conditions than we currently expect. Successful completion of our clinical trials is a prerequisite to submitting a biologics license application, or BLA, to FDA and a marketing authorization application, or MAA, to the EMA for each product candidate and, consequently, to obtaining approval and initiating commercial marketing of our current and future product candidates. We do not know whether any of our clinical trials will begin or be completed on schedule, if at all.

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

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We could encounter delays if a clinical trial is suspended or terminated by us, the IRBs of the institutions in which such trials are being conducted, the Data Safety Monitoring Board, or DSMB, for such trial or FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects that arise in our trial or that occur in other gene therapy trials utilizing AAV vectors sponsored by third parties, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Further, FDA may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. For example, in our Phase 1/2 clinical trial for DTX101, laboratory elevations in ALT levels were observed in 5 of 6 patients with patient 3 in Cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L). As required by the trial protocol, we have reported the ALT levels for patient 3 in Cohort 2 to the Data Safety Monitoring Committee, the FDA and the appropriate regulatory authorities and will await their feedback prior to initiating dosing of Cohort 3. Any delays in our preclinical or future clinical development programs may harm our business, financial condition and prospects significantly.

Our transition from HEK293 to a HeLa platform may require comparability studies, which may result in delays to the approval process for our current or future programs and increased costs resulting from additional preclinical trials.

We have conducted some of our preclinical evaluations with viral vectors produced on adherent and suspension platforms utilizing human embryonic kidney 293, or HEK293, cells. We are conducting our Phase 1/2 trials of DTX101 and DTX301, and plan to conduct our Phase 1/2 trials of DTX401, and potentially other programs using viral vectors produced on the HEK293 platform. For Phase 3 studies and commercial production of each of our product candidates, we plan to use an immortal cell line used in scientific research known as HeLa. HeLa is the oldest and most commonly used human cell line. Even if we successfully complete our planned preclinical studies and clinical trials using vectors produced on our adherent and suspension HEK293 platforms, FDA or other regulatory authorities may require a clinical bridge study, or comparability study, showing comparability of vectors produced on the HeLa platform prior to commencing Phase 3 trials of DTX301, DTX401, DTX601, DTX501, DTX701, and DTX101 delaying the development process. If we make manufacturing or formulation changes to our product candidates in the future, we may need to conduct additional preclinical studies to bridge our modified product candidates to earlier versions. If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

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

We may not be successful in our efforts to use and expand our development platform to build a pipeline of product candidates.

A key element of our strategy is to use our targeted focus, premiere execution and team of leading experts, to identify genetically defined diseases with high unmet medical need in order to build a pipeline of product candidates. Although our research and development efforts to date have resulted in a pipeline of product candidates, we may not be able to continue to identify and develop new product candidates. Even if we are successful in continuing to build our pipeline, the potential product candidates that we identify may not be suitable for clinical development. For example, they may be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be drugs that will receive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize product candidates based upon our approach, we will not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price.  There is no assurance that our platform will successfully accelerate our preclinical and clinical development, and the process of obtaining regulatory approvals will, in any event, require the expenditure of substantial time and financial resources.

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals for our product candidates, we will not be able to commercialize, or will be delayed in commercializing, our product candidates and our ability to generate revenue will be materially impaired.

Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale, distribution, import and export are subject to comprehensive regulation by FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Before we can commercialize any of our product candidates, we must obtain marketing approval. We have not received approval or clearance to market any of our product candidates from regulatory authorities in any jurisdiction and it is possible that none of our product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval or clearance. We have only limited experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third-party CROs or regulatory consultants to assist us in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing regulatory approval also requires the submission of information about the biologic manufacturing process to and inspection of manufacturing facilities by, the relevant regulatory authority. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.

The process of obtaining regulatory approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted BLA, or equivalent application types, may cause delays in the approval or rejection of an application. FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. Our product candidates could be delayed in receiving, or fail to receive, regulatory approval for many reasons, including the following:

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In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, may impose certain post-marketing requirements that impose limits on our marketing and distribution activities, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenue will be materially impaired.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following any potential marketing approval.

As with many pharmaceutical and biological products, treatment with our product candidates may produce undesirable side effects or adverse reactions or events. Although preclinical safety and biodistribution testing conducted on AAV vectors and data from previous clinical trials of other AAV vectors suggest that our AAV capsids may be well tolerated, known adverse side effects that could result from treatment with AAV vectors include an immunologic reaction to the capsid protein or gene at early time points after administration. For example, in our Phase 1/2 clinical trial for DTX101, laboratory elevations in ALT levels were observed in 5 of 6 patients with patient 3 in Cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L). In previous clinical trials involving AAV viral vectors for gene therapy, some subjects experienced adverse events, including the development of a T-cell mediated immune response against the vector capsid proteins. If our vectors demonstrate a similar effect, or other adverse events, we may be required to halt or delay further clinical development of our product candidates. In addition, theoretical adverse side effects of AAV vectors include replication and spread of the virus to other parts of the body and insertional oncogenesis, which is the process whereby the insertion of a gene near a gene that is important in cell growth or division results in uncontrolled cell division, which could potentially enhance the risk of malignant transformation or cancer. Potential procedure-related events are similar to those associated with standard coronary diagnostic procedures, and may include vascular injury (e.g., damage to the femoral, radial, or brachial arteries at the site of vascular access, or damage to the coronary arteries) or myocardial injury. If any such adverse events occur, our clinical trials could be suspended or terminated and FDA, the EMA or other foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The product-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

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Genetically defined diseases may have relatively low prevalence and it may be difficult to identify patients with the disease, which together with other factors have in the past and may in the future lead to delays in enrollment for our trials.

Genetically defined diseases generally, and especially those for which our current product candidates are targeted, may have relatively low prevalence. For example, we estimate that there are approximately 10,000 patients worldwide with OTC deficiency, 8,000 of whom we estimate have late-onset OTC deficiency, which is our target population, 6,000 patients worldwide with GSDIa, approximately 2,000 worldwide patients with citrullinemia type I, more than 50,000 patients worldwide with PKU, and more than 50,000 Wilson disease patients worldwide. In addition, approximately 25% of potential patients in the United States have neutralizing antibodies that will significantly affect our product candidates’ therapeutic efficacy. As a result, we will be required to screen for, and exclude from our clinical trials, patients with neutralizing antibodies to the product candidate that is subject to the clinical trial with specific assays developed for each clinical trial. Moreover, following administration of any AAV vector, patients are likely to develop neutralizing antibodies specific to the vector administered. These could be significant obstacles to the timely recruitment and enrollment of a sufficient number of eligible patients into our trials. For example, we have experienced slower than expected patient enrollment in our ongoing Phase I/II clinical trial of DTX101 and we may experience similar delays in any of our future clinical trials. Patient enrollment may be affected by other factors including:

We intend to engage third parties to develop companion diagnostics for use in our clinical trials to screen for neutralizing antibodies, but such third parties may not be successful in developing or administering such companion diagnostics in a timely manner, or at all. The lack of a suitable companion diagnostics would create difficulty in identifying patients with pre-existing neutralizing antibodies to be excluded from our clinical trials. Our inability to enroll a sufficient number of patients with the applicable genetic alteration for our clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing. Further, if we are unable to include patients with the applicable genetic alteration, this could compromise our ability to seek participation in FDA’s expedited review and approval programs, including Breakthrough Therapy Designation and Fast Track Designation, or otherwise to seek to accelerate clinical development and regulatory timelines.

If we are unable to identify, source, and develop effective predictive biomarkers, or our collaborators are unable to successfully develop and commercialize companion diagnostics for our product candidates, or experience significant delays in doing so, we may not realize the full commercial potential of our product candidates.

We currently anticipate that we will need companion diagnostics to determine whether or not we can dose a particular patient with each of our products. We expect to use predictive biomarkers to identify the right patients for certain of our product candidates. For example, to evaluate therapeutic response of DTX301, we plan to measure ammonia levels and other biomarkers, including ¹³C-acetate, which are established measures of OTC deficiency disease status and ureagenesis. We cannot assure you that ¹³C-acetate or any other future potential biomarker will in fact prove predictive, be reliably sourced, or be accepted by the FDA or other regulatory authorities. In addition, our success may depend, in part, on the development and commercialization of companion diagnostics. We also expect the FDA will require the development and regulatory approval of a companion diagnostic assay as a condition to approval of DTX301. There has been limited success to date industrywide in developing and commercializing these types of companion diagnostics. Development and manufacturing of companion diagnostics is complex and there are limited manufacturers with the necessary expertise and capability. Even if we are able to find a qualified collaborator, it may not be able to manufacture the companion diagnostics at a cost or in quantities or on timelines necessary for use with our product candidates. To be successful, we need to address a number of scientific, technical and logistical challenges. We have not yet initiated development and commercialization of companion diagnostics. We have little experience in the development and commercialization of diagnostics and may not be successful in developing and commercializing appropriate diagnostics to pair with any of our product candidates that receive marketing approval. University of Pennsylvania School of Medicine currently conducts some of our clinical assays pursuant to a sponsored research agreement, one of which is required for our ongoing Phase I/II clinical trial. We intend to enter into agreements

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with third parties for the automation, characterization and validation, of our companion diagnostic and the manufacture of its critical reagents. However, we may be unable to enter into any such agreement on favorable terms, or at all.

Companion diagnostics are subject to regulation by FDA and similar regulatory authorities outside the United States as medical devices and require regulatory clearance or approval prior to commercialization. In the United States, companion diagnostics are cleared or approved through FDA’s 510(k) premarket notification or premarket approval, or PMA, process. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted 510(k) premarket notification, PMA or equivalent application types in jurisdictions outside the United States, may cause delays in the approval, clearance or rejection of an application. Given our limited experience in developing and commercializing diagnostics, we expect to rely in part or in whole on third parties for companion diagnostic design and commercialization. We and our collaborators may encounter difficulties in developing and obtaining approval or clearance for the companion diagnostics, including issues relating to selectivity/specificity, analytical validation, reproducibility, or clinical validation. Any delay or failure by us or our collaborators to develop or obtain regulatory approval of the companion diagnostics could delay or prevent approval of our product candidates.

Positive results from early preclinical studies of our product candidates are not necessarily predictive of the results of later preclinical studies and clinical trials of our product candidates. If we cannot replicate the positive results from our earlier preclinical studies of our product candidates in our later preclinical studies and clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize our product candidates.

Positive results from our preclinical studies of our product candidates, and any positive results we may obtain from our early clinical trials of our product candidates, may not necessarily be predictive of the results from required later preclinical studies and clinical trials. Similarly, even if we are able to complete our planned preclinical studies or clinical trials of our product candidates according to our current development timeline, the positive results from our preclinical studies and clinical trials of our product candidates may not be replicated in subsequent preclinical studies or clinical trial results.

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval.

A Breakthrough Therapy Designation by FDA for our product candidates may not lead to a faster development or regulatory review or approval process and it does not increase the likelihood that our product candidates will receive marketing approval.

We may seek a Breakthrough Therapy Designation for some of our product candidates. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs that have been designated as breakthrough therapies, interaction and communication between FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by FDA may also be eligible for accelerated approval.

Designation as a breakthrough therapy is within the discretion of FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, FDA may disagree and instead determine not to make such designation. In any event, the receipt of a Breakthrough Therapy Designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under non-expedited FDA review procedures and does not assure ultimate approval by FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, FDA may later decide that the drugs no longer meet the conditions for qualification.

A Fast Track Designation by FDA may not actually lead to a faster development or regulatory review or approval process.

We have sought and received Fast Track Designation for DTX101 and we may seek Fast Track Designation for some of our other product candidates. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for Fast Track Designation. FDA has broad discretion whether or not to grant this designation, so even if we believe a particular product candidate is eligible for this designation, we cannot assure you that FDA would decide to grant it. Even though we have obtained Fast Track Designation for DTX101 and even if we receive Fast Track Designation for our other product candidates, we may not experience a faster development process, review or

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approval compared to non-expedited FDA review procedures. In addition, FDA may withdraw Fast Track Designation for DTX101 or any other product candidate that is granted if it believes that the designation is no longer supported by data from our clinical development program.

We have sought and received Orphan Drug Designation for DTX101, DTX301 and DTX401 in the United States and Europe, and we may seek Orphan Drug Designation for some of our other product candidates and we may be unsuccessful or may be unable to maintain the benefits associated with Orphan Drug Designation, including the potential for market exclusivity.

As part of our business strategy, we have sought and received Orphan Drug Designation for DTX101, DTX301 and DTX401 in the United States and Europe. We may seek Orphan Drug Designation for our other product candidates and we may be unsuccessful or unable to maintain the associated benefits. Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs intended to treat relatively small patient populations as orphan drugs. Under the U.S. Orphan Drug Act, FDA may designate a drug as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the United States, Orphan Drug Designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax credits for qualified clinical research costs, and prescription drug user-fee waivers.

Similarly, in the European Union, the European Commission grants Orphan Drug Designation after receiving the opinion of the EMA’s Committee for Orphan Medicinal Products on an Orphan Drug Designation application. In the European Union, Orphan Drug Designation is intended to promote the development of drugs that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in the European Union and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to those affected). Additionally, orphan designation is granted for drugs intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug. In the European Union, Orphan Drug Designation entitles a party to financial incentives such as reduction of fees or fee waivers.

Generally, if a drug with an Orphan Drug Designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug is entitled to a period of marketing exclusivity, which precludes the EMA or FDA from approving another marketing application for the same drug and indication for that time period, except in limited circumstances. If our competitors are able to obtain orphan drug exclusivity prior to use, for products that constitute the same drug and treat the same indications as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time. The applicable period is seven years in the United States and ten years in the European Union. The European Union exclusivity period can be reduced to six years if a drug no longer meets the criteria for Orphan Drug Designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified.

Even though we have obtained Orphan Drug Designations for DTX101, DTX301 and DTX401, and even if we obtain orphan drug exclusivity for DTX101 and other product candidates, that exclusivity may not effectively protect DTX101, DTX301, DTX401 or our other product candidates from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, FDA can subsequently approve a later application for the same drug for the same condition if FDA concludes that the later drug is clinically superior in that it is shown to be safer in a substantial portion of the target populations, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if FDA later determines that the request for designation was materially defective or if we are unable to manufacture sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Orphan Drug Designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. While we intend to seek Orphan Drug Designation for our other product candidates in addition to DTX101, DTX301 and DTX401, we may never receive such designations. Even if we do receive such designations, there is no guarantee that we will enjoy the benefits of those designations.

Even if we receive regulatory approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

If FDA or a comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the biologic will be governed by, and subject to, extensive and ongoing regulatory requirements. These requirements include submissions of safety and

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other post-marketing information and reports, registration, as well as continued compliance with current Good Manufacturing Practices, or cGMPs, and Good Clinical Practices, or GCPs, for any clinical trials that we conduct post-approval. Any regulatory approvals that we receive for our product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or may include conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and surveillance to monitor the safety and efficacy of the product. FDA also may place other conditions on approvals including the requirement for a risk evaluation and mitigation strategy, or REMS, to assure the safe use of the product. If FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS before it can obtain approval. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Later discovery of previously unknown problems with a product candidate, including adverse events of unanticipated severity or frequency, or with our manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

Risks Related to Manufacturing and Commercialization

Gene therapy products are novel, complex, expensive and difficult to manufacture. We could experience manufacturing problems that result in delays in our development or commercialization programs or otherwise harm our business.

The manufacturing process used to produce our product candidates is complex, novel and has not been validated for commercial use. Several factors could cause production interruptions, including equipment malfunctions, regulatory inspections, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error or disruptions in the operations of our suppliers.

Our product candidates require processing steps that are more complex than those required for most small molecule drugs. Moreover, unlike small molecules, the physical and chemical properties of a biologic such as ours generally cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product is consistent from lot to lot or will perform in the intended manner. Accordingly, we employ multiple steps to control the manufacturing process to assure that the process works reproducibly and the product candidate is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, noncompliance with regulatory requirements, product recalls, product liability claims or insufficient inventory. We may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, the EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.

In addition, FDA, the EMA and other foreign regulatory authorities may require us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, FDA, the EMA or other foreign regulatory authorities may require that we not distribute a lot until the agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects.

We also may encounter problems hiring and retaining the experienced scientific, quality-control and manufacturing personnel needed to operate our manufacturing processes, which could result in delays in production or difficulties in maintaining compliance with applicable regulatory requirements. We also may not be able to complete scaling up of our facility in Woburn, MA, and this facility may not enable the expansion of our internal manufacturing process discovery and development to the extent we anticipate, or at all.

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Any problems in our manufacturing process or facilities could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit our access to additional attractive development programs. Problems in our manufacturing process could restrict our ability to meet market demand for our products.

Delays in obtaining a biologics license or disruptions in our manufacturing process may delay or disrupt our commercialization efforts. To date, no cGMP gene therapy manufacturer in the United States has received approval from FDA for the manufacture and commercialization of a gene therapy product.

Before we can begin to commercially manufacture our product candidates in the facility of a contractor or collaborator, or if we ever establish our own facility, we must obtain a biologics license from FDA. The biologics license is a determination that the product, the manufacturing process, and the manufacturing facility meet applicable requirements to ensure continued safety, purity and potency of the product. It is possible that FDA will not accept a future registration package in support of a license application for any of one or more reasons, including the safety, purity, and potency of the product candidate, the degree of product characterization, elements of the design or execution of the previous trials or safety concerns, or other trial results. Even if we receive regulatory approval for any of our product candidates, we will need to evaluate the formulation, stability and reproducibility of the formulated drug or drug product for commercial manufacturing. An MAA must also be submitted and approved by the appropriate European Union regulatory authority, and the product candidate must be manufactured in accordance with the approved application. To date, no cGMP gene therapy manufacturer in the United States has received approval from FDA for the manufacture and commercialization of a gene therapy product and, therefore, the timeframe required for us to obtain such approval is uncertain.

We expect our manufacturing strategy will involve the use of one or more CMOs as well as establishing our own capabilities and infrastructure, including at our Woburn, MA facility where we will support continued innovation in vector optimization and development of manufacturing processes required for IND-enabling studies and the reliable production of high quality AAV vectors at commercial scale. We expect that development of our own process development facility will provide us with enhanced control of material supply for both clinical trials and the commercial market, enable the more rapid implementation of process changes, and allow for better long-term margins. However, we have no experience as a company in developing a manufacturing facility and may never be successful in developing our own manufacturing facility or capability. Additionally, given that cGMP gene therapy manufacturing is a nascent industry, there are a small number of CMOs with the experience necessary to manufacture our product candidates and we may have difficulty finding or maintaining relationships with such CMOs or hiring experts for internal manufacturing and accordingly, our production capacity may be limited. We may establish multiple manufacturing facilities as we expand our commercial footprint to multiple geographies, which may lead to regulatory delays or prove costly. Even if we are successful, our manufacturing capabilities could be affected by cost-overruns, unexpected delays, equipment failures, lack of capacity, labor shortages, natural disasters, power failures and numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy and have a material adverse effect on our business.

In addition, the manufacturing process for any products that we may develop is subject to FDA and foreign regulatory authority approval process, and we will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority requirements on an ongoing basis. If we or our CMOs are unable to reliably produce products to specifications acceptable to FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CMOs will be able to manufacture the approved product to specifications acceptable to FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations and growth prospects.

We intend to produce and to rely on third parties to produce our product candidates and other key materials, but we and these third parties have minimal or no experience producing our product candidates or other materials for late-stage clinical use or at commercial scale, and may not achieve the necessary regulatory approvals or produce our products or other materials at the quality, quantities, locations and timing needed to support development or commercialization.

Manufacturing of our product candidates is complex and any manufacturer with whom we may enter into an agreement may not have the expertise necessary to or be able to manufacture our product candidates at a cost or in quantities or on timelines necessary for the successful commercialization of our product candidates. If we successfully commercialize any of our product candidates, we will be required to establish commercial manufacturing capabilities, which we expect will rely on one or more third parties, and there is no guarantee that any such third parties will be able to do this in a timely manner, or at all. In addition, in the event that our product development pipeline increases and matures, we will have a greater need for clinical trial and commercial manufacturing capacity. Given that no gene therapy product has been approved in the United States, and only one has been approved in the European Union, there are few manufacturers with expertise in the manufacture of gene therapy products at late-stage clinical or commercial scale.

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Although we have made, and expect to continue to make, substantial investments to develop manufacturing processes designed to produce AAV vectors at commercial scale, we do not have experience in manufacturing gene therapy products at commercial scale. We also have no experience in manufacturing any other pharmaceutical or biological products on a commercial scale and our potential suppliers will have to construct and validate new commercial manufacturing facilities and obtain regulatory approvals for the facilities before being able to produce our product candidates and there can be no assurance that they will succeed in doing so. Although we have specifically invested in developing expertise in manufacturing processes and have hired a team with extensive experience in production of product candidates for clinical use because we believe that these processes will be vital to support manufacture at late-stage clinical scale or, if approved, at commercial scale, we cannot assure you that our experience and expertise at manufacturing our product candidates on a small, clinical scale will be in fact sufficient to manufacture our products at late-stage clinical scale or, if approved, commercial scale. If our third-party manufacturers are unable to produce our viral vectors or product candidates in the necessary quantities, or in compliance with cGMP, or other pertinent regulatory requirements, such as stability, expiry or potency requirements or specifications, and within our planned time frame and cost parameters, the development and sales of our products, if approved, may be materially harmed.

We may run into technical or scientific issues related to manufacturing or development that we may be unable to resolve in a timely manner or with available funds. In addition, we have not completed the development, characterization and validation activities necessary for commercial and regulatory approvals. If any of our manufacturing partners does not obtain such regulatory approvals for their facilities, our commercialization efforts will be harmed. In addition, any significant disruption in our supplier relationships could harm our business. We source key materials from third parties, either directly through agreements with suppliers or indirectly through our manufacturers who have agreements with suppliers. There are a small number of suppliers for certain key materials that are used to manufacture our product candidates. Such suppliers may not sell these key materials to our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these key materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these key materials.

Any contamination in our or our third parties’ manufacturing process, shortages of raw materials or failure of any of our key suppliers to deliver necessary components of our platform could result in delays in our clinical development or marketing schedules.

Given the nature of biologics manufacturing, there is a risk of contamination. Any contamination could materially adversely affect our or our third-party vendor’s ability to produce our gene therapies on schedule and could therefore harm our results of operations and cause reputational damage.

Some of the raw materials required in our and our third-party vendors manufacturing processes are derived from biological sources. We cannot assure you that we or our third-party vendors have, or will be able to obtain on commercially reasonable terms, or at all, sufficient rights to these materials derived from biological sources. Such raw materials are difficult to procure and may also be subject to contamination or recall. A material shortage, contamination, recall, or restriction on the use of biologically derived substances in the manufacture of our product candidates could adversely impact or disrupt the clinical and commercial manufacturing of our product candidates, which could materially and adversely affect our operating results and development timelines.

We rely on third-party suppliers for the supply and manufacture of certain components of our technology. Specifically, we have only one source of supply for some of the materials used in the upstream and downstream steps of our manufacturing process. These suppliers are not required to give us advance notice in the event they discontinue supply of the relevant materials. Should our ability to procure these material components from our suppliers be compromised, our ability to continuously operate would be impaired until an alternative supplier is sourced, qualified and tested, which could limit our ability to produce a clinical and commercial supply of our product candidates and harm our business.

Our use of viruses, chemicals and other hazardous materials requires us to comply with regulatory requirements and exposes us to significant potential liabilities.

Our development and manufacturing processes involve the use of viruses, chemicals and other hazardous materials, and produce waste products. Accordingly, we are subject to federal, state and local laws and regulations in the United States, are subject to comparable regulations in Europe and are subject to other foreign regulations governing the use, manufacture, distribution, storage, handling, treatment and disposal of these materials. In addition to ensuring the safe handling of these materials, applicable requirements require increased safeguards and security measures for many of these agents, including controlling access and screening of entities and personnel who have access to them, and establishing a comprehensive national database of registered entities. In the event of an accident or failure to comply with environmental, occupational health and safety and export control laws and regulations, we could be held liable for damages that result, and any such liability could exceed our assets and resources.

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Our estimates of the incidence and prevalence for target patient populations for some or all of our product candidates may be inaccurate. If the market opportunities for our product candidates are smaller than we estimate or if any approval that we obtain is based on a narrower definition of the patient population, our revenue and ability to achieve profitability will be adversely affected, possibly materially.

Our projections of both the number of people who have OTC deficiency, GSDIa, citrullinemia type I, PKU, Wilson disease, hemophilia B, and hemophilia A, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. The precise incidence and prevalence for OTC deficiency and GSDIa are unknown. By our estimate, the number of addressable patients globally with late-onset OTC deficiency is approximately 8,000, with GSDIa is approximately 6,000, citrullinemia type I approximately 2,000, PKU more than 50,000, and more than 50,000 for Wilson disease. We estimate that the number of addressable patients with moderate to severe hemophilia B and hemophilia A is approximately 2,800 and 10,300 in the United States, respectively, and approximately 6,000 and 35,800 globally, respectively.

The total addressable market opportunity for DTX301 for the treatment of patients with OTC deficiency, DTX401 for the treatment of GSDIa patients, DTX601 for the treatment of patients with citrullinemia type I, DTX501 for the treatment of patients with PKU, DTX701 for the treatment of patients with Wilson disease, DTX101 for the treatment of hemophilia B, and DTX201 for the treatment of hemophilia A will ultimately depend upon, among other things, the diagnosis criteria included in the final label for each of DTX301, DTX401, DTX601, DTX501, DTX701, DTX101, and DTX201 if our product candidates are approved for sale for these indications, acceptance by the medical community and patient access, drug pricing and reimbursement. Additionally, approximately 25% of potential patients estimated to exist in the United States have neutralizing antibodies that will significantly affect our product candidates’ therapeutic efficacy. Thus, the number of patients globally may turn out to be lower than expected, patients may not be otherwise amenable to treatment with our products, or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business.

The commercial success of any of our product candidates will depend upon its degree of market acceptance by physicians, patients, third-party payors and others in the medical community.

Ethical, social and legal concerns about gene therapy could result in additional regulations restricting or prohibiting our products. Even with the requisite approvals from FDA in the United States, the EMA in the European Union and other regulatory authorities internationally, the commercial success of our product candidates will depend, in part, on the acceptance of physicians, patients and health care payors of gene therapy products in general, and our product candidates in particular, as medically necessary, cost-effective and safe. Any product that we commercialize may not gain acceptance by physicians, patients, health care payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of gene therapy products and, in particular, our product candidates, if approved for commercial sale, will depend on several factors, including:

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Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after it is launched.

Our gene therapy approach utilizes vectors derived from viruses, which may be perceived as unsafe or may result in unforeseen adverse events. Negative public opinion and increased regulatory scrutiny of gene therapy may damage public perception of the safety of our product candidates and adversely affect our ability to conduct our business or obtain regulatory approvals for our product candidates.

Gene therapy remains a novel technology, with no gene therapy product approved to date in the United States and only one gene therapy product approved to date in the European Union. Public perception may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. In particular, our success will depend upon physicians who specialize in the treatment of genetic diseases targeted by our product candidates, prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments with which they are familiar and for which greater clinical data may be available. More restrictive government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop. For example, earlier gene therapy trials led to several well- publicized adverse events, including cases of leukemia and death seen in other trials using other vectors.

A public backlash developed against gene therapy following the death in September 1999 of a patient who had volunteered for a gene therapy clinical trial that utilized an adenovirus vector at University of Pennsylvania School of Medicine. Researchers at the university, led by James M. Wilson, M.D., Ph.D., the chair of our clinical advisory board, had infused the volunteer’s liver with a gene aimed at reversing OTC deficiency. The procedure triggered an extreme immune-system reaction that caused multiple organ failure in a very short time, leading to the first death to occur as a direct result of a gene therapy experiment. In addition, in two gene therapy studies in 2003, 20 subjects treated for X-linked severe combined immunodeficiency using a murine gamma-retroviral vector showed correction of the disease. However, the studies were suspended by FDA after a child in France developed leukemia and ultimately four other subjects were found to have developed leukemia.

Although none of our current product candidates utilize the human adenovirus or murine gamma-retroviruses used in the above- mentioned 1999 or 2003 studies, our product candidates do use a viral vector delivery system. The risk of cancer remains a concern for gene therapy and we cannot assure you that it will not occur in any of our planned or future clinical studies. In addition, there is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biological activity of the genetic material or other components of products used to carry the genetic material.

Serious adverse events in our clinical trials, or other clinical trials involving gene therapy products, particularly AAV gene therapy products such as candidates based on the same capsid serotypes as our product candidates, or occurring during use of our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any products for which we obtain marketing approval.

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For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act, was enacted to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.  As implementation of the of the Affordable Care Act is ongoing, the law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, that while not a law, is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In addition, Congress could consider subsequent legislation to replace elements of the Affordable Care Act that are repealed, or the President could sign additional Executive Orders affecting elements of the Affordable Care Act. The implications of a potential repeal and/or replacement of the Affordable Care Act, or of other actions by the President or Congress related to the Affordable Care Act, for our and our partners’ business and financial condition, if any, are not yet clear.

Moreover, the Drug Supply Chain Security Act imposes new obligations on manufacturers of pharmaceutical products related to product tracking and tracing. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the current regulations, guidance or interpretations will be changed, or what the impact of such changes on our business, if any, may be.

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

The biotechnology and pharmaceutical industries, including the gene therapy field, are characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. We face substantial competition from many different sources, including large and specialty pharmaceutical and biotechnology companies, academic research institutions, government agencies and public and private research institutions, some or all of which may have greater access to capital or resources than we do.

We are aware of several companies focused on developing gene therapies in various indications using various modalities including AAV vectors, including Spark Therapeutics, Inc., Applied Genetic Technologies Corporation, Asklepios BioPharmaceutical, Inc., Audentes Therapeutics, Inc., Adverum Biotechnologies, Voyager Therapeutics, Inc., GenSight Biologies SA, NightstaRx Limited, Selecta Biosciences, Inc., REGENX, bluebird bio, Inc. and uniQure as well as several companies addressing other methods for modifying genes and regulating gene expression. Any advances in gene therapy technology made by a competitor may be used to develop therapies that could compete against any of our product candidates. If any of our competitors obtain regulatory approval of a gene therapy product for a disease that our current or future product candidates target, it may significantly diminish the market opportunity for our competing product candidate. This risk is particularly applicable when the patient populations for a disease are very small, which is the case for our product candidates, and in the field of gene therapy where a single administration may be sufficient to durably treat the disease.

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The main competitors for our specific programs are as follows:

To become and remain profitable, we must develop and eventually commercialize product candidates with significant market potential, which will require us to be successful in a range of challenging activities. These activities can include completing preclinical studies and clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products that are approved and satisfying any post marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.

If we obtain approval to commercialize our product candidates outside of the United States, in particular in the European Union, a variety of risks associated with international operations could harm our business.

We expect that we will be subject to additional risks in commercializing our product candidates outside the United States, including:

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In some countries, particularly the countries in Europe, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our drugs is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

Further, in many foreign countries it is common for others to engage in business practices that are prohibited by U.S. laws and regulations applicable to us, including the Foreign Corrupt Practices Act. Although we expect to implement policies and procedures designed to comply with these laws and policies, there can be no assurance that our employees, contractors and agents will comply with these laws and policies. If we are unable to successfully manage the challenges of international expansion and operations, our business and operating results could be harmed.

The pricing, insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate product revenue.

Our target patient populations are small, and accordingly, the pricing, insurance coverage, and reimbursement status of our product candidates, if approved, must be sufficient to support our commercial infrastructure. Our per-patient prices must be sufficient to recover our development and manufacturing costs and potentially achieve profitability.

We expect the cost of a single administration of gene therapy products, such as those we are developing, to be substantial, when and if they achieve regulatory approval. We expect that coverage and reimbursement by government and private payors will be essential for most patients to be able to afford these treatments. Accordingly, sales of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors. Coverage and reimbursement by a third-party payor may depend upon several factors, including the third-party payor’s determination that use of a product is:

No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, obtaining coverage and reimbursement for a product from third-party payors is a time-consuming and costly process that could require us to provide to each different payor supporting scientific, clinical and cost-effectiveness data. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If coverage and reimbursement are not available, or are available only at limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be adequate to realize a sufficient return on our investment. Assuming we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover all or a significant portion of the cost of our products. Therefore, coverage and adequate reimbursement is critical to new product acceptance. Additionally, there may be significant delays in obtaining coverage and reimbursement for newly approved biologics, and coverage may be more limited than the purposes for which the product is approved by FDA or comparable foreign regulatory authorities.

There is significant uncertainty related to third-party coverage and reimbursement of newly approved products. In the United States, third-party payors, including government payors such as the Medicare and Medicaid programs, play an important role in determining the extent to which new drugs and biologics will be covered and reimbursed. The Medicare and Medicaid programs increasingly are used as models for how private payors and government payors develop their coverage and reimbursement policies. Currently, no gene therapy product has been approved for coverage and reimbursement by the Centers for Medicare & Medicaid Services, or CMS, the agency responsible for administering the Medicare program. It is difficult to predict what CMS will decide with respect to coverage and reimbursement for fundamentally novel products such as ours, as there is no body of established practices and precedents for these types of products. Moreover, reimbursement agencies in the European Union may be more conservative than

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CMS. For example, several cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement in certain European Union Member States. It is difficult to predict what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.

Outside the United States, international operations generally are subject to extensive government price controls and other market regulations, and increasing emphasis on cost-containment initiatives in the European Union, Canada and other countries may put pricing pressure on us. For example, one gene therapy product was approved in the European Union in 2012 but is yet to be widely available commercially. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. In general, the prices of medicines under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for medical products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable product revenues.

Moreover, increasing efforts by government and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for our product candidates. Payors increasingly are considering new metrics as the basis for reimbursement rates, such as average sales price, average manufacturer price, or AMP, and actual acquisition cost. The existing data for reimbursement based on some of these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates, and CMS has begun making pharmacy National Average Drug Acquisition Cost and National Average Retail Price data publicly available on at least a monthly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement metrics on the willingness of payors to cover candidate products that we or our partners are able to commercialize. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become intense. As a result, increasingly high barriers are being erected to the entry of new products such as ours.

If in the future we are unable to establish U.S. or global sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved and we may not be able to generate any revenue.

We do not currently have a sales or marketing infrastructure and have limited experience in the sale, marketing or distribution of drugs or biologics. To achieve commercial success for any approved product candidate for which we retain sales and marketing responsibilities, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. In the future, we may choose to build a focused sales and marketing infrastructure to sell, or participate in sales activities with our collaborators for, some of our product candidates if and when they are approved.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our product candidates on our own include:

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenue or the profitability to us from these revenue streams is likely to be lower than if we were to market and sell any product candidates that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties

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and any of them may fail to devote the necessary resources and attention to sell and market our product candidates effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates. Further, our business, results of operations, financial condition and prospects will be materially adversely affected.

Risks Related to Our Financial Position and Need for Additional Capital

We are a biopharmaceutical company with a limited operating history and have not generated any revenue from product sales. We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future and may not continue as a going concern.

We are a biopharmaceutical company with a limited operating history on which to base an investment decision. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We commenced operations in November 2013. Our operations to date have been limited primarily to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights and conducting research and development activities for our product candidates. We have never generated any revenue from product sales. We have not obtained regulatory approvals for any of our product candidates. We have funded our operations to date through proceeds from sales of preferred stock, from our IPO and from payments received in connection with our collaboration agreement with Bayer and, to a lesser extent, through borrowings under a loan and security agreement, as amended, that we entered into with Silicon Valley Bank, or SVB, in August 2014, as amended. We have incurred net losses in each year since our inception. As of December 31, 2016, we had an accumulated deficit of $100.2 million. Our net loss was $49.0 million and $35.1 million for the years ended December 31, 2016 and 2015, respectively. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses over the next several years and for the foreseeable future and may not continue as a going concern. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital. We expect our research and development expenses to significantly increase in connection with beginning clinical trials of our product candidates. In addition, if we obtain marketing approval for our product candidates, we will incur significant sales, marketing and manufacturing expenses. As a public company, we will continue to incur costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical drugs, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any product revenue from our lead programs and product candidates, DTX301, DTX401, DTX601, DTX501, DTX701, DTX101, and DTX201, and we do not know and do not expect to generate any revenue from the sale of our product candidates in the near future. We do not expect to generate significant product revenue unless and until we or our partners obtain marketing approval of and begin to sell DTX301, DTX401, DTX601, DTX501, DTX701, DTX101, or DTX201, or one of our other product candidates. Our ability to generate product revenue depends on a number of factors, including, but not limited to, our ability to:

We have entered into a collaboration agreement with Bayer for the development of DTX201 for hemophilia A. Absent our entering into a collaboration or partnership agreement for our remaining product candidates, we expect to incur significant sales and marketing costs as we prepare to commercialize our product candidates. Despite expending these costs, even if we initiate and successfully complete pivotal clinical trials of our product candidates and our product candidates are approved for commercial sale, our product candidates may not be commercially successful. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.

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We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate some of our product development programs or commercialization efforts.

The development of pharmaceutical drugs is capital-intensive. We initiated Phase 1/2 open-label clinical trial of DTX101 in adults with moderate/severe to severe hemophilia B in January 2016 and a Phase 1/2 open-label clinical trial of DTX301 for OTC deficiency in December 2016. We are in IND-enabling activities to support IND filings for DTX401 for GSDIa and DTX201 for hemophilia A by the end of 2017, and are in candidate selection activities for DTX501, DTX701, and DTX601, and expect to select development candidates for DTX501 and DTX701 by the end of 2017. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, initiate clinical trials of and seek marketing approval for our product candidates. In addition, depending on the status of regulatory approval or, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of Bayer, or other collaborators. We may also need to raise additional funds sooner if we choose to pursue additional indications or geographies for our product candidates or otherwise expand more rapidly than we presently anticipate. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate certain of our research and development programs or future commercialization efforts.

We expect that our existing cash, cash equivalents and marketable securities totaling $78.0 million and payments expected to be received in connection with our collaboration agreement with Bayer, including reimbursements and $15 million in milestones, and borrowing capacity under our loan and security agreement with SVB, will enable us to fund our operating expenses and capital expenditure requirements through mid-2018. Our future capital requirements will depend on and could increase significantly as a result of many factors, including:

Identifying potential product candidates and conducting preclinical development testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenue, if any, will be derived from product sales that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to complete development of our product candidates and commercialize our products, if approved.

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Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. Dislocations in the financial markets have generally made equity and debt financing more difficult to obtain and may have a material adverse effect on our ability to meet our fundraising needs. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidate or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

The terms of our loan and security agreement may restrict our ability to engage in certain transactions.

In August 2014, we entered into a loan and security agreement with SVB. Pursuant to the terms of the loan and security agreement, as amended, subject to certain exceptions, we cannot engage in certain transactions unless certain conditions are met or we receive the prior approval of SVB. Such transactions include:

If SVB does not provide its consent to such actions, we could be prohibited from engaging in transactions that could be beneficial to our business and our stockholders unless we were to repay the loans, which may not be desirable or possible. The loan and security agreement is collateralized by a pledge of substantially all of our assets, except for intellectual property. If we were to default under the loan and security agreement, including for an inability to repay amounts as they become due, and we were unable to obtain a waiver for such a default, SVB would have a right to accelerate our obligation to repay the entire loan and foreclose on these assets in order to satisfy our obligations under the loan and security agreement. In addition, SVB would also have the right to place a hold on our accounts maintained at SVB and refuse to fund any then unfunded commitments under the loan and security agreement. Any such action on the part of SVB against us could have a materially adverse impact on our business, financial condition and results of operations.

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Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, contain rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carry forwards and certain built-in losses recognized in years after the ownership change. An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation. If an ownership change occurs, Section 382 generally imposes an annual limitation on the use of pre-ownership change net operating losses, credits and certain other tax attributes to offset taxable income earned after the ownership change. The annual limitation is equal to the product of the applicable long-term tax exempt rate and the value of the Company’s stock immediately before the ownership change. This annual limitation may be adjusted to reflect any unused annual limitation for prior years and certain recognized built-in gains and losses for the year. In addition, Section 383 generally limits the amount of tax liability in any post-ownership change year that can be reduced by pre-ownership change tax credit carryforwards. This could result in increased U.S. federal income tax liability for us if we generate taxable income in a future period. Limitations on the use of NOLs and other tax attributes could also increase our state tax liability. The use of our tax attributes will also be limited to the extent that we do not generate positive taxable income in future tax periods. As a result of these limitations, we may be unable to offset future taxable income (if any) with losses, or our tax liability with credits, before such losses and credits expire.

As of December 31, 2016, we had federal and state net operating loss carryforwards of $73.1 million and $73.5 million, respectively, both of which begin to expire in 2033. Our ability to utilize those net operating loss carryforwards could be limited by an “ownership change” as described above, which may increase our federal income tax liability. The completion of our recent IPO, together with private placements and other transactions that have occurred since our inception, may have triggered such an ownership change pursuant to Section 382. Any such limitation, whether as the result of our IPO, prior private placements, sales of our common stock by our existing stockholders or additional sales of our common stock by us, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.

Risks Related to Our Relationships with Third Parties

Our executive officers, directors, principal stockholders and their affiliates exercise significant influence over our company, which could delay or prevent a change in corporate control.

As of March 2, 2017, the existing holdings of our executive officers, directors, principal stockholders and their affiliates, including entities affiliated with FMR LLC, or FMR, investment funds affiliated with OrbiMed Advisors LLC, or OrbiMed, and New Leaf Venture Partners, LLC will represent beneficial ownership, in the aggregate, of approximately 57% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. This concentration of ownership might adversely affect the market price of our common stock by:

We may seek to establish additional collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with additional pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates. We may enter into collaborations and partnerships for our programs and pipeline intended to allow us to leverage the resources and expertise of strategic collaborators or partners.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate

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to patients, the potential of competing drugs, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any additional collaborations or other arrangements that we may establish may not be favorable to us.

We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

We may not be able to negotiate additional collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.

In addition, our collaboration with Bayer and any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

We expect to rely on third parties to conduct our preclinical studies and clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties, comply with regulatory requirements or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We do not have the ability to independently conduct preclinical and clinical trials. We expect to rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct preclinical studies and clinical trials for our product candidates. We expect to rely heavily on these parties for execution of preclinical and clinical trials for our product candidates and control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our preclinical and clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards and our reliance on CROs will not relieve us of our regulatory responsibilities. For any violations of laws and regulations during the conduct of our preclinical and clinical trials, we could be subject to warning letters or enforcement action that may include civil penalties up to and including criminal prosecution.

We and our CROs will be required to comply with regulations, including GCPs, for conducting, monitoring, recording and reporting the results of preclinical and clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial patients are adequately informed of the potential risks of participating in clinical trials and their rights are protected. These regulations are enforced by FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any drugs in clinical development. FDA enforces GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, FDA will determine that any of our future clinical trials will comply with GCPs. In addition, our clinical trials must be conducted with product candidates produced in accordance with the requirements in cGMP regulations. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action. We also are required to register our ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

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Although we intend to design the clinical trials for our product candidates, CROs will conduct all of the clinical trials. As a result, many important aspects of our development programs, including their conduct and timing, will be outside of our direct control. Our reliance on third parties to conduct future preclinical and clinical trials will also result in less direct control over the management of data developed through preclinical and clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

These factors may materially adversely affect the willingness or ability of third parties to conduct our preclinical and clinical trials and may subject us to unexpected cost increases that are beyond our control. If the CROs do not perform preclinical and clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development, regulatory approval and commercialization of our product candidates may be delayed, we may not be able to obtain regulatory approval and commercialize our product candidates, or our development programs may be materially and irreversibly harmed. If we are unable to rely on preclinical and clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of any clinical trials we conduct and this could significantly delay commercialization and require significantly greater expenditures.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any preclinical studies or clinical trials with which such CROs are associated with may be extended, delayed or terminated. In such cases, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication could be harmed, our costs could increase and our ability to generate revenue could be delayed.

We depend on third parties, including researchers and sublicensees, who are not under our control.

Since we are party to a collaboration agreement for the development of DTX201 with Bayer and rely on University of Pennsylvania School of Medicine to conduct preclinical studies for certain of our product candidates, we depend upon our sublicensee and independent investigators and scientific collaborators and other universities and medical institutions or private physician scientists, to advise us and to conduct our preclinical studies and clinical trials under agreements with us, including by developing and running screening assays for prospective patients in our clinical studies. University of Pennsylvania School of Medicine currently conducts some of our clinical assays pursuant to a sponsored research agreement, one of which is required for our first planned clinical trial. These collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs or the timing of their procurement of clinical-trial data or their compliance with applicable regulatory guidelines. Should any of these scientific advisors or those of our sublicensee become disabled or die unexpectedly, or should they fail to comply with applicable regulatory guidelines, we or our sublicensee may be forced to scale back or terminate development of that program. They may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking those programs ourselves. These collaborators may also have relationships with other commercial entities, some of which may compete with us. Failing to devote sufficient time and resources to our program or product candidates, or substandard performance and failure to comply with regulatory guidelines, could result in delay of any FDA applications and our commercialization of the product candidate involved. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, we will be unable to prevent them from establishing competing businesses or developing competing products. For example, if a key scientist acting as a principal investigator in any of our clinical trials identifies a potential product or compound that is more scientifically interesting to his or her professional interests, his or her availability to remain involved in our clinical trials could be restricted or eliminated. If any of the foregoing were to become inaccessible or terminated, it would be difficult for us to develop and commercialize our biologic product candidates.

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We rely on third parties to conduct some aspects of our vector production, product manufacturing, reagent manufacturing, protocol development, research, and preclinical and clinical testing, and these third parties may not perform satisfactorily.

We do not currently independently conduct all aspects of our vector production, product manufacturing, reagent manufacturing, protocol development, research and monitoring and management of our ongoing preclinical studies and clinical trials. We currently rely, and expect to continue to rely, on third parties with respect to these items, and control only certain aspects of their activities.

Most of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, our product candidate activities may be delayed. Our reliance on these third parties for research and development activities, including the conduct of any IND-enabling studies, reduces our control over these activities but does not relieve us of our responsibility to ensure compliance with all required legal, regulatory and scientific standards and any applicable trial protocols. For example, for product candidates that we develop and commercialize on our own, we will remain responsible for ensuring that each of our IND-enabling studies and clinical trials are conducted in accordance with the trial plan and protocols.

If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, or if there are process deviations that result in noncompliance with stability requirements or specifications, we may be delayed in completing, or unable to complete, the preclinical studies and clinical trials required to support future IND submissions and approval of our product candidates.

We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical trials. There are a small number of suppliers for certain capital equipment and raw materials that we use to manufacture our product candidates. Such suppliers may not sell these raw materials to our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Any significant delay in the supply of a product candidate, or the raw material components thereof for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, our ability to commercially launch and/or generate revenues from the sale of any of our approved products would be impaired. Reliance on third-party manufacturers entails exposure to risks to which we would not be subject if we manufactured the product candidates ourselves, including:

Any of these events could lead to delays in the development of our product candidates, including delays in our clinical trials, or failure to obtain regulatory approval for our product candidates, or it could impact our ability to successfully commercialize our current product candidates or any future products. Some of these events could be the basis for FDA or other regulatory action, including injunction, recall, seizure or total or partial suspension of production.

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Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion from government healthcare programs, contractual damages, reputational harm and diminished profits and future earnings.

Although we do not currently have any drugs on the market, once we begin commercializing our product candidates, we will be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product candidates for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations in the U.S., include the following:

Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales team, were to be found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

We may in the future form strategic alliances or acquire businesses or products or product candidates and we may not realize the benefits of such acquisitions or arrangements.

We may acquire additional businesses or products or product candidates, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them

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with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new drugs resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.

Risks Related to Intellectual Property

If we are unable to adequately protect our proprietary technology or obtain and maintain patent protection for our technology and product candidates or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar to ours and our ability to successfully commercialize our technology and product candidates may be impaired.

Our commercial success depends in part on our ability to obtain and maintain proprietary or intellectual property protection in the United States and other countries for our current product candidates and future products, as well as our core technologies, including our manufacturing know-how. We expect to protect our proprietary and intellectual property position by, among other methods, filing patent applications in the United States and abroad related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how and continuing technological innovation to develop and maintain our proprietary and intellectual property position.

We have in-licensed patents and patent applications owned by the Trustees of the University of Pennsylvania, or the University of Pennsylvania, relating to various AAV vectors. These patents and patent applications are licensed or sublicensed to REGENX and sublicensed to us. Our sublicenses are exclusive, but limited to particular fields, such as in vivo gene therapy for OTC deficiency, GSDIa, citrullinemia type I, PKU, Wilson disease, hemophilia B, hemophilia A, and other future elected indications and are subject to certain retained rights. As described in “Business — Intellectual Property,” most of these patents will expire in 2022, although some will expire later. In particular, any patent issuing on our licensed patent application relating to nucleic acid sequences encoding human ornithine transcarbamylase, should any patent issue, would not be expected to expire before 2035. The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation.

The degree of patent protection we require to successfully compete in the marketplace may be unavailable or severely limited in some cases and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We cannot provide any assurances that any of our licensed patents have, or that any of our pending licensed patent applications that mature into issued patents will include, claims with a scope sufficient to protect our current and future product candidates or otherwise provide any competitive advantage. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Furthermore, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally twenty years after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Moreover, our exclusive license is subject to retained rights, which may adversely impact our competitive position. As a result, our licensed patent portfolio may not provide us with adequate and continuing patent protection sufficient to exclude others from commercializing products similar to our product candidates, including biosimilar versions of such products. In addition, the patent portfolio licensed to us is, or may be, licensed to third parties, such as outside our field, and such third parties may have certain enforcement rights. Thus, patents licensed to us could be put at risk of being invalidated or interpreted narrowly in litigation filed by or against another licensee or in administrative proceedings brought by or against another licensee in response to such litigation or for other reasons.

Other parties have developed technologies that may be related or competitive to our own and such parties may have filed or may file patent applications, or may have received or may receive patents, claiming inventions that may overlap or conflict with those claimed in our own patent applications or issued patents. Publications of discoveries in the scientific literature often lag behind the actual discoveries and patent applications in the United States and in other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether the inventors of our licensed patents and applications were the first to make the inventions claimed in those patents or pending patent applications, or that they were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, and commercial value of our patent rights cannot be predicted with any certainty.

In addition, the patent prosecution process is expensive and time-consuming and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We cannot provide any assurances that we will be able to pursue or obtain additional patent protection based on our research and development efforts, or that any such patents or other intellectual property we generate will provide any competitive advantage. Patent prosecution is a lengthy

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process and the scope of the claims initially submitted for examination may be significantly narrowed by the time they issue, if at all. Moreover, we do not have the right to control the preparation, filing and prosecution of patent applications, or to control the maintenance of the patents, covering technology that we license from third parties. Therefore, these patents and applications may not be filed, prosecuted or maintained in a manner consistent with the best interests of our business. In addition, under our agreements with REGENX and the University of Pennsylvania, we do not have the first right to enforce the licensed patents, and our enforcement rights are subject to certain limitations that may adversely impact our ability to use the licensed patents to exclude others from commercializing competitive products. Moreover, REGENX and the University of Pennsylvania may have interests which differ from ours in determining whether and the manner in which to enforce such patents.

Even if we acquire patent protection that we expect should enable us to maintain competitive advantage, third parties, including competitors, may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. In litigation, a competitor could claim that our patents, if issued, are not valid for a number of reasons. If a court agrees, we would lose our rights to those challenged patents.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and our licensed patents may be challenged in courts or patent offices in the United States and abroad. For example, we may be subject to a third-party submission of prior art to the U.S. Patent and Trademark Office, or USPTO, challenging the validity of one or more claims of our licensed patents. Such submissions may also be made prior to a patent’s issuance, precluding the granting of a patent based on one of our pending licensed patent applications. We may become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging the patent rights of others from whom we have obtained licenses to such rights. Competitors may claim that they invented the inventions claimed in such issued patents or patent applications prior to the inventors of our licensed patents, or may have filed patent applications before the University of Pennsylvania did. A competitor may also claim that we are infringing its patents and that we therefore cannot practice our technology as claimed under our licensed patents, if issued. Competitors may also contest our licensed patents, if issued, by showing that the invention was not patent-eligible, was not novel, was obvious or that the patent claims failed any other requirement for patentability.

In addition, the University of Pennsylvania may in the future be subject to claims by former employees, collaborators or consultants asserting an ownership right in our licensed patents or patent applications, as a result of the work they performed on the University of Pennsylvania’s behalf. An adverse determination in any such submission or proceeding may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar technology and therapeutics, without payment to us, or could limit the duration of the patent protection covering our technology and product candidates. Such challenges may also result in our inability to manufacture or commercialize our product candidates without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

Even if they are unchallenged, our licensed patents and pending patent applications, if issued, may not provide us with any meaningful protection or prevent competitors from designing around our patent claims to circumvent our licensed patents by developing similar or alternative technologies or therapeutics in a non-infringing manner. For example, a third party may develop a competitive therapeutic that provides benefits similar to one or more of our product candidates but that uses a vector or an expression construct that falls outside the scope of our patent protection or license rights. If the patent protection provided by the patents and patent applications we hold or pursue with respect to our product candidates is not sufficiently broad to impede such competition, our ability to successfully commercialize our product candidates could be negatively affected, which would harm our business. Although currently all of our patents and patent applications are in-licensed, similar risks would apply to any patents or patent applications that we may own or in-license in the future.

We are required to pay certain royalties under our license agreements with third-party licensors, and we must meet certain milestones to maintain our license rights.

Under our license agreements with REGENX and the University of Pennsylvania, we will be required to pay royalties based on our revenues from sales of our products utilizing the technologies and products sublicensed by REGENX from the University of Pennsylvania and licensed directly to us by the University of Pennsylvania and these royalty payments could adversely affect the overall profitability for us of any products that we may seek to commercialize. These agreements contain diligence obligations and we may not be successful in meeting all of the obligations in the future on a timely basis or at all. For example, in order to maintain our license rights under our license agreement with the University of Pennsylvania, we need to use commercially reasonable efforts in the development and commercialization of our licensed product candidates. In order to maintain our license rights under our license agreements with REGENX, we will need to meet certain specified milestones, subject to certain cure provisions, in the development of our product candidates and in the raising of funding. We will need to outsource and rely on third parties for many aspects of the

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clinical development, sales and marketing of our products covered under our license agreements. Delay or failure by us or these third parties could adversely affect the continuation of our license agreements with third-party licensors.

All of our current product candidates are licensed from or based upon licenses from the University of Pennsylvania. If any of these license or sublicense agreements are terminated or interpreted to narrow our rights, our ability to advance our current product candidates or develop new product candidates based on these technologies will be materially adversely affected.

We now depend, and will continue to depend, on our licenses of the University of Pennsylvania technology through REGENX, as well as directly from the University of Pennsylvania, and potentially on other licensing arrangements or strategic relationships with third parties for the research, development, manufacturing and commercialization of our current product candidates. If any of our licenses or relationships or any in-licenses on which our licenses are based are terminated or breached, we may:

Additionally, even if not terminated or breached, our intellectual property licenses or sublicenses may be subject to disagreements over contract interpretation which could narrow the scope of our rights to the relevant intellectual property or technology or increase our financial or other obligations.

If we experience any of the foregoing, it could have a materially adverse effect on our business and could force us to cease operations which could cause you to lose all of your investment.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and future products and use our proprietary technologies without infringing the proprietary rights and intellectual property of third parties. The biotechnology and pharmaceutical industries are characterized by extensive and frequent litigation regarding patents and other intellectual property rights. We may in the future become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, future products and technology, including interference or inter partes review proceedings before the USPTO. Our competitors or other third parties may assert infringement claims against us, alleging that our therapeutics, manufacturing methods, formulations or administration methods are covered by their patents. For example, we do not know which processes we will use for commercial manufacture of our future products, or which technologies owned or controlled by third parties may prove important or essential to those processes. Given the vast number of patents in our field of technology, we cannot be certain or guarantee that we do not infringe existing patents or that we will not infringe patents that may be granted in the future. Many companies have filed, and continue to file, patent applications related to gene therapy and orphan diseases. Some of these patent applications have already been allowed or issued and others may issue in the future. Since this area is competitive and of strong interest to pharmaceutical and biotechnology companies, there will likely be additional patent applications filed and additional patents granted in the future, as well as additional research and development programs expected in the future. Furthermore, because patent applications can take many years to issue, may be confidential for 18 months or more after filing and can be revised before issuance, there may be applications now pending which may later result in issued patents that may be infringed by the manufacture, use, sale or importation of our product candidates or future products. If a patent holder believes the manufacture, use, sale or importation of one of our product candidates or future products infringes its patent, the patent holder may sue us even if we have licensed other patent protection for our technology. Moreover, we may face patent infringement claims from non-practicing entities that have no relevant product revenue and against whom our licensed patent portfolio may therefore have no deterrent effect.

It is also possible that we have failed to identify relevant third-party patents or applications. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Moreover, it is difficult for industry participants, including us, to identify all third-party patent rights that may be relevant to our product candidates and technologies because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. We may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our technology. In addition, we may be unaware of one

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or more issued patents that would be infringed by the manufacture, sale, importation or use of a current or future product candidate, or we may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our technologies, our future products or the manufacture or use of our future products. We are aware of, for example, four third-party patent families that include issued U.S. patents with claims that, if valid and enforceable, could be construed to cover some of our product candidates, if and when approved, or their methods of manufacture or use. We are aware of an additional three third-party patent families that include issued European claims that, if valid and enforceable, could be construed to cover certain methods that may be used in the manufacture of our product candidates.

Third parties may assert infringement claims against us based on existing intellectual property rights and intellectual property rights that may be granted in the future. If we were to challenge the validity of an issued U.S. patent in court, such as an issued U.S. patent of potential relevance to some of our product candidates or future products or manufacture or methods of use, we would need to overcome a statutory presumption of validity that attaches to every U.S. patent. This means that in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. There is no assurance that a court would find in our favor on questions of infringement or validity.

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. If we are found, or believe there is a risk we may be found, to infringe a third party’s intellectual property rights, we could be required or may choose to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any such license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. Without such a license, we could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our future products or force us to cease some of our business operations, which could materially harm our business. If we lose a foreign patent lawsuit, alleging our infringement of a competitor’s patents, we could be prevented from marketing our therapeutics in one or more foreign countries and/or be required to pay monetary damages for infringement or royalties in order to continue marketing. Claims that we have misappropriated the confidential information, trade secrets or other intellectual property of third parties could have a similar negative impact on our business. Any of these outcomes would have a materially adverse effect on our business.

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our future products or processes. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion.

We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time consuming and unsuccessful.

Competitors and other third parties may infringe, misappropriate or otherwise violate our licensed patents, any patents we may own or license in the future and other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims. A court may disagree with our allegations, however, and may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the third-party technology in question. Further, such third parties could counterclaim that we infringe their intellectual property or that a patent we have asserted against them is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims challenging the validity, enforceability or scope of asserted patents are commonplace. In addition, third parties may initiate legal proceedings against us to assert such challenges to our intellectual property rights. The outcome of any such proceeding is generally unpredictable. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Patents may be unenforceable if someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. It is possible that prior art of which we and the patent examiner were unaware during prosecution exists, which could render our licensed patents invalid. Moreover, it is also possible that prior art may exist that we are aware of but do not believe is relevant to our licensed patents, but that could nevertheless be determined to render those patents invalid. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, such as opposition proceedings. Such proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable.

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An adverse result in any litigation or administrative proceeding could put one or more of our licensed patents at risk of being invalidated or interpreted narrowly. If a defendant were to prevail on a legal assertion of invalidity or unenforceability of our licensed patents covering one of our product candidates, we would lose at least part, and perhaps all, of the patent protection covering such product candidate. Competing therapeutics may also be sold in other countries in which our patent coverage might not exist or be as strong. Any of these outcomes would have a materially adverse effect on our business.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

Litigation or other legal proceedings relating to intellectual property claims, with or without merit, is unpredictable and generally expensive and time-consuming and is likely to divert significant resources from our core business, including distracting our technical and management personnel from their normal responsibilities. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation in certain countries, including the United States, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities.

We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating or successfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our product candidates, we may not be able to stop a competitor from marketing drugs that are the same as or similar to our product candidates, which would have a material adverse effect on our business.

Some intellectual property which we have in-licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with non-U.S. manufacturers.

Many of the intellectual property rights we have licensed are generated through the use of U.S. government funding and are therefore subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that

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reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply.

We may not be able to effectively enforce our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly in developing countries. Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws. Additionally, the patent laws of some foreign countries do not afford intellectual property protection to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property rights. This could make it difficult for us to stop the infringement of our licensed patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our licensed or owned inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own therapeutics and, further, may export otherwise infringing products to territories where we have patent protection or license rights, if our ability to enforce our patents to stop infringing activities is inadequate. These therapeutics may compete with our product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and resources from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in the major markets for our future products, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our future products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

Changes to the patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Recent patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or Leahy-Smith Act, signed into law on September 16, 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-Smith Act has transformed the U.S. patent system into a “first to file” system. The first-to-file provisions, however, only became effective on March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could make it more difficult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business, results of operations and financial condition.

The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. For example, in Association for Molecular Pathology v. Myriad Genetics, Inc., the Supreme Court ruled that a “naturally occurring DNA segment is a product of

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nature and not patent eligible merely because it has been isolated,” and invalidated Myriad Genetics’s patents on the BRCA1 and BRCA2 genes. Certain claims of our licensed patents relate to isolated AAV vectors, capsid proteins, or nucleic acids. To the extent that such claims are deemed to be directed to natural products, or to lack an inventive concept above and beyond an isolated natural product, a court may decide the claims are invalid under Myriad. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.

In addition to the protection afforded by patents, we rely upon unpatented trade secret protection, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our contractors, collaborators, scientific advisors, employees and consultants and invention assignment agreements with our consultants and employees. We may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements, however, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the contractors, collaborators, scientific advisors, employees and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation. As a result, we could lose our trade secrets. Enforcing a claim that a third party illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing or unwilling to protect trade secrets.

Our trade secrets could otherwise become known or be independently discovered by our competitors. Competitors could purchase our product candidates and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If our trade secrets are not adequately protected or sufficient to provide an advantage over our competitors, our competitive position could be adversely affected, as could our business.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of, or are in breach of non-competition or non-solicitation agreements with third parties.

We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information or materials of former employers, competitors or other third parties. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know-how or trade secrets of others without authorization in their work for us, we may in the future be subject to claims that we caused an employee to breach the terms of his or her confidentiality, non-competition or non-solicitation agreement, or that we or these individuals have, inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information or materials of a former employer, competitor or other third party. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defenses to these claims fail, in addition to requiring us to pay monetary damages, a court could prohibit us from using technologies or features that are essential to our product candidates, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers or others. An inability to incorporate such technologies or features could have a material adverse effect on our business and may prevent us from successfully commercializing our product candidates. In addition, we may lose valuable intellectual property rights or personnel as a result of such claims. Moreover, any such litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent contractors. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our product candidates, which would have an adverse effect on our business, results of operations and financial condition.

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Risks Related to Employee Matters, Managing Growth and

Other Risks Related to Our Business

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on the research and development, clinical, commercial and business development expertise of Dr. Annalisa Jenkins, our President and Chief Executive Officer, Dr. Samuel C. Wadsworth, our Chief Scientific Officer, Mary T. Thistle, our Chief Operating Officer, Jean Franchi, our Chief Financial Officer, Eric Crombez, our Chief Medical Officer, and Dr. K. Reed Clark, our Senior Vice President of Pharmaceutical Development, as well as the other principal members of our management, scientific, clinical and commercial team. Although we have entered into employment letter agreements with our executive officers, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize drugs. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.

If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We have begun the process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which will require annual management assessment of the effectiveness of our internal control over financial reporting. We recruited finance and accounting personnel with certain skill sets that we require as a public company. If we are unable to continue to attract and retain high quality personnel with these skill sets, our ability to maintain proper and effective internal control over financial reporting may be compromised.

Implementing any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our service to new and existing customers.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. For example, the global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the global financial crisis, could result in a variety of risks to our business, including, weakened demand for our product candidates and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

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Exposure to UK political developments, including the outcome of the UK referendum on membership in the European Union, could have a material adverse effect on us.

On June 23, 2016, a referendum was held on the United Kingdom’s membership in the European Union, the outcome of which was a vote in favor of leaving the European Union. The United Kingdom’s vote to leave the European Union creates an uncertain political and economic environment in the United Kingdom and potentially across other European Union member states, which may last for a number of months or years.

Article 50 of the Treaty of the European Union, or Article 50, allows a member state to decide to withdraw from the European Union in accordance with its own constitutional requirements. The formal process for leaving the European Union will be triggered only when the United Kingdom delivers an Article 50 notice to the European Council, although informal negotiations around the terms of any exit may be held before such notice is given. Delivery of the Article 50 notice will start a two-year period for the United Kingdom to exit from the European Union, although this period can be extended with the unanimous agreement of the European Council. Without any such extension (and assuming that the terms of withdrawal have not already been agreed), the United Kingdom’s membership in the European Union would end automatically on the expiration of that two-year period.

The result of the referendum means that the long-term nature of the United Kingdom’s relationship with the European Union is unclear and that there is considerable uncertainty as to when any such relationship will be agreed and implemented. In the interim, there is a risk of instability for both the United Kingdom and the European Union, which could adversely affect our results, financial condition and prospects.

It is currently expected that the UK government will shortly commence negotiations in connection with any exit from the European Union and will make a decision regarding the timing for giving an Article 50 notice. There is also considerable uncertainty as to whether, following any Article 50 notice being given, the arrangements for the United Kingdom to leave the European Union will be agreed upon within the two-year period and, if not, whether an extension of that time period would be agreed upon. It is also possible that the European Union will pressure the United Kingdom to exit prior to the end of the two-year period. There is also a risk of the United Kingdom’s exit from the European Union being effected without mutually acceptable terms being agreed and that any terms of such exit could adversely affect our operating results, financial condition and prospects.

The political and economic instability created by the United Kingdom’s vote to leave the European Union has caused and may continue to cause significant volatility in global financial markets and the value of the Pound Sterling currency or other currencies, including the Euro. Depending on the terms reached regarding any exit from the European Union, it is possible that there may be adverse practical and/or operational implications on our business.

Consequently, no assurance can be given as to the impact of the referendum outcome and, in particular, no assurance can be given that our operating results, financial condition and prospects would not be adversely impacted by the result.

We or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Natural disasters could severely disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our manufacturing facilities, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, could have a material adverse effect on our business.

Our internal computer systems, or those of our third-party CROs, CMOs, or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product candidates’ development programs.

Despite the implementation of security measures, our internal computer systems and those of our third-party CROs, CMOs, and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or

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inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.

Our employees, principal investigators, CROs, CMOs, and consultants may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk that our employees, principal investigators, CROs, CMOs, and consultants may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate the regulations of FDA and other regulatory authorities, including those laws requiring the reporting of true, complete and accurate information to such authorities; healthcare fraud and abuse laws and regulations in the United States and abroad; or laws that require the reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials or creating fraudulent data in our preclinical studies or clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have a code of conduct applicable to all of our employees. However, it is not always possible to identify and deter misconduct by employees and other third parties and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. Additionally, we are subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any product candidates that we may develop.

We will face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any product candidates that we may develop. If we cannot successfully defend ourselves against claims that our product candidates caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

Although we maintain product liability insurance coverage, it may not be adequate to cover all liabilities that we may incur. We anticipate that we will need to increase our insurance coverage when we begin clinical trials and if we successfully commercialize any product candidate. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we

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could be held liable for any resulting damages and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials.

Risks Related to Our Common Stock

We will incur significant costs as a result of operating as a public company and our management is required to devote substantial time to new compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Stock Market LLC, or NASDAQ. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We expect these expenses to increase once we are no longer an “emerging growth company.”

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our stockholders.

Our stock price has been and is likely to be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. From October 22, 2015 through March 2, 2017, our stock price has traded at prices as low as $1.65 per share and as high as $15.55 per share.  As a result of this volatility, our stockholders may not be able to sell their common stock at or above the price they paid for their shares. The market price for our common stock may be influenced by many factors, including:

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If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. If few analysts commence coverage of us, the trading price of our stock would likely decrease. If one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated by-laws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirors to negotiate with our board of directors, they would apply even if an offer rejected by our board of directors were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year in which we have total annual gross revenue of $1 billion or more; (ii) December 31, 2020; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

We may choose to take advantage of some, but not all, of the available exemptions. In particular, we provided only two years of audited financial statements and did not include all of the executive compensation information that would have been required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

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In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be our stockholders’ sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. Additionally, under the loan and security agreement with SVB, we are currently restricted from paying cash dividends and we expect these restrictions to continue in the future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We lease approximately 15,000 square feet of office and laboratory space under various operating lease agreements for its Cambridge, MA location that, as amended, expire in January 2018. We also lease approximately 17,600 square feet of laboratory and office space located in Woburn, Massachusetts. We took occupancy in Woburn, MA in April 2016 and it was operational in June 2016. The lease for this property expires in March 2021.

Item 3. Legal Proceedings.

We are not a party to any legal proceedings and we are not aware of any claims or actions pending or threatened against us. In the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business.

Item 4. Mine Safety Disclosures.

Not Applicable.

 

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

On October 22, 2015, our common stock began trading on the NASDAQ Global Select Market under the symbol “DMTX”. Prior to that time, there was no public market for our common stock. Shares sold in our initial public offering on October 22, 2015 were priced at $13.00 per share.

On March 2, 2017, the closing price for our common stock as reported on the NASDAQ Global Select Market was $1.90. The following table sets forth the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market for the period indicated.

 

 

Holders

The number of record holders of our common stock as of March 2, 2017 was 1,796. The number of holders of record of our common stock does not reflect the number of beneficial holders whose shares are held by depositors, brokers or other nominees.

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Performance Graph

The following graph illustrates a comparison of the total cumulative stockholder return for our common stock since October 22, 2015, which is the date our shares began trading, to two indices: the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The graph assumes an initial investment of $100 on October 22, 2015, in our common stock, the stocks comprising the NASDAQ Composite Index, and the stocks comprising the NASDAQ Biotechnology Index. Historical stockholder return is not necessarily indicative of the performance to be expected for any future periods.

Comparison of Cumulative Total Return*

Among Dimension Therapeutics, Inc., the NASDAQ Composite Index and the NASDAQ Biotechnology Index

 

 

Dividend Policy

We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our board of directors. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends.

Equity Compensation Plans

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to Item 12. of Part III of this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

We did not purchase any of our registered equity securities during the period covered by this Annual Report.

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Use of Proceeds from Registered Securities

On October 27, 2015, we completed the initial public offering of our common stock and issued and sold 5,500,000 shares of our common stock at a public offering price of $13.00 per share. On November 25, 2015, the underwriters of the Company’s IPO exercised their over-allotment option to purchase an additional 104,775 shares of common stock at the initial public offering price of $13.00 per share.

The offer and sale of all of the shares in the offering was registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-206911), which was declared effective by the SEC on October 21, 2015. Following the sale of the shares in connection with the closing of our initial public offering, the offering terminated. The offering commenced on October 21, 2015 and did not terminate until the sale of all of the shares offered. Goldman, Sachs & Co. and Citi Global Markets Inc. acted as joint book-running managers of the offering, and Wells Fargo Securities LLC, Canaccord Genuity Inc. and Cantor Fitzgerald & Co. acted as co-managers of the offering.

We received aggregate gross proceeds from the offering, including in connection with the exercise by the underwriters of their over-allotment option, of $72.9 million, or aggregate net proceeds of $64.6 million after deducting underwriting discounts and commissions of $5.1 million and offering expenses of $3.2 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

As of December 31, 2016, we have not used any proceeds from the offering, which closed on October 27, 2015, or from the underwriters’ exercise their over-allotment option, which closed on November 25, 2015. There has been no material change in our planned use of the net proceeds from the offering as described in our final prospectus filed pursuant to Rule 424(b)(4) under the Securities Act with the Securities and Exchange Commission on October 22, 2015.

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Item 6. Selected Financial Data.

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and related notes and other financial information included in this Annual Report on Form 10-K.

We derived the financial data for the years ended December 31, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2016 and 2015 from our audited financial statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the balance sheet data as of December 31, 2014 from our audited financial statements that are not included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in future periods.

 

 

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Annual Report on Form 10-K, including those risks identified under the Risk Factors section. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Annual Report on Form 10-K, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a leader in discovering and developing new therapeutic products for people living with devastating rare and metabolic diseases associated with the liver, based on the most advanced mammalian adeno-associated virus (AAV) gene delivery technology. The liver is a vital organ that plays an important role in human metabolism and key physiologic functions, and is the target organ for our programs: ornithine transcarbamylase (OTC) deficiency, glycogen storage disease type Ia (GSDIa), phenylketonuria (PKU), Wilson disease, citrullinemia type I, hemophilia B, and hemophilia A. We continue to advance our lead clinical programs in hemophilia B and OTC deficiency, our preclinical programs, and retain the global rights to all of our liver-directed programs, with the exception of our hemophilia A program, which is partnered with Bayer. We have developed a robust scientific platform that brings together deep expertise in rare genetic diseases, liver biology, AAV gene therapy, pharmaceutical development, and mammalian vector manufacturing. We believe our continued development of our manufacturing processes, methods and expertise will yield the most comprehensive and leading manufacturing platform developed to date, including our next generation HeLa 2.0 platform, for AAV-based gene therapy product candidates. We believe that by leveraging the expertise created by our platform we will be able to accelerate the research and development of our pipeline of programs while continuing to discover and develop the next generation of products in this field.

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Our pipeline consists of the following programs for the treatment of rare and metabolic diseases associated with the liver, also known as inherited metabolic disorders (IMD), and hemophilia:

 

 

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These data suggest prolonged stabilization of FIX expression levels and are comparable to results published by Nathwani et al in the New England Journal of Medicine (2011), where patients have had measurable levels of FIX for 3-5 years or more at last follow-up. All patients in both cohorts 1 and 2 improved from moderate/severe-to-severe to either moderate or mild range in terms of factor levels based on WFH criteria. In addition, none of the patients in cohort 2 have required prophylactic or on-demand recombinant FIX transfusion for spontaneous bleeds post-dosing. According to the WFH, people with FIX levels of 5-40% usually bleed only as a result of surgery or major injury, do not bleed often and, in fact, may never have a bleeding problem (World Federation of Hemophilia). Elevations in alanine aminotransferase (ALT) were observed in 5 of 6 patients with patient 3 in cohort 2 experiencing a grade 4 adverse event due to an elevated laboratory ALT (defined as >800 IU/L). All elevated liver enzymes were clinically asymptomatic with no elevations of gamma-glutamyl transferase (GGT), alkaline

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phosphatase or bilirubin, and no patients experienced a drug related serious adverse event (SAE) as of the February 28, 2017 data cutoff. Two patients in each cohort received a standard tapering course of corticosteroids to treat mild, asymptomatic elevations in ALTs (52-98 IU/L), similar to findings from multiple studies using other AAV serotypes, including AAV8 and AAV9. The third patient in cohort 2 also received a standard tapering course of corticosteroids and was at 116 IU/L at 11 weeks post-dosing, following a peak ALT of 914 IU/L.

 

 

Asymptomatic transient elevations in liver enzymes observed in patients 1 and 2 from cohort 2 were associated with a mild T-cell response to the capsid, corresponding to elevations in liver enzymes and declines in FIX activity. Samples from the third patient in cohort 2 were subject to substantial analyses to characterize and determine the potential immunological basis for the subclinical ALT elevation. There is no evidence that the elevation was caused by a peripheral immune response to the capsid or transgene. We have ongoing studies to explore additional causes for the ALT elevation in this patient, including other immune and non-immune causes, and the role of a rare HLA genotype present in this patient.

We expect that cohort 2 will continue to receive a standard tapering course of corticosteroid therapy and as of the February 28, 2017 data cutoff, 2 of 3 patients’ ALT levels were in the normal range, defined as ALT ≤40 IU/L. Cohort 1 patients were all clinically stable and off steroids with ALT levels in the normal range. As required by the trial protocol, we have reported the ALT levels for patient 3 in cohort 2 to the Data Safety Monitoring Committee (DSMC), the U.S. Food and Drug Administration (FDA), and the appropriate regulatory authorities and remain in ongoing communications, and will await their feedback prior to initiating dosing of cohort 3. DTX101 has received orphan drug designation from U.S. Food and Drug Administration and the European Commission for the treatment of hemophilia B.

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Since our inception on June 20, 2013, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date with proceeds from the sale of our equity securities and payments received in connection with our collaboration agreement with Bayer, and, to a lesser extent, through borrowings under a loan and security agreement. Through December 31, 2016, we had received net proceeds of $88.8 million from our sales of preferred stock, $64.6 million from our initial public offering, $37.4. million under the collaboration agreement with Bayer, and $7.6 million from borrowings under a loan and security agreement.

Since our inception, we have incurred significant operating losses. Our net losses were $49.0 million and $35.1 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had an accumulated deficit of $100.2 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses and capital requirements will increase in connection with our ongoing activities, as we:

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Further, we expect to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

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As of December 31, 2016, we had cash, cash equivalents and marketable securities of $78.0 million. We believe with our existing cash, cash equivalents and marketable securities as of December 31, 2016 and reimbursements and milestones to be received in connection with our collaboration agreement with Bayer and borrowing capacity under our loan and security agreement with SVB, will enable us to fund our operating expenses and capital expenditure requirements through mid-2018. See “— Liquidity and Capital Resources.”

Components of our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. All of our revenue to date has been derived from our collaboration agreement with Bayer.

In June 2014, we entered into a research and development collaboration and license agreement with Bayer for the development and commercialization of a gene therapy for the treatment of hemophilia A. Under the terms of our agreement with Bayer, we received a nonrefundable, noncreditable upfront license payment of $20.0 million in June 2014 and we are eligible to receive development and commercialization milestone payments of up to $232.0 million, as well as tiered royalty payments ranging in the high single-digit to low double-digit percentages, not exceeding the mid-teens, of net sales of commercialized products resulting from the collaboration, as defined in our agreement with Bayer. Bayer will fund certain research and development services performed by us during the research term and will reimburse us for all project costs, including any third-party costs, in the performance of our obligations under the annual research plan and in accordance with the mutually agreed upon research budget.

The deliverables under our agreement with Bayer include (1) research services to be provided over the research term, (2) a development and commercialization license and (3) our participation in a Joint Steering Committee, or JSC, and a Joint Research and Development Committee, or JRDC, to be provided over the research term. We determined that the development and commercialization license and involvement in the JSC and the JRDC do not have standalone value to Bayer and, therefore, are not separable from the delivery of the research services. Therefore, all deliverables under the agreement have been combined and accounted for as a single unit of accounting. Accordingly, the upfront license payment and research payments are being recognized by us as revenue on a straight-line basis over the estimated performance period, which approximates the 54-month research term of the agreement with Bayer that commenced in June 2014. As future research payments are earned, we will recognize as revenue the portion of payments equal to the percentage of the elapsed research term to the total estimated research term, with the remaining portion of consideration received being recognized over the remaining estimated performance period on a straight-line basis. We concluded at the outset of the arrangement that none of the future milestone payments included in the arrangement qualified as substantive milestones. Any future milestone payments will be recognized, along with the other arrangement consideration, over the remaining estimated period of performance, if any, beginning at the time a milestone payment is earned, with a cumulative catch-up being recognized for the elapsed portion of the estimated research term. As of December 31, 2016, we had not earned any milestone or royalty payments.

During the years ended December 31, 2016 and 2015, we recognized revenue related to our collaboration agreement with Bayer as follows:

 

 

During the years ended December 31, 2016 and 2015, we recognized revenue of $11.5 million and $7.8 million, respectively, related to our collaboration agreement with Bayer. During the years ended December 31, 2016 and 2015, we earned research payments under the collaboration agreement of $8.3 million and $7.7 million, respectively. As of December 31, 2016, we had short-term and long-term deferred revenue of $8.7 million and $8.7 million, respectively, related to our collaboration agreement with Bayer.

We expect that any future revenue recognized under our collaboration agreement will fluctuate from quarter to quarter as a result of the uncertain timing of future milestone payments and the uncertain quantity of our research services provided from quarter to quarter.

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Operating Expenses

Research and Development Expenses

Research and development expenses, which include costs of research services incurred in connection with our collaboration with Bayer, consist primarily of costs incurred in connection with the discovery and development of our product candidates, which include:

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs such as fees paid to academic collaborators, CROs, CMOs and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources primarily to conduct our internal process discovery and development, as well as for managing our preclinical development, process development and clinical development activities. These employees work across multiple development programs and, therefore, we do not track their costs by program.

The table below summarizes our research and development expenses incurred by development program:

 

 

We expect that our expenses will increase in connection with our planned preclinical manufacturing and clinical development activities in the near term. At this time, we cannot reasonably estimate the costs for completing the preclinical and clinical development of any of our product candidates.

The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

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Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs, as well as professional fees for legal, patent, consulting, accounting and audit services.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs, as well as investor and public relations expenses associated with being a public company.

Interest Income (Expense), net

Interest income (expense), net consists of interest earned on our cash, cash equivalents and marketable securities, as well as interest expense incurred on borrowings at various dates under our loan and security agreement entered into in August 2014, as amended.

Income Taxes

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. We did not provide for any income taxes in any of the years ended December 31, 2016 or 2015.

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Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition. Accordingly, we recognize revenue for each unit of accounting when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectability is reasonably assured.

Collaborative Research and License Agreement

The terms of our collaboration agreement with Bayer contains multiple deliverables, including licensing and research and development activities. The arrangement consideration from collaboration agreements, like the one we have with Bayer, typically include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified development and commercialization milestones, and royalty payments based on product sales derived from the collaboration. We evaluate our collaborative agreements for proper classification in our statements of operations and comprehensive loss based on the nature of the underlying activity. We generally reflect as revenue amounts due under our collaborative agreements related to reimbursement of development activities as we are generally the principal under the arrangement. We evaluate multiple-element arrangements based on the guidance in ASC Topic 605-25, Revenue Recognition — Multiple-Element Arrangements, or ASC 605-25. Pursuant to the guidance in ASC 605-25, we evaluate multiple-element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized. This evaluation requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that the delivered item has value to the customer on a standalone basis and, if the arrangement includes a general right of return with respect to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. In assessing whether an item has standalone value, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, we consider whether the collaboration partner can use any other deliverable for its intended purpose without the receipt of the remaining deliverable, whether the value of the deliverable is dependent on the undelivered item, and whether there are other vendors that can provide the undelivered items.

The consideration received under the arrangement that is fixed or determinable is then allocated among the separate units of accounting based on the relative selling prices of the separate units of accounting. We determine the selling price of a unit of accounting within each arrangement following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence, or VSOE, of selling price, if available; third-party evidence, or TPE, of selling price if VSOE is not available; or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. We typically use BESP to estimate the selling price as we generally do not have VSOE or TPE of selling price for our units of accounting. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.

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We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605 are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, we recognize revenue from the combined unit of accounting over the contractual or estimated performance period for the undelivered items, which is typically the term of our research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then we recognize revenue under the arrangement on a straight-line basis over the period we are expected to complete our performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable, as of the period ending date.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which we expect to complete our aggregate performance obligations.

At the inception of an arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (1) the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, (2) the consideration relates solely to past performance, and (3) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone and the level of effort and investment required to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. We will recognize revenue in its entirety upon successful accomplishment of any substantive milestones, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, with a cumulative catch-up being recognized for the elapsed portion of the period of performance, assuming all other revenue recognition criteria are met.

To date, we have not recorded any substantive milestones under our collaboration agreement with Bayer because no milestones that meet the required criteria listed above have been identified. Payments for achievement of non-substantive milestones are deferred and recognized as revenue over the estimated period of performance applicable to our collaborative arrangement. As these milestones are achieved, we will recognize as revenue a portion of the milestone payment that is equal to the percentage of the performance period completed when the milestone is achieved, multiplied by the amount of the milestone payment, upon achievement of such milestone. We will recognize the remaining portion of the milestone payment over the remaining performance period under either the proportional performance method or on a straight-line basis.

Amounts received prior to satisfying the revenue recognition criteria listed above are recorded as deferred revenue in the accompanying balance sheets. Although we follow detailed guidelines in measuring revenue, certain judgments affect the application of our revenue policy. For example, in connection with our existing collaboration agreement, we have recorded on our balance sheet short-term and long-term deferred revenue based on our best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that we expect will not be recognized within the next 12 months are classified as long-term deferred revenue. However, this estimate is based on our current research plan and, if our research plan should change in the future, we may recognize a different amount of deferred revenue over the following 12-month period.

The estimate of deferred revenue also reflects management's estimate of the periods of our involvement in our collaboration. Our performance obligations under this collaboration consist of participation on steering committees and the performance of other research and development services. In certain instances, the timing of satisfying these obligations can be difficult to estimate. Accordingly, our estimates may change in the future. Such changes to estimates would result in a change in prospective revenue recognition amounts. If these estimates and judgments change over the course of any of our collaborative agreements, it may affect the timing and amount of revenue that we recognize and record in future periods.

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Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a predetermined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

We base our expenses related to preclinical studies and, in the future, clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Stock-Based Compensation

We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service based vesting conditions and record the expense for these awards using the straight-line method.

For stock-based awards granted to consultants and non-employees, compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Determination of the Fair Value of Common Stock

As a privately held company prior to our October 2015 IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants' Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations were prepared using either an option-pricing method, or OPM, or a hybrid method, which used market approaches to estimate our enterprise value. The hybrid method is a probability-weighed expected return method, or PWERM, where the equity value in one or more of the scenarios is calculated using an OPM. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company's securities changes.

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Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the Company, assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. These third-party valuations were performed at various dates, which resulted in valuations of our common stock of $0.38 per share as of December 31, 2013, $0.56 per share as of June 20, 2014, $3.57 per share as of April 21, 2015, $4.09 per share as of June 1, 2015, $4.85 per share as of August 4, 2015 and $10.20 per share as of September 4, 2015. In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, which may be a date later than the most recent third-party valuation date, including:

The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

In the course of preparing the IPO offering documents, in July 2015, we performed a retrospective fair value assessment and concluded that the fair value of our common stock underlying stock options we granted on March 27, 2014 and April 22, 2014 was $0.53 per share for accounting purposes and that the fair value of our common stock underlying stock options we granted on September 25, 2014, October 21, 2014 and December 17, 2014 was $0.58 per share for accounting purposes. The respective reassessed values, which we applied to determine the fair values of the March and April stock option grants and the September, October and December stock option grants to determine stock-based compensation expense for accounting purposes, were based in part upon a revised valuation of our common stock prepared as of December 31, 2013 and a first-time valuation of our common stock prepared as of September 25, 2014, performed on a retrospective basis with the assistance of a third-party specialist. The revised December 31, 2013 valuation and the September 25, 2014 valuation were performed using an OPM backsolve to determine our enterprise value.

Following our IPO, stock option values have been have been determined based on the quoted market price of our common stock.

Related Party Transactions

During the year ended December 31, 2016, we did not transact with any related parties. During the years ended December 31, 2015 and 2014, we transacted with a number of related parties in the course of ordinary business. Our related party transactions are described in detail in Note 9 to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

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Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

Results of Operations

Comparison of the Years Ended December 31, 2016 and 2015

The following table summarizes our results of operations for the year ended December 31, 2016 and 2015:

 

 

Revenue

We recognized $11.5 million of revenue for the year ended December 31, 2016 compared to $7.8 million for the year ended December 31, 2015. Revenue for the years ended December 31, 2016 and 2015 resulted from our collaboration agreement with Bayer, which commenced in June 2014. Amounts recorded as deferred revenue under the collaboration agreement with Bayer totaled $17.3 million and $20.5 million as of December 31, 2016 and 2015, respectively.

Research and Development Expenses

 

 

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Research and development expenses were $47.7 million for the year ended December 31, 2016, compared to $34.0 million for the year ended December 31, 2015. The increase of $13.7 million was due primarily to the increase of $7.6 million of costs incurred in process development, manufacturing activities, IND enabling activities and early clinical development of DTX301, an increase of $6.0 million of unallocated research and development expenses and an increase of $3.4 million of costs incurred in manufacturing activity of DTX401, offset by a decrease of $2.1 million in DTX101-related expenses due to lower pre-clinical and manufacturing activity due to the transition from pre-clinical studies to clinical studies and $1.4 million in DTX201 project costs primarily due to decreases in preclinical development activity. The increase of $6.0 million in unallocated research and development expenses was primarily due to:

General and Administrative Expenses

 

 

General and administrative expenses were $12.8 million for the year ended December 31, 2016, compared to $8.7 million for the year ended December 31, 2015. The increase of $4.1 million was primarily due to an increase of $2.7 million in personnel-related costs (including a $1.6 million increase in stock-based compensation) as a result of the full year impact of full-time employees hired in late 2015 and increases associated with the Company’s first full year of operating as a public company including increases of $0.8 million in professional fees primarily for legal fees and business insurance and increases of $0.6 million of facility related and other expenses.

Interest Income (Expense), net

We recorded $30 thousand of interest income, net of $251 thousand of interest expense, for the year ended December 31, 2016, compared to $91 thousand of interest expense, net of $6 thousand of interest income, for the year ended December 31, 2015, which consisted of interest expense incurred on borrowings at various dates under our loan and security agreement entered into in August 2014.

Comparison of the Years Ended December 31, 2015 and 2014

The following table summarizes our results of operations for the years ended December 31, 2015 and 2014:

 

 

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Revenue

We recognized $7.8 million of revenue for the year ended December 31, 2015 compared to $2.8 million for the year ended December 31, 2014. Revenue for the year ended December 31, 2015 and 2014 resulted from our collaboration agreement with Bayer, which commenced in June 2014. Amounts recorded as deferred revenue under the collaboration agreement with Bayer totaled $20.5 million and $22.6 million as of December 31, 2015 and 2014, respectively.

Research and Development Expenses

 

 

Research and development expenses were $34.0 million for the year ended December 31, 2015, compared to $13.0 million for the year ended December 31, 2014. The increase of $21.0 million was due to increases of $5.0 million in DTX101-related expenses as we increased our manufacturing activities and advanced our preclinical studies and prepared to begin our clinical studies, $0.8 million in DTX201 project costs as we increased our manufacturing activities and advanced our preclinical development, $2.1 million of costs incurred in the manufacturing and preclinical development of DTX301, $0.6 million of costs incurred in the preclinical development of DTX401, $2.9 million in other research and development programs as we exercised options for additional licenses with respect to three additional indications under the 2015 option and license agreement with REGENX, and $9.7 million of unallocated research and development expenses. The increase of $9.7 million in unallocated research and development expenses was due to:

General and Administrative Expenses

 

 

General and administrative expenses were $8.7 million for the year ended December 31, 2015, compared to $2.7 million for the year ended December 31, 2014. The increase of $6.0 million was primarily due to an increase of $3.4 million in personnel-related

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costs (including a $0.6 increase in stock-based compensation) as a result of the hiring of full-time employees to support growth in our operations, an increase of $1.8 million in professional fees for legal, accounting and audit services, public relations services, Board of Directors and recruiting fees, an increase of $0.2 million of facility-related expenses, and $0.6 million of other expenses, primarily franchise tax, information technology and travel expenses.

Interest Income (Expense), net

We recorded $91 thousand of interest expense, net of $6 thousand of interest income, for the year ended December 31, 2015, compared to $17 thousand of interest expense, net of $1 thousand of interest income, for the year ended December 31, 2014, which consisted of interest expense incurred on borrowings at various dates under our loan and security agreement entered into in August 2014.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have generated revenue to date only from our collaboration agreement with Bayer. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any product for several years, if at all. We have funded our operations to date with proceeds from the sale of our equity securities and payments received in connection with our collaboration agreement with Bayer, and, to a lesser extent, through borrowings under a loan and security agreement, as amended, that we entered into with SVB in August 2014. Through December 31, 2016, we had received net proceeds of $88.8 million from our sales of preferred stock, $37.4 million from our collaboration agreement with Bayer, $7.6 million of borrowings under a loan and security agreement and net proceeds of $64.6 million from our IPO.

On October 27, 2015, we completed an IPO of our common stock, which resulted in the issuance and sale of 5,500,000 shares of our common stock at a public offering price of $13.00 per share, resulting in net proceeds of $63.4 million after deducting underwriting discounts and other offering costs. On November 25, 2015, the underwriters of our IPO exercised their over-allotment option to purchase an additional 104,775 shares of common stock at the initial public offering price of $13.00 per share, resulting in net proceeds of $1.3 million, after deducting underwriting discounts and other offering costs.

As of December 31, 2016, we had cash, cash equivalents and marketable securities totaling $78.0 million. We invest our cash in money market funds, U.S. government securities, corporate bonds, and commercial paper, with the primary objectives to preserve principal, provide liquidity and maximize income without significantly increasing risk.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

 

 

Operating activities. During the year ended December 31, 2016, operating activities used $47.6 million of cash, resulting from our net loss of $49.0 million, partially offset by non-cash charges of $5.0 million and cash used by changes in our operating assets and liabilities of $3.6 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2016 consisted primarily of a $1.7 million increase in accounts receivable from Bayer, a $2.7 million increase in prepaid expenses and other current assets, primarily due to prepayments of external program-related expenses, and a $3.2 million decrease in deferred revenue from Bayer. These changes were partially offset by a $0.8 million increase in accounts payable and a $3.0 million increase in accrued expense and other current liabilities. These increases in accounts payable and accrued expenses were due to the timing of vendor invoicing and payments associated with program-related expenses.

During the year ended December 31, 2015, operating activities used $32.0 million of cash, resulting from our net loss of $35.1 million, partially offset by cash provided by changes in our operating assets and liabilities of $1.0 million and by non-cash charges of $2.1 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2015 consisted primarily of a $1.1 million increase in accounts payable, a $1.8 million decrease in accounts receivable from Bayer, and a $2.4 million

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increase in accrued expense and other current liabilities and amounts due to related parties These increases in accrued expenses and other current liabilities and accounts payable were due to the timing of vendor invoicing and payments. These changes were partially offset by a $2.3 million increase in prepaid expenses and other current assets, primarily due to prepayments of external program-related expenses, and a $2.1 million decrease in deferred revenue from Bayer.

During the year ended December 31, 2014, operating activities provided $8.8 million of cash, primarily resulting from cash provided by changes in our operating assets and liabilities of $21.4 million and non-cash charges of $0.3 million, partially offset by our net loss of $13.0 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2014 consisted primarily of a $22.6 million increase in deferred revenue related to research payments received from Bayer in connection with our collaboration agreement, a $0.8 million increase in accrued expenses and other current liabilities and amounts due to related parties and a $0.4 million increase in accounts payable. These increases in accrued expenses and other current liabilities and accounts payable were due to the timing of vendor invoicing and payments. These increases were partially offset by a $2.0 million increase in accounts receivable from Bayer and a $0.4 million increase in prepaid expenses and other current assets. The increase in prepaid expenses and other current assets was primarily due to deposits and prepayments of maintenance agreements.

Investing activities. During the year ended December 31, 2016, we used $54.3 million of cash in investing activities, consisting primarily of purchases of marketable securities of $54.2 million, which was partially offset by proceeds from the sale and maturities of marketable securities of $6.6 million. In addition, we used $6.7 million related to leasehold improvements and purchases of equipment for our Woburn, MA facility.

During the year ended December 31, 2015, we used $2.5 million of cash in investing activities, consisting of purchases of property and equipment of $2.5 million.

During the year ended December 31, 2014, we used $1.8 million of cash in investing activities, consisting of purchases of property and equipment of $1.7 million and lease deposits of $0.1 million.

Financing activities. During the year ended December 31, 2016, net cash provided by financing activities was $5.1 million, consisting primarily of proceeds from issuance of notes payable of $5.8 million which were offset by repayment of notes payable of $0.7 million.

During the year ended December 31, 2015, net cash provided by financing activities was $143.7 million, consisting of net proceeds from our initial public offering of $64.6 million, net proceeds from our issuances of preferred stock of $79.2 million and net proceeds from our issuance of notes payable of $0.2 million, of which were partially offset by $0.4 million of principal repayments under our loan and security agreement.

During the year ended December 31, 2014, net cash provided by financing activities was $6.4 million, consisting of net proceeds from our issuance of Series A preferred stock of $4.9 million and net proceeds from our issuance of notes payable of $1.5 million.

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates in development, including as we:

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As of December 31, 2016, we had cash, cash equivalents and marketable securities of $78.0 million. We expect that our existing cash, cash equivalents and marketable securities and reimbursements and milestones to be received in connection with our collaboration agreement with Bayer and borrowing capacity under our loan and security agreement with SVB, will enable us to fund our operating expenses and capital expenditure requirements through mid-2018. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaborations agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

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Loan and Security Agreement

On August 21, 2014, we entered into a loan and security agreement with SVB as amended, which provided for advances under an equipment line of up to $1.8 million. Through December 31, 2016, we had borrowed the full $1.8 million available under the loan and security agreement and had made $0.6 million of scheduled principal repayments. Under the loan and security agreement, for each advance under the equipment line, we are obligated to make six monthly, interest-only payments. Thereafter, we are obligated to pay 36 monthly installments of interest and principal. Outstanding principal under the loan and security agreement accrue interest at an annual rate of 5.5%, which was determined on the date of each drawdown.

In connection with entering into the loan and security agreement, in August 2014, we granted to the lender a warrant to purchase 11,973 shares of our common stock at an exercise price of $0.56 per share. This warrant was exercised at the option of the lender by the option of a cashless exercise in December 2015 resulting in the issuance of 11,306 of our common shares.

In December 2015, we amended the loan and security agreement (the “First Amendment”) with SVB in connection with the formation of our securities corporation. The amendment call for us and our subsidiaries, excluding our securities corporation, to maintain all operating, depository and securities accounts with SVB, provided, further, we shall have at all times at least 105% of the then-outstanding loan obligations on deposit in operating, depository and securities accounts maintained with SVB.

In February 2016, we entered into a second amendment to the loan and security agreement with SVB. Under the second amendment, we may borrow an aggregate principal amount of up to $7.0 million for certain equipment purchases. Through December 31, 2016, we had borrowed $5.8 million under the second amendment of our loan and security agreement and made $0.1 million of scheduled principal payments. Under the loan and security agreement, for each advance under the equipment line, we are obligated to make six monthly, interest-only payments. Thereafter, we are obligated to pay 36 monthly installments of interest and principal. Outstanding principal under the advances of the second amendment to the loan and security agreement accrue interest at an annual rate of 3.0%, which was determined on the date of each drawdown. In addition, the Company is required to make an additional final payment equal to 6% of the original principal amount of each advance due on the earliest to occur of the maturity date of the advance, acceleration of the terms of the loan, prepayment of the advance or termination of the loan and security agreement. As of December 31, 2016, the Company accrues the related total final payments due of $0.1 million to outstanding debt by charges to interest expense using the effective-interest method from the date of issuance through the maturity date.

Through December 31, 2016, we had borrowed a total of $7.6 million available under the loan and security agreement, as amended, and had made $0.7 million of scheduled principal repayments. Borrowings under the loan and security agreement are secured by substantially all of our assets, except for our intellectual property. There are no financial covenants associated with the loan and security agreement. There are negative covenants restricting our activities, such as disposing of our business or certain assets, changing our business, management, ownership or business locations, incurring additional debt or liens or making payments on other debt, making certain investments and declaring dividends, acquiring or merging with another entity, engaging in transactions with affiliates or encumbering intellectual property. The obligations under the loan and security agreement are subject to acceleration upon occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2016 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

 

 

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Under various licensing and related agreements, we will be required to make milestone payments and pay royalties and other amounts to third parties. We have not included any contingent payment obligations, such as milestones or royalties, in the table above as the amount, timing and likelihood of such payments are not known.

Under the 2013 license agreement with REGENX, we are required to pay low to mid single-digit royalties on net sales of each developed product as well as milestone fees, if any, owed by REGENX to GlaxoSmithKline, or GSK, or sublicense fees owed by REGENX to the University of Pennsylvania or GSK. As a result of our activities under the 2013 license agreement, the milestones payable will not exceed $1.65 million, not including any applicable 10% sublicensing fees REGENX may owe the University of Pennsylvania or GSK and for which we would be responsible to REGENX, and are payable contingent not only on us achieving the milestone, but also on us achieving the milestone before all other licensees.

Under the 2015 option and license agreement with REGENX, we have agreed to make future milestone payments of up to an aggregate of $9.0 million per indication upon achieving specified development milestones with respect to any product developed utilizing any compound covered under the 2015 option and license agreement. As of December 31, 2016, we had not developed a commercial product using the licensed technologies and no pre-commercialization milestones had been achieved under these agreements. We have not included any contingent payment obligations, such as milestones or royalties, in the table above as the amount, timing and likelihood of such payments are not known.

Under the 2015 sponsored research and option agreement with University of Pennsylvania, as amended, we have agreed to research spending through December 31, 2017. The agreement allows for termination upon written notice.  In the event of termination, we shall pay the University of Pennsylvania the amount needed to cover costs through the effective termination date, as well as allowable commitments incurred; provided, however, payments for allowable commitments extending beyond the effective termination date shall not exceed $2.8 million, as of December 31, 2016. As the agreement can be cancelled at our option, we have not included any contingent payment obligations in the table above as the amount, timing and likelihood of such payments are not known.

In May 2016, we entered into a research, collaboration and license agreement with the University of Pennsylvania.  The agreement was subsequently amended in October 2016 and December 2016. The agreement provides the terms for us and the University of Pennsylvania to collaborate with respect to the pre-clinical development of gene therapy products for the treatment of citrullinemia type I (DTX601), phenylketonuria (DTX501) and Wilson disease (DTX701) (each, a “Subfield”). The agreement allows for termination upon written notice. We will fund the cost of the research program in accordance with a mutually agreed-upon research budget. In addition, we would be required to make milestone payments if certain development and commercial milestones are achieved over time, as well as low to mid single-digit royalties percentages on net sales of each Subfield’s licensed products. As of December 31, 2016, we had not developed a commercial product using the licensed technologies and no development milestones had been achieved under the agreement. We have not included any contingent payment obligations in the table above as the amount, timing and likelihood of such payments are not known.

We enter into contracts in the normal course of business with various third parties for preclinical research studies, clinical trials, testing and other services. These contracts generally provide for termination upon notice, and therefore we believe that our noncancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

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

Recently Issued and Adopted Accounting Pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

 

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We had cash, cash equivalents and marketable securities of approximately $78.0 million at December 31, 2016. The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Our primary exposure to market risk relates to fluctuations in interest rates, which are affected by changes in the general level of U.S. interest rates. Given the short-term nature of our cash, cash equivalents and marketable securities and the conservative nature of our investments, we believe that a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operation. We do not own any foreign currency or other derivative financial instruments.

Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data are listed under Part IV, Item 15 in this Annual Report on Form 10-K and are included at the end of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, our 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. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of December 31, 2016, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officer and effected by the company's board of preparation of financial statements for external purposes in accordance with GAAP and directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our company's assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Our management, with the participation of our principal executive and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, based on criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016, based on those criteria.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the deferral allowed under the JOBS Act for emerging growth companies.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

 

 

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2016.

Item 11. Executive Compensation.

The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2016.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2016.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2016.

Item 14. Principal Accounting Fees and Services.

The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2016.

 

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Item 16. Form 10-K Summary

Not applicable.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

 

 

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Exhibit Index

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Dimension Therapeutics, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Dimension Therapeutics, Inc. and its subsidiary as of December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company will require additional financing to fund future operations. Management’s plans in regard to this matter are described in Note 1.

/s/ PricewaterhouseCoopers LLP

March 9, 2017

Boston, Massachusetts

 

 

 

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DIMENSION THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

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

 

 

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DIMENSION THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

 

 

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

 

 

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DIMENSION THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

 

 

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

 

 

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DIMENSION THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

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

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DIMENSION THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

1. Nature of the Business and Basis of Presentation

Dimension Therapeutics, Inc. (the “Company”) was incorporated in Delaware on June 20, 2013. The Company is the leader in discovering and developing new therapeutic products for people living with devastating rare and metabolic diseases associated with the liver, based on the most advanced mammalian adeno-associated virus (AAV) gene delivery technology. The liver is a vital organ that plays an important role in human metabolism and key physiologic functions, and is the target organ for our initial programs: OTC deficiency, GSDIa, citrullinemia type I, phenylketonuria, Wilson disease, hemophilia B, and hemophilia A.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In accordance with ASC 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. As of December 31, 2016 the Company had an accumulated deficit of $100,195.  During the year ended December 31, 2016, the Company incurred a loss of $49,001 and used $47,644 of cash in operations.  The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash, cash equivalents and marketable securities of $77,949 at December 31, 2016, together with the receipt of contingent payments expected to be received in connection with our collaboration with Bayer, including reimbursements and $15 million in milestones, and cost management initiatives, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from issuance of the financial statements.  If the Company does not obtain the milestone payments, the Company would be forced to delay, reduce or eliminate certain research and development programs, reduce or eliminate discretionary operating expenses, delay product portfolio expansion, which could adversely affect its business prospects. In addition, the Company will seek additional funding through public or private financings, debt financing, collaboration agreements or government grants. The inability to obtain funding, as and when needed, would have a negative impact on the Company’s financial condition and ability to pursue its business strategies.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements reflect the operations of Dimension Therapeutics, Inc. and Dimension Securities Corporation, our wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses and the valuation of common stock. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

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Concentrations of Credit Risk, Significant Customers and Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company has all cash, cash equivalents and marketable securities balances at one accredited financial institution in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

As of December 31, 2016 and 2015 the Company's accounts receivable balances resulted from its collaboration agreement with Bayer (see Note 8), and the Company believes Bayer to be creditworthy.

The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of an equity financing, these costs are recorded in stockholders' equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. The Company has recorded deferred offering costs of $145 as of December 31, 2016 related to its At-the-Market (ATM) agreement entered into in connection with its Form S-3 Registration Statement prospectus dated November 10, 2016. Should shares under the AMT no longer be considered probable, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive loss. The Company did not record any deferred offering costs as of December 31, 2015.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents, which consist of money market funds and U.S. government securities, are stated at fair value.

Marketable Securities

Marketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of investments available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis.

Property and Equipment

Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method over the estimated useful life of each asset. Computer equipment is depreciated over five years. Laboratory equipment is depreciated over five years. Furniture and fixtures are depreciated over seven years. Leasehold improvements are amortized over the shorter of the lease term or the five-year estimated useful life of the asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares

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forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. To date, the Company has not recorded any impairment losses on long-lived assets.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Debt Issuance Costs

The Company has adopted the amendments to the Financial Accounting Standards Board ("FASB") Accounting Standards Codification made in Accounting Standards Update ("ASU") 2015-03, Interest — Imputation of Interest (Subtopic 835-30) ("ASU 2015-03") simplifying the presentation of debt issuance costs. According to ASU 2015-03, the Company presents debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of that debt liability.

Segment Information

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. All of the Company's tangible assets are held in the United States. To date, all of the Company's revenue has been generated in the United States.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 605, Revenue Recognition. Accordingly, the Company recognizes revenue for each unit of accounting when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectability is reasonably assured.

Collaborative Research and License Agreements

The terms of these agreements contain multiple deliverables, which may include licenses and research and development activities. The terms of these agreements may also include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration. The Company evaluates its collaborative agreements for proper classification in its statements of operations and comprehensive loss based on the nature of the underlying activity. The Company generally reflects as revenue amounts due under its collaborative agreements related to reimbursement of development activities as the Company is generally the principal under the arrangement.

The Company evaluates multiple-element arrangements based on the guidance in ASC Topic 605-25, Revenue Recognition — Multiple-Element Arrangements ("ASC 605-25"). Pursuant to the guidance in ASC 605-25, the Company evaluates multiple-element arrangements to determine (i) the deliverables included in the arrangement and (ii) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When the Company determines that an arrangement should be accounted for as a single unit of accounting, the Company must determine the period over which the performance obligations will be

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performed and revenue will be recognized. This evaluation requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that (i) the delivered item has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return with respect to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the Company's control. In assessing whether an item has standalone value, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can use any other deliverable for its intended purpose without the receipt of the remaining deliverable, whether the value of the deliverable is dependent on the undelivered item, and whether there are other vendors that can provide the undelivered items.

The consideration received under the arrangement that is fixed or determinable is then allocated among the separate units of accounting based on the relative selling prices of the separate units of accounting. The Company determines the selling price of a unit of accounting within each arrangement following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence ("VSOE") of selling price, if available; third-party evidence ("TPE") of selling price if VSOE is not available; or best estimate of selling price ("BESP"), if neither VSOE nor TPE is available. The Company typically uses BESP to estimate the selling price as it generally does not have VSOE or TPE of selling price for its units of accounting. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.

The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605 are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, the Company recognizes revenue from the combined unit of accounting over the contractual or estimated performance period for the undelivered items, which is typically the term of the Company's research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then the Company recognizes revenue under the arrangement on a straight-line basis over the period the Company is expected to complete its performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable, as of the period ending date.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which the Company expects to complete its aggregate performance obligations.

At the inception of an arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the Company's performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from the Company's performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone and the level of effort and investment required to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. The Company will recognize revenue in its entirety upon successful accomplishment of any substantive milestones, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, with a cumulative catch-up being recognized for the elapsed portion of the period of performance, assuming all other revenue recognition criteria are met.

To date, the Company has not recorded any substantive milestones because no milestones that meet the required criteria listed above have been identified. Payments for achievement of non-substantive milestones are deferred and recognized as revenue over the estimated period of performance applicable to the collaborative arrangement. As these milestones are achieved, the Company will

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recognize as revenue a portion of the milestone payment that is equal to the percentage of the performance period completed when the milestone is achieved, multiplied by the amount of the milestone payment, upon achievement of such milestone. The Company will recognize the remaining portion of the milestone payment over the remaining performance period under either the proportional performance method or on a straight-line basis.

Amounts received prior to satisfying the revenue recognition criteria listed above are recorded as deferred revenue in the accompanying balance sheets. Although the Company follows detailed guidelines in measuring revenue, certain judgments affect the application of the Company's revenue policy. For example, in connection with its existing collaboration agreement, the Company has recorded on its balance sheet short-term and long-term deferred revenue based on its best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue. However, this estimate is based on the Company's current research plan and, if its research plan should change in the future, the Company may recognize a different amount of deferred revenue over the following 12-month period.

The estimate of deferred revenue also reflects management's estimate of the periods of the Company's involvement in its collaboration. The Company's performance obligations under this collaboration consist of participation on steering committees and performance of other research and development services. In certain instances, the timing of satisfying these obligations can be difficult to estimate. Accordingly, the Company's estimates may change in the future. Such changes to estimates would result in a change in prospective revenue recognition amounts. If these estimates and judgments change over the course of any of the Company's collaborative agreements, it may affect the timing and amount of revenue that the Company will recognize and record in future periods.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, facilities costs, depreciation, third party license fees, and external costs of outside vendors engaged to conduct preclinical and clinical development activities and trials. Research and development expenses include the Company's costs of performing services in connection with its collaboration agreement with Bayer.

Nonrefundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

Research Contract Costs and Accruals

The Company has entered into various research and development contracts with research institutions and other companies both inside and outside of the United States. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company's estimates. The Company's historical accrual estimates have not been materially different from the actual costs.

Patent Costs

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.

Stock-Based Compensation

The Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues stock options and restricted stock awards with only service based vesting conditions and records the expense for these awards using the straight-line method.

For stock-based awards granted to consultants and non-employees, compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period

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prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company's common stock and updated assumption inputs in the Black-Scholes option-pricing model.

The Company classifies stock-based compensation expense in its statement of operations and comprehensive loss in the same manner in which the award recipient's payroll costs are classified or in which the award recipient's service payments are classified.

The Company recognizes compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, the Company has considered its historical experience to estimate pre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual forfeiture rate is materially different from the Company's estimate, the Company may be required to record adjustments to stock-based compensation expense in future periods.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to the Company’s initial public offering in October 2015, the Company was a private company and lacked company-specific historical and implied volatility information. Therefore, the Company estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company's stock options has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders' equity (deficit) that result from transactions and economic events other than those with stockholders. For the year ended December 31, 2016, the Company’s only element of other comprehensive loss was unrealized loss on marketable securities. For the years ended December 31, 2105 and 2014, there were no differences between net loss and comprehensive loss.

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company's tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

Net Loss per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options, warrants and unvested restricted stock. Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of the Company's common shares and participating securities. The Company's convertible preferred stock contains participation rights in any dividend paid by the Company and are deemed to be participating securities. Net loss attributable to common stockholders and participating preferred

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shares are allocated to each share on an as-converted basis as if all of the earnings for the period had been distributed. The participating securities do not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods that have a net loss.

Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted method. The Company allocates earnings first to preferred stockholders based on dividend rights, and then to common and preferred stockholders based on ownership interests. The weighted average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options, warrants, unvested restricted common stock and convertible preferred stock. Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive.

In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is antidilutive. The Company reported a net loss attributable to common stockholders for the years ended December 31, 2016, 2015 and 2014.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The guidance was originally effective for public entities for interim and annual periods beginning after December 15, 2016 and allows for adoption using a full retrospective method, or a modified retrospective method. Early adoption was originally not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date for public entities to annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption of the standard is permitted for annual periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify various aspects of Topic 606, including the identification of performance obligations and the implementation of licensing guidance. The Company is currently evaluating the impact that the adoption of ASU 2014-010 will have on its consolidated financial statements. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to clarify aspects of Topic 606, including assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition and completed contracts at transition. The Company is in the process of evaluating the impact of this new guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, to amend aspects of Topic 606, including the Codification’s online feedback mechanism, submissions to the Transition Resource Group for Revenue Recognition and Stakeholders’ technical inquiries. The Company is in the process of evaluating the impact of this new guidance.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss)) for equity securities with readily determinable fair values. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. This guidance will be effective for us on January 1, 2018. The Company is currently evaluating the impact that the adoption of ASU 2016-01 will have on its financial statements.

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a

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right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment awards including income tax consequences, classification of awards as either equity or liabilities and classification within the statement of cash flows. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The company is in the process of evaluating the impact of this new guidance.

 

 

3. Fair Value Measurements and Marketable Securities

 

Fair Value Measurements

The Company’s cash equivalents are generally classified within Level 1 of the fair value hierarchy. The Company’s investments in marketable securities are classified within Level 2 of the fair value hierarchy.

The fair values of the Company’s marketable securities are generally based on prices obtained from independent pricing sources. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. Typical inputs used by these pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers and/or estimates cash flow, prepayment spreads and default rates.

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

 

 

During the year ended December 31, 2016 and 2015, there were no transfers between Level 1 and Level 2.

 

The carrying amounts reflected in the consolidated balance sheets for accounts payable and accrued expenses approximate fair value due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company.

 

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Marketable Securities

 

The following tables summarize the Company’s marketable securities as of December 31, 2016:

 

 

 

4. Prepaid expenses and other current assets:

Prepaid expenses and other current assets consisted of the following:

 

 

 

5. Property and Equipment, net

Property and Equipment, net consisted of the following:

 

 

Depreciation and amortization expense was $1,652, $716 and $164 for the years ended December 31, 2016, 2015 and 2014, respectively.

Substantially all of the Company’s laboratory equipment server as collateral for the Company’s standby letter of credit pursuant to the agreement for the Company’s leased facilities (see Note 14).

 

 

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6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

 

 

7. Notes Payable

In August, 2014, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”), which provided for advances under an equipment line of up to $1,750. As of December 31, 2015, the Company has borrowed the full amount of $1,750 under the loan and security agreement and incurred a total of $35 of related issuance costs. Under the loan and security agreement, for each advance under the equipment line, the Company is obligated to make six monthly, interest-only payments. Thereafter, the Company is obligated to pay 36 monthly installments of interest and principal. Outstanding principal under the loan and security agreement accrue interest at an annual rate of 5.5%, which was determined on the date of each drawdown based on an annual rate of 2.25% plus the greater of (1) 3.25% or (2) the rate of interest per annum from time to time published in the money rates section of The Wall Street Journal as the prime rate then in effect. Borrowings under the loan and security agreement are secured by substantially all of our assets, except for our intellectual property.

In connection with entering into the loan and security agreement, in August 2014, the Company granted to the lender a warrant to purchase 11,973 shares of our common stock at an exercise price of $0.56 per share. This warrant was exercised at the option of the lender by the option of a cashless exercise in December 2015 resulting in the issuance of 11,306 of our common shares. Because the warrant is indexed to the Company's own stock and can only be settled by gross physical delivery of shares or net share settlement, the Company has determined that this warrant qualifies for equity classification. Therefore, the warrant was recorded as a credit to additional paid-in capital and as a debt discount on the date of issuance. Based on the relative fair values of the warrant and the notes payable on the date of the grant, the amount allocated to the warrant was $5, determined using the Black-Scholes option-pricing model with the following inputs: ten-year expected term; 2.41% risk-free interest rate; 70.93% expected volatility; and no dividends. The debt discount at date of issuance, which also included $30 of fees paid to the lender and for legal services, is being accreted to the carrying value of the debt using the effective interest method.

In December 2015, the Company, in connection with the formation of Dimension Securities Corporation, entered into a First Amendment to the loan and security agreement with SVB. The First Amendment requires the Company to maintain on deposit in operating, depository and securities accounts maintained with SVB a compensating balance of 105% of the then-outstanding obligations, as defined in the loan and security agreement. As December 31, 2016, the Company was required to maintain a compensating balance of $6,844 in its accounts with SVB to meet this requirement.

In February 2016, the Company entered into a Second Amendment to the loan and security agreement (the “Second Amendment”) with Silicon Valley Bank (“SVB”). Under the Second Amendment, the Company may borrow an aggregate principal amount of up to $7,000 for certain equipment purchases. In accordance with terms of the Second Amendment, the Company is obligated to make six monthly interest-only payments. Thereafter, the Company is obligated to pay thirty-six (36) monthly installments of interest and principal. Advances under the second amendment to loan and security agreement accrue interest at an annual rate of 0.5% below the Prime Rate, which interest shall be determined by SVB on the Funding Date of the applicable Equipment Advance and shall be payable monthly in arrears. In addition, a final payment equal to 6% of the original principal amount of each advance is due on the earlier of the maturity date of the advance, acceleration of the terms of the loan, prepayment of the advance or termination of the loan and security agreement.

Through December 31, 2016, the Company borrowed $5,801 under the Second Amendment in three advances and incurred $22 of related issuance costs. The issuance costs are being accreted to the principal amount of debt and being amortized to interest expense using the effective-interest method over the same period. In accordance with the terms of the Second Amendment, the borrowed loan amounts through December 31, 2016, accrues interest at an annual rate of 3.0%. In addition, the Company accrues the related total final payments due of $348 to outstanding debt by charges to interest expense using the effective-interest method from the date of issuance through the maturity date. The effective interest rate of the outstanding debt under the Second Amendment is approximately 6.2%.

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As of December 31, 2016 and December 31, 2015, notes payable consist of the following:

 

 

During the years ended December 31, 2016 and 2015, the Company made scheduled principal repayments totaling $679 and $394, respectively.

During the years ended December 31, 2016 and 2015, the Company recognized $217 and $88, respectively, of interest expense related to the loan and security agreement with SVB.

Borrowings under the loan and security agreement are secured by substantially all of our assets, except for our intellectual property. There are no financial covenants associated with the loan and security agreement. There are negative covenants restricting our activities, such as disposing of our business or certain assets, changing our business, management, ownership or business locations, incurring additional debt or liens or making payments on other debt, making certain investments and declaring dividends, acquiring or merging with another entity, engaging in transactions with affiliates or encumbering intellectual property. The obligations under the loan and security agreement are subject to acceleration upon occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition.

Estimated future principal payments due under the loan and security agreement with SVB are as follows:

 

 

 

8. Collaboration and License Agreements

Bayer HealthCare LLC

In June 2014, the Company entered into a research and development collaboration and license agreement with Bayer for the development and commercialization of a gene therapy for the treatment of hemophilia A (the “collaboration agreement”). Under the agreement, the Company granted to Bayer an exclusive license to develop and commercialize one or more novel gene therapies for hemophilia A. The Company is responsible for all research and development activities for those biologic therapeutics under the agreement prior to completion of clinical proof-of-concept (“POC”) trials, with Bayer funding the Company’s efforts and providing consulting and technological support. Upon the successful demonstration of clinical POC, the agreement requires that Bayer use commercially reasonable efforts to conduct later-stage development and commercialization of gene therapy products for treatment of hemophilia A for such therapy. Bayer will have worldwide rights to commercialize the potential future product. Under this agreement, Bayer was also granted a right of first notice for gene therapy treatments for hemophilia B, which it declined to exercise in July 2016.

Financial Terms

Under the terms of the agreement with Bayer, the Company received a nonrefundable, noncreditable upfront license payment of $20,000 in June 2014 and is eligible to receive development and commercialization milestone payments of up to $232,000, as well as tiered royalty payments ranging in the high single-digit to low double-digit percentages, not exceeding the mid-teens, of net sales of commercialized products resulting from the collaboration, as defined in the agreement with Bayer. Bayer will fund certain research and development services performed by the Company during the research term and will reimburse the Company for all project costs, including any third-party costs, in the performance of its obligations under the annual research plan and in accordance with the mutually agreed upon research budget.

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The Company determined that the deliverables under its agreement with Bayer include (i) research services to be provided over the research term, (ii) a development and commercialization license and (iii) the Company’s participation in a Joint Steering Committee (“JSC”) and a Joint Research and Development Committee (“JRDC”) to be provided over the research term. The Company determined that the development and commercialization license and involvement in the JSC and the JRDC do not have standalone value to Bayer and, therefore, are not separable from the delivery of the research services. Therefore, all deliverables under the agreement have been combined and accounted for as a single unit of accounting. Accordingly, the upfront license payment and research payments are being recognized by the Company as revenue on a straight-line basis over the estimated performance period, which approximates the 54-month research term of the agreement with Bayer that commenced in June 2014. As future research payments are earned, the Company will recognize as revenue the portion of payments equal to the percentage of the elapsed research term to the total estimated research term, with the remaining portion of consideration received being recognized over the remaining estimated performance period on a straight-line basis. The Company concluded at the outset of the arrangement that none of the future milestone payments included in the arrangement qualified as substantive milestones. Any future milestone payments will be recognized, along with the other arrangement consideration, over the remaining estimated period of performance, if any, beginning at the time a milestone payment is earned, with a cumulative catch-up being recognized for the elapsed portion of the estimated research term. As of December 31, 2016, the Company had not earned any milestone or royalty payments.

Revenue recognized under the collaboration agreement with Bayer consisted of the following:

 

 

During the years ended December 31, 2016, 2015 and 2014, research payments earned by the Company under the collaboration agreement totaled $8,292, $7,740 and $3,265, respectively. The costs incurred by the Company related to the research activities of the collaboration agreement are recorded as research and development expense in the consolidated statement of operations and comprehensive loss.

As of December 31, 2016 and 2015, deferred revenue related to the collaboration agreement with Bayer totaled $17,326 and $20,505, which related to the upfront license payment, research services payments and to advance payments for future research services.

Term and Termination

The agreement with Bayer expires on a licensed treatment-by-licensed treatment and country-by-country basis until the later of ten years from the date of first commercial sale or when patent claims have expired, lapsed, been abandoned or been invalidated in such country. The Company and Bayer, through the JSC, may mutually agree to terminate the collaboration early in the event clinical development is ended as required by a regulatory authority or in light of data from any studies conducted prior the POC trial. Bayer has the unilateral right to terminate the agreement in its entirety or with respect to one or more country by providing written notice to the Company. Bayer may also terminate the agreement with notice after two unsuccessful attempts to demonstrate clinical POC in a Phase I human POC trial. Bayer may further terminate the agreement with notice in the event that, following the POC trial, there is a material safety issue with respect to a licensed product. Reciprocal termination rights under the agreement include termination for breach and termination for bankruptcy.

REGENX

2013 License Agreement

In October 2013, the Company entered into a license agreement with REGENX, as amended in June and September 2014 (the "REGENX 2013 License Agreement") for an exclusive, sublicensable, worldwide commercial license under certain intellectual property for preclinical and clinical research and development, and commercialization of drug therapies using REGENX's licensed patents for the treatment of hemophilia A and hemophilia B, as well as a one-year option to obtain exclusive licenses for the commercialization of two other diseases to be elected by the Company in the future. The REGENX 2013 License Agreement requires the Company to pay ongoing annual maintenance fees of $35 for each indication elected by the Company, beginning in October 2014. The Company is also required to pay low to mid single-digit royalties on net sales of licensed products as well as milestone fees, if any, owed by REGENX to Glaxo Smith Kline ("GSK") or sublicense fees owed by REGENX to Penn or GSK as a result of the Company's activities under the REGENX 2013 License Agreement. The milestones payable will not exceed $1,650 and are payable contingent not only on the Company achieving the milestone, but also on the Company achieving the milestone before all other licensees.

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The REGENX 2013 License Agreement expires upon the expiration, lapse, abandonment or invalidation of the last claim of the licensed intellectual property to expire, lapse or become abandoned or unenforceable in all the countries of the world. Upon expiration, the Company's knowhow license will become non-exclusive, perpetual, irrevocable and royalty-free with respect to licensed know-how that REGENX owns in the field and will continue with respect to all of REGENX's other know-how in the field under its GSK and/or Penn licenses for so long as its rights from those licensors continue. The Company may terminate REGENX License Agreement upon prior written notice to REGENX. REGENX may terminate the license agreement if the Company or its affiliates become insolvent, if the Company is greater than a specified number of days late in paying money due under the license agreement, or, effective immediately, if the Company or its affiliates commence certain actions relating to the licensed patents. Either party may terminate the REGENX 2013 License Agreement for a material breach that is not cured within a specified number of days.

In September 2014, the Company elected its third indication under the REGENX 2013 License Agreement, and the license was amended to extend the term of the option to elect the fourth and final disease indication for an additional six months. In consideration for the extension of the option, the Company paid an extension fee of $150. In January 2015, the Company elected its fourth and final indication under the REGENX 2013 License Agreement.

As of December 31, 2016 and 2015, the Company had not developed a commercial product using the licensed technologies and no milestones had been achieved.

Research and Management Services Agreement

In October 2013, in connection with the REGENX 2013 License Agreement, the Company engaged REGENX for the provision of certain research services (the "REGENX Research Services Agreement") through REGENX's existing sponsored research agreement with Penn.

Management Services Agreement

In April 2014, the Company engaged REGENX Holdings LLC for the provision of certain research and development management services (the "REGENX Management Services Agreement"), including strategic, business and operational advice.

Material Transfer Agreement

In April 2014, the Company entered into a material transfer agreement and purchase order with REGENX, pursuant to which the Company purchased certain biologic materials from REGENX for research and development and clinical trials.

2015 Option and License Agreement

In March 2015, the Company entered into an option and license agreement with REGENX (the "REGENX 2015 Option and License Agreement") that granted the Company options to commercial exclusive licenses for four new disease indications to be elected by the Company in the future. If elected, each option carries an option fee of $1,000 payable to REGENX upon exercise and annual maintenance fees of $50. In addition, for each option exercised, the Company is obligated to pay REGENX up to $9,000 upon achievement of various substantive milestones, as well as mid to high single-digit royalties on net sales of licensed products and mid single-digit to low double-digit percentage sublicenses fees, if any. In May, August and December 2015, the Company exercised options under the REGENX 2015 Option and License Agreement for three new indications and paid a $1,000 option fee for each indication pursuant to the agreement.

Any options not exercised will automatically terminate in 2019 (which may be extended for additional time for a fee). The Company may terminate the REGENX 2015 Option and License Agreement upon prior written notice. REGENX may terminate the agreement if the Company or its controlling affiliates become insolvent, if the Company is greater than a specified number of days late in paying money due under the REGENX 2015 Option and License Agreement, or, effective immediately, if the Company or its affiliates commence certain actions relating to the licensed patents. Either party may terminate the REGENX 2015 Option and License Agreement for a material breach that is not cured within a specified number of days.

University of Pennsylvania

2015 Sponsored Research and Option Agreement

In January 2015, the Company entered into an agreement with the Penn to sponsor certain research of Dr. Wilson at University of Pennsylvania School of Medicine related to liver gene therapy and hemophilia. The agreement was subsequently amended in August 2015, March 2016 and December 2016. In consideration for funding such research, Penn granted the Company an option to

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obtain a worldwide, non-exclusive or exclusive, royalty-bearing license, with the right to sublicense, under certain patent rights conceived, created or reduced to practice in the conduct of the research. The Company is required to reimburse Penn for filing, prosecuting and maintaining such patent rights unless and until the Company declines to exercise its option. Dr. Wilson is required to provide the Company with task-based, scientific reports of progress and results of the research, and Penn granted the Company a royalty-free, nontransferable, non-exclusive right to copy and distribute any research reports furnished to the Company for any reasonable purpose, provided the results are not made publicly available until certain conditions are met, and the right to use, disclose and otherwise exploit the research results for any reasonable purpose, subject to similar restrictions on our public disclosure of the research results. Otherwise, the sponsored research agreement contains customary confidentiality provisions.

The Company’s sponsored research agreement with Penn will expire on December 31, 2017 unless earlier terminated or the parties mutually agree to extend or renew the agreement. Either party may terminate the agreement if Dr. Wilson becomes unavailable and an acceptable substitute is not found within a certain period of time, or if the Company fails to mutually agree on an acceptable work plan and budget for the sponsored research. The Company may also terminate the sponsored research agreement upon written notice to Penn, as long as the Company has met all of its payment and performance obligations to date. In the event of termination, the Company shall pay Penn the amount needed to cover costs through the effective termination date as well as allowable commitments incurred; provided, however, payments for allowable commitments extending beyond the effective termination date shall not exceed $2,762, as of December 31, 2016. Either party may terminate this agreement for a material breach that is not cured within a specified number of days.

2016 Research, Collaboration and License Agreement

In May 2016, the Company entered into a research, collaboration and license agreement with Penn.  The agreement was subsequently amended in October 2016 and December 2016. The agreement provides the terms for the Company and Penn to collaborate with respect to the pre-clinical development of gene therapy products for the treatment of citrullinemia type I (DTX601), phenylketonuria (DTX501) and Wilson disease (DTX701) (each, a “Subfield”).    

Under the agreement, Penn granted the Company an exclusive, worldwide, royalty-bearing right and license to certain patent rights arising out of the research program, subject to certain retained rights, and a non-exclusive, worldwide, royalty-bearing right and license to certain Penn intellectual property, in each case to research, develop, make, have made, use, sell, offer for sale, commercialize and import licensed products in each Subfield for the term of the agreement.

In May 2016, the Company paid to Penn immaterial one-time, non-refundable upfront payments recorded as research and development expense in exchange for the licenses.  The Company will fund the cost of the research program in accordance with a mutually agreed-upon research budget and will be responsible for clinical development, manufacturing and commercialization of each Subfield.  Research program costs will be recorded as research and development expense in the period the research services are performed.  

In addition, the Company would be required to make milestone payments if certain development and commercial milestones are achieved over time, as well as low to mid single-digit royalties percentages on net sales of each Subfield’s licensed products.  Should they be achieved, potential development milestones through U.S. and EU regulatory acceptance total up to a maximum of $5,000 per Subfield and would be recorded as research and development expense in the periods they are achieved. As no milestones have been achieved and the agreement can be cancelled at our option, no future potential milestone payments have accrued as of December 31, 2016.

 

 

9. Related Party Transactions

In October 2013, the Company entered into a license agreement (see Note 8) with REGENX Biosciences, LLC, predecessor to REGENXBIO Inc., ("REGENX") and issued common stock and restricted common stock to REGENX and directors and management of REGENX as well as to Penn and an affiliate of Penn. In connection with the transaction, the Company issued, at a price of $0.0002923 per share, 3,421 shares of common stock to REGENX, 2,379,242 shares of common stock to directors and management of REGENX and 1,038,474 shares of common stock to Penn and an affiliate of Penn.

In October 2013, the Company also entered into a Stock Purchase Agreement (the "SPA") with Beacon Bioventures Fund III Limited Partnership ("Beacon Bioventures") for the issuance of Series A preferred stock, pursuant to which Beacon Bioventures purchased 5,000,000 shares of the Company's Series A preferred stock in October 2013 and 10,000,000 shares of the Company's Series A preferred in February 2015, each at a price of $1.00 per share.

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In addition, in October 2013, the Company issued to Beacon Bioventures in exchange for consulting services provided by Fidelity Biosciences Corp. ("Fidelity Biosciences"), an entity affiliated with Beacon Bioventures, an aggregate of 153,951 shares of fully vested common stock as well as 85,528 shares of restricted common stock at a price of $0.0002923 per share, which shares were subject to repurchase by the Company from April 30, 2014 to October 27, 2014. The issuance of restricted common stock to Beacon Bioventures was considered an award to a non-employee requiring the fair value of these awards to be remeasured at the end of each reporting period prior to the completion of the consulting services, using the then-current fair value of the Company's common stock. Related to the issuance of the 85,528 shares of restricted common stock, the Company recorded general and administrative expenses of $42 for the year ended December 31, 2014.

As of December 31, 2014, REGENX and directors and management of REGENX, Penn and an affiliate of Penn, and Beacon Bioventures were principal stockholders of the Company. In addition, as of the same date, each of REGENX and Beacon Bioventures was represented by at least one member of the Company's board of directors. As of December 31, 2015, REGENX and directors and management of REGENX, Penn and an affiliate of Penn, and Beacon Bioventures were principal stockholders of the Company. However, as of the same date, REGENX and Beacon Bioventures were no longer represented in the Company’s board of directors.

As of January 1, 2016, the Company no longer considers the Penn or REGENX to be related parties, as Penn and REGENX were no longer principal shareholders and REGENX was no longer represented on the Company’s board of directors. Accordingly, expenses incurred in connection with Penn or REGENX subsequent to January 1, 2016 are no longer considered to be related party expenses.

The Company entered into two license agreements with REGENX and two research agreements with University of Pennsylvania (see Note 8).    

Related party expenses consisted of the following:

 

 

Cash payments made to REGENXBIO, Inc. (“REGENX”) during the years ended December 31, 2015 and 2014 were $3,890, and $7,341, respectively. There were no related party amounts due to REGENX by the Company as of December 31, 2015.

Cash payments made to the University of Pennsylvania during the years ended December 31, 2015 and 2014 were $5,137 and $0, respectively. Related party amounts due to University of Pennsylvania by the Company were $522 as of December 31, 2015.

Cash payments made to Fidelity Biosciences during the years ended December 31, 2015 and 2014 were $1 and $18, respectively. There were no related party amounts due to Fidelity Biosciences by the Company as of December 31, 2015.

 

 

10. Stockholders’ Equity

On October 9, 2015, the Company effected a one-for-2.923 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s Convertible Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios. The significant increase in common stock outstanding in October 2015 will impact the year-over-year comparability of the Company’s net loss per share calculations over the next year.

On October 27, 2015, the Company completed an IPO, which resulted in the issuance and sale of 5,500,000 shares of its common stock at a public offering price of $13.00 per share, resulting in net proceeds of $63,368 after deducting underwriting discounts and other offering costs. Upon the closing of the IPO, all outstanding shares of the Company’s Convertible Preferred Stock were converted into 15,286,968 shares of the Company’s common stock. On November 25, 2015, the underwriters of the Company’s IPO exercised their over-allotment option to purchase an additional 104,775 shares of common stock at the initial public offering price of $13.00 per share, resulting in net proceeds of $1,252 after deducting underwriting discounts and other offering costs.

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Upon closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into 15,286,968 shares of common stock.

As of December 31, 2016 and 2015, the Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue 5,000,000 shares of $0.0001 par value undesignated preferred stock. The rights, preferences, restrictions, qualifications and limitations of such stock are to be determined by the Company’s board of directors.

As of December 31, 2016 and 2015, the Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue 150,000,000 shares of $0.0001 par value common stock. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any.  Through December 31, 2016, no dividends have been declared.

 

 

11. Stock-Based Compensation

2015 Stock Option and Incentive Plan

On September 2, 2015, the Company’s stockholders approved the 2015 Stock Option and Incentive Plan (the “2015 Plan”), which became effective October 21, 2015. The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, performance share awards, cash-based awards and other stock-based awards. The 2015 Stock Option Plan replaced the Company’s 2013 Stock Option and Grant Plan (the “2013 Plan”). The Company will grant no future stock options or other awards under the 2013 Stock Option Plan. Any options or awards outstanding under the 2013 Stock Option Plan remained outstanding and effective.

Vesting periods are determined at the discretion of the board of directors, the compensation committee of the board of directors or a similar committee performing the functions of the compensation committee and which is comprised of not less than two non-employee directors who are independent. Stock options granted to employees and directors typically vest over four years. Stock options granted to non-employees typically vest over periods ranging from two years to four years, depending on the period during which the services are provided. The Company measures and records the value of options granted to non-employees over the period of time services are provided and, as such, unvested portions are subject to remeasurement at subsequent reporting periods.

During the year ended December 31, 2016 and 2015, under the 2015 Plan, the Company granted to employees and directors no shares of restricted common stock and options to purchase 1,192,814 and 75,698 shares of common stock, respectively. During the years ended December 31, 2016 and 2015, under the 2015 Plan, the Company granted to non-employees no shares of restricted common stock and options to purchase no shares of common stock.

The total number of shares that may be issued under all equity plans was 5,889,101, of which 1,223,561 shares remained available for future grant as of December 31, 2016. The number of shares of common stock that may be issued under the 2015 Plan will automatically increase on each January 1, beginning on January 1, 2016 and ending on January 1, 2020, equal to the lesser of (i) 4% of the shares of the Company’s common stock outstanding on the immediately preceding December 31 or (ii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, canceled, repurchased or are otherwise terminated by the Company under the 2015 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. On January 1, 2016, 1,000,329 shares of common stock, representing 4% of the Company’s issued and outstanding shares of common stock as of December 31, 2015, were added to the 2015 Plan. Such shares are included in the equity plan totals specified above.

2015 Employee Stock Purchase Plan

On September 2, 2015, the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (the “ESPP”), which became effective October 27, 2015. A total of 256,585 shares of common stock were reserved for issuance under this plan as of December 31, 2016. In addition, the number of shares of common stock that may be issued under the ESPP will automatically increase on each January 1, beginning on January 1, 2017 and ending on January 1, 2021, equal to the lesser of (i) 256,585 shares of common stock, (ii) 1% of the Company’s shares of common stock outstanding on the immediately preceding December 31 or (iii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors. As of December 31, 2016 there was no activity under the ESPP.

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Stock Option Valuation

The fair value of each option granted to employees and directors during the years ended December 31, 2016, 2015 and 2014, under the Company’s stock option plans has been calculated on the date of grant using the following assumptions:

 

 

Expected dividend yield: The Company has not paid and does not anticipate paying any dividends in the foreseeable future.

Risk-free interest rate: The Company determined the risk-free interest rate by using a weighted average equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant.

Expected volatility: As the Company has only been a public company since October 2015, there is not sufficient historical volatility for the expected term of the options. Therefore, the Company used an average historical share price volatility based on an analysis of reported data for a peer group of comparable companies.

Expected term (in years): Expected term represents the period that the Company’s share option grants are expected to be outstanding. As the Company has only been a public company since October 2015, there is not sufficient historical term data to calculate the expected term of the options. Therefore, the Company elected to utilize the “simplified” method to estimate the expected term of option grants issued to employees. Under this approach, the weighted average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on historical analysis of actual stock option forfeitures.

For options granted to nonemployees, the expected life of the option used is ten years, which is the contractual term of each such option. All other assumptions used to calculate the grant date fair value are generally consistent with the assumptions used for options granted to employees.

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2015:

 

 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock at December 31, 2016.

The weighted average grant-date fair value of stock options granted during the years ended December 31, 2016 and 2015 was $7.15 and $4.49 per share, respectively.

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As of December 31, 2016 there were no outstanding unvested service-based stock options held by non-employees for purchase. As of December 31, 2015, there were outstanding unvested service-based stock options held by non-employees for the purchase of 3,527 shares of common stock.

Until April 2015, the Company had been obligated to issue additional stock options to purchase shares of the Company's common stock to certain executives of the Company such that these executives would maintain their potential stock ownership in the event that the Company granted additional shares of Series A preferred stock. In connection with the Company's issuance of Series A preferred stock in February 2015, the Company granted stock options in April 2015 for the purchase of 102,086 shares of common stock to those executives.

Restricted Common Stock

The Company has granted restricted common stock with time-based vesting conditions. Unvested shares of restricted common stock may not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting conditions of each award. The following table summarizes the Company’s restricted common stock activity since December 31, 2014:

 

 

The total fair value of restricted common stock vested during the years ended December 31, 2016 and 2015 was $362 and $286, respectively.

Stock-Based Compensation

Stock-based compensation expense related to stock options and restricted common stock was classified in the consolidated statements of operations and comprehensive loss as follows:

 

 

As of December 31, 2016, total unrecognized compensation cost related to the unvested awards was $7,930, which is expected to be recognized over a weighted average period of 2.6 years.

 

 

12. Income Taxes

During the years ended December 31, 2016 and 2015, the Company recorded no income tax benefits for the net operating losses incurred in each year or interim period, due to its uncertainty of realizing a benefit from those items. All of the Company's losses before income taxes were generated in the United States.

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A reconciliation of U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

Net deferred tax assets as of December 31, 2016 and 2015 consisted of the following:

 

 

As of December 31, 2016, the Company had net operating loss carryforwards for federal and state income tax purposes of $73,099 and $73,498, respectively, which begin to expire in 2033. The Company also had an additional $74 of federal and state net operating losses not reflected above that were attributable to stock option exercises, which will be recorded as an increase in additional paid-in capital once they are realized in accordance with accounting for stock-based compensation awards. As of December 31, 2016, the Company also had available research and development and orphan drug tax credit carryforwards for federal and state income tax purposes of $3,785 and $625 respectively, which begin to expire in 2033 and 2029, respectively. Utilization of the net operating loss carryforwards and research and development and orphan drug tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income.

Utilization of the net operating loss carryforwards and research and development and orphan drug tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development and orphan drug tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development and orphan drug tax credit carryforwards before utilization. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

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The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company's history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2016, 2015 and 2014. Management reevaluates the positive and negative evidence at each reporting period.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2016, 2015 and 2014, related primarily to the increase in net operating loss carryforwards, capitalized research and development expenses and research and development and orphan drug tax credit carryforwards and were as follows:

 

 

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2016, 2015 and 2014. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2013 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2016 and 2015, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company's statements of operations and comprehensive loss.

 

 

13. Net Loss per Share

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

 

 

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The Company’s potential dilutive securities, which include convertible preferred stock, stock options, unvested restricted common stock and a warrant to purchase common stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an antidilutive effect:

 

 

 

14. Commitments and Contingencies

Leases

The Company leases approximately 15,000 square foot office and laboratory space under various operating lease agreements for its Cambridge, MA location that, as amended, expire in January 2018.  In connection with these agreements, in March 2014, the Company made security deposits totaling $88. In October 2014, one of the leases was amended to increase the leased space and to extend the term of the lease through January 2018. In connection with the lease amendment, the Company entered into an equipment-collateralized irrevocable standby letter of credit (see Note 5) in the amount of $81, naming the landlord as beneficiary.

In March 2015, the Company entered into a second equipment-collateralized irrevocable standby letter of credit (see Note 5) in the amount of $92, naming the landlord as beneficiary, which replaced the security deposits paid by the Company in March 2014. In April 2015, the security deposits of $88 were returned to the Company.

As amended, required lease payments include base rent of $53 per month through March 2015, which increases to $62 per month over the course of the amended lease through January 2018.  

In November 2015, the Company entered into an operating lease agreement with ARE-MA Region No. 20, LLC (“ARE”) for approximately 17,600 square feet of laboratory and office space located at 19 Presidential Way, Woburn, Massachusetts. The lease commenced upon substantial completion of building improvements on April 1, 2016 and continues for a term of 5 years. Annual rent under the lease, exclusive of operating expenses and real estate taxes, will be $342 for the first year, with annual increases of $1.00 per square foot each year thereafter. Under the terms of the lease, ARE contributed $35.00 per rentable square foot of tenant improvement allowances, which was included in the base rent set forth in the lease. The ARE lease contains customary provisions allowing ARE to terminate our lease should the Company fail to remedy any breach of our obligations within specified time periods, or upon our bankruptcy or insolvency.

The Company recognizes rent expense on a straight-line basis over the lease period and has recorded deferred rent for rent expense incurred but not yet paid. The Company recorded rent expense of $960, $734 and $227 during the years ended December 31, 2016, 2015 and 2014, respectively.

The following table summarizes the future minimum lease payments under the Cambridge and Woburn operating leases:

 

 

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The Company is further responsible for its pro rata share of operating expenses, real estate taxes and utilities of the facilities housing the leased office and laboratory space.

License Agreements

The Company has entered into license agreements with REGENX and the University of Pennsylvania under which it is obligated to make contingent payments (see Note 8).

Research and Development Agreement

In June 2015, the Company entered into a three-year cooperative research and development agreement with the Eunice Kennedy Shriver National Institute of Child Health and Human Development, an institute of the U.S. National Institutes of Health, to conduct on behalf of the Company a non-clinical study to investigate the effectiveness of a potential gene therapy treatment for patients with GSDIa. Under the agreement, as amended in November 2016, the Company is obligated to make noncancelable research funding payments of $244 for the first year and $300 annually for the remaining two years, for total aggregate payments of $844.

Legal Proceedings

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not aware of any claims under indemnification arrangements, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2016.

 

 

15. 401(k) Savings Plan

The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Company's board of directors. To-date, no contributions have been made to the plan by the Company.

 

 

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16. Quarterly Financial Data (Unaudited)

The following tables present quarterly consolidated statement of operations data for fiscal 2016 and 2015. The below data is unaudited but, in our opinion, reflects all adjustments necessary for a fair presentation of this data in accordance with GAAP.

 

 

 

 

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