Item 1. Financial Statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America, or GAAP.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Prior to December 13, 2019, the Company accounted for its 50% investment in Casebia Therapeutics Limited Liability Partnership, or Casebia, under the equity method. As described in Note 5, on December 13, 2019, Casebia became a fully-owned subsidiary and, as a result, the Company consolidated Casebia’s financial results from that date forward. All intercompany balances and transactions have been eliminated in consolidation. The Company views its operations and manages its business in one operating segment, which is the business of discovering, developing and commercializing therapies derived from or incorporating genome-editing technology. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the three-month interim periods ended March 31, 2020 and 2019.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019, which are contained in the 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 12, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, revenue recognition, equity-based compensation expense and reported amounts of expenses during the period. Significant estimates in these consolidated financial statements have been made in connection with revenue recognition and equity-based compensation expense. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions. Changes in estimates are reflected in reported results in the period in which they become known.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on February 12, 2020, except with respect to the Company’s policy on credit losses noted within the “Recently adopted accounting standards” section below.
Recently Adopted Accounting Standards
Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements, or ASC 326. The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The targeted transition relief standard allows filers an option to irrevocably elect the fair value option of ASC 825-10, Financial Instruments-Overall, applied on an instrument-by-instrument basis for eligible instruments. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial position or results of operations upon adoption.
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2. Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Computer equipment
|
|
$
|
727
|
|
|
$
|
727
|
|
Furniture, fixtures and other
|
|
|
3,215
|
|
|
|
3,215
|
|
Laboratory equipment
|
|
|
18,555
|
|
|
|
16,640
|
|
Leasehold improvements
|
|
|
21,400
|
|
|
|
21,400
|
|
Construction work in process
|
|
|
1,999
|
|
|
|
1,394
|
|
Total property and equipment, gross
|
|
|
45,896
|
|
|
|
43,376
|
|
Accumulated depreciation
|
|
|
(14,123
|
)
|
|
|
(12,046
|
)
|
Total property and equipment, net
|
|
$
|
31,773
|
|
|
$
|
31,330
|
|
Depreciation expense for the three months ended March 31, 2020 and 2019 was $2.1 million and $1.0 million, respectively.
3. Accrued Expenses
Accrued expenses consist of the following (in thousands):
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|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Payroll and employee-related costs
|
|
$
|
5,431
|
|
|
$
|
15,229
|
|
Research costs
|
|
|
11,113
|
|
|
|
9,434
|
|
Licensing fees
|
|
|
—
|
|
|
|
750
|
|
Professional fees
|
|
|
1,694
|
|
|
|
2,040
|
|
Intellectual property costs
|
|
|
2,780
|
|
|
|
2,311
|
|
Accrued property and equipment
|
|
|
148
|
|
|
|
407
|
|
Other
|
|
|
758
|
|
|
|
9
|
|
Total
|
|
$
|
21,924
|
|
|
$
|
30,180
|
|
4. Commitments and Contingencies
Future Lease Commitments
The Company has entered into certain leasing commitments, for which, right of use assets and right of use liabilities are not reflected on the consolidated balance sheet as the leases have not yet commenced.
In November 2019, the Company, together with one of its partners, committed to making payments to a clinical manufacturing organization under a lease arrangement. The lease arrangement is expected to commence in the second half of 2020, at which time an upfront payment of $2.6 million is due. In addition, the Company and its partner have committed to paying approximately $3.7 million in annual rental payments for a five-year period following commencement. All payments will be split equally between the Company and its partner.
Litigation
In the ordinary course of business, the Company is from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment and other matters. While the outcome of those proceedings and claims cannot be predicted with certainty, the Company is not party to any legal or arbitration proceedings that may have significant effects on its financial position. It is not a party to any material proceedings in which any director, member of executive management or affiliate of the Company is either a party adverse to it or its subsidiaries or has a material interest adverse to it or its subsidiaries.
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Letters of Credit
As of March 31, 2020, the Company had restricted cash of $5.0 million representing letters of credit securing the Company’s obligations under certain leased facilities in Cambridge, Massachusetts, as well as certain credit card arrangements. The letters of credit are secured by cash held in a restricted depository account. The cash deposit is recorded in restricted cash in the accompanying consolidated balance sheet as of March 31, 2020.
Research, License and Intellectual Property Agreements
The Company has engaged several research institutions and companies to identify new delivery strategies and applications of the Company’s gene-editing technology. The Company is also a party to a number of research license agreements which require significant upfront payments and may be required to make future royalty payments and potential milestone payments from time to time. In addition, the Company is also a party to intellectual property agreements, which require maintenance and milestone payments from time to time. Further, the Company is a party to a number of manufacturing agreements that require upfront payments for the future performance of services.
In association with these agreements, on a product-by-product basis, the counterparties are eligible to receive up to low eight-digit potential payments upon specified research, development and regulatory milestones. In addition, on a product-by-product basis, the counterparties are eligible to receive potential commercial milestone payments based on specified annual sales thresholds. The potential payments are low-single digit percentages of the specified annual sales thresholds. The counterparties are also eligible to receive low single-digit royalties on future net sales.
Under certain circumstances and if certain contingent future events occur, Vertex Pharmaceuticals Incorporated and certain of its subsidiaries, or Vertex, is eligible to receive up to $395.0 million in potential specified research, development, regulatory and commercial milestones and tiered single-digit royalties on future net sales. Refer to Note 5 for further discussion on the Company’s arrangements with Vertex.
5. Significant Contracts
Agreements with Vertex Pharmaceuticals Incorporated and certain of its subsidiaries
Summary
On October 26, 2015, the Company entered into a strategic collaboration, option and license agreement, or the 2015 Collaboration Agreement, with Vertex. The 2015 Collaboration Agreement is focused on the use of the Company’s CRISPR/Cas9 gene-editing technology to discover and develop potential new treatments aimed at the underlying genetic causes of human disease.
On December 12, 2017, the Company and Vertex entered into Amendment No. 1 to the 2015 Collaboration Agreement, or Amendment No. 1, and the Joint Development Agreement, or the JDA. Amendment No. 1, among other things, modified certain definitions and provisions of the 2015 Collaboration Agreement to make them consistent with the JDA and clarified how many options are exercised (or deemed exercised) in connection with certain targets specified under the 2015 Collaboration Agreement. Amendment No. 1 also amended other provisions of the 2015 Collaboration Agreement, including the expiration terms.
In connection with the 2015 Collaboration Agreement, Vertex made a nonrefundable upfront payment of $75.0 million. Under the 2015 Collaboration Agreement, Vertex agreed to fund the discovery activities conducted pursuant to the agreement while retaining options to co-exclusive and exclusive licenses. In December 2017, upon execution of the JDA and Amendment No. 1, Vertex exercised its option to obtain a co-exclusive license to develop and commercialize hemoglobinopathy and beta-globin targets. As such, for potential hemoglobinopathy treatments, including treatments for sickle cell disease, the Company and Vertex will share equally all research and development costs and worldwide revenues. In connection with the JDA, the Company received a $7.0 million up-front payment from Vertex and subsequently received a one-time low seven-digit milestone payment upon the dosing of the second patient in a clinical trial with the initial product candidate. In addition, upon execution of the JDA and Amendment No. 1, it was clarified that Vertex may elect to license up to four remaining targets, for which it will lead global development and commercialization activities and the Company received the right to receive up to $420.0 million in development, regulatory and commercial milestones and royalties on net product sales for each of the targets (inclusive of $10 million due upon exercise of each exclusive option).
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In June 2019, the Company and Vertex entered into a series of agreements, which closed on July 23, 2019, including a strategic collaboration and license agreement, or the 2019 Collaboration Agreement, for the development and commercialization of products for the treatment of Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1. Under the terms of the 2019 Collaboration Agreement, the Company received an upfront, nonrefundable payment of $175.0 million. In addition, the Company is eligible to receive potential aggregate payments of up to $825.0 million based upon the successful achievement of specified research, development, regulatory and commercial milestones for the DMD and DM1 programs. The Company is also eligible to receive tiered royalties on future net sales on any products that may result from this collaboration. For the DMD program, Vertex is responsible for all research, development, manufacturing and commercialization activities and all related costs. For the DM1 program, the Company will perform specified guide RNA research and Vertex is responsible for all other research, development, manufacturing and commercialization costs. Upon Investigational New Drug, or IND, application filing, the Company has the option to forego the DM1 milestones and royalties and instead, co-develop and co-commercialize all DM1 products globally in exchange for payment of 50% of research and development costs incurred by Vertex from the effective date of the agreement through IND filing.
In connection with the execution of the 2019 Collaboration Agreement, the Company and Vertex entered into a second amendment to the 2015 Collaboration Agreement, or Amendment No. 2. Among other things, Amendment No. 2 modified certain definitions and provisions of the 2015 Collaboration Agreement to make them consistent with the 2019 Collaboration Agreement and set forth the number and identity of the collaboration targets under the 2015 Collaboration Agreement. The Company and Vertex agreed that one of the four remaining options under the 2015 Collaboration Agreement, as amended, would not be exercised; instead, the Company will reacquire the exclusive rights and will conduct research and development activities for the specified target. Vertex will have the option to co-develop and co-commercialize the specified target upon IND filing in exchange for payment of 50% of research and development costs incurred by the Company from the effective date of the agreement through IND filing. If Vertex does not exercise its option to co-develop and co-commercialize the specified target, Vertex is eligible to receive up to $395.0 million in potential specified research, development, regulatory and commercial milestones and tiered single-digit royalties on future net sales.
In October 2019, Vertex exercised the remaining three options granted to it under the 2015 Collaboration Agreement to exclusively license the collaboration targets developed under the 2015 Collaboration Agreement, resulting in a payment of $30.0 million to the Company in the fourth quarter of 2019. The Company achieved the first milestone under the 2019 Collaboration Agreement in the first quarter of 2020 and in connection therewith received a payment of $25.0 million in April 2020.
Accounting for the Vertex Agreements
The 2015 Collaboration Agreement, Amendment No. 1, and JDA are collectively the “2015 Agreements” and the 2019 Collaboration Agreement and Amendment No. 2. are collectively the “2019 Agreements.” The 2015 Collaboration Agreement, Amendment No. 1, Amendment No. 2, JDA and 2019 Collaboration Agreement are collectively the “Vertex Agreements.”
The Vertex Agreements include components of a customer-vendor relationship as defined under ASC 606, Revenue from Contracts with Customers, or ASC 606, collaborative arrangements as defined under ASC 808, Collaborative Agreements, or ASC 808, and research and development costs as defined under ASC 730, Research and Development, or ASC 730.
Accounting Analysis Under ASC 606
Accounting for the 2019 Agreements
Identification of the Contract
The 2019 Agreements represented a contract modification to the 2015 Agreements. As a result, the 2019 Agreements and the 2015 Agreements are combined for accounting purposes and treated as a single arrangement.
Identification of Performance Obligations
The Company concluded the following material promises were both capable of being distinct and distinct within the context of the Vertex Agreements and represented separate performance obligations: (i) an exclusive license for worldwide rights for DMD gene editing products, or DMD License; (ii) an exclusive license for worldwide rights for DM1 gene editing products, or DM1 License; (iii) the performance of specified guide RNA research for DM1, or DM1 R&D Services; (iv) a material right representing the option to obtain a co-exclusive development and commercialization license for a specified target, or Specified Target Option; (v) three material rights representing the option for up to three exclusive licenses to develop and commercialize the collaboration targets, or Collaboration Target Options; and (vi) the waiving of Vertex’s material right associated with its option to a fourth exclusive license in connection with the Company’s reacquisition of exclusive rights to the specified target.
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Determination of Transaction Price
The overall transaction price was determined based on the remaining transaction price from the 2015 Agreements, as well as the transaction price from the 2019 Agreements. The transaction price includes variable consideration estimated using the most likely amount methodology. As such, the Company determined the transaction price totaling $268.6 million was comprised of: (i) $57.8 million of pre-existing deferred revenue from the 2015 Agreements; (ii) non-cash consideration of $10.0 million related to the waiving of Vertex’s material right associated with its option to a fourth exclusive license in connection with the Company’s reacquisition of exclusive rights to the specified target; (iii) an upfront payment of $175.0 million; (iv) variable consideration of $25.0 million which represented the Company’s estimate related to a near-term research and development milestone for which the Company determined that it is not probable that a significant reversal of cumulative consideration will occur at the onset of the transaction; and (v) variable consideration of $0.8 million which represents the Company’s estimate of payments from Vertex for DM1 R&D Services.
The Company determined that all other possible variable consideration resulting from milestones and royalties discussed above was fully constrained as of March 31, 2020. The Company will re-evaluate the transaction price in each reporting period.
Allocation of Transaction Price to Performance Obligations
The selling price of each performance obligation was determined based on the Company’s estimated standalone selling price, or the ESSP. The Company developed the ESSP for all the performance obligations included in the Vertex Agreements with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company then allocated the transaction price to each performance obligation on a relative standalone selling price basis.
The ESSP for the DMD License and DM1 License was determined to be $224.6 million and $76.2 million, respectively. The ESSP was determined based on probability and present value adjusted cash flows from projected worldwide net profit for each of the respective programs based on probability assessments, projections based on internal forecasts, industry data, and information from other guideline companies within the same industry and other relevant factors. On a relative basis, $151.1 million and $51.3 million of the transaction price was allocated to the DMD License and DM1 License, respectively.
The ESSP for the Specified Target Option material right was determined to be $17.5 million, which was based on the incremental discount between (i) the value of the probability and present value adjusted cash flows from the equal sharing of projected worldwide net profit increased by the value of the option provided to Vertex less (ii) the expected exercise price at the time of option exercise. The present value adjusted cash flows also considered projections based on internal forecasts, industry data, and information from other guideline companies within the same industry and other relevant factors. On a relative basis, $11.8 million of the transaction price was allocated to the Specified Target Option material right.
The ESSP for each of the three Collaboration Target Option material rights was determined to be $25.0 million, $22.2 million and $22.2 million, respectively, which was determined based on the probability and present value adjusted cash flows from milestone payments owed for exclusive licenses, less the price paid to exercise each option. On a relative basis, $46.7 million of the transaction price was allocated to the Collaboration Target Option material rights.
The aforementioned ESSPs reflect the level of risk and expected probability of success inherent in the nature of the associated research area.
The ESSP for the waiving of Vertex’s material right associated with its option to a fourth exclusive license under the 2015 Agreements was determined to be $10.0 million, or the contractual value of the option. On a relative basis, $6.7 million of the transaction price was allocated to the waiving of Vertex’s material right associated with its option to a fourth exclusive license under the 2015 Agreements.
The ESSP for the DM1 R&D Services was determined to be $1.7 million, which was based on estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. On a relative basis, $1.1 million of the transaction price was allocated to the DM1 R&D Services.
Recognition of Revenue
The Company determined that the DMD License and DM1 License represent functional intellectual property, as the intellectual property provides Vertex with the ability to perform a function or task in the form of research and development. As such, the revenue related to the licenses was recognized at the point in time in which they were delivered during the third quarter of 2019.
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The revenue allocated to the waiving of Vertex’s material right associated with its option to a fourth exclusive license in connection with Company’s reacquisition of exclusive rights to the specified target was recognized at the point in time in which the option was waived, on the effective date of the 2019 Agreements.
The Company concluded that the Specified Target Option and Collaboration Target Options were considered material rights under the Vertex Agreements. Revenue related to the three Collaboration Target Options material right was recognized at the point in time in which Vertex exercised the Collaboration Target Options, which occurred in the fourth quarter of 2019. Revenue related to the Specified Target Option will be recognized at the point in time in which the option is exercised.
The Company recognizes revenue related to the DM1 R&D Services over time as the services are rendered, which is expected to be over an 18-month period from the effective date of the 2019 Agreements.
Accounting for the 2015 Agreements (prior to the execution of the 2019 Agreements)
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective approach. The Company applied the practical expedient in ASC 606-10-65-1 in identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price under the practical expedient in ASC 606. There was no significant impact on revenue recognized under ASC 606 and the prior revenue recognition as a result of the adoption.
Identification of the Contract
Amendment No. 1 and the JDA represented a contract modification to the 2015 Collaboration Agreement. As a result, the 2015 Agreements are combined for accounting purposes and treated as a single arrangement.
Identification of Performance Obligations
The Company concluded the following material promises were both capable of being distinct and distinct within the context of the 2015 Agreements and represented separate performance obligations: (i) the non-exclusive research license; (ii) four material rights representing the option for up to four exclusive licenses to develop and commercialize the collaboration targets; (iii) a combined performance obligation representing the co-exclusive research license, and a development and commercialization license to develop and commercialize hemoglobinopathies and beta-globin targets; and (iv) the performance of R&D Services.
Determination of Transaction Price
The overall transaction price was comprised of: (i) original upfront payment of $75.0 million, (ii) an upfront payment of $7.0 million under the JDA, and (iii) $19.3 million of variable consideration associated with the R&D services.
The Company determined that all other possible variable consideration resulting from milestones and royalties discussed above was fully constrained at the time of the transaction.
Allocation of Transaction Price to Performance Obligations
The selling price of each performance obligation was determined based on the Company’s ESSP. The Company developed the ESSP for all the performance obligations included in the 2015 Agreements with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company then allocated the transaction price to each performance obligation on a relative standalone selling price basis.
The ESSP for R&D Services was determined to be $19.3 million. The Company developed the ESSP for the R&D Services primarily based on the nature of the services to be performed and estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company allocated $19.3 million of the transaction price to R&D Services.
The Company’s ESSP for each of the remaining material rights to obtain an exclusive license to develop and commercialize a single collaboration target are $45.6 million, $38.4 million, $17.3 million and $17.3 million for a total of $118.6 million. ESSPs for these items were determined based on the probability and present value adjusted cash flows from milestone payments owed for exclusive licenses, less the price paid to exercise each option. On a relative basis, $57.7 million of the transaction price was allocated to these material rights.
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The Company’s ESSP for the co-exclusive research license and the development and commercialization licenses for hemoglobinopathy and beta-globin targets is $48.9 million. The ESSP for this item was determined based on probability and present value adjusted cash flows from the equal sharing of projected worldwide net profit. ESSP reflects the level of risk and expected probability of success inherent in the nature of the associated research area. On a relative basis, $23.8 million of the transaction price was allocated to the co-exclusive research license and the development and commercialization licenses for hemoglobinopathy and beta-globin targets.
The Company used a market-based approach to determine the ESSP of the non-exclusive research license of $1.0 million. The Company determined ESSP by use of comparative data, including in-licensed research agreements negotiated and executed within the Company. On a relative basis, $0.5 million of the transaction price was allocated to the non-exclusive research license.
The aforementioned ESSPs reflect the level of risk and expected probability of success inherent in the nature of the associated research area.
Recognition of Revenue
The Company determined that the non-exclusive research license is symbolic intellectual property as Vertex receives value from the license through the Company’s ongoing activities, and, as such, the revenue related to the non-exclusive research license was recognized ratably over the term of the arrangement. Upon the execution of the JDA, a co-exclusive research, development and commercialization license was granted for hemoglobinopathy and beta-globin targets. The Company determined that the revenue related to these licenses was recognized at a point in time, in which they were delivered at inception of the JDA in December 2017. As Vertex has the material right in its option to obtain four additional exclusive licenses to develop and commercialize four additional collaboration targets, the Company determined that consideration allocated to these material rights would be included in the transaction price of the exclusive license and recognized at a point in time, upon the exercise of the option by Vertex or expiration. As the Company has a right to consideration from Vertex in an amount that corresponds directly with the value of the Company’s performance completed to date for the R&D services, the Company recognized revenue related to the R&D services as invoiced, in line with the practical expedient in ASC 606-10-55-18.
Revenue recognized in connection with the Vertex Agreements
Revenue recognized under the 2019 Agreements and revenue recognized under the 2015 Agreements for the three months ended March 31, 2020 and 2019, respectively, was not material.
As of March 31, 2020, there was $0.8 million of current deferred revenue related to the collaboration with Vertex compared to $0.9 million as of December 31, 2019. As of March 31, 2020, there was $11.8 million of non-current deferred revenue related to the collaboration with Vertex, which is unchanged from December 31, 2019. The transaction price allocated to the remaining performance obligations was $12.6 million.
Milestones under the Vertex Agreements
The Company has evaluated the milestones that may be received in connection with the Vertex Agreements. As discussed above, the Company is eligible to receive up to $410.0 million in additional development, regulatory and commercial milestones and royalties on net product sales for each of the three collaboration targets that Vertex licensed in the fourth quarter of 2019. Each milestone is payable only once per collaboration target, regardless of the number of products directed to such collaboration target that achieve the relevant milestone event.
The Company is eligible to receive potential future payments of up to $800.0 million based upon the successful achievement of specified research, development, regulatory and commercial milestones for the DMD and DM1 programs. As discussed above, the first research milestone of $25.0 million was included in the transaction price. This amount was recorded as a contract asset within prepaid expenses and other current assets on the condensed consolidated balance sheet at December 31, 2019. This milestone was achieved during the first quarter of 2020 and paid during the second quarter of 2020. As of March 31, 2020, the $25.0 million milestone was recorded in accounts receivable on the condensed consolidated balance sheet. The Company is also eligible to receive tiered royalties on future net sales on any products that may result from this collaboration; however, the Company has the option to forego the DM1 milestones and royalties to co-develop and co-commercialize all DM1 products globally.
Each of the remaining milestones are fully constrained as of March 31, 2020. There is uncertainty that the events to obtain the research and developmental milestones will be achieved given the nature of clinical development and the stage of the CRISPR/Cas9 technology. The remaining research, development and regulatory milestones will be constrained until it is probable that a significant revenue reversal will not occur. Commercial milestones and royalties relate predominantly to a license of intellectual property and are determined by sales or usage-based thresholds. The commercial milestones and royalties are accounted for under the royalty recognition constraint and will be accounted for as constrained variable consideration. The Company applies the royalty recognition constraint for each commercial milestone and will not recognize revenue for each until the subsequent sale of a licensed product (achievement of each) occurs.
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Accounting Analysis under ASC 808
In connection with the 2019 Agreements, the Company identified the following collaborative elements, which were unchanged as those identified with the 2015 Agreements and are accounted for under ASC 808: (i) development and commercialization services for shared products; (ii) R&D Services for follow-on products; and (iii) committee participation. The related impact of the cost sharing associated with research and development is included in research and development expense. Expenses related to services performed by the Company are classified as research and development expense. Payments received from Vertex for partial reimbursement of expenses are recorded as a reduction of research and development expense.
During the three months ended March 31, 2020 and 2019, the Company recognized $9.1 million and $7.1 million of research and development expense related to the Vertex Agreements. Research and development expense for the three months ended March 31, 2020 and 2019 was net of $5.5 million and $4.5 million of reimbursements from Vertex, respectively.
Accounting Analysis under ASC 730
In connection with the 2019 Vertex Agreements, the Company and Vertex agreed that one of the four remaining options under the 2015 Agreements, as amended, would not be exercised; instead, the Company will conduct research and development activities for a specified target. Vertex will have the option to co-develop and co-commercialize the specified target upon IND filing in exchange for payment of 50% of research and development costs incurred by the Company from the effective date of the agreement through IND filing. If Vertex does not exercise its option to do so within a specified time period, Vertex is eligible to receive up to $395.0 million in potential specified research, development, regulatory and commercial milestones and tiered single-digit royalties on future net sales.
In connection therewith, the Company determined that in order for the Company to obtain the right to conduct research and development activities on the specified target, the Company had waived its right to receive an option exercise payment of $10.0 million from Vertex, which was included as non-cash consideration in the transaction price for the 2019 Agreements described above. The Company then subsequently reacquired its rights to the specified target by waiving payment owed by Vertex of $10.0 million for a license that represents in-process research and development and therefore, $10.0 million of non-cash consideration was fully expensed upon the execution of the 2019 Agreements. The Company also determined that research and development services through IND for the specified target and any payment of future development and commercialization milestones, as well as sales-based milestones and royalties for the specified target, would be accounted for as research and development costs under ASC 730 and expensed as incurred. In addition, the Company also determined that should the Company elect its option to co-develop and co-commercialize all DM1 products globally, it will record the option fee as research and development expense upon exercise.
Joint Venture with Bayer Healthcare LLC
Summary
On December 19, 2015, the Company entered into an agreement with Bayer, to establish a joint venture to focus on the research and the development of new therapeutics to cure blood disorders, blindness and congenital heart disease. On February 12, 2016, the Company and Bayer completed the formation of the joint venture entity, Casebia. Bayer and the Company each received a 50% equity interest in the entity in exchange for their respective contributions to the entity. At that time, the Company also entered into a separate service agreement with Casebia, under which the Company agreed to provide compensated research and development services. Collectively, these agreements are referred to as the “2015 Casebia Agreements.”
On December 13, 2019, the Company, Bayer and Casebia entered into a series of transactions by which, among other things, the Company acquired 100% of the partnership interests in Casebia, or the Retirement Agreement, the Company and Bayer terminated their joint venture, or the Joint Venture Termination Agreement, and the Company and Bayer entered into a new option agreement, or the 2019 Option Agreement. Collectively, these agreements are referred to as the “2019 Casebia Agreements.”
In connection with the Retirement Agreement, Casebia retired Bayer’s outstanding partnership interests in exchange for $22.0 million less certain estimated interim operating expenses of $6.0 million, and the Company acquired 100% of the partnership interests in Casebia.
In connection with entering into the Retirement Agreement, the Company, Bayer and Casebia entered into the Joint Venture Termination Agreement. In connection therewith, the Company and Bayer agreed to terminate the Joint Venture Agreement from December 2015. Under the Joint Venture Termination Agreement, Casebia-owned patents are co-owned by the Company and Bayer, subject to certain exclusive licenses granted therein. Under the Joint Venture Termination Agreement, the Company and Bayer each retained rights to their respective contributed intellectual property.
In connection with entering into the Retirement Agreement and the Joint Venture Termination Agreement, the Company and Bayer also entered into the 2019 Option Agreement, under which, among other things, the Company committed to invest a specified
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amount in certain research and development activities as described under “Accounting Analysis – Accounting for 2019 Casebia Agreements”. In addition, Bayer has an option (exercisable during a specified exercise period defined by future events, but in no event longer than 5 years after the effective date of the 2019 Option Agreement) to co-develop and co-commercialize two products for the diagnosis, treatment or prevention of certain autoimmune disorders, eye disorders or hemophilia A disorders. In the event Bayer elects to co-develop and co-commercialize a product, the parties will negotiate and enter into a co-development and co-commercialization agreement, or the Co-Commercialization Agreement, for such product, and Bayer would be responsible for 50% of the research and development costs incurred by the Company for such product going forward. Bayer would receive 50% of all profits from sales of such product and would be responsible for 50% of all losses.
If Bayer elects to exercise its option to co-develop and co-commercialize a product, Bayer will make a one-time $20.0 million payment, or the Option Payment, to the Company that will become non-refundable once the parties execute a Co-Commercialization Agreement with respect to such optioned product. The Option Payment is payable only once with respect to the first time Bayer exercises an option under the 2019 Option Agreement.
In addition, following Bayer’s exercise of its option and/or the execution of the Co-Commercialization Agreement for an optioned product, for a period beginning on the effective date of such Co-Commercialization Agreement and ending on the earlier of the three month anniversary of such effective date or during the 90-day negotiation process of such Co-Commercialization Agreement, Bayer has a right to negotiate an exclusive license to develop and commercialize such optioned product. If Bayer exercises such right, the parties will enter into an exclusive license agreement for such optioned product on terms mutually agreeable to the parties. Further, the Option Payment paid for such optioned product would become credited against payments due under such exclusive license or any other exclusive license entered into in connection with the 2019 Option Agreement.
Either party may terminate the 2019 Option Agreement upon the other party’s material breach, subject to specified notice and cure provisions. The Company may also terminate the 2019 Option Agreement in the event Bayer commences or participates in any action or proceeding challenging the validity or enforceability of any Company patent necessary or useful for the research, development, manufacture or commercialization of a product that is the subject of the 2019 Option Agreement. Bayer may also terminate the 2019 Option Agreement upon the Company’s bankruptcy or insolvency, or for convenience at any time, after giving written notice.
Accounting Analysis
Accounting for the 2015 Casebia Agreements
During 2016, the Company recorded an equity method investment of $36.5 million equal to the fair value of the Company’s interest in Casebia and subsequently recorded unrealized equity method losses for the same amount. The Company had no further contractual obligations to provide cash financing to Casebia and accordingly, no additional losses were recorded beyond the initial equity amount. Casebia’s net losses were $14.2 million for the three months ended March 31, 2019 and unrecognized equity method losses in excess of the Company’s equity method investment in Casebia were $51.9 million as of March 31, 2019.
The remaining performance obligations prior to the 2019 Casebia Agreements included research and development services, which were recorded as revenue under ASC 606, and cost sharing activities with Casebia related to shared research and technology licenses, which were recorded as a cost/profit sharing arrangement under ASC 808, with the related impact of the cost sharing included as research and development expense. All performance obligations were terminated upon the execution of the 2019 Casebia Agreements.
During the three months ended March 31, 2019, the Company recognized $0.2 million of revenue related to the collaboration with Casebia. During the three months ended March 31, 2019, the Company recognized $0.5 million of research and development expense related to the collaboration with Casebia. During the three months ended March 31, 2019, the Company recognized a loss from equity method investment of $1.0 million related to stock-based compensation expense for Casebia employees.
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Accounting for the 2019 Casebia Agreements
The Company determined that the Retirement Agreement and Joint Venture Termination Agreement resulted in the Company obtaining a controlling interest in Casebia and should be accounted for as a separate component from the 2019 Option Agreement. In doing so, the Company allocated the consideration transferred of $41.0 million (consisting of $16.0 million of assets acquired net of the purchase price, as displayed in the table below, and $25.0 million of cash allocated to the 2019 Option Agreement) between the two components using a relative fair value approach. The Company determined the relative fair value related to obtaining a controlling interest in Casebia was $32.0 million and the relative fair value of the consideration transferred related to the 2019 Option Agreement was $25.0 million, which is comprised of $20.2 million related to certain research and development activities and $4.8 million related to certain options as described above.
As a result of the Retirement Agreement, the Company determined that it had obtained a controlling interest in a variable interest entity, for which it became the primary beneficiary. As such, under ASC 810, Consolidation, the Company accounted for the net assets obtained under ASC 805, Business Combinations. In accordance therewith, the Company determined the set of acquired assets and assumed liabilities did not meet the definition of a business, as the Company did not acquire an assembled workforce and thus the Company did not acquire substantive processes capable of producing outputs. As such, no goodwill was recorded. The Company measured the fair value of the assets and liabilities received, determining the relative fair value was $16.0 million (after paying the $16.0 million for Bayer’s 50% interest) and recorded the difference between that amount and the Company’s carrying amount, which was zero, as a gain within other income (expense). The relative fair value of the assets and liabilities received (exclusive of the $16.0 million paid from Casebia to Bayer to retire Bayer’s interest in the JV) was determined as follows (in thousands):
Fair value
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
6,784
|
|
Prepaid expenses and other current assets
|
|
|
2,565
|
|
Property, plant and equipment, net
|
|
|
9,340
|
|
Operating lease assets
|
|
|
11,003
|
|
Restricted cash
|
|
|
1,226
|
|
Accrued expenses and other current liabilities
|
|
|
(3,915
|
)
|
Operating lease liabilities
|
|
|
(11,003
|
)
|
Net assets
|
|
$
|
16,000
|
|
The value of the reacquired rights related to the intellectual property was determined to be insignificant.
The Company determined that the 2019 Option Agreement should be accounted for under ASC 730-20, Research and Development Expense. This determination was based on the fact that the financial risk associated with the research and development has been transferred to the Company because repayment of any of the funds provided by Bayer depends solely on the results of the research and development having a future economic benefit. The Company further determined that it had two separate obligations under the 2019 Option Agreements, which consist of research and development services and future delivery of up to two options for products in defined fields. The relative fair value of the obligations was determined to be $20.2 million and $4.8 million, respectively. As the Company has accounted for its obligations as a contract to perform research and development for others, with respect to the obligation to perform research and development services the Company will recognize an offset to research and development expense as the research is performed and, with respect to the future delivery of up to two option for products in defined fields, at the earlier of option exercise (at or near IND application filing), expiration, or when commercially reasonable efforts to progress the program have been exhausted.
During the three months ended March 31, 2020, the Company recorded a benefit of $1.9 million to research and development expense for qualifying expenses incurred under the 2019 Option Agreement. The Company has recorded $11.8 million in other current liabilities relating to certain research and development obligations to be satisfied within one year of the balance sheet date and $11.3 million in other long-term liabilities consisting of the relative fair value of such obligations to be satisfied beyond one year from the balance sheet date as well as the relative fair value of the options.
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6. Share Capital
The Company had 103,901,006 authorized common shares as of March 31, 2020, with a par value of CHF 0.03 per share. Share Capital consisted of the following:
|
|
|
|
As of
|
|
Type of Share Capital
|
|
Conditional Capital
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Common shares
|
|
Registered share capital
|
|
|
61,036,566
|
|
|
|
61,036,566
|
|
Common shares
|
|
Authorized share capital
|
|
|
19,246,503
|
|
|
|
19,246,503
|
|
Common shares
|
|
Conditional share capital - Bonds or similar debt instruments
|
|
|
4,919,700
|
|
|
|
4,919,700
|
|
Common shares
|
|
Conditional share capital - Employee benefit plans
|
|
|
18,698,237
|
|
|
|
18,698,237
|
|
|
|
Total
|
|
|
103,901,006
|
|
|
|
103,901,006
|
|
At-the-Market Offering
In August 2018, the Company entered into an Open Market Sale AgreementSM, or the 2018 ATM, with Jefferies LLC, or Jefferies, under which Jefferies was able to offer and sell, from time to time, common shares having aggregate gross proceeds of up to $125.0 million.
In August 2019, following the termination of the 2018 ATM by its terms, the Company entered into a new Open Market Sale AgreementSM with Jefferies, or the 2019 ATM, under which the Company may offer and sell, from time to time, common shares having aggregate gross proceeds of up to $200.0 million.
During the three months ended March 31, 2019, the Company sold 631,580 shares of common stock under the 2018 ATM for net cash proceeds of $23.9 million, after deducting commission fees of $0.7 million. For the year ended December 31, 2019, the Company issued and sold an aggregate of 2.8 million common shares under the 2018 ATM, at an average price of $44.38 per share, for aggregate proceeds of $120.6 million, which were net of equity issuance costs of $4.4 million.
As of March 31, 2020, the Company has not yet issued or sold any securities under the 2019 ATM.
7. Stock-based Compensation
During the three months ended March 31, 2020 and 2019, the Company recognized the following stock-based compensation expense (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
7,362
|
|
|
$
|
4,962
|
|
General and administrative
|
|
|
6,789
|
|
|
|
4,709
|
|
Loss from equity method investment
|
|
|
-
|
|
|
|
1,025
|
|
Total
|
|
$
|
14,151
|
|
|
$
|
10,696
|
|
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Stock option activity
The following table summarizes stock option activity for the three months ended March 31, 2020:
|
|
Shares
(in thousands)
|
|
|
Weighted-
average
exercise price
per share
|
|
Outstanding at December 31, 2019
|
|
|
7,782,437
|
|
|
$
|
31.30
|
|
Granted
|
|
|
887,458
|
|
|
$
|
45.73
|
|
Exercised
|
|
|
(88,466
|
)
|
|
$
|
19.37
|
|
Cancelled or forfeited
|
|
|
(86,114
|
)
|
|
$
|
42.20
|
|
Outstanding at March 31, 2020
|
|
|
8,495,315
|
|
|
$
|
32.82
|
|
Exercisable at March 31, 2020
|
|
|
3,697,079
|
|
|
$
|
25.25
|
|
Vested and expected to vest at March 31, 2020
|
|
|
8,495,315
|
|
|
$
|
32.82
|
|
As of March 31, 2020, total unrecognized compensation expense related to stock options was $107.3 million, which the Company expects to recognize over a remaining weighted-average period of 2.8 years.
Restricted stock activity
The following table summarizes restricted stock activity for the three months ended March 31, 2020:
|
|
Restricted
Stock
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Unvested balance as of December 31, 2019
|
|
|
699,534
|
|
|
$
|
56.53
|
|
Granted
|
|
|
277,970
|
|
|
|
45.78
|
|
Vested
|
|
|
(5,000
|
)
|
|
|
33.58
|
|
Cancelled or forfeited
|
|
|
(5,444
|
)
|
|
|
51.18
|
|
Unvested balance as of March 31, 2020
|
|
|
967,060
|
|
|
$
|
53.59
|
|
As of March 31, 2020, total unrecognized compensation expense related to unvested restricted common shares was $39.9 million, which the Company expects to recognize over a remaining weighted-average vesting period of 2.4 years.
8. Net Loss Per Share Attributable to Common Shareholders
The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Outstanding options
|
|
|
8,495,315
|
|
|
|
8,032,582
|
|
Unvested restricted common shares
|
|
|
967,060
|
|
|
|
345,296
|
|
Total
|
|
|
9,462,375
|
|
|
|
8,377,878
|
|
9. Income Taxes
During the three months ended March 31, 2020 and 2019, the Company recorded an income tax provision of $0.4 million and $0.1 million, respectively, representing an effective tax rate of -0.5% and -0.2%, respectively. The income tax provision is primarily attributable to the year-to-date pre-tax income earned by the Company’s U.S. subsidiary. The difference in the statutory tax rate and effective tax rate is primarily a result of the jurisdictional mix of earnings and losses that are not benefited. The Company maintains a valuation allowance against certain deferred tax assets that are not more-likely-than-not realizable. As a result, the Company has not recognized a tax benefit related to losses generated in Switzerland in the current periods. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted in the United States. The impact of the CARES Act on the Company for the period ending March 31, 2020 was not material.
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10. Related Party Transactions
Casebia
Prior to the termination of the joint venture in December 2019, Casebia was a related party under ASC 850, Related Party Disclosures, or ASC 850. Refer to Note 5, “Joint Venture with Bayer Healthcare LLC.”
Vertex
In the fourth quarter of 2018, upon becoming owners of record of more than 10% of the voting interest of the Company, Vertex became a related party under ASC 850. As of July 2, 2019, upon becoming owners of record of less than 10% of the voting interest of the Company, Vertex was no longer a related party under ASC 850. Refer to Note 5, “Agreements with Vertex Pharmaceuticals Incorporated and certain of its subsidiaries.”
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