Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a clinical-stage, biopharmaceutical company focused primarily on developing a cure for people with chronic hepatitis B virus (“HBV”) infection. We are advancing multiple product candidates with distinct mechanisms of action that we believe have the potential to provide a new curative regimen for chronic HBV infection. We have also initiated a drug discovery and development effort for treating coronaviruses, including COVID-19.
Given the biology of HBV, we believe combination therapies are the key to more effective HBV treatment and a potential functional cure. Our product pipeline includes multiple product candidates that target various steps in the viral lifecycle. We believe each of these mechanisms, when administered for a finite duration in combination with existing approved therapies, have the potential to improve upon the standard of care and potentially lead to a functional cure.
Our HBV product pipeline consists of the following programs:
Our two lead product candidates are AB-729, our proprietary subcutaneously-delivered RNAi product candidate that suppresses HBsAg expression, and AB-836, our proprietary next-generation oral capsid inhibitor that suppresses HBV DNA replication. AB-729 is currently in an ongoing Phase 1a/1b clinical trial and we expect AB-836 to progress into a Phase 1a/1b clinical trial in the first half of 2021. In parallel, we are in lead optimization with oral compounds for our PD-L1 program and next-generation HBV RNA destabilizer program. At this time, our coronavirus research program is focused on the discovery and development of new molecular entities that address specific viral targets including the nsp12 viral polymerase and the nsp5 viral protease.
COVID-19 Impact
In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. This virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to nearly every country in the world. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society. The pandemic has resulted in and will likely continue to result in significant disruptions to businesses. A number of countries and other jurisdictions around the world have implemented extreme measures to try and slow the spread of the virus. These measures include the closing of businesses and requiring people to stay in their homes, the latter of which raises uncertainty regarding the ability to travel to hospitals in order to participate in clinical trials. Additional measures that have had, and will
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likely continue to have, a major impact on clinical development, at least in the near-term, include shortages and delays in the supply chain, and prohibitions in certain countries on enrolling subjects in new clinical trials. Future disruptions related to the COVID-19 pandemic could negatively impact our plans and timelines in 2021 and beyond, including enrolling and monitoring subjects in our clinical trials.
Collaborations and Royalty Entitlements
In August 2020, we entered into a clinical collaboration agreement with Assembly Biosciences, Inc. (“Assembly”) to evaluate AB-729 in combination with Assembly’s lead HBV core inhibitor (capsid inhibitor) candidate vebicorvir (“VBR”) and standard-of-care NA therapy for the treatment of patients with chronic HBV infection. We and Assembly will share in the costs of the collaboration.
We have a royalty entitlement on ONPATTRO® (Patisiran) (“ONPATTRO”), a drug developed by Alnylam Pharmaceuticals, Inc. (“Alnylam”) under a license agreement with us that incorporates our lipid nanoparticle delivery (“LNP”) technology. In July 2019, we received $20 million in gross proceeds before advisory fees from the sale of this royalty interest to Ontario Municipal Employees Retirement System (“OMERS”), effective as of January 1, 2019. The royalty interest will revert back to us after OMERS receives $30 million in royalty payments from Alnylam. We also have rights to a second, lower royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas Therapeutics, Inc. (“Acuitas”). The royalty entitlement from Acuitas has been retained by us and was not part of the royalty entitlement sale to OMERS.
As of December 31, 2020, we owned approximately 16% of the common equity of Genevant Sciences Ltd. (“Genevant”), a company we launched with Roivant Sciences, Ltd. and to which we licensed exclusive rights to our lipid nanoparticle ("LNP") and ligand conjugate delivery platforms for RNA-based applications outside of HBV, except to the extent certain rights had already been licensed to other third parties (the “Genevant License”). Under the Genevant License, we are entitled to receive tiered low single-digit royalties on future sales of Genevant products covered by the licensed patents. If Genevant sub-licenses the intellectual property licensed by us to Genevant, we are entitled to receive under the Genevant License, upon the commercialization of a product developed by such sub-licensee, the lesser of (i) twenty percent of the revenue received by Genevant for such sublicensing and (ii) tiered low single-digit royalties on product sales by the sublicensee.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Contingent Consideration
The significant accounting policy that we believe to be most critical in fully understanding and evaluating our financial results relates to our contingent consideration. This accounting policy requires us to make certain estimates and assumptions. We believe that the estimates and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates and assumptions are made. Actual results may differ from our estimates. Our critical accounting estimates affect the calculation of our net income or loss.
In connection with the acquisition of Enantigen Therapeutics, Inc. (“Enantigen”) in October 2014, we have obligations to make potential future payments of up to $102.5 million upon the achievement of certain commercial milestones. The sales milestones are tied to the first commercial sales by us of a product indicated for the treatment of HBV. These potential contingent payments are recorded as a liability and remeasured to fair value as of each reporting date. In assessing the fair value of the liability, significant judgments are required to be made by management to estimate the probability of program success, the timing and extent of future product sales, appropriate discount rates, and other estimates and assumptions that could materially affect the determination of fair value. These judgments include the use of, but are not limited to: future forecasts and other macroeconomic indicators that forecast market conditions, the timing and amount of estimated future revenues, market-based discount rates and other market-comparative data. As assumptions related to the probability of program success and timing and amount of potential future product sales are highly uncertain due to the unpredictable nature of product development, management risk adjusts the estimated cash flows to reflect these uncertainties.
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RESULTS OF OPERATIONS
The following summarizes our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019:
Year Ended December 31,
2020 2019
(in thousands)
Total revenue $ 6,914 $ 6,011
Impairment of intangible assets — 43,836
Impairment of goodwill — 22,471
Total other operating expenses 64,720 83,605
Loss from operations (57,806) (143,901)
Other income (loss) (5,939) (22,478)
Loss before income taxes (63,745) (166,379)
Income tax benefit — 12,656
Net loss (63,745) (153,723)
Dividend accretion of convertible preferred shares (12,123) (11,149)
Net loss attributable to common shares $ (75,868) $ (164,872)
For the fiscal year ended December 31, 2020, our net loss attributable to common shares was $75.9 million, or a loss of $1.00 per basic and diluted common share, as compared to a net loss of $164.9 million, or a loss of $2.89 per basic and diluted common share, for the year ended December 31, 2019.
Revenue
Revenue for the years ended December 31, 2020 and 2019 is summarized in the following table:
Year ended December 31,
2020 2019
(in thousands, except percentages)
Revenue from collaborations and licenses
Acuitas Therapeutics, Inc. $ 3,259 47 % $ 1,931 32 %
Gritstone Oncology, Inc. — — % 1,819 30 %
Acrotech Biopharma, LLC 269 4 % 605 10 %
Non-cash royalty revenue
Alnylam Pharmaceuticals, Inc. 3,386 49 % 1,656 28 %
Total revenue $ 6,914 100 % $ 6,011 100 %
Revenue consists mainly of royalties received from other companies for sales of products that utilize our licensed technologies.
Total revenue increased $0.9 million for the year ended December 31, 2020 compared to 2019, primarily due to a $3.1 million increase in license royalty revenue from Alnylam and Acuitas due to the growth of Alnylam’s sales of ONPATTRO. This increase was partially offset by a $1.8 million decrease in revenue from Gritstone Oncology, Inc. primarily due to a $1.5 million milestone payment received in 2019.
The royalty interest for ONPATTRO from Alnylam was sold to OMERS, effective as of January 1, 2019, for $20 million in gross proceeds before advisory fees. OMERS will retain this entitlement until it has received $30 million in royalties, at which point 100% of such royalty interest on future global net sales of ONPATTRO will revert back to us. OMERS has assumed the risk of collecting up to $30 million of future royalty payments from Alnylam and we are not obligated to reimburse OMERS if they fail to collect any such future royalties. During the term of this agreement, we recognize non-cash royalty revenue related
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to the sales of ONPATTRO. From the inception of the royalty sale through December 31, 2020, the Company has recorded an aggregate of $5.1 million of non-cash royalty revenue for royalties earned by OMERS. The royalty interest for ONPATTRO from Acuitas was not part of the royalty sale to OMERS and we have retained the rights to receive those royalties. Revenue contracts are described in more detail in “Item 1. Business.”
Operating expenses
Operating expenses for the years ended December 31, 2020 and 2019 are summarized in the following table:
Year ended December 31,
2020 2019
(in thousands, except percentages)
Research and development $ 47,481 73 % $ 57,601 38 %
General and administrative 14,724 23 % 17,727 12 %
Depreciation 1,978 3 % 2,028 1 %
Change in fair value of contingent consideration 473 1 % (173) — %
Site consolidation 64 — % 156 — %
Impairment of intangible assets — — % 43,836 29 %
Impairment of goodwill — — % 22,471 15 %
Arbitration — — % 6,266 4 %
Total operating expenses $ 64,720 100 % $ 149,912 100 %
Research and development
Research and development expenses consist primarily of personnel expenses, fees paid to clinical research organizations and contract manufacturers, consumables and materials, consulting, and other third party expenses to support our clinical and pre-clinical activities, as well as a portion of stock-based compensation and general overhead costs.
Research and development expenses decreased $10.1 million in 2020 compared to 2019 due primarily to the October 2019 decision to discontinue development of AB-506, our prior generation capsid inhibitor product candidate and higher expenses for AB-729 during 2019 for preclinical studies and drug product supply in preparation for our Phase 1a/1b clinical trial which commenced in the second quarter of 2019. These decreases were partially offset by an increase in expenses associated with development of our lead capsid inhibitor product candidate (AB-836), including preclinical studies and drug product supply in preparation for our Phase 1a/1b clinical trial, which is expected to initiate in the first half of 2021.
A significant portion of our research and development expenses are not tracked by project, as they benefit multiple projects or our overall technology platform.
General and administrative
General and administrative expenses decreased $3.0 million in 2020 compared to 2019, due primarily to severance related to the departure of our former President and Chief Executive Officer in June 2019. In accordance with the terms of his legacy employment agreement, our former President and Chief Executive Officer received $2.3 million of cash severance and we recognized $1.1 million of non-cash stock-based compensation expense for the accelerated vesting of his stock options in 2019. In addition, legal fees decreased $1.1 million in 2020 compared to 2019 due primarily to the settlement of an arbitration case with the University of British Columbia (“UBC”) in September 2019. These decreases in general and administrative expenses in 2020 compared to 2019 were partially offset by increases in employee compensation and insurance premiums.
Change in fair value of contingent consideration
In October 2014, Arbutus Inc., our wholly-owned subsidiary, acquired all of the outstanding shares of Enantigen pursuant to a stock purchase agreement. The amount paid to Enantigen’s selling shareholders could be up to an additional $102.5 million in
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sales performance milestones in connection with the sale of the first commercialized product by us for the treatment of HBV, regardless of whether such product is based upon assets acquired under this agreement, and a low single-digit royalty on net sales of such first commercialized HBV product, up to a maximum royalty payment of $1.0 million.
In general, increases in the fair value of the contingent consideration are related to the progress of our programs as they get closer to triggering these contingent payments. In 2020, the fair value of our contingent consideration liability increased $0.5 million related to the passage of time. In 2019, the fair value of our contingent consideration liability decreased by $0.2 million after we re-evaluated the timing of the future sales milestones following the discontinuation of the AB-506 program.
Site consolidation charges
In February 2018, we announced a site consolidation and organizational restructuring to better align our HBV business in Warminster, PA, including closing our Burnaby, Canada facility. Most of the employee-related site consolidation expenses were expensed ratably over the period that employees provided services, which was substantially completed in 2018. Total site consolidation expenses were $5.0 million, which was fully recognized as of December 31, 2020.
Impairment of intangible assets and goodwill
In 2019, we recorded a $43.8 million non-cash impairment expense to reduce the carrying value of its in-process research and development (“IPR&D”) intangible assets to zero. We also recognized a corresponding income tax benefit of $12.7 million in 2019 related to the decrease in our deferred tax liability related to the IPR&D intangible assets. The impairment was due to a decision to delay indefinitely the further development of our cccDNA program while we focus on our other development programs.
Also during 2019, we recorded a $22.5 million non-cash impairment to reduce the carrying amount of our goodwill asset to zero. Due to a sustained decrease in our share price in the months leading-up to the assessment, our market capitalization was reduced below the book value of our net assets and we concluded that the fair value of our single reporting unit was below its carrying amount by an amount in excess of the carrying amount of the goodwill asset.
We did not record any impairments during 2020.
Arbitration
In the third quarter of 2019, the arbitrator in the arbitration proceedings between UBC and us issued his decision, awarding UBC approximately $5.9 million, which included interest of approximately $2.6 million. An award for costs and attorneys’ fees is still to be determined. We recorded expense of $6.3 million in 2019, consisting of $5.9 million for the award (including interest) and $0.4 million for an estimate of a potential award for costs and attorney’s fees.
This arbitration concerned certain early work on lipid nanoparticle delivery systems and related inventions undertaken by us and assigned to UBC. These inventions were subsequently licensed back to us by UBC under a license agreement, initially entered into in 1998 and subsequently amended in 2001, 2006 and 2007. We have granted sublicenses under the UBC license to Alnylam as well as other third parties.
On December 18, 2020, UBC delivered to us a notice of arbitration alleging that under its cross license with us, it is due royalties of $2.0 million plus interest arising from our sale to OMERS of part of our royalty interest on future global net sales of ONPATTRO, currently being sold by Alnylam.
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Other income (losses)
Other income (losses) for the years ended December 31, 2020 and 2019 are summarized in the following table:
Year ended December 31,
2020 2019
(in thousands, except percentages)
Interest income $ 741 (12) % $ 2,111 (9) %
Interest expense (4,011) 68 % (2,108) 9 %
Equity investment loss (2,545) 43 % (22,522) 100 %
Foreign exchange gain (loss) (124) 2 % 41 — %
Total other loss $ (5,939) 101 % $ (22,478) 100 %
Interest income
Interest income decreased $1.4 million in 2020 compared to 2019 due primarily to a general decline in market interest rates.
Interest expense
Interest expense increased $1.9 million in 2020 compared to 2019 due primarily to the non-cash amortization of discount and issuance costs related to the sale of a portion of our ONPATTRO royalty interest to OMERS in July 2019.
Equity investment loss
In July 2020, we participated in the recapitalization of Genevant, led by Roivant, with an equity investment of $2.5 million. We determined that this $2.5 million additional investment in Genevant was funding prior losses and recorded the amount as an equity investment loss in 2020. Due to our loss of significant influence with respect to Genevant as a result of the recapitalization, we discontinued the use of equity method accounting for our interest in Genevant in 2020. Following the recapitalization, we account for our interest in Genevant as equity securities without readily determinable fair values. Accordingly, an estimate of the fair value of the securities is based on the original cost less previously recognized equity method losses, less impairments, plus or minus changes resulting from future observable price changes in orderly transactions for identical or similar Genevant securities. As of December 31, 2020, the carrying value of our investment in Genevant was zero and we owned approximately 16% of the common equity of Genevant.
The equity investment losses for 2019 reflected our proportionate share of Genevant’s net results under the equity method of accounting on a one-quarter lag basis of $14.9 million and a $7.6 million impairment charge to reduce the carrying value of our investment in Genevant to zero. The impairment was due to uncertainty surrounding the recovery of the remaining carrying value of our investment in Genevant.
Foreign exchange gains (losses)
In connection with our site consolidation to Warminster, PA, our Canadian dollar-denominated expenses and cash balances have decreased significantly now that a majority of our business transactions are based in the United States. We continue to incur expenses and hold some cash balances in Canadian dollars, and as such, we will remain subject to risks associated with foreign currency fluctuations. During the year ended December 31, 2020, we recorded foreign exchange losses of $0.1 million. During the year ended December 31, 2019, we recorded foreign exchange gains of less than $0.1 million.
Income tax benefit
For the year ended December 31, 2019, we recorded an income tax benefit of $12.7 million related to the decrease of our deferred tax liability associated with impairments of our IPR&D intangible assets.
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LIQUIDITY AND CAPITAL RESOURCES
Since our incorporation, we have financed our operations through the sales of equity, debt, revenues from research and development collaborations and licenses with corporate partners, a royalty monetization, interest income on funds available for investment, and government contracts, grants and tax credits.
As of December 31, 2020, we had cash and cash equivalents of $52.3 million and investments in marketable securities of $71.0 million, totaling $123.3 million. We had no outstanding debt as of December 31, 2020.
Sources of Liquidity
In December 2018, we entered into an Open Market Sale Agreement (“Sale Agreement”) with Jefferies LLC (“Jefferies”), under which we could issue and sell our common shares, from time to time, for an aggregate sales price of up to $50.0 million. In December 2019, we entered into an amendment to the Sale Agreement with Jefferies (the “2019 Amendment”) in connection with the filing of a shelf registration statement on Form S-3 (File No. 333-235674), filed with the SEC on December 23, 2019 (the “Shelf Registration Statement”). The 2019 Amendment revised the original Sale Agreement to reflect that we may sell our common shares, from time to time, for an aggregate sales price of up to $50.0 million, under the Shelf Registration Statement. During July 2020, we fully utilized the remaining availability under the Sale Agreement, as amended by the 2019 Amendment. In August 2020, we entered into a new amendment to the Sale Agreement (the “2020 Amendment”) with Jefferies. Pursuant to the 2020 Amendment, we can issue and sell common shares, from time to time, for an aggregate sales price of up to an additional $75.0 million under the Sale Agreement. During 2020, we issued 24,728,368 common shares under the Sale Agreement, as amended, resulting in net proceeds of approximately $86.3 million. From January 1, 2021 through March 3, 2021, we received an additional $24.3 million of net proceeds from the issuance of our common shares under the Sale Agreement, as amended, and as of March 3, 2021 there was approximately $16.4 million available under the Sale Agreement, as amended.
In August 2020, we filed a new $200 million shelf registration statement on Form S-3 (File No. 333-248467), which was declared effective by the SEC on October 22, 2020 (the “New Shelf Registration Statement”). As of March 4, 2021, we have not sold any securities under the New Shelf Registration Statement.
Additionally, we have a royalty entitlement on ONPATTRO, a drug developed by Alnylam that incorporates our LNP technology and was approved by the FDA and the EMA during the third quarter of 2018 and was launched by Alnylam immediately upon approval in the United States. In July 2019, we sold a portion of this royalty interest to OMERS, effective as of January 1, 2019, for $20 million in gross proceeds before advisory fees. OMERS will retain this entitlement until it has received $30 million in royalties, at which point 100% of such royalty interest on future global net sales of ONPATTRO will revert to us. OMERS has assumed the risk of collecting up to $30 million of future royalty payments from Alnylam and Arbutus is not obligated to reimburse OMERS if they fail to collect any such future royalties. If this royalty entitlement reverts to us, it has the potential to provide an active royalty stream or to be otherwise monetized again in full or in part. In addition to the royalty from the Alnylam LNP license agreement, we are also receiving a second, lower royalty interest on global net sales of ONPATTRO originating from a settlement agreement and subsequent license agreement with Acuitas. The royalty from Acuitas has been retained by us and was not part of the royalty sale to OMERS.
Cash requirements
At December 31, 2020 we held an aggregate of $123.3 million in cash, cash equivalents and investments in marketable securities. From January 1, 2021 through March 3, 2021, we received an additional $24.3 million of net proceeds from the issuance of common shares under the ATM program. We believe that our cash resources will be sufficient to fund our operations through the third quarter of 2022 based on our expectation of a net cash burn between $70 million and $75 million in 2021. In the future, substantial additional funds will be required to continue with the active development of our pipeline products and technologies. In particular, our funding needs may vary depending on a number of factors including:
• the effects of the COVID-19 pandemic on our business, the medical community and the global economy;
• revenue earned from our legacy collaborative partnerships and licensing agreements, including potential royalty payments from Alnylam’s ONPATTRO;
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• revenue earned from ongoing collaborative partnerships, including milestone and royalty payments;
• the extent to which we continue the development of our product candidates, add new product candidates to our pipeline, or form collaborative relationships to advance our product candidates;
• delays in the development of our product candidates due to pre-clinical and clinical findings;
• our decisions to in-license or acquire additional products, product candidates or technology for development, in particular for our HBV therapeutics programs;
• our ability to attract and retain corporate partners, and their effectiveness in carrying out the development and ultimate commercialization of our product candidates;
• whether batches of drugs that we manufacture fail to meet specifications resulting in delays and investigational and remanufacturing costs;
• the decisions, and the timing of decisions, made by health regulatory agencies regarding our technology and products;
• competing technological and market developments; and
• costs associated with prosecuting and enforcing and defending our patent claims and other intellectual property rights, including litigation and arbitration arising in the course of our business activities.
We intend to seek funding to maintain and advance our business from a variety of sources including public or private equity or debt financing, potential monetization transactions, collaborative or licensing arrangements with pharmaceutical companies and government grants and contracts. There can be no assurance that funding will be available at all or on acceptable terms to permit further development of our research and development programs. Further, the continued spread of COVID-19 has also led to severe disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future.
If adequate funding is not available, we may be required to delay, reduce or eliminate one or more of our research or development programs or reduce expenses associated with our non-core activities. We may need to obtain funds through arrangements with collaborators or others that may require us to relinquish most or all of our rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise seek if we were better funded. Insufficient financing may also mean failing to prosecute our patents or relinquishing rights to some of our technologies that we would otherwise develop or commercialize.
Cash Flows
The following table summarizes our cash flow activities for the periods indicated:
Year ended December 31,
2020 2019
(in thousands)
Net loss $ (63,745) $ (153,723)
Non-cash items 11,873 84,942
Net change in operating items 431 (2,225)
Net cash used in operating activities $ (51,441) $ (71,006)
Net cash provided by (used in) investing activities (14,909) 28,338
Net cash provided by financing activities 86,746 37,457
Effect of foreign exchange rate changes on cash and cash equivalents 56 68
Increase (decrease) in cash and cash equivalents $ 20,452 $ (5,143)
Cash and cash equivalents, beginning of period 31,799 36,942
Cash and cash equivalents, end of period $ 52,251 $ 31,799
Net cash used in operating activities in 2020 decreased $19.6 million compared to 2019 due primarily to (i) a decrease in research and development payments of approximately $10.1 million, which was due primarily to the October 2019 decision to
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discontinue development of AB-506, our prior generation capsid inhibitor product candidate, and (ii) higher spend on AB-729 during 2019 for preclinical studies and drug product supply in preparation for our Phase 1a/1b clinical trial which commenced in the second quarter of 2019. The decrease in cash used in operating activities in 2020 compared to 2019 was also due to the payment of a $5.9 million arbitration award to UBC in 2019 and a $2.3 million cash severance payment to our former President and Chief Executive Officer in 2019.
Net cash from investing activities in 2020 decreased by $43.2 million compared to 2019 due primarily to the timing of maturities and acquisitions of investments in marketable securities.
Net cash from financing activities in 2020 increased $49.3 million compared to 2019. Cash provided by financing activities in 2020 consisted primarily of $86.3 million of proceeds from sales of common shares under the Sale Agreement, as amended. Cash provided by financing activities in 2019 consisted primarily of $18.5 million of net proceeds from the sale a portion of our future royalties from sales of ONPATTRO and $18.6 million of proceeds from sales of common shares under the Sale Agreement, as amended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
Please refer to note 2 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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