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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from                       to                    

Commission File Number: 001-38722

 

ORCHARD THERAPEUTICS PLC

(Exact Name of Registrant as Specified in its Charter)

 

 

England and Wales

Not Applicable

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

108 Cannon Street

London, United Kingdom

EC4N 6EU

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: +44 (0) 203 808-8286

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

American Depositary Shares, each representing one

ordinary share, nominal value £0.10 per share

 

ORTX

 

The Nasdaq Global Select Market

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 every Interactive Data File required to be submitted 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 such files).     Yes  ☒    No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes  ☒    No  

As of May 4, 2021, the registrant had 123,769,373 voting and non-voting ordinary shares, nominal value £0.10 per share, outstanding.

 

 


 

Summary of the Material Risks Associated with Our Business

 

Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:

 

 

We have incurred net losses since inception. We expect to incur net losses for the foreseeable future and may never achieve or maintain profitability.

 

We will need additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

 

Our gene therapy product candidates are based on a novel technology, which makes it difficult to predict the time and cost of product candidate development and of subsequently obtaining regulatory approval.

 

The results from our clinical trials for OTL-200 for metachromatic leukodystrophy, or MLD, OTL-103 for Wiskott Aldrich syndrome, or WAS, and for any of our other product candidates may not be sufficiently robust to support marketing approval or the submission of marketing approval. Before we submit our product candidates for marketing approval, the U.S. Food and Drug Administration, or FDA, and/or the European Medicines Agency, or EMA, may require us to conduct additional clinical trials or evaluate patients for an additional follow-up period.

 

Interim data and ad hoc analyses are preliminary in nature. Success in preclinical studies or early clinical trials may not be indicative of results obtained in later trials.

 

Gene therapies are novel, complex and difficult to manufacture. We have limited manufacturing experience and we rely on third party manufacturers that are often our single source of supply. We could experience manufacturing problems that result in delays in the development or commercialization of our commercial products or our product candidates or otherwise harm our business.

 

Libmeldy™, Strimvelis® and our product candidates and the process for administering Libmeldy, Strimvelis and our product candidates may cause serious or undesirable side effects or adverse events or have other properties that could delay or prevent regulatory approval, limit commercial potential or result in significant negative consequences for our company.

 

We may find it difficult to enroll patients in our clinical trials, which could delay or prevent us from proceeding with clinical trials of our product candidates.

 

If we are unable to establish effective sales and marketing capabilities or enter into agreements with third parties to market, sell and gain reimbursement for Libmeldy and our product candidates that may be approved, we may not be successful in commercializing Libmeldy or our product candidates if and when approved, and we may be unable to generate product revenue.

 

If the size and value of the market opportunities for our commercial products or product candidates are smaller than our estimates, or if we have difficulty in finding patients that meet eligibility requirements for Libmeldy, Strimvelis or any of our product candidates, if approved, our product revenues may be adversely affected and our business may suffer.

 

We face significant competition in our industry and there can be no assurance that our commercial products or our product candidates, if approved, will achieve acceptance in the market over existing established therapies. In addition, our competitors may develop therapies that are more advanced or effective than ours, which may adversely affect our ability to successfully market or commercialize any of our product candidates.

 

Business interruptions resulting from the COVID-19 pandemic or similar public health crises have caused and may cause or continue to cause a disruption to the development of our product candidates and adversely impact our business.

 

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

 

We may become subject to claims that we are infringing certain third-party patents, for example, patents relating to lentiviral vectors, or other third-party intellectual property rights, any of which may prevent or delay our development and commercialization efforts and have a material adverse effect on our business.

 

We have entered into collaborations with third parties to develop or commercialize product candidates and we may continue to do so in the future. If these collaborations are not successful, our business could be adversely affected.

 

The market price of our ADSs may be highly volatile and may fluctuate due to factors beyond our control.

i


 

The summary risk factors described above should be read together with the text of the full risk factors below, in the section entitled “Risk Factors” in Part I, Item 1.A. and the other information set forth in this Quarterly Report on Form 10-Q for the period ended March 31, 2021, as well as in other documents that we file with the U.S. Securities and Exchange Commission. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects.

ii


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Cash Flows

3

 

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

96

Item 3.

Defaults Upon Senior Securities

96

Item 4.

Mine Safety Disclosures

96

Item 5.

Other Information

96

Item 6.

Exhibits

96

Signatures

97

 

 

 

 

 


iii


 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or 10-Q, contains express or implied 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 substantial risks and uncertainties. In some cases, forward-looking statements may be identified by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. The forward-looking statements and opinions contained in this 10-Q are based upon information available to our management as of the date of this 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Forward-looking statements contained in this 10-Q include, but are not limited to, statements about:

 

the timing, progress and results of clinical trials and preclinical studies for our programs and product candidates, including statements regarding the timing of initiation and completion of trials or studies and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

 

the timing, scope or likelihood of regulatory submissions, filings, and approvals;

 

our ability to develop and advance product candidates into, and successfully complete, clinical trials;

 

our expectations regarding the market opportunity for and size of the patient populations for Libmeldy (OTL-200) and our product candidates, if approved for commercial use;

 

the implementation of our business model and our strategic plans for our business, commercial products, product candidates and technology;

 

our plans and ability to build out our commercial infrastructure and successfully identify eligible patients, launch, market, and sell Libmeldy in Europe and any current and future product candidates for which we receive marketing approval;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

the pricing and reimbursement of Libmeldy, Strimvelis, and any of our product candidates, if approved, including reimbursement for patients treated in a country where they are not resident;

 

the adequacy, scalability and commercial viability of our manufacturing capacity, methods and processes, including those of our manufacturing partners, and plans for future development;

 

the rate and degree of market acceptance and clinical utility of our commercial products and product candidates, in particular, and gene therapy, in general;

 

our ability to establish or maintain collaborations or strategic relationships or obtain additional funding;

 

the impact of the COVID-19 global pandemic on our business operations, including clinical trials, regulatory strategy, and the operations of our third-party manufacturers, suppliers, and partners;

 

our competitive position;

 

the scope of protection we and/or our licensors are able to establish and maintain for intellectual property rights covering our commercial products and product candidates;

 

developments and projections relating to our competitors and our industry;

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

the impact of laws and regulations;

 

our ability to attract and retain qualified employees and key personnel;

 

our ability to contract with third party suppliers, clinical sites and manufacturers and their ability to perform adequately;

 

our projected financial condition, including the sufficiency of our cash, cash equivalents and investments to fund operations in future periods and future liquidity, working capital and capital requirements; and

 

other risks and uncertainties, including those listed under the caption “Item 1A. Risk Factors” in this 10-Q.  

iv


 

You should refer to the section titled “Item 1A. Risk Factors” in this 10-Q for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot be assured that the forward-looking statements in this 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, these statements should not be regarded as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this 10-Q and the documents that we reference in this 10-Q and have filed as exhibits to this 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

 

v


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ORCHARD THERAPEUTICS PLC

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,883

 

 

$

55,135

 

Marketable securities

 

 

219,543

 

 

 

136,813

 

Trade receivables

 

 

 

 

 

878

 

Prepaid expenses and other current assets

 

 

12,504

 

 

 

13,365

 

Research and development tax credit receivable, current

 

 

17,493

 

 

 

17,344

 

Total current assets

 

 

328,423

 

 

 

223,535

 

Non-current assets:

 

 

 

 

 

 

 

 

Operating lease right-of-use-assets

 

 

28,700

 

 

 

29,815

 

Property and equipment, net

 

 

4,591

 

 

 

4,781

 

Research and development tax credit receivable, net of current portion

 

 

3,552

 

 

 

 

Restricted cash

 

 

4,266

 

 

 

4,266

 

Other assets

 

 

19,581

 

 

 

18,540

 

Total assets

 

$

389,113

 

 

$

280,937

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,905

 

 

$

8,823

 

Accrued expenses and other current liabilities

 

 

25,672

 

 

 

28,943

 

Operating lease liabilities

 

 

7,964

 

 

 

8,934

 

Notes payable current

 

 

6,944

 

 

 

4,861

 

Total current liabilities

 

 

48,485

 

 

 

51,561

 

Notes payable, long term

 

 

18,208

 

 

 

20,204

 

Operating lease liabilities, net of current portion

 

 

20,847

 

 

 

24,168

 

Other long-term liabilities

 

 

5,993

 

 

 

6,570

 

Total liabilities

 

 

93,533

 

 

 

102,503

 

Commitments and contingencies (see Note 12)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Ordinary shares, £0.10 nominal value; 120,549,163 and 98,283,603 ordinary shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively; 3,215,434 and nil non-voting ordinary shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

 

15,995

 

 

 

12,507

 

Additional paid-in capital

 

 

920,211

 

 

 

771,194

 

Accumulated other comprehensive income

 

 

196

 

 

 

373

 

Accumulated deficit

 

 

(640,822

)

 

 

(605,640

)

Total shareholders’ equity

 

 

295,580

 

 

 

178,434

 

Total liabilities and shareholders’ equity

 

$

389,113

 

 

$

280,937

 

 

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

1


ORCHARD THERAPEUTICS PLC

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Product sales, net

 

$

 

 

$

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

21,035

 

 

 

24,836

 

Selling, general and administrative

 

 

14,051

 

 

 

20,145

 

Total costs and operating expenses

 

 

35,086

 

 

 

44,981

 

Loss from operations

 

 

(35,086

)

 

 

(44,981

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

171

 

 

 

1,480

 

Interest expense

 

 

(538

)

 

 

(613

)

Other income (expense), net

 

 

1,358

 

 

 

(6,790

)

Total other income (expense), net

 

 

991

 

 

 

(5,923

)

Net loss before income tax

 

 

(34,095

)

 

 

(50,904

)

Income tax (expense) benefit

 

 

(1,087

)

 

 

335

 

Net loss

 

 

(35,182

)

 

 

(50,569

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(64

)

 

 

6,034

 

Unrealized loss on marketable securities

 

 

(113

)

 

 

(1,021

)

Total other comprehensive (loss) income:

 

 

(177

)

 

 

5,013

 

Total comprehensive loss

 

$

(35,359

)

 

$

(45,556

)

Net loss per share, basic and diluted

 

$

(0.31

)

 

$

(0.51

)

Weighted average ordinary shares outstanding, basic and diluted

 

 

114,829,272

 

 

 

98,713,126

 

 

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

2


ORCHARD THERAPEUTICS PLC

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(35,182

)

 

$

(50,569

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

495

 

 

 

482

 

Non-cash share-based compensation

 

 

6,268

 

 

 

9,479

 

Amortization of Strimvelis loss provision

 

 

(446

)

 

 

(1,691

)

Other non-cash adjustments

 

 

2,968

 

 

 

6,537

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

887

 

 

 

670

 

Research and development tax credit receivable

 

 

(3,554

)

 

 

(3,385

)

Prepaid expenses, other current assets and other assets

 

 

1,399

 

 

 

(2,500

)

Operating leases, right-of-use assets

 

 

1,252

 

 

 

1,025

 

Accounts payable, accrued expenses and other current liabilities

 

 

(8,905

)

 

 

(8,903

)

Operating lease liabilities

 

 

(4,424

)

 

 

(1,047

)

Net cash used in operating activities

 

 

(39,242

)

 

 

(49,902

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

47,200

 

 

 

68,143

 

Purchases of marketable securities

 

 

(130,387

)

 

 

 

Payment of construction deposit

 

 

 

 

 

(10,000

)

Purchases of property and equipment

 

 

(339

)

 

 

(1,329

)

Net cash (used in) provided by investing activities

 

 

(83,526

)

 

 

56,814

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from equity plans

 

 

2,822

 

 

 

1,438

 

Taxes paid on net settlement of equity plan issuances

 

 

(296

)

 

 

 

Proceeds from the issuance of ordinary shares in private placement

 

 

150,000

 

 

 

 

Payment of placement agent fees and offering costs

 

 

(6,092

)

 

 

 

Net cash provided by financing activities

 

 

146,434

 

 

 

1,438

 

Effect of exchange rate changes on cash, cash equivalents, and

   restricted cash

 

 

82

 

 

 

(303

)

Net increase in cash, cash equivalents and restricted cash

 

 

23,748

 

 

 

8,047

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

59,401

 

 

 

23,317

 

Cash, cash equivalents, and restricted cash, end of period

 

$

83,149

 

 

$

31,364

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

 

Property and equipment and intangible assets included in

    accounts payable and accrued expenses

 

$

4,834

 

 

$

382

 

Offering costs included in accounts payable and accrued expenses

 

 

198

 

 

 

 

Lease assets obtained in exchange for new operating lease liabilities

 

 

 

 

 

3,752

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

482

 

 

 

485

 

 

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

 

3


 

ORCHARD THERAPEUTICS PLC

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

Ordinary Shares

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Total

 

Balance at December 31, 2019

 

 

96,923,729

 

 

$

12,331

 

 

$

738,481

 

 

$

2,042

 

 

$

(453,661

)

 

$

299,193

 

Share-based compensation expense

 

 

 

 

 

 

 

 

9,479

 

 

 

 

 

 

 

 

 

9,479

 

Exercise of share options

 

 

230,836

 

 

 

30

 

 

 

1,408

 

 

 

 

 

 

 

 

 

1,438

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

6,034

 

 

 

 

 

 

6,034

 

Unrealized loss on available for sale debt securities

 

 

 

 

 

 

 

 

 

 

 

(1,021

)

 

 

 

 

 

(1,021

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,569

)

 

 

(50,569

)

Balance at March 31, 2020

 

 

97,154,565

 

 

$

12,361

 

 

$

749,368

 

 

$

7,055

 

 

$

(504,230

)

 

$

264,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

98,283,603

 

 

$

12,507

 

 

$

771,194

 

 

$

373

 

 

$

(605,640

)

 

$

178,434

 

Share-based compensation expense

 

 

 

 

 

 

 

 

6,268

 

 

 

 

 

 

 

 

 

6,268

 

Exercise of share options

 

 

1,319,493

 

 

 

172

 

 

 

2,650

 

 

 

 

 

 

 

 

 

2,822

 

Vesting of restricted stock units, net of shares withheld for taxes

 

 

45,746

 

 

 

6

 

 

 

(302

)

 

 

 

 

 

 

 

 

(296

)

Sale of ordinary shares and non-voting ordinary shares, net of issuance costs of $6,290

 

 

24,115,755

 

 

 

3,310

 

 

 

140,401

 

 

 

 

 

 

 

 

 

143,711

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(64

)

 

 

 

 

 

(64

)

Unrealized loss on available for sale debt securities

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

 

 

 

(113

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,182

)

 

 

(35,182

)

Balance at March 31, 2021

 

 

123,764,597

 

 

$

15,995

 

 

$

920,211

 

 

$

196

 

 

$

(640,822

)

 

$

295,580

 

 

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

 

4


 

 

ORCHARD THERAPEUTICS PLC

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Nature of the Business

Orchard Therapeutics plc (the “Company”) is a global gene therapy company dedicated to transforming the lives of people affected by severe diseases through the development of innovative, potentially curative gene therapies. The Company’s ex vivo autologous hematopoietic stem cell (“HSC”) gene therapy approach utilizes genetically modified blood stem cells and seeks to correct the underlying cause of disease in a single administration. The Company’s gene therapy product candidate pipeline spans multiple therapeutic areas where the disease burden on children, families and caregivers is immense and current treatment options are limited or do not exist.

The Company is a public limited company incorporated pursuant to the laws of England and Wales. The Company has American Depositary Shares (“ADSs”) registered with the U.S. Securities and Exchange Commission (the “SEC”) and has been listed on the Nasdaq Global Select Market since October 31, 2018. The Company’s ADSs each represent one ordinary share of the Company.

In December 2020, the Company received standard marketing authorization from the European Commission for Libmeldy™ (atidarsagene autotemcel), for the treatment of early onset metchromatic leukodystrophy (“MLD”), characterized by biallelic mutations in the arylsulfatase-A (ARSA) gene leading to a reduction of the ARSA enzymatic activity in children with (i) late infantile or early juvenile forms, without clinical manifestations of the disease, or (ii) the early juvenile form, with early clinical manifestations of the disease, who still have the ability to walk independently and before the onset of cognitive decline.

 

On February 9, 2021, the Company issued and sold (i) 20,900,321 ordinary shares, nominal value £0.10 per share, at a purchase price of $6.22 per share (the “Purchase Price”), which was the closing sale price of the Company’s ADSs on the Nasdaq Global Select Market on February 4, 2021, and (ii) 3,215,434 non-voting ordinary shares, nominal value £0.10 per share, at the Purchase Price (together (i) and (ii) the “Private Placement”). The Private Placement resulted in net proceeds to the Company of $143.7 million after deducting placement agent fees of $6.0 million and other issuance costs of $0.3 million. The ordinary shares and non-voting ordinary shares were sold pursuant to a securities purchase agreement entered into between the Company and the purchasers named therein on February 4, 2021.

The Company’s business is subject to risks and uncertainties common to development-stage companies in the biotechnology industry. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any products, if approved, will be commercially viable. The Company operates in an environment of rapid technological innovation and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and service providers. Even if the Company’s product development efforts are successful in gaining regulatory approval, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

Through March 31, 2021, the Company funded its operations primarily with proceeds from the sale of convertible preferred shares, ADSs in the Company’s initial public offering (the “IPO”) and follow-on offering, ordinary shares in the Private Placement, proceeds from share issuances from employee equity plans, receipts from the United Kingdom (“UK”) research and development tax credit, and reimbursements from our research agreements with the University of California (“UCLA”) and the California Institute of Regenerative Medicine (“CIRM”). The Company has incurred recurring losses since its inception. As of March 31, 2021, the Company had an accumulated deficit of $640.8 million. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash, cash equivalents, and marketable securities on hand as of March 31, 2021 of $298.4 million will be sufficient to fund its operations and capital expenditure requirements for at least the next twelve months.

The Company will seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company's shareholders. The future viability of the Company is dependent on its ability to raise additional capital to finance its operations. If the Company is unable to obtain funding, the Company will be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

 

5


 

 

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of presentation

The condensed consolidated interim financial statements of the Company are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial reporting and in accordance with Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”), and Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”). All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated upon consolidation.

The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2021 (the “Annual Report”).  The condensed consolidated balance sheet as of December 31, 2020 was derived from audited consolidated financial statements included in the Company’s Annual Report but does not include all disclosures required by U.S. GAAP. 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements.  However, these interim financial statements include all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of the Company’s management, necessary to fairly state the results of the interim period.  The interim results are not necessarily indicative of results to be expected for the full year.

Amounts reported are computed based on thousands, except percentages, per share amounts or as otherwise noted. As a result, certain totals may not sum due to rounding.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual for research and development expenses, the research and development tax credit receivable, share-based compensation, operating lease assets and liabilities, and income taxes. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The future developments of the COVID-19 pandemic may also directly or indirectly impact the Company’s business, including impacts due to quarantines, border closures, increased border controls, travel restrictions, shelter-in-place orders and shutdowns, business closures, cancellations of public gatherings and other measures.  Actual results could differ from the Company’s estimates. 

Foreign currency

The financial statements of the Company’s subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for shareholders’ equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss) in shareholders’ equity. Foreign currency transaction gains and losses are included in other income (expense), net in the results of operations. The Company recorded realized and unrealized foreign currency transaction gains of $1.4 million and losses of $6.8 million for the three months ended March 31, 2021 and 2020, respectively, which is included in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents.

Marketable debt securities

Marketable securities consist of investments with original maturities greater than ninety days at the date of acquisition. 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

6


 

portfolio of investments as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices or other observable inputs. Unrealized gains and losses are recorded as a component of other comprehensive income (loss). Realized gains and losses are determined on a specific identification basis and are included in other income (loss). Amortization and accretion of discounts and premiums is also recorded in other income (loss).

When the fair value is below the amortized cost of the asset an estimate of expected credit losses is made, and is limited to the amount by which fair value is less than amortized cost. The credit-related impairment amount is recognized in the statement of operations; remaining impairment amount and unrealized gains are reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Credit losses are recognized through the use of an allowance for credit losses account and subsequent improvements in expected credit losses are recognized as a reversal of the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis the allowance for credit loss is written off and the excess of the amortized cost basis of the asset over its fair value is recorded in the condensed consolidated statements of operation.

United Kingdom research and development tax credit

As a company that carries out research and development activities, the Company is able to submit tax credit claims from two UK research and development tax relief programs, the Small and Medium-sized Enterprises research and development tax credit (“SME”) program and the Research and Development Expenditure Credit (“RDEC”) program depending on eligibility. Qualifying expenditures largely comprise employment costs for research staff, consumables and certain internal overhead costs incurred as part of research projects for which the Company does not receive income.

Each reporting period, management evaluates which tax relief programs the Company is expected to be eligible for and records a reduction to research and development expense for the portion of the expense that it expects to qualify under the programs, that it plans to submit a claim for, and it has reasonable assurance that the amount will ultimately be realized. Based on criteria established by HM Revenue and Customs (“HMRC”), management of the Company expects a proportion of expenditures being undertaken in relation to its pipeline research, clinical trials management and manufacturing development activities to be eligible for the research and development tax relief programs for the year ended December 31, 2021. The Company has qualified under the more favorable SME regime for the year ended December 31, 2020 and expects to qualify under the SME regime for the year ending December 31, 2021.

The RDEC and SME credits are not dependent on the Company generating future taxable income or on the ongoing tax status or tax position of the Company. The Company has assessed its research and development activities and expenditures to determine whether the nature of the activities and expenditures will qualify for credit under the tax relief programs and whether the claims will ultimately be realized based on the allowable reimbursable expense criteria established by the UK government which are subject to interpretation. At each period end, the Company estimates the reimbursement available to the Company based on available information at the time.

The Company recognizes credits from the research and development incentives when the relevant expenditure has been incurred and there is reasonable assurance that the reimbursement will be received. Such credits are accounted for as reductions in research and development expense in the condensed consolidated statement of operations and comprehensive loss. The following table below outlines the changes to the research and development tax credit receivable, including amounts recognized as an offset to research and development expense during the period:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

17,344

 

 

$

28,644

 

Recognition of credit claims as offset to research and development expense

 

 

3,554

 

 

 

3,417

 

(Receipt) of credit claims

 

 

 

 

 

 

Foreign currency translation

 

 

147

 

 

 

(1,850

)

Balance at end of period

 

$

21,045

 

 

$

30,211

 

As of March 31, 2021, the Company’s tax incentive receivable from the UK government was $21.1 million, of which $17.5 million was classified as current and $3.6 million was classified as long-term. As of December 31, 2020, the Company’s tax incentive receivable from the UK government was $17.3 million, all of which was classified as current.

7


 

Restricted cash and construction deposits

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash on the Company’s condensed consolidated balance sheet. The Company has an outstanding letter of credit for $3.0 million associated with a lease and is required to hold this amount in a standalone bank account, as of March 31, 2021 and December 31, 2020. The Company is also contractually required to maintain cash collateral accounts associated with corporate credit cards and other leases in the amount of $1.3 million at March 31, 2021 and December 31, 2020.

The Company includes the restricted cash balance in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheet that sum to the total of the amounts reported in the unaudited condensed consolidated statement of cash flows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Cash and cash equivalents

 

$

78,883

 

 

$

55,135

 

Restricted cash

 

 

4,266

 

 

 

4,266

 

Total cash, cash equivalents and restricted

   cash shown in the statement of cash flows

 

$

83,149

 

 

$

59,401

 

 

The Company has $8.1 million in an escrow account associated with construction on the Fremont facility, for which the Company has ceased construction and build-out and subleased to a third-party. Subject to the terms of the lease and reduction provisions, this amount may be returned to the Company upon qualifying construction expenditure or will be returned in late 2022 (the “Sunset Date”) to the extent construction expenses have not been incurred. The Company deposited $10.0 million into the account in the first quarter of 2020 and has received $1.9 million in receipts from the escrow funds for costs incurred to date. Of the $8.1 million remaining in the escrow account, $1.6 million is classified within prepaid expenses and other current assets and $6.5 million is classified within other assets on the condensed consolidated balance sheet based on the timing of when the Company expects funds to be returned from the escrow agent. Future receipts from the escrow deposit will be dependent upon the timing of the subtenant construction spend through the Sunset Date.

 

Research and development costs

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, share-based compensation and benefits, facilities costs, depreciation, third-party license fees, certain milestone payments, and external costs of outside vendors engaged to conduct clinical development activities and clinical trials, as well as costs to develop a manufacturing process, perform analytical testing and manufacture clinical trial materials. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. 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. In addition, funding from research grants is recognized as an offset to research and development expense on the basis of costs incurred on the research program. Royalties to third parties associated with our research grants will be accrued when they become probable.

Research agreement costs and accruals

The Company has entered into various research and development contracts. These agreements are cancelable, and related costs are recorded as research and development expenses as incurred. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations as of period end to those third parties.  Any accrual estimates are based on a number of factors, including the Company’s knowledge of the progress towards completion of the research and development activities, invoicing to date under the contracts, communication from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced, and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the Company have not been materially different from the actual costs.

Share-based compensation

8


 

The Company measures share-based awards granted to employees, consultants, and directors based on the fair value of the shares and options on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is the vesting period of the respective award. Forfeitures are accounted for as they occur.

Comprehensive loss

Comprehensive loss is composed of net loss and other comprehensive (loss) income. Other comprehensive (loss) income consists of unrealized gains and losses on marketable debt securities and foreign currency translation.   

 

Leases

 

The Company determines if an arrangement is a lease at contract inception. Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease liabilities with a term greater than one year and their corresponding right-of-use assets are recognized on the balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The Company made an accounting policy election to not record a right-of-use asset or lease liability for leases with a term of one year or less. To date, the Company has not identified any material short-term leases, either individually or in the aggregate.

 

As the Company’s leases do not provide an implicit rate, the Company utilized the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term as the lease an amount equal to the lease payments in a similar economic environment. The Company estimated the incremental borrowing rate based on the Company’s currently outstanding credit facility as inputs to the analysis to calculate a spread, adjusted for factors that reflect the profile of secured borrowing over the expected term of the lease.

 

The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, utilities, performance of manufacturing services, purchase of inventory, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected not to apply the practical expedient and, with respect to its lease of manufacturing space at a contract manufacturing organization, the Company has allocated the consideration between the lease and non-lease components of the contract based on the respective fair values of the lease and non-lease components. The Company calculated the fair value of the lease and non-lease components using financial information readily available as part of its master services arrangement and other representative data indicative of fair value.

 

The Company accounts for sublease income on a straight-line basis over the respective lease period and records an unbilled rent receivable for sublease income incurred but not yet paid. The Company periodically performs a collectability assessment associated with any unbilled rent receivables. The Company recognizes the sublease income as a reduction to the related operating expense associated with the head lease.

Strimvelis loss provision

As part of the GSK transaction (as detailed in Note 10), the Company is required to maintain commercial availability of Strimvelis in the European Union until such time that an alternative gene therapy is available. Strimvelis is not currently expected to generate sufficient cash flows to overcome the costs of maintaining the product and certain regulatory commitments; therefore, the Company initially recorded a liability associated with the loss contract of $18.4 million in 2018. The Company recognizes the amortization of the loss provision on a diminishing balance basis based on the actual net loss incurred associated with Strimvelis and the expected future net losses to be generated until such time as Strimvelis is no longer commercially available. The amortization of the provision is recorded as a reduction in research and development expense. The Company has made an estimate of the expected future losses associated with Strimvelis and adjust this estimate as facts and circumstances change regarding the commercial availability and costs of maintaining and selling Strimvelis. The Company does not update the accrued loss provision for any subsequent adjustment of the future losses, however, the timing of recognizing the amortization of what was originally recorded is adjusted for updates to estimates of potential future losses. The Company will continue to evaluate its future estimates for amortization of the Strimvelis loss provision. The following table below outlines the changes to the Strimvelis loss provision for the periods ended March 31, 2021 and 2020:  

9


 

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

4,482

 

 

$

6,790

 

Amortization of loss provision

 

 

(446

)

 

 

(1,691

)

Foreign currency translation

 

 

40

 

 

 

(348

)

Balance at end of period

 

$

4,076

 

 

$

4,751

 

 

Of the balance as of March 31, 2021 noted in the table above, $1.1 million is classified as current, and $3.0 million is classified as non-current.

Net loss per share

Basic net loss per share is computed by dividing the net loss by the weighted average number of voting and non-voting ordinary shares outstanding for the period. Diluted net loss is computed by adjusting net loss based on the potential impact of dilutive securities. Diluted net loss per share is computed by dividing the diluted net loss by the weighted average number of ordinary shares outstanding for the period, including potential dilutive ordinary shares. For purpose of this calculation, outstanding options and unvested restricted shares are considered potential dilutive ordinary shares.  Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential ordinary share equivalents outstanding would have been anti-dilutive.

The following securities, presented based on amounts outstanding at each period end, are considered to be ordinary share equivalents, but were not included in the computation of diluted net loss per ordinary share because to do so would have been anti-dilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Share options

 

 

12,935,554

 

 

 

12,688,361

 

Unvested performance-based restricted share units

 

 

717,167

 

 

 

511,324

 

 

 

 

13,652,721

 

 

 

13,199,685

 

 

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 – Income Taxes and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for the Company beginning January 1, 2021 and did not have a material impact on our condensed consolidated financial statements.

3. Fair Value Measurements and Marketable Debt Securities

The following tables present information about the Company’s financial assets that have been measured at fair value as of March 31, 2021 and indicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. During the three months ended March 31, 2021, there were no transfers between Level 1 and Level 2 financial assets.

10


 

The following table summarizes the Company’s cash equivalents and marketable debt securities as of March 31, 2021:

 

 

 

Fair Value Measurements at March 31, 2021 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

26,091

 

 

$

 

 

$

 

 

$

26,091

 

Corporate bonds

 

 

 

 

$

5,174

 

 

 

 

 

 

5,174

 

Commercial paper

 

 

 

 

 

23,854

 

 

 

 

 

 

23,854

 

Total cash equivalents

 

$

26,091

 

 

$

29,028

 

 

$

 

 

$

55,119

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 

 

$

96,879

 

 

$

 

 

$

96,879

 

Commercial paper

 

 

 

 

 

122,664

 

 

 

 

 

$

122,664

 

Total marketable securities

 

$

 

 

$

219,543

 

 

$

 

 

$

219,543

 

Total

 

$

26,091

 

 

$

248,571

 

 

$

 

 

$

274,662

 

The following table summarizes the Company’s cash equivalents and marketable debt securities as of December 31, 2020:

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents