SEC Filings

10-Q
AVEXIS, INC. filed this Form 10-Q on 11/09/2017
Entire Document
 
avxs_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

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

 

For the quarterly period ended September 30, 2017

 

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: 001-37693


AveXis, Inc.

(Exact name of registrant as specified in its charter)


 

Delaware

90-1038273

(State or other jurisdiction of
incorporation or organization)

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

 

2275 Half Day Rd, Suite 200

Bannockburn, Illinois 60015

(Address of principal executive offices, including zip code)

 

(847) 572-8280

(Registrant’s telephone number, including area code)

 


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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

  (Do not check if a smaller reporting company)

 

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 ☒

 

As of November 8, 2017, there were 31,976,418 shares of the registrant’s common stock outstanding.

 

 

 

 


 

AveXis, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarter Ended September 30, 2017

 

INDEX

 

PART 1. 

FINANCIAL INFORMATION

3

 

 

 

Item 1. 

Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2. 

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

16

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4. 

Controls and Procedures

31

 

 

 

PART II. 

OTHER INFORMATION

33

 

 

 

Item 1. 

Legal Proceedings

33

 

 

 

Item 1A. 

Risk Factors

33

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3. 

Default Upon Senior Securities

34

 

 

 

Item 4. 

Mine Safety Disclosures

34

 

 

 

Item 5. 

Other Information

34

 

 

 

Item 6. 

Exhibits

34

 

 

 

EXHIBIT INDEX 

35

 

 

SIGNATURES 

36

 

 

 

 


 

PART 1.FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

AveXis, Inc.

 

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

     

2017

     

2016

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

374,211

 

$

240,430

Prepaid expenses and other current assets

 

 

9,092

 

 

4,750

Total current assets

 

 

383,303

 

 

245,180

Property and equipment, net

 

 

46,332

 

 

24,201

Other long-term assets

 

 

2,422

 

 

1,194

Total assets

 

$

432,057

 

$

270,575

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

9,399

 

$

3,196

Accrued expenses and other current liabilities

 

 

15,276

 

 

16,794

Accrued indemnification obligation

 

 

2,784

 

 

4,453

Total current liabilities

 

 

27,459

 

 

24,443

Long-term liabilities

 

 

548

 

 

 —

Total liabilities

 

$

28,007

 

$

24,443

Commitments and contingencies

 

 

 

 

 

 

Common stock; par value $0.0001 per share, 100,000,000 shares authorized, 31,972,377 shares issued and outstanding at September 30, 2017; 27,700,054 shares issued and outstanding at December 31, 2016

 

 

 3

 

 

 3

Additional paid-in capital

 

 

681,995

 

 

387,691

Accumulated deficit

 

 

(277,948)

 

 

(141,562)

Total stockholders’ equity

 

 

404,050

 

 

246,132

Total liabilities and stockholders’ equity

 

$

432,057

 

$

270,575

 

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

3


 

AveXis, Inc.

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2017

    

2016

    

2017

    

2016

 

Revenue

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

16,095

 

 

7,083

 

 

38,898

 

 

17,325

 

Research and development

 

 

33,425

 

 

14,098

 

 

98,946

 

 

40,542

 

Total operating expenses

 

 

49,520

 

 

21,181

 

 

137,844

 

 

57,867

 

Loss from operations

 

 

(49,520)

 

 

(21,181)

 

 

(137,844)

 

 

(57,867)

 

Interest income

 

 

881

 

 

99

 

 

1,458

 

 

230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(48,639)

 

$

(21,082)

 

$

(136,386)

 

$

(57,637)

 

Basic and diluted net loss per common share

 

$

(1.52)

 

$

(0.87)

 

$

(4.67)

 

$

(2.75)

 

Weighted-average basic and diluted common shares outstanding

 

 

31,941,185

 

 

24,166,113

 

 

29,228,847

 

 

20,958,421

 

 

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

4


 

AveXis, Inc.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(136,386)

 

$

(57,637)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,315

 

 

33

 

Stock-based compensation

 

 

23,595

 

 

22,713

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Prepaid and other current assets

 

 

(4,355)

 

 

(2,908)

 

Other long-term assets

 

 

(1,228)

 

 

(848)

 

Accounts payable

 

 

6,624

 

 

1,051

 

Accrued expenses and other current liabilities

 

 

(1,461)

 

 

4,262

 

Accrued indemnification obligation

 

 

(1,669)

 

 

136

 

Net cash used in operating activities

 

 

(113,565)

 

 

(33,198)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(23,364)

 

 

(11,702)

 

Net cash used in investing activities

 

 

(23,364)

 

 

(11,702)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

269,869

 

 

247,228

 

Payments of deferred offering costs

 

 

 —

 

 

(1,198)

 

Proceeds from exercise of stock options

 

 

1,258

 

 

218

 

Service-based restricted stock unit vesting

 

 

(417)

 

 

 —

 

Proceeds from exercise of stock warrants

 

 

 —

 

 

42

 

Net cash provided by financing activities

 

 

270,710

 

 

246,290

 

Net increase in cash and cash equivalents

 

 

133,781

 

 

201,390

 

Cash and cash equivalents, Beginning of Period

 

 

240,430

 

 

62,252

 

Cash and cash equivalents, End of Period

 

$

374,211

 

$

263,642

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Capital expenditures in accounts payable and accrued liabilities

 

$

4,954

 

$

4,927

 

Deferred issuance costs for underwritten offering in accounts payable and accrued liabilities

 

$

 —

 

$

727

 

 

 

 

 

 

 

 

 

 

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

5


 

AveXis, Inc.

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.Background

 

AveXis, Inc. was formed on March 8, 2010 in the state of Delaware as Biolife Cell Bank, LLC. In January 2012, the Company converted from a limited liability company to a corporation, Biolife Cell Bank, Inc. In January 2014, the Company amended and restated its Certificate of Incorporation to change its name to AveXis, Inc. ("AveXis" or "the Company").

 

The Company is a clinical-stage gene therapy company dedicated to developing and commercializing gene therapy treatments for patients suffering from rare and life-threatening neurological genetic diseases. The Company's initial product candidate, AVXS-101, is a gene therapy product candidate currently in a pivotal clinical trial for the treatment of spinal muscular atrophy (“SMA”), Type 1, the leading genetic cause of infant mortality.

 

Initial Public Offering

 

On February 10, 2016, the Company completed an initial public offering (“IPO”), which resulted in the issuance and sale of 4,750,000 shares of its common stock at a public offering price of $20.00 per share, resulting in net proceeds of approximately $88.4 million after deducting underwriting discounts. Upon the closing of the IPO, the 3,278,938 shares of Class B-1 preferred stock, 326,557 shares of Class B-2 preferred stock, 2,365,020 shares of Class C preferred stock and 3,105,000 of Class D preferred stock were automatically converted into shares of the Company’s common stock.

 

On March 3, 2016, the underwriters of the Company’s IPO exercised their over-allotment option to purchase an additional 527,941 shares of the Company’s common stock at the initial public offering price of $20.00 per share, less underwriting discounts and commissions, resulting in additional net proceeds of approximately $9.8 million.

 

September 2016 Underwritten Public Offering

 

On September 13, 2016, the Company completed an underwritten public offering of 4,887,500 shares of its common stock, 4,597,645 shares of which were issued and sold by the Company, including the exercise in full by the underwriters of their option to purchase 637,500 shares from the Company, and 289,855 shares of which were sold by PBM Capital Investments, LLC ("PBM"), an existing stockholder of the Company, each at a public offering price of $34.50 per share. After deducting the underwriting discounts and commissions, the net proceeds to the Company were approximately $149.1 million. The Company did not receive proceeds from the sale of the common stock by PBM.

 

June 2017 Underwritten Public Offering

 

On June 26, 2017, the Company completed an underwritten public offering of 4,111,250 shares of its common stock, including the exercise in full by the underwriters of their option to purchase 536,250 shares from the Company, at a public offering price of $70.00 per share. After deducting the underwriting discounts and commissions, the net proceeds to the Company were approximately $269.9 million.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in the annual consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are

6


 

necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The December 31, 2016 condensed consolidated balance sheet data contained within this Form 10-Q was derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report on Form 10-K”), but does not include all disclosures required by GAAP.

 

Significant Accounting Policies

 

There have been no material changes in the Company’s significant accounting policies as of and for the nine months ended September 30, 2017, as compared with the significant accounting policies described in the Company’s Annual Report on Form 10-K. 

 

Use of Estimates

 

The preparation of the 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 and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues, if any, and expenses during the reporting period. Actual results could differ from those estimates.

 

Recently Issued Accounting Pronouncements 

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”). The guidance requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal years beginning after December 15, 2018.  The Company is evaluating the adoption of ASC 842, but has not determined the effects it may have on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 is intended to reduce the diversity in practice regarding how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. The Company is evaluating the adoption of ASU 2016-15, but has not determined the effects it may have on the Company’s consolidated financial statements.

 

Recently Adopted Accounting Pronouncements 

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the statement of operations. This change eliminates the notion of the additional paid-in capital pool and reduces the complexity in accounting for excess tax benefits and tax deficiencies. The new standard is effective for public companies for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods; however, early adoption is allowed. The Company adopted the new standard on January 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

7


 

3.Property and Equipment, Net

 

Property and equipment, net, consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

Furniture

 

$

713

 

$

108

Equipment

 

 

30,480

 

 

230

Leasehold improvements

 

 

4,458

 

 

777

Construction in progress

 

 

12,057

 

 

23,162

Property and equipment, gross

 

 

47,708

 

 

24,277

Less: accumulated depreciation

 

 

(1,376)

 

 

(76)

Property and equipment, net

 

$

46,332

 

$

24,201

 

Depreciation expense was $586 and $6 for the three months ended September 30, 2017 and 2016, respectively, and $1,315 and $33 for the nine months ended September 30, 2017 and 2016, respectively. Advances paid towards the acquisition of property and equipment, and the cost of property and equipment not ready for use before the end of the period, are both classified as construction in progress.

 

4.Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

Accrued manufacturing development costs

 

$

3,865

 

$

7,167

Accrued payroll, bonus and deferred compensation

 

 

5,199

 

 

3,841

Accrued construction in progress

 

 

2,826

 

 

2,979

Accrued clinical trial costs

 

 

617

 

 

389

Accrued professional and consulting fees

 

 

1,143

 

 

1,588

Other

 

 

1,626

 

 

830

Accrued expenses and other current liabilities

 

$

15,276

 

$

16,794

 

 

5.Accrued Indemnification Obligation

 

In January 2014, the Company issued 2,334,391 shares of restricted common stock to a member of its Board of Directors (Dr. Brian Kaspar, see Note 6), a related party, pursuant to a consulting agreement for scientific advisory services to be performed by the director on behalf of the Company. In connection with the restricted stock purchase agreement, the Company agreed to indemnify Dr. Kaspar for any taxes, interest, fines, penalties or other costs and expenses that Dr. Kaspar may incur in the future should the Internal Revenue Service succeed in a tax determination that the stock price paid by Dr. Kaspar (which was par value) was lower than the fair market value of the stock on the date of grant. The indemnification term is in effect for six years after the due date of the tax return for the year in which the stock was issued.  In January 2016, the Company entered into an employment agreement with Dr. Kaspar. 

 

In connection with the preparation of the Company's audited consolidated financial statements for the year ended December 31, 2014, the Company determined that the per share fair value of the Company's common stock on January 28, 2014, the grant date, was $1.51.  

 

As a result, the Company issued Dr. Kaspar an amended Form 1099 for the 2014 tax year reflecting an aggregate fair value of the restricted stock grant of $3.5 million. Due to the indemnity obligation contained in Dr. Kaspar’s restricted stock purchase agreement, the Company was required to reimburse Dr. Kaspar for the taxes he paid following the amendment of Dr. Kaspar’s 2014 personal income tax return. As a result, the Company has concluded that payment of such indemnity is probable as of December 31, 2016 and September 30, 2017. 

 

8


 

Additionally, the Company intends to gross-up such indemnification payment for the tax that will be payable by Dr. Kaspar on the indemnity payment.

 

On May 3, 2017, the Company paid Dr. Kaspar $1.7 million, which represents the tax liabilities owed to the U.S., State of Ohio and municipality of New Albany, Ohio pursuant to Dr. Kaspar’s 2014 amended tax returns. As a result, the Company has accrued balances of $2.8 million and $4.5 million at September 30, 2017 and December 31, 2016, respectively, representing the Company’s best estimate of the ultimate tax indemnification and gross-up payment to be made to Dr. Kaspar. The overall decrease in the accrued indemnification obligation was due to the May 3, 2017 payment to Dr. Kaspar, offset slightly by the accrual of additional interest through September 30, 2017. The Company expects to pay this entire amount in 2017.

 

6.Stock-Based Compensation

 

2014 Stock Plan (the “2014 Plan”) and 2016 Equity Incentive Plan (the “2016 Plan”)

 

The following table summarizes stock option activity under the 2014 Plan and the 2016 Plan (collectively, the “Plans”) for the nine months ended September 30, 2017 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

Weighted Average

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

    

Shares

    

Price

    

Life (Years)

    

Value (a)

Outstanding at December 31, 2016

 

2,577

 

$

22.01

 

8.79

 

$

66,466

Granted

 

959

 

$

75.37

 

 

 

 

 

Exercised

 

(152)

 

$

10.42

 

 

 

 

 

Cancelled or forfeited

 

(74)

 

$

20.27

 

 

 

 

 

Outstanding at September 30, 2017

 

3,310

 

$

38.04

 

8.53

 

$

194,310

Exercisable at September 30, 2017

 

1,116

 

$

20.03

 

7.96

 

$

85,622

Exercisable and expected to vest at September 30, 2017

 

3,310

 

$

38.04

 

8.53

 

$

194,310


(a)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in-the-money at September 30, 2017 and December 31, 2016.

 

For the nine months ended September 30, 2017 and 2016, the total number of stock options exercised was 152 and 34, respectively, resulting in total proceeds of $1,258 and $218, respectively.

 

As of September 30, 2017 and December 31, 2016, there was $49.0 million and $20.6 million, respectively, of unrecognized stock-based compensation expense related to stock option awards that is expected to be recognized over a weighted-average period of 1.4 and 1.4 years, respectively.

 

The Company has recorded total stock-based compensation expense related to the issuance of stock option awards under the Plans in the consolidated statements of operations and comprehensive loss as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2017

    

2016

    

2017

    

2016

 

Research and development

$

4,894

 

$

2,007

 

$

10,418

 

$

14,758

 

General and administrative

 

5,274

 

 

2,616

 

 

12,490

 

 

7,253

 

 

$

10,168

 

$

4,623

 

$

22,908

 

$

22,011

 

 

9


 

Stock Options Granted

 

The weighted-average grant date fair value of options granted during the three months ended September 30, 2017 and 2016 was $60.34 and $27.87, respectively, and for the nine months ended September 30, 2017 and 2016 was $54.56 and $23.98, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

 

    

2017

    

2016

    

    

2017

    

2016

 

 

Expected volatility

 

100.13

%  

97.82

%  

 

88.81

%  

92.46

%

 

Risk-free interest rate

 

1.81

%  

1.10

%  

 

1.90

%  

1.42

%

 

Expected term (in years)

 

6.08

 

6.08

 

 

6.08

 

6.08

 

 

Expected dividend yield

 

0.00

%  

0.00

%  

 

0.00

%  

0.00

%

 

 

Options generally expire ten years following the date of grant. Options typically vest over a period of three to four years, but vesting provisions can vary by award based on the discretion of the Board of Directors. Options to purchase common stock carry an exercise price equal to the estimated fair value of the Company’s common stock on the date of grant. Options to purchase shares of the Company’s common stock may be exercised by payment of the exercise price in cash, by the delivery of previously acquired shares of common stock having a fair value equal to the exercise price payable or the withholding of common shares equal to the fair value of the aggregate exercise price. Upon the termination of service of a holder of stock options awarded under the Plans, all unvested options are immediately forfeited and vested options may be exercised within three months of termination.

 

Service-Based Restricted Stock Units

 

As of September 30, 2017, and December 31, 2016, there were 37,934 and 57,500, respectively, outstanding service-based restricted stock units (“RSUs”) granted to employees.  During the nine months ended September 30, 2017,  18,966 RSUs vested, which included 5,961 RSUs exchanged for tax-related purposes resulting in the remaining 13,005 RSUs converting to common stock. The Company recognized RSU-related stock-based compensation expense of $687 during the nine months ended September 30, 2017, of which $613 is recorded within research and development expense and $74 within general and administrative expense. There were 57,500 RSUs issued and outstanding as of September 30, 2016.  At September 30, 2017 and 2016, there was $541 and $0, respectively, of unrecognized compensation cost related to unvested RSUs that will be recognized as expense over a weighted-average period of 0.9 years. A summary of the status of the Company's RSUs at September 30, 2017 and of changes in RSUs outstanding under the 2016 Plan for the nine months ended September 30, 2017 is as follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

 

 

Grant Date

 

 

Number

 

Fair Value

 

    

of Shares

    

Per Share

Outstanding at December 31, 2016

 

58

 

$

34.90

Granted

 

 —

 

 

 —

Vested

 

(19)

 

$

34.90

Forfeited and cancelled

 

(1)

 

$

34.90

Outstanding at September 30, 2017

 

38

 

$

34.90

 

The Company granted RSUs with service-based vesting terms. The outstanding RSUs vest over a period of three years. For awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the RSUs on the date of grant and is recognized as expense on a straight-line basis, net of estimated forfeitures, over the requisite service period. All RSUs issued vest over time as stipulated in the individual RSU award agreements.

 

10


 

Performance-Based Restricted Stock Units

 

On March 20, 2017, the Company granted to certain employees a total of 49,332 performance-based restricted stock units (“PSUs)”. These PSUs vest upon the achievement of certain regulatory and manufacturing milestones. If the milestones do not occur on or before the three-year anniversary of the grant date, all unvested PSUs will be cancelled. As of September 30, 2017, all 49,332 of these PSUs were outstanding, none had vested and the weighted average grant date fair value of all shares was $79.75 per share. The Company has not yet recognized any PSU-related stock-based compensation as regulatory and manufacturing milestones have not yet been met; however, in the event the performance conditions are met, $3.9 million of research and development compensation expense will be recognized by the Company. There were no PSUs issued and outstanding during the nine months ended September 30, 2016.

 

Restricted Stock Granted to Non-Employees

 

In January 2014, the Company issued 2,334,391 shares of restricted common stock to Dr. Brian Kaspar pursuant to a consulting agreement for scientific advisory services. Of these shares, 583,597 common shares were vested at the time of grant and the remaining restricted shares were scheduled to vest in the amount of 25% per year on the second,  third and fourth anniversary of the grant date pursuant to a restricted stock purchase agreement, which became effective upon the effectiveness of the consulting agreement.

 

In January 2016, the Company entered into an employment agreement with Dr. Kaspar. Upon the effectiveness of the employment agreement, Dr. Kaspar’s 1,750,794 unvested shares granted pursuant to the restricted stock purchase agreement vested in full. As a result of the vesting of the remainder of this award the Company recorded $10.4 million of additional stock-based compensation expense during the year ended December 31, 2016.

 

Warrants Granted to Non-Employees

 

During the nine month period ended September 30, 2017, there were no warrants exercised and as a result no proceeds received by the Company. As of September 30, 2017, there were 305,775 common stock warrants vested and outstanding issued to non-employees with a weighted-average exercise price of $2.57.

 

7.Net Loss Per Common Share

 

Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options, stock warrants and unvested restricted common stock.

 

The Company applies the two-class method to calculate its basic and diluted net loss per share attributable to common stockholders, as its preferred stock and common stock are participating securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company was in a net loss position for each of the periods presented. For the three and nine month periods

11


 

ended September 30, 2017 and 2016, the following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding because the effect would be anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

 

    

2017

    

2016

 

    

2017

    

2016

 

Stock options

 

3,310

 

2,567

 

 

3,310

 

2,567

 

Stock warrants

 

306

 

310

 

 

306

 

310

 

Unvested service-based restricted stock units

 

38

 

58

 

 

38

 

58

 

Unvested performance-based restricted stock units

 

49

 

 —

 

 

49

 

 —

 

 

 

3,703

 

2,935

 

 

3,703

 

2,935

 

 

Amounts in the table above reflect the common stock equivalents of the noted instruments.

 

The following table summarizes the calculation of the basic and diluted net loss per common share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(48,639)

 

$

(21,082)

 

$

(136,386)

 

$

(57,637)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic and diluted common shares

 

 

31,941

 

 

24,166

 

 

29,229

 

 

20,958

 

Basic and diluted net loss per common share

 

$

(1.52)

 

$

(0.87)

 

$

(4.67)

 

$

(2.75)

 

 

 

8.Commitments and Contingencies

 

Operating Leases

 

In March 2014, the Company entered into a lease agreement, which expired in April 2017, for approximately 2,418 square feet of office space in Dallas, Texas.

 

The Company leases a 15,668 square foot facility for its corporate headquarters in Bannockburn, Illinois, pursuant to a lease that expires in July 2024. The lease agreement provides for annual escalation in rent payments during the lease term. The Company is amortizing the escalation in rental payments on a straight-line basis over the term of the lease.

 

The Company also leases a 1,318 square foot facility in Columbus, Ohio for research and development activities, pursuant to a lease that expires in March 2019.

 

In March 2016, the Company entered into a lease agreement, which expires in August 2026, for approximately 48,529 square feet of warehouse and office space in Libertyville, Illinois. A portion of the warehouse space is used as manufacturing space. The lease agreement provides for annual escalation in rent payments during the lease term. The Company is amortizing the escalation in rental payments on a straight‑line basis over the term of the lease. In May 2017, the Company entered into two month-to-month lease agreements to add an additional 4,582 square feet of office space in Libertyville, Illinois. This has subsequently been reduced to one month-to-month lease agreement. In September 2017, the Company entered into a  lease agreement that commences in January 2018 and expires in August 2026 for approximately 12,539 square feet of warehouse and office space in Libertyville, Illinois adjacent to the Company’s manufacturing facility. 

 

In July 2017, the Company entered into a lease agreement which expires in June 2027, for approximately 16,808 square feet in San Diego, California for research and development activities. The lease agreement provides for annual escalation

12


 

in rent payments during the lease term. The Company is amortizing the escalation in rental payments on a straight‑line basis over the term of the lease.

 

Guarantees and Indemnifications

 

The Company has accrued $2.8 million and $4.5 million at September 30, 2017 and December 31, 2016, respectively, representing the Company's best estimate of the ultimate tax indemnification and gross-up payment to be made to Dr. Kaspar pursuant to a tax indemnification granted to Dr. Kaspar in connection with a restricted common stock grant (see Note 5).

 

Additionally, in the normal course of business, the Company has entered into agreements that contain a variety of representations and provide for general indemnification, including indemnification agreements with the Company’s officers and directors. The Company's exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any claims or been required to defend any action related to these indemnification obligations. As of September 30, 2017 and December 31, 2016, the Company did not have any material indemnification claims related to these agreements that were probable or reasonably possible and consequently has not recorded any related liabilities.

 

Litigation

 

On September 8, 2016, Sophia's Cure Foundation ("SCF"), a non-profit 501(c)(3) public charity, filed a complaint in U.S. District Court, Southern District of Ohio, naming as defendants Nationwide Children's Hospital ("NCH") and other entities affiliated with NCH, the Company and certain of the Company's present and former executives (the "Complaint"). According to the complaint, in 2012, SCF and Nationwide Children’s Hospital Foundation (“NCH Foundation”) entered into a donation agreement under which SCF provided NCH a gift of $550,000 to fund clinical work associated with the study of the product candidate that the Company now refers to as AVXS-101 for SMA Type 1 patients, and NCH Foundation agreed in such donation agreement to reference SCF as the "primary sponsor" of such clinical work in all publications issued by NCH Foundation. The complaint also alleges that NCH breached the donation agreement by not naming SCF as the sponsor of the investigational new drug application (the "IND") that it filed for AVXS-101. Additionally, the complaint alleges that the Company and the named Company executives tortiously interfered with SCF's rights under the donation agreement by assuming sponsorship of the IND under the NCH License. There is no contractual relationship between the Company and SCF. The complaint seeks, among other relief, monetary damages of $500.0 million and equitable relief, including taking steps to designate SCF as the sponsor of the IND. On October 10, 2017, the Court granted all of the defendants’ motions to dismiss. On October 31, 2017, SCF filed a second amended complaint against all of the defendants except two of the Company’s present executives, who were dropped from the second amended complaint. The Company believes that the second amended complaint is without merit and intends to vigorously defend itself and its present and former executives from the allegations. The Company views the possibility of loss in this matter to be remote.

 

Lawsuits may be asserted against the Company in the normal course of business. Based on information currently available, management believes that the disposition of any matters, including the matter involving SCF described above, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

 

9.Taxes

 

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, including its net operating losses. Based on its history of operating losses, the Company believes that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of September 30, 2017 and December 31, 2016.

 

13


 

10.Collaboration and License Agreements

 

The Company has entered into three license agreements related to its planned preclinical programs in Rett syndrome and amyotrophic lateral sclerosis (“ALS”) caused by mutations in the gene that produces the copper zinc superoxide dismutase 1 (“SOD1”) enzyme (“genetic ALS”).

 

REGENXBIO Inc.

 

Effective June 7, 2017, the Company entered into a License Agreement (the “REGENX Rett and ALS License”) with REGENXBIO Inc. (“REGENX”). Under the terms of the REGENX Rett and ALS License, REGENX granted the Company an exclusive worldwide license to utilize REGENX's proprietary adeno-associated virus ("AAV") gene delivery platform for the treatment of Rett syndrome and genetic ALS caused by mutations in the gene that produces the copper zinc superoxide dismutase 1 (“SOD1”) enzyme by in vivo gene therapy, using REGENX’s AAV9 gene delivery vector. Under the REGENX Rett and ALS License, REGENX granted the Company an exclusive, worldwide license under the licensed patent rights to make, have made, use, import, sell and offer for sale any products covered by the REGENX Rett and ALS License (the “REGENX Rett and ALS licensed products”) in the field of the treatment of (i) Rett syndrome in humans by in vivo gene therapy using AAV9 delivering the gene encoding for methyl CpG binding protein 2, and (ii) ALS caused by SOD1 mutation in humans by in vivo gene therapy using AAV9 delivering the gene encoding for SOD1, subject to certain rights reserved by REGENX and its licensors.

 

As consideration for the REGENX Rett and ALS License, in June 2017 the Company paid an initial fee of $6.0 million. This $6.0 million initial fee paid to REGENX was recognized as research and development expense during the three months ended September 30, 2017. Additionally, the Company agreed to pay potential future milestones of up to $36.0 million in the aggregate for the REGENX Rett and ALS licensed products, and a low double digit royalty on net sales, if any, of the REGENX Rett and ALS licensed products, subject to reduction in specified circumstances; and lower mid-double digit percentages of any sublicense fees the Company receives from sublicenses of the licensed intellectual property rights.  The Company also agreed to pay an annual maintenance fee on each anniversary of the effective date of the REGENX Rett and ALS License.

 

The REGENX Rett and ALS License will expire upon the later of (i) the expiration, lapse, abandonment or invalidation of the last valid claim of the licensed intellectual property to expire, lapse or become abandoned or unenforceable in all the countries of the world or (ii) seven years from the first commercial sale of each REGENX Rett and ALS licensed product. Upon expiration of the REGENX Rett and ALS License, the license granted to the Company becomes irrevocable, perpetual, royalty-free and fully paid-up. The Company has the right to terminate the REGENX Rett and ALS License upon a specified period of prior written notice. REGENX may terminate the REGENX Rett and ALS License if the Company or its affiliates become insolvent, if the Company is greater than a specified number of days late in paying money due under the REGENX Rett and ALS License, or, effective immediately, if the Company or its affiliates, or sublicensees commence any action against REGENX or its licensors to declare or render any claim of the licensed patent rights invalid or unenforceable. Either party may terminate the REGENX Rett and ALS License for material breach if such breach is not cured within a specified number of days.

 

Nationwide Children’s Hospital

 

In September 2016, the Company entered into two exclusive license agreements with NCH, pursuant to which NCH granted the Company exclusive, worldwide licenses under certain patent rights to make, have made, use, sell, offer for sale and import any products covered by each license (“NCH licensed products”) and a non-exclusive, worldwide license under certain technical information to develop and manufacture the NCH licensed products, in the field of therapies and treatments of Rett syndrome and ALS in human use, respectively (each an “NCH License”). 

 

The Company paid an initial fee of $0.2 million to NCH in connection with the NCH License for Rett syndrome and $0.1 million in connection with the NCH License for ALS in human use. Each initial fee was recognized as research and development expense during the three months ended September 30, 2016.  Additionally, the Company agreed to pay potential future development milestone-based payments and an annual maintenance fee under each NCH License.  Following the first commercial sale of an NCH licensed product for Rett syndrome or ALS, as applicable, under an

14


 

applicable NCH License, the Company must begin paying NCH an aggregate low-single digit royalty on net sales of NCH licensed products by the Company, its affiliates and sublicensees during the term of such license.

 

15


 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”), our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions intended to identify statements about the future. These statements speak only as of the date of this Quarterly Report and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements include, without limitation, statements about the following:

 

·

the timing, progress and results of preclinical studies and clinical trials for AVXS-101 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

·

the timing of and our ability to obtain and maintain regulatory approval of AVXS-101;

·

the proposed clinical development pathway for AVXS-101 and the acceptability of the results of such trials for regulatory approval of AVXS-101 by the FDA or comparable foreign regulatory authorities;

·

the proposed timing of filing investigational new drug applications with the FDA in connection with gene therapies we are developing for ALS and Rett syndrome in connection with the recent license agreements executed with REGENX and Nationwide Children’s Hospital;

·

our expectations regarding timing for meetings with regulatory agencies;

·

our expectations regarding the size of the patient populations for our product candidates, if approved for commercial use;

·

our manufacturing capabilities and strategy, including the scalability and commercial viability of our manufacturing methods and processes and our ability to establish a satisfactory potency assay for AVXS-101;

·

our ability to successfully commercialize AVXS-101;

·

our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for or ability to obtain additional financing;

·

our ability to identify and develop new product candidates, including our planned new programs in Rett syndrome and ALS;

·

our ability to identify, recruit and retain key personnel;

·

our and our licensors’ ability to protect and enforce our intellectual property protection for AVXS-101, and the scope of such protection;

·

our financial performance;

·

the development of and projections relating to our competitors or our industry;

·

our expectations about the outcome of litigation and controversies with third parties, including the lawsuit filed by Sophia’s Cure Foundation; and

16


 

·

the impact of laws and regulations. 

 

You should refer to “Item 1A. Risk Factors” in our Annual Report, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.

 

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

 

Business Overview

 

We are a clinical-stage gene therapy company dedicated to developing and commercializing novel treatments for patients suffering from rare and life-threatening neurological genetic diseases. Our initial product candidate, AVXS-101, is our proprietary gene therapy product candidate. We are conducting our pivotal clinical trial for AVXS-101 for the treatment of spinal muscular atrophy Type 1, or SMA Type 1, the leading genetic cause of infant mortality. SMA Type 1 is a lethal genetic disorder characterized by motor neuron loss and associated muscle deterioration, resulting in mortality or the need for permanent ventilation support before the age of two for greater than 90% of patients. The survival motor neuron protein, or SMN, is a critical protein for normal motor neuron signaling and function. Patients with SMA Type 1 either have experienced a deletion of their SMN1 genes, which prevents them from producing adequate levels of functional SMN protein, or carry a mutation in their SMN1 gene. AVXS-101 is designed to deliver a fully functional human SMN gene into the nuclei of motor neurons that then generates an increase in SMN protein levels and we believe this will result in improved motor neuron function and patient outcomes.

 

The U.S. Food and Drug Administration, or FDA, and the European Medicines Agency, or EMA, have each granted AVXS-101 orphan drug designation for the treatment of SMA, and the FDA has granted AVXS-101 fast track designation for the treatment of SMA Type 1. The FDA granted breakthrough therapy designation for AVXS-101 for the treatment of SMA Type 1 in pediatric patients, and the EMA granted access into its PRIority MEdicines, or PRIME, program for AVXS-101 for the treatment of SMA Type 1. In addition to developing AVXS-101 to treat SMA Type 1, we plan to develop AVXS-101 to treat additional SMA types and develop other novel treatments for rare neurological genetic diseases.

We expect to conduct an end-of-Phase 1 meeting with the FDA late in the fourth quarter of 2017, which we expect will help further inform the regulatory pathway for AVXS-101. We anticipate providing an update on the outcome of that meeting once the official minutes are available, which we anticipate to be early in the first quarter of 2018. With the pivotal trial initiated, we are continuing discussions with the FDA on key topics, including dosing, for intrathecal administration of AVXS-101 for the planned clinical trial in patients with SMA Type 2. We intend to initiate a pivotal trial of AVXS-101 for the treatment of SMA Type 1 in Europe during the first half of 2018.

 

Pivotal Trial of AVXS-101

 

In September 2017, based on the FDA’s review of our clinical, chemistry, manufacturing and control data, including a potency assay of AVXS-101, we initiated our pivotal trial of AVXS-101 for patients with SMA Type 1 using the intravenous, or IV, formulation produced by our GMP commercial manufacturing process. The first patient in the clinical trial was dosed during the fourth quarter 2017.

17


 

 

The open-label, single-arm, single-dose, multi-center trial, which we call STR1VE, is designed to evaluate the efficacy and safety of a one-time IV infusion of AVXS-101 of 1.1 x 1014 vg/kg, which is equivalent to the proposed therapeutic dose received by the second dosing cohort in our Phase 1 trial, in patients with SMA Type 1.

 

The trial will enroll a minimum of 15 patients with SMA Type 1 who are less than six months of age at the time of gene therapy, and who have one or two copies of the SMN2 backup gene as determined by genetic testing and bi-allelic SMN1 gene deletion or point mutations. There will be at least a four-week dosing interval between dosing of the first three patients to allow review of the safety analysis from six time points (days one, two, seven, 14, 21 and 30), as well as early signals of efficacy, prior to dosing of the next patient.

 

The intent-to-treat, or ITT, population is defined as patients who are less than six months of age and symptomatic at the time of gene therapy, with two copies of the SMN2 gene as determined by genetic testing, bi-allelic SMN1 gene deletion and no c.859G>C mutation in SMN2.  The intended enrollment will include at least 15 patients that meet the ITT criteria.   The first 3 patients will be ITT patients per the trial protocol definition and will be dosed 4 weeks apart to assess safety and efficacy using CHOP INTEND.

 

The co-primary efficacy outcome measures of the trial will include:

·

The achievement of the developmental milestone of independent sitting for at least 30 seconds at 18 months of age; and

·

Event-free survival at 14 months of age, with an event defined as either death or at least 16 hours per day of required ventilation support for breathing for 14 consecutive days in the absence of acute reversible illness or perioperatively.

 

Co-secondary outcome measures will include:

·

The ability to thrive, defined as the ability to remain independent from feeding support, tolerate thin liquids and maintain weight; and

·

The ability to remain independent of ventilatory support at 18 months of age.

 

Top-Line Results of Phase 1 Clinical Trial 

 

In our fully enrolled Phase 1 clinical trial, we treated 15 SMA Type 1 patients, divided into two dosing cohorts, and observed a favorable safety profile and that AVXS-101 is generally well-tolerated. As of August 7, 2017, all patients in the study have survived event free, in contrast to the 8% event free rate demonstrated in an independent, peer-reviewed natural history study for patients with SMA Type 1. Additionally, we have observed improved motor function, including in some patients, the attainment of motor milestones such as the ability to sit unassisted, crawl, stand and walk — motor milestone achievements that are essentially never seen among untreated patients suffering from SMA Type 1. The open-label, dose-escalating study was designed to evaluate the safety and tolerability of AVXS-101 in patients with SMA Type 1. The key measures of efficacy were the time from birth to an "event," which was defined as either death or at least 16 hours per day of required ventilation support for breathing for 14 consecutive days in the absence of acute reversible illness or perioperatively, and video confirmed achievement of ability to sit unassisted. Additionally, several exploratory objective measures were assessed, including a standard motor milestone development survey and Children's Hospital of Philadelphia Infant Test of Neuromuscular Disorders, or CHOP INTEND.

 

·

Event-free Survival and Safety:  Data as of August 7, 2017, showed no new events, and 15 of 15 patients (100%) were event-free at 20 months of age. The expected event-free survival rate at 20 months based on the natural history of the disease is 8%. Based on data accumulated up to this date, AVXS-101 appeared to have a favorable safety profile and to be generally well tolerated, with no new treatment related safety or tolerability concerns identified. The median age at last follow-up was 25.7 months and 30.8 months for patients who received a dose of AVXS-101 administered in the proposed therapeutic dose-cohort and in low-dose cohort, respectively. Use of the term "proposed therapeutic dose" does not imply that we have established efficacy, but this one-time dose is the dosing level that we presently intend to evaluate in future trials.

 

18


 

o

As has been previously reported, a total of five adverse events, or AEs, in four patients were deemed treatment-related. Of these, two were serious adverse events, or SAEs, experienced by two patients, and three were non-serious AEs experienced by two patients. All consisted of clinically asymptomatic liver enzyme elevations and were resolved with prednisolone treatment. There were no clinically significant elevations of gamma-glutamyl transferase, alkaline phosphatase or bilirubin and, as such, the conditions for drug induced liver injury, also known as Hy’s Law,  were not met. Other non-treatment-related AEs were expected and were associated with SMA.

o

A cumulative total of 297 AEs (five treatment-related AEs and 292 non-treatment related AEs) were reported as of August 7, 2017, following monitoring and source verification. Of these, 56 were determined to be SAEs and 241 were non-serious AEs.

 

·

Treatment Durability and Motor Milestone Achievement

o

As of August 7, 2017, 11 of 12 patients (92%) in the proposed therapeutic dose-cohort have achieved and maintained CHOP-INTEND scores of ≥40 points at 20 or more months of age.

o

As of August 7, 2017, 11 of 12 patients (92%) in the proposed therapeutic dose-cohort achieved head control, 9 of 12 patients (75%) could roll over and 11 of 12 patients (92%) could sit with assistance by 20 months of age.  

o

As of August 7, 2017, 11 of 12 patients (92%) in the proposed therapeutic dose-cohort could sit unassisted for at least five seconds, 10 of 12 patients (83%) could sit unassisted for at least 10 seconds and nine of 12 patients (75%) could sit unassisted for 30 seconds or more by 20 months of age.  

o

As of August 7, 2017, two of 12 patients (17%) in the proposed therapeutic dose-cohort could crawl, pull to a stand and stand and walk independently by 20 months of age.

19


 

§

All motor milestones have been assessed and adjudicated by an independent third-party reviewer using video evidence.

 

The proposed therapeutic dose-cohort

Age at Gene Transfer (mos)

Event-Free Survivala

Event-free Survival and Motor and Other Milestones Among the 12 Patients in the Proposed Therapeutic Dose-Cohort as of August 7, 2017*

Brings Hand to Mouth

Controls Head

Rolls Overb

Sits with Assistance

Sits Unassistedc

Other Achievements

≥5 secs

≥10 secs

≥30 secs

Speaks

Swallows

No NIV Use

No Nutritional Supportd

E.04

5.6

31.1

+

+

+

+

+

 

 

+

+

 

 

E.05

4.2

28.5

+

+

+

+

+

+

+

+

+

+

+

E.06

1.9

26.1

+

+

+

+

+

+

+

+

+

+

+

E.07

3.6

28.1

+

+

+

+

+

+

 

+

+

+

 

E.08

7.9

32.4

+

 

 

 

 

 

 

 

 

 

 

E.09

4.9

28.9

+

+

+

+

+

+

+

+

+

+

+

E.10

0.9

25.3

+

+

+

+

+

+

+

+

+

+

+

E.11

2.3

23.8

+

+

+

+

+

+

+

+

+

 

 

E.12

2.6

23.9

+

+

+

+

+

+

+

+

+

+

+

E.13

0.9

22.1

+

+

 

+

+

+

+

+

+

 

 

E.14

4.1

22.0

+

+

+

+

+

+

+

+

+

+

+

E.15

2.1

20.6

+

+

 

+

+

+

+

+

+

 

 

This Study

100

100

92

75

92

92

83

75

92

92

58

50

Natural History

8 by 20 mose

NA

0

0**

0**

0**

0**

0**

NA

NA

NA

8 by 20 mose

 

*At baseline, none of the patients in the proposed therapeutic dose-cohort had achieved any of the listed motor milestones except for bringing a hand to the mouth. As of August 7, 2017, the majority of these patients had reached at least one major motor milestone. No patients in Cohort 1 are listed, since none attained any motor milestones. NA denotes not available, and NIV noninvasive ventilation. Plus signs indicate achievement of milestone.

a.

Event-free survival (the primary efficacy outcome) was defined as the age at the end of the study at which patients were free of ventilatory support, which was defined as the need for ventilation for at least 16 hours per day for at least 14 consecutive days.

b.

According to item 20 on the Bayley Scales of Infant and Toddler Development, rolling over is defined as movement of at least 180 degrees both left and right from a position of lying on the back.

c.

Sitting unassisted for at least 5 seconds is in accordance with the criteria of item 22 on the Bayley Scales of Infant and Toddler Development gross motor subtest and surpasses the 3-second count that is used as a basis for sitting (test item 1) on the Hammersmith Functional Motor Scale–Expanded for Spinal Muscular Atrophy (SMA). Sitting unassisted for at least 10 seconds is in accordance with the criteria used in the World Health Organization Multicentre Growth Reference Study. Sitting unassisted for at least 30 seconds defines functional independent sitting and is in accordance with the criteria of item 26 on the Bayley Scales of Infant and Toddler Development gross motor subtest.

20


 

d.

Nutritional support refers to the placement of either a gastrostomy tube or a nasogastric tube, as determined by the preference of the parents or the primary physician. Once enrolled in the study, all the patients who required nutritional support underwent gastrostomy-tube placement, and none were removed during the study.

e.

Data are from Finkel et al.

** Data are from De Sanctis et al

 

·

Nutritional and Respiratory Support

o

According to natural history of the disease, nearly all Type 1 patients require nutritional and respiratory support by 12 months of age, and are not able to swallow or speak effectively.

o

As of August 7, 2017, all patients who were free of respiratory or feeding support on January 20, 2017, continued without the need for supportive care.

§

As of August 7, 2017, six of seven (86%) patients in the proposed therapeutic dose-cohort  that did not require feeding support before treatment continued without feeding support after treatment; seven of 10 (70%) patients that did not require bi-level positive airway pressure, or BiPAP, support before treatment did not require BiPAP support at last assessment.

§

As of August 7, 2017, eleven of 12 (92%) patients in the proposed therapeutic dose-cohort were fed orally, and six of 12 (50%) patients were exclusively fed orally.

o

Further, as of August 7, 2017, eleven of 12 (92%) patients were able to speak; three more patients than previously reported on April 25, 2017 at the American Academy of Neurology.

 

To date, we have funded our research and development and operating activities primarily through public and private equity offerings totaling $597.5 million of net proceeds. We have not generated any revenue from sales of gene therapy products to date. We have incurred significant annual net operating losses in every year since our inception and expect to continue to incur net operating losses for the foreseeable future. Our net operating losses were $38.5 million and $83.0 million for the years ended December 31, 2015 and 2016, respectively. As of September 30, 2017, we had an accumulated deficit of $277.9 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next few years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly if and as we continue to develop and conduct clinical trials with respect to AVXS-101; develop our planned new programs for Rett syndrome and genetic ALS; maintain, expand and protect our intellectual property portfolio; establish a commercial infrastructure to support the manufacture, marketing and sale of AVXS-101 if it receives regulatory approval; and hire additional personnel, such as clinical, regulatory, manufacturing, quality control and scientific personnel.

 

Licensing Agreements

 

AVXS-101

 

To date, we have entered into three license agreements relating to the development of AVXS-101.

 

Nationwide Children’s Hospital

 

In October 2013, we entered into an exclusive, worldwide license agreement with Nationwide Children’s Hospital, or NCH, under certain patent applications, and a non-exclusive license under certain technical information, for the use of its scAAV9 technology for the treatment of SMA, of all types, or the NCH SMA License. In January 2016, we amended and restated the NCH SMA License in its entirety. Under the NCH SMA License, we initially issued NCH and The Ohio State University, or OSU, 331,053 shares of common stock. Until May 2015, when we had reached a market capitalization of $100.0 million, we were obligated to issue additional shares to NCH and OSU from time to time to maintain a 3% ownership of the company on a fully-diluted basis. We issued an aggregate of 124,990 additional shares of common stock between October 2013 and May 2015 pursuant to these anti-dilution obligations. With certain exceptions, we are required to make up to $0.1 million in development milestone based payments to NCH. In addition, we are responsible for all clinical trial costs that are not covered by grants or certain other sources.

 

Following the first commercial sale of a NCH SMA licensed product we must begin paying NCH an aggregate low-single digit royalty on net sales of any products covered by the NCH SMA License, subject to reduction in specified

21


 

circumstances and annual minimum royalties that increase over time. In addition, we must pay NCH a portion of sublicensing revenue received from our sublicense of the licensed technology at percentages between low-double digits and low-teens.

 

On November 6, 2015, the FDA approved our sponsorship of the IND and the transfer of the associated regulatory filing from NCH.

 

ReGenX Biosciences, LLC

 

In March 2014, we entered into an exclusive license agreement with ReGenX Biosciences, LLC, or ReGenX Biosciences, predecessor to REGENXBIO Inc., or REGENX, under certain patent rights owned by the Trustees of the University of Pennsylvania and licensed to ReGenX Biosciences, for the development and commercialization of products to treat spinal muscular atrophy by in vivo gene therapy using AAV9, or the ReGenX SMA License. Under the ReGenX SMA License, we paid ReGenX Biosciences an initial licensing fee of $2.0 million. We are also required to pay ReGenX Biosciences: annual maintenance fees, up to $12.25 million in milestone fees for all products covered by the ReGenX SMA License, or ReGenX SMA licensed products; mid-single to low-double digit royalty percentages on net sales of ReGenX SMA licensed products, subject to reduction in specified circumstances; and lower mid-double digit percentages of any sublicense fees we receive from sublicensees for the licensed patent rights. As of September 30, 2017, we have paid $2.4 million under the ReGenX SMA License, which includes $0.3 million in aggregate milestone payments.

 

Asklepios Biopharmaceutical, Inc.

 

In May 2015, we entered into a non-exclusive, worldwide license agreement with Asklepios Biopharmaceutical, Inc., or AskBio, under certain patents and patent applications, for the use of AskBio’s self-complementary AAV genome technology for the treatment of SMA in humans, or the AskBio License. Under the AskBio License, we paid AskBio a one-time upfront license fee of $1.0 million, payable across stipulated milestones. We are also required to pay ongoing annual maintenance fees, up to a total of $0.6 million in clinical development milestone payments and up to a total of $9.0 million in commercial milestone payments. Under the terms of the AskBio License, we are required to pay AskBio annual tiered royalties on net sales of any products covered by the AskBio License, on a country-by-country basis, starting at percentages in the low-single digits and increasing to mid-single digits. These royalty rates are subject to potential reduction in specified circumstances, including, in the event we exercise our option to make a specified one-time royalty option fee payment to AskBio. We must also pay AskBio a low-double digit percentage of all consideration we receive from any sublicense of the licensed technology. Through September 30, 2017, we have paid the $1.0 million upfront license fee owed under the AskBio License.

 

Preclinical Programs for Rett Syndrome and ALS

 

We have also entered into three license agreements relating to our planned new programs for Rett syndrome and ALS.

 

REGENXBIO Inc.

 

Effective June 7, 2017, we entered into an exclusive license agreement with REGENX under certain patents and patent applications owned by the Trustees of the University of Pennsylvania and licensed to REGENX, for the development and commercialization of products to treat Rett syndrome and genetic ALS using the AAV 9 vector, or the REGENX Rett and ALS License. Under the REGENX Rett and ALS License, REGENX granted us an exclusive, worldwide license under the licensed patent rights to make, have made, use, import, sell and offer for sale any products covered by the REGENX Rett and ALS License, or the REGENX Rett and ALS licensed products, in the field of the treatment of (i) Rett syndrome in humans by in vivo gene therapy using AAV9 delivering the gene encoding for methyl CpG binding protein 2, and (ii) ALS caused by SOD1 mutation in humans by in vivo gene therapy using AAV9 delivering the gene encoding for SOD1, subject to certain rights reserved by REGENX and its licensors. The patent rights exclusively in-licensed include an issued United States patent, which expires in 2026. We have the right to sublicense the licensed technology to third parties subject to certain conditions as specified in the REGENX Rett and ALS License. Under the REGENX Rett and ALS License we grant a non-exclusive, worldwide, royalty-free, transferable, sublicenseable,

22


 

irrevocable, perpetual license back to REGENX to (a) use any patentable modifications and improvements to the licensed technology that we or our affiliates or sublicensees develop, or licensed back improvements, and (b) practice the licensed back improvements in connection with AAV9 outside of our fields of use.

 

Under the terms of the REGENX Rett and ALS License, we have paid or are required to pay:

 

·

an initial fee of $6.0 million;

·

an annual maintenance fee;

·

up to $36.0 million in total milestone fees for the REGENX Rett and ALS licensed products;

·

a low double digit royalty percentage on net sales of REGENX Rett and ALS licensed products, subject to reduction in specified circumstances; and

·

a lower mid-double digit percentage of any sublicense fees we receive from sublicensees for the licensed intellectual property rights.

 

We are obligated to achieve certain development milestones with respect to the licensed disease indications. We do not have the right to control prosecution of the in-licensed patent applications nor the right to enforce the in-licensed patents. In addition, our rights under the REGENX Rett and ALS License are generally not assignable without the prior written consent of REGENX. 

 

The REGENX Rett and ALS License will expire upon the later of (i) the expiration, lapse, abandonment or invalidation of the last valid claim of the licensed intellectual property to expire, lapse or become abandoned or unenforceable in all the countries of the world or (ii) seven years from the first commercial sale of each REGENX Rett and ALS licensed product. Upon expiration of the REGENX Rett and ALS License, the license granted to us becomes irrevocable, perpetual, royalty-free and fully paid-up. We have the right to terminate the REGENX Rett and ALS License upon a specified period of prior written notice. REGENX may terminate the REGENX Rett and ALS License if we or our affiliates become insolvent, if we are greater than a specified number of days late in paying money due under the REGENX Rett and ALS License, or, effective immediately, if we or our affiliates, or sublicensees commence any action against REGENX or its licensors to declare or render any claim of the licensed patent rights invalid or unenforceable. Either party may terminate the REGENX Rett and ALS License for material breach if such breach is not cured within a specified number of days. Upon termination of the REGENX Rett and ALS License, other than for REGENX’s material breach, we grant to REGENX a non-exclusive, perpetual, irrevocable, worldwide, royalty-free, transferable, sublicenseable license under patentable modifications and improvements to any vector claimed by the licensed patents for use by REGENX for the research, development and commercialization of products in any therapeutic indication. 

 

Nationwide Children’s Hospital

 

In September 2016, we entered into exclusive license agreements with NCH, pursuant to which NCH granted us exclusive, worldwide licenses under certain patent rights to make, have made, use, sell, offer for sale and import any products covered by each license, or NCH licensed products, and a non-exclusive, worldwide license under certain technical information to develop and manufacture the NCH licensed products, in the field of therapies and treatments of Rett syndrome and ALS in human use, respectively. We refer to each of the Rett syndrome and ALS in human use licenses individually as an NCH License. The patent rights exclusively in-licensed from NCH and relevant to our contemplated Rett syndrome product are a currently pending patent application being pursued only in the United States. The patent application covers the use of the AAV9 vector delivered intrathecally for the treatment of Rett syndrome. If a patent issues from this patent application, it is expected to expire in 2029. The patent rights exclusively in-licensed from NCH and relevant to our contemplated ALS product are a currently pending patent application being pursued in the United States, Canada and Europe. The patent application claims the use of the AAV9 vector as a composition of matter and its use for the treatment of ALS. If a patent issues from this patent application, it is expected to expire in 2035. We have the right to subcontract the manufacturing of products using the licensed rights under each NCH License. We also have the right to sublicense the licensed technology under each NCH License to third parties through multiple tiers.

 

Each NCH License sets forth a development plan for our development of the licensed technology to make and sell NCH licensed products, including for the treatment of Rett syndrome and ALS in humans, as applicable, throughout the world. We are required, if commercially reasonable, to market NCH licensed products after regulatory approval, satisfy the

23


 

market demand for such products in those countries in which we have obtained regulatory approval and where it is commercially reasonable to do so and continue to develop additional NCH licensed products within the applicable field. In the event we fail to comply with such obligations, subject to certain conditions, NCH has the right to either terminate the applicable NCH License or convert our license into a non-exclusive license with respect to the applicable NCH licensed product in the applicable country. We are responsible for all clinical trial costs under each NCH License.

 

We paid an initial fee of $0.2 million to NCH in connection with the NCH License for Rett syndrome and $0.1 million in connection with the NCH License for ALS in human use. We also must pay NCH an annual maintenance fee under each NCH License. Following the first commercial sale of an NCH licensed product under an applicable NCH License, we must begin paying NCH an aggregate low-single digit royalty on net sales of NCH licensed products by us, our affiliates and sublicensees during the term of such license. If we unsuccessfully challenge any of the licensed patents, the royalty rate increases from low single digits to high-single digits, in the case of the NCH License for Rett syndrome, and to mid-single digits, in the case of the NCH License for ALS in human use.

 

With certain exceptions, we are required to make certain development milestone-based payments to NCH under each NCH License. In addition, we must also pay NCH a portion of sublicensing revenue received from our sublicense of the rights to licensed technology at a mid-single digits percentage.

 

We do not have the right to control prosecution of the in-licensed patent rights under either NCH License, however NCH is required to consult with us on material matters regarding the prosecution of such patent rights, and NCH has the first right to enforce any patents issuing from the in-licensed patent rights and if NCH does not enforce the rights within a certain time frame, then we have the right to enforce. In addition, our rights under each NCH License are not assignable without the prior written consent of NCH, except to our affiliates, subsidiaries or any successor in interest in connection with a merger, acquisition, consolidation or sale, provided that our assignee assumes our obligations under the applicable NCH License in writing. 

 

Unless terminated earlier, each agreement will expire on a NCH licensed product-by-NCH licensed product and country-by-country basis upon the expiration of the royalty term for such NCH licensed product in such country. The royalty term will expire on the later of (i) the date on which the last relevant patent underlying the relevant NCH licensed product expires or (ii) the expiration of any orphan drug-based exclusive marketing rights conferred by any regulatory authority with respect to a NCH licensed product in a licensed territory. Upon expiration of the agreement with respect to a particular NCH licensed product in a particular country, the license to us will survive and as a fully-paid up license. Each NCH License may be terminated prior to its expiration:

 

·

By us at any time after the second anniversary of the effective date of the applicable NCH License by providing six months' prior written notice to NCH;

·

By either party upon the other party's material breach of the applicable NCH License that is not cured within 90 days after receiving written notice of such breach, except in certain cases in which we may request a longer cure period;

·

By NCH in the event of our bankruptcy, insolvency or certain similar occurrences; or

·

By NCH if we or any of our affiliates bring any action or proceeding against NCH, other than a suit brought in response to any suit brought by NCH.

 

Certain accrued payments that we are required to make to NCH will become due in the event of termination as specified in the applicable agreement.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenue from the commercial sale of gene therapy products, and we do not expect to generate substantial revenue for at least the next few years. In the future, we will seek to generate revenue primarily from product sales and, potentially, collaborations with strategic partners.

 

24


 

Operating Expenses

 

We classify our operating expenses into two categories: research and development and general and administrative expenses. Personnel costs including salaries, benefits, bonuses and stock-based compensation expense, comprise a significant component of each of these expense categories. We allocate expenses associated with personnel costs based on the nature of work associated with these resources.

 

Research and Development Expenses

 

Research and development expense consists of expenses incurred while performing research and development activities to discover and develop potential gene therapy treatments. This includes conducting preclinical studies and clinical trials, investment in our manufacturing facility, manufacturing equipment and manufacturing development efforts and activities related to regulatory filings for product candidates. We recognize research and development expenses as they are incurred. Up-front fees incurred in obtaining technology licenses for research and development activities are expensed as incurred if the technology licensed has no alternative future use. Our research and development expense primarily consists of:

 

·

salaries and personnel-related costs, including benefits and any employee stock-based compensation, for our scientific personnel performing research and development activities;

·

stock-based compensation expense related to restricted common stock grants and stock warrant issuances to consultants assisting us in the research and development of our product candidate;

·

costs related to executing preclinical studies and clinical trials;

·

costs related to acquiring, developing and manufacturing materials for preclinical studies and clinical trials;

·

costs related to developing processes and analytical methods to manufacture and test product from a significant number of small scale and full scale engineering and GMP clinical manufacturing runs;

·

fees paid to consultants and other third parties who support our product candidate development;

·

other costs incurred in seeking regulatory approval of our product candidates; and

·

allocated facility-related costs and overhead.

 

We typically utilize our employee, consultant and infrastructure resources across our development programs. To date, substantially all of our research and development expenses have been associated with AVXS-101.

 

We plan to increase our research and development expense for the foreseeable future as we continue our effort to develop and manufacture AVXS-101 and to advance the development of future product candidates, subject to the availability of sufficient funding.

 

The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of AVXS-101 or any future product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.

 

General and Administrative Expense

 

General and administrative expense consists primarily of salaries and personnel-related costs, including employee benefits and any stock-based compensation, for employees performing functions other than research and development. This includes personnel in executive, business operations, finance and administrative support functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, professional fees for auditing, tax and legal services, expenses associated with obtaining and maintaining patents and costs of our information systems.

 

We expect that our general and administrative expense will increase as we continue to operate as a public reporting company and continue to develop and potentially commercialize AVXS-101 and our future product candidates. We believe that these increases likely will include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to

25


 

continue to incur increased costs to comply with corporate governance, internal controls, investor relations, disclosure and similar requirements applicable to public reporting companies.

 

Interest Income

 

Interest income primarily consists of any interest income earned on our cash and cash equivalents.

 

Income Taxes

 

To date, we have not been required to pay U.S. federal or state income taxes because we have not generated taxable income.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our critical accounting policies are described in Note 2 to our consolidated financial statements for the year ended December 31, 2016, included in our Annual Report on Form 10-K. There were no material changes to our critical accounting policies during the nine months ended September 30, 2017.

 

Emerging Growth Company Status

 

Under Section 107(b) of the JOBS Act, an “emerging growth company,” or EGC, can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

As an EGC, we rely on certain of exemptions and reduced reporting requirements under the JOBS Act, including exemptions from the requirement to provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an EGC until the earlier of: the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; December 31, 2021; the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC. Based on our public float as of the date of this report, we currently expect that we will become a large accelerated filer, and cease to be an EGC, as of December 31, 2017.

 

Recent Accounting Pronouncements

 

See Note 2 for disclosure of recent accounting pronouncements.

 

26


 

Results of Operations

 

Comparison of the Three and Nine Months ended September 30, 2017 and 2016

 

The following table summarizes our results of operations for the three and nine months ended September 30, 2017 and 2016, together with the dollar increase or decrease in those items (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

 

2017

 

 

2016

 

Period-to-Period Change

 

 

2017

 

 

2016

 

Period-to-Period Change

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

General and administrative

 

 

16,095

 

 

7,083

 

 

9,012

 

 

38,898

 

 

17,325

 

 

21,573

 

Research and development

 

 

33,425

 

 

14,098

 

 

19,327

 

 

98,946

 

 

40,542

 

 

58,404

 

Total operating expenses

 

 

49,520

 

 

21,181

 

 

28,339

 

 

137,844

 

 

57,867

 

 

79,977

 

Interest income

 

 

881

 

 

99

 

 

782

 

 

1,458

 

 

230

 

 

1,228

 

Net loss

 

$

(48,639)

 

$

(21,082)

 

$

(27,557)

 

$

(136,386)

 

$

(57,637)

 

$

(78,749)

 

 

General and Administrative Expense

 

General and administrative expense increased from $7.1 million for the three months ended September 30, 2016, to $16.1 million for the three months ended September 30, 2017. This $9.0 million increase included increases of $2.7 million in salaries and personnel-related costs, $2.6 million in non-cash stock-based compensation expense, $2.1 million in other administrative costs driven by increased headcount across all general and administrative functions to support our overall growth, and $1.6 million in legal, professional and consulting fees.

 

General and administrative expense increased from $17.3 million for the nine months ended September 30, 2016, to $38.9 million for the nine months ended September 30, 2017. This $21.6 million increase included increases of $6.9 million in salaries and personnel-related costs, $5.8 million in other administrative costs driven by increased headcount across all general and administrative functions to support our overall growth, $5.3 million in non-cash stock-based compensation expense, and $3.6 million in legal, professional and consulting fees.

 

Research and Development Expense

 

Research and development expense increased from $14.1 million for the three months ended September 30, 2016, to $33.4 million for the three months ended September 30, 2017. The $19.3 million increase was primarily attributable to product manufacturing expenses and associated accelerated spending, including increased headcount, in our product manufacturing facility, as well as expenses related to the conclusion of our Phase 1 clinical trial of AVXS-101 in SMA Type 1 and commencement of our pivotal trial of AVXS-101. More specifically, this amount included increases of $5.6 million in research and development supplies and materials, $5.2 million in third-party clinical and manufacturing research and development expense associated with product manufacturing, $3.8 million in salaries and personnel-related expenses, driven by increased headcount across all research and development and manufacturing functions,  $2.6 million in other research and development expenses, $2.3 million in non-cash stock-based compensation expense and, partially offset by decreases of $0.2 million in license fees.  

 

Research and development expense increased from $40.5 million for the nine months ended September 30, 2016, to $99.0 million for the nine months ended September 30, 2017.  This  $58.4 million increase included the benefit of a $4.4 million decrease in non-cash stock-based compensation expense that was primarily attributable to the recognition of $10.4 million of additional stock compensation expense upon the vesting in full of Dr. Kaspar’s restricted stock award during the year ended December 31, 2016. Excluding this non-cash stock-based compensation benefit, research and development expense increased $62.9 million which was primarily attributable to increased product manufacturing expenses and associated accelerated spending, including increased headcount, in our product manufacturing facility as

27


 

well as expenses related to the conclusion of our Phase 1 clinical trial of AVXS-101 in SMA Type 1 and the commencement of our pivotal trial of AVXS-101. More specifically, this amount included increases of $25.8 million in third-party clinical and manufacturing research and development expense associated with product manufacturing, $16.3 million in research and development supplies and materials, $8.8 million in salaries and personnel-related expenses, driven by increased headcount across all research and development and manufacturing functions, $6.1 million in other research and development expenses, and $5.9 million in license fees.

 

Interest Income

 

Interest income for the nine months ended September 30, 2017 consists of interest earned on our cash and cash equivalents and increased from the prior periods due to larger balances of cash and cash equivalents during those periods.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

To date, we have funded our research and development and operating activities primarily through equity financings, including $98.2 million, $149.1 million and $269.7 million of net proceeds from our initial public offering, our September 2016 public offering and our June 2017 public offering, respectively, and $80.5 million of aggregate net proceeds from private placements of stock prior to our initial public offering.

 

As of September 30, 2017, we had cash and cash equivalents of $374.2 million and had no debt outstanding.

 

Cash Flows

 

The following table provides information regarding our cash flows for the nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2017

    

2016

Net cash used in operating activities

 

$

(113,565)

 

$

(33,198)

Net cash used in investing activities

 

 

(23,364)

 

 

(11,702)

Net cash provided by financing activities

 

 

270,710

 

 

246,290

Net increase in cash and cash equivalents

 

$

133,781

 

$

201,390

 

Operating Activities

 

For the nine months ended September 30, 2017, our net cash used in operating activities of $113.6 million primarily consisted of a net loss of $136.4 million, primarily attributable to our spending on research and development, manufacturing and general and administrative expenses and $2.1 million in net cash used in changes in working capital items, which was partially offset by $24.9 million in adjustments for non-cash items, primarily stock-based compensation. The $2.6 million in net cash used in changes in working capital represents primarily a $5.6 million increase in prepaid expenses and other current assets and other long-term assets and a $3.1 million increase in accrued expenses and other current liabilities and the accrued indemnification obligation, partially offset by a $6.6 million decrease in accounts payable.  

 

For the nine months ended September 30, 2016, our net cash used in operating activities of $33.2 million consisted of a net loss of $57.6 million, primarily attributable to our spending on research and development and general and administrative expenses, which was partially offset by $22.7 million in adjustments for non-cash items and $1.7 million in net cash used in changes in working capital items. Adjustments for non-cash items primarily consisted of $22.7 million of stock-based compensation expense, of which $10.4 million was associated with the vesting in full of the restricted stock grant to Dr. Kaspar. The change in working capital was primarily attributable to a $3.7 million increase

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in prepaid expenses and other long-term assets, partially offset by a $5.4 million increase in accounts payable and accrued expenses and other current liabilities.

 

Investing Activities

 

For the nine months ended September 30, 2017, net cash used in investing activities consisted of $23.4 million of capital expenditures, primarily related to our manufacturing facility and purchases of property and equipment.  For the nine months ended September 30, 2016, net cash used in investing activities consisted of $11.7 million of capital expenditures, primarily related to our manufacturing facility and purchases of property and equipment.

 

During the nine months ended September 30, 2017, we transferred a significant amount of our capital assets from Construction in progress to Equipment upon the successful completion of GMP manufacturing runs. We expect to continue to transfer capital assets as we complete the build-out of our scalable GMP manufacturing facility.

 

Financing Activities

 

For the nine months ended September 30, 2017, net cash provided by financing activities of $270.7 million consisted primarily of funds raised from our June 2017 underwritten public offering. For the nine months ended September 30, 2016, net cash provided by financing activities consisted primarily of $246.3 million from our initial public offering and our September 2016 public offering. 

 

Future Funding Requirements

 

To date, we have not generated any revenues from the commercial sale of approved gene therapy products or drug therapies and we do not expect to generate substantial revenue for at least the next few years. If we fail to complete the development of our product candidates in a timely manner or fail to obtain their regulatory approval, our ability to generate future revenue will be compromised. We do not know when, or if, we will generate any revenue from our gene therapy core business. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize AVXS-101. In addition, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, product candidates, including with respect to development of AVXS-101 for other types of SMA and other product candidates for other diseases. We also expect to continue to incur costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

 

Based upon our current operating plan, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2019. We intend to devote the majority of our capital resources for clinical development, manufacturing and regulatory approval of AVXS-101. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of product candidates.

 

Our future capital requirements will depend on many factors, including:

 

·

the progress and results of our studies and clinical trials for AVXS-101;

·

the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates, including our planned new programs in Rett syndrome and ALS;

·

the number and development requirements of other product candidates that we may pursue;

·

the costs, timing and outcome of regulatory review of our product candidates;

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·

the cost and timing of establishing and validating manufacturing processes and facilities, including our own, for development and commercialization of our product candidates, if approved;

·

the efforts necessary to institute post-approval regulatory compliance requirements;

·

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;

·

the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval, which may be affected by market conditions, including obtaining coverage and adequate reimbursement of our product candidates from third-party payors, including government programs and managed care organizations, and competition within the therapeutic class to which our product candidates are assigned;

·

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and

·

the extent to which we acquire or in-license other product candidates and technologies.

 

Our future commercial revenue, if any, will be derived from sales of therapy products that we do not expect to be commercially available for at least the next few years, if at all. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the terms of these equity securities or this debt may restrict our ability to operate. Any future debt financing and equity financing, if available, may involve agreements that include covenants limiting and restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, entering into profit-sharing or other arrangements or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

Contractual Obligations, Commitments and Contingencies

 

We lease a 15,668 square foot facility for our corporate headquarters in Bannockburn, Illinois, pursuant to a lease that expires in July 2024. The lease agreement provides for annual escalation in rent payments during the lease term. We also lease a 1,318 square foot facility in Columbus, Ohio for research and development activities, pursuant to a lease that expires in March 2019.  In March 2016, we entered into a lease agreement, which expires in August 2026, for approximately 48,529 square feet of manufacturing, warehouse and office space in Libertyville, Illinois. The lease agreement provides for annual escalation in rent payments during the lease term. In March 2014, we entered into a lease agreement, which expired in April 2017, for approximately 2,418 square feet of office space in Dallas, Texas. In May 2017, we entered into two month-to-month lease agreements to add an additional 4,582 square feet of office space in Libertyville, Illinois which has subsequently been reduced to one month-to-month lease agreement. In September 2017, the Company entered into a lease agreement that commences in January 2018 and expires in August 2026 for approximately 12,539 square feet of warehouse and office space in Libertyville, Illinois adjacent to our manufacturing facility. In July 2017, we entered into a lease agreement which expires in June 2027, for approximately 16,808 square feet in San Diego, California for research and development activities. The lease agreement provides for annual escalation in rent payments during the lease term. 

 

We may be required to make certain royalty payments under our licensing and supply agreements, as described in “Licensing Agreements;” however, the amount and timing of when these payments will actually be made is uncertain, and the payments are contingent upon the initiation and completion of future activities.

 

During the three and nine months ended September 30, 2017, there were no other material changes outside the ordinary course of our business to the contractual obligations specified in the table of contractual obligations included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

 

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Off-Balance Sheet Arrangements

 

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Our primary exposure to market risk for our cash and cash equivalents is interest income sensitivity, which is affected by changes in the general level of U.S interest rates. As of September 30, 2017, we had cash and cash equivalents totaling $374.2 million. Cash and cash equivalents consist of cash, deposits with banks and short term highly liquid money market instruments with remaining maturities at the date of purchase of 90 days or less. These instruments are exposed to the impact of interest rate changes which may result in fluctuations to our interest income. The primary objective of our investment activity is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality. We do not believe a sudden change in the interest rates would have a material impact on our financial condition or results of operations. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weaknesses discussed below. Notwithstanding these material weaknesses, our management has concluded that the financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”).

 

In connection with the preparation of our Annual Report on Form 10-K for the year ended December 31, 2016, our management concluded that, as of December 31, 2016, our internal control over financial reporting was not effective, as a result of material weaknesses in our control over financial reporting.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.  The material weaknesses identified in our internal control over financial reporting related to our lack of sufficiently trained professionals with an appropriate level of accounting knowledge, lack of written policies regarding our accounting function and procedures to identify and appropriately account for complex debt and equity agreements or share-based compensation awards, lack of restricted access to key financial systems and records and appropriate segregation of duties.

 

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Status of Remediation of Material Weaknesses

 

We have taken numerous steps to address these material weaknesses and believe we have made significant progress toward remediating them, primarily through the hiring of multiple additional full-time accounting and financial personnel.  With the addition of these personnel and others, we believe we now have sufficient personnel with an appropriate level of accounting knowledge and experience commensurate with our financial reporting requirements.

 

Based on our risk assessments and ongoing reviews of our financial statements, we have implemented controls over key financial transaction areas, application of GAAP, SEC reporting and associated disclosures and are in the process of formally documenting our key accounting policies and procedures. We have also performed additional review procedures in areas subject to audit adjustments in prior periods and have identified key controls for our significant processes. In addition, effective January 1, 2017, we have converted to a new enterprise resource planning (“ERP”) financial system to support improved automation and control over our finance and accounting functions, including proper access and segregation of duties. Effective with our IPO, we no longer have complex debt and equity agreements. We have designed and implemented controls and procedures to identify and appropriately account for our share-based compensation awards.

 

During the remainder of 2017, we intend to continue our remediation efforts by completing the documentation of our key controls and testing the design and operating effectiveness of these controls.  We are actively working to implement effective internal control over financial reporting, which includes remediation of these material weaknesses. However, such compliance is not guaranteed, and we cannot provide any assurance that our internal control over financial reporting will be effective as a result of these efforts.

 

Except as described above, there were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.OTHER INFORMATION

 

Item 1.Legal Proceedings

 

For this item, please refer to Note 8, Commitments and Contingencies to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

 

Item 1A.Risk Factors 

 

The discussion of our business and operations discussed in this report should be read together with the risk factors contained in Item 1A of our Annual Report, as filed with the SEC on March 16, 2017, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner. There are no material changes from the risk factors as previously disclosed in our Annual Report, except as noted below:

 

Preclinical testing of our gene therapy product candidates for Rett syndrome and ALS may not result in our advancement of these programs into clinical trials.

 

Although a substantial amount of our efforts to date have focused on the development of AVXS-101 for SMA, a key element of our strategy is to discover, develop and potentially commercialize a portfolio of product candidates to treat other rare and life-threatening neurological genetic diseases. In furtherance of that strategy, we recently announced that we had entered into a license agreement with REGENX to develop and commercialize gene therapy treatments to treat two rare monogenic disorders: Rett syndrome and a genetic form of amyotrophic lateral sclerosis, or ALS, caused by mutations in the superoxide dismutase 1, or SOD1, gene. Our development efforts for our Rett syndrome and ALS programs are at an extremely early stage, and we have not yet completed IND-enabling preclinical studies for either of these programs. It is possible that future research and preclinical development of these programs may not establish sufficient indications of clinical benefit or acceptable tolerability to support the submission of an IND for one or both of these programs, in which case we may never initiate clinical trials, and we may be forced to suspend development activities for one or both of these programs. If we are not able to advance these programs into clinical trials, we will not be able to commercialize products for these indications, which would have a material adverse effect on our future business prospects, financial condition and results of operations.

 

The development of product candidates for our Rett syndrome and ALS programs will be subject to many risks. If we do not successfully develop and commercialize product candidates in these programs, our business prospects may be adversely affected.

 

Even if the results of IND-enabling studies for our gene therapy product candidates for the treatment of Rett syndrome and ALS substantiate advancing these programs into clinical trials, the development of these product candidates will be subject to many risks. There is a high failure rate for drugs and biologic products proceeding through clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical testing and earlier-stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may experience regulatory delays or rejections as a result of many factors, including due to changes in regulatory policy during the period of our product candidate development. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced.

 

Our ability to successfully develop gene therapy treatments for Rett syndrome and ALS will be subject to many of the same development risks as our AVXS-101 product candidate for SMA, including those discussed under the headings "Risk Factors — Risks related to the development of our current product candidate" and "Risk Factors — Risks related

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to the commercialization of AVXS-101" in our Annual Report on Form 10-K for the year ended December 31, 2016, which is incorporated by reference into this Quarterly Report on Form 10-Q. These risks include the risks of:

 

·

completing preclinical studies and clinical trials with positive results;

·

receiving marketing approvals from applicable regulatory authorities;

·

obtaining, maintaining, defending and enforcing intellectual property rights important to the product candidates;

·

establishing commercial manufacturing capabilities, or contracting with third-party manufacturers with such capabilities;

·

establishing and maintaining collaborations, licensing or other arrangements;

·

launching commercial sales, if and when approved;

·

achieving acceptance, if and when approved, by patients and the medical community;

·

effectively competing with other therapies; and

·

maintaining an acceptable safety profile following approval.

 

If we are unable to successfully develop and commercialize product candidates for Rett syndrome or ALS, we will not be able to obtain future revenues from these programs, which would have a material adverse effect on our future business prospects, financial condition and results of operations.

 

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.Default Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

None.

 

Item 5.