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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 113 added, 187 removed, 65 unchanged (82% of the section changed)

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The interim condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S.

Securities and Exchange Commission on March 4, 2020 (2019 Annual Report).

In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).

These forward-looking statements are subject to risks and uncertainties, including those set forth under “Part I.

Risk Factors” in our 2019 Annual Report, “Part II.

Risk Factors” in this report, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

We are a clinical-stage biotechnology company developing innovative therapeutics targeting chronic hepatitis B virus (HBV) infection and disorders associated with the microbiome.

Our HBV Cure program is focused on advancing a new class of potent, oral core inhibitors that have the potential to increase cure rates for chronically infected patients.

Our Microbiome program is developing novel oral live microbial biotherapeutic candidates with our fully integrated platform, including a robust process for strain identification and selection, current Good Manufacturing Practice (cGMP) manufacturing expertise and targeted delivery to the lower gastrointestinal tract with the GEMICEL® technology.

Like most companies, the spread of the novel coronavirus, SARS-CoV-2, which causes coronavirus disease (COVID-19), and the ongoing COVID-19 pandemic has affected certain aspects of our business.

Securities and Exchange Commission on February 25, 2021 (2020 Annual Report).

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under “Part I.

Risk Factors” in our 2020 Annual Report and “Part II.

Risk Factors” in this report.

We are a clinical-stage biotechnology company advancing a novel class of oral therapeutic candidates for the treatment of chronic hepatitis B virus (HBV) infection.

According to the World Health Organization (WHO), approximately 270 million people worldwide are chronically infected with HBV.

Our research and development programs are pursuing multiple drug candidates designed to inhibit the HBV replication cycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of discovering and developing finite and curative therapies for patients with chronic HBV infection.

We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core (HBc) protein in a way that affects assembly and stability of HBV nucleocapsids.

The ongoing COVID-19 pandemic has affected certain aspects of our business.

As further detailed below, those effects have been primarily limited to where and how our employees work in our labs and offices.

To date, our current and future planned clinical trials and pre-clinical studies have not been subject to significant impact as a result of the COVID-19 pandemic.

Business Highlights

During the third quarter of 2020, we continued to grow our business and advance our development pipeline of product candidates in both our HBV Cure and Microbiome programs.

Key highlights and accomplishments during the quarter, as well as upcoming milestones and subsequent events include:

HBV Cure Program

Vebicorvir (VBR or ABI-H0731 (H0731)), our lead core inhibitor product candidate in the HBV Cure program :

Continuation of our ongoing open-label extension study, ABI-H0731-211 (Study 211), and transition of patients who achieve agreed-upon stopping criteria off therapy.

Study 211 is the first clinical trial with a core inhibitor to stop therapy and monitor for sustained virologic response (SVR) in patients with chronic HBV infection.

Patients who stopped therapy in Study 211 have not achieved meaningful SVR rates as 39 of 41 patients have now relapsed.

We continue to collect and analyze Study 211 data and intend to submit more detailed findings to a future medical meeting.

Presentation of additional interim analyses on HBeAg positive and negative patients from Study 211 at the European Association for the Study of the Liver’s (EASL) Digital International Liver Congress TM .

Continuation of a study, ABI-H0731-205, evaluating treatment intensification with VBR in patients with chronic HBV infection who are only partially virologically suppressed on nucleos(t)ide analog reverse transcriptase inhibitor (NrtI) therapy alone after at least a year of treatment.

End-of-Phase 2 Meeting with National Medical Products Administration, Center for Drug Evaluation, China, in July 2020 with agreement on Phase 3 registrational program for chronic suppressive therapy.

ABI-H2158 (H2158), our second -generation core inhibitor product candidate in the HBV Cure program :

Continuation of a Phase 2 clinical study, ABI-H2158-201, using a 300 mg dose of H2158.

Presentation of detailed data on the final dose-ranging cohorts of the Phase 1b portion of the Phase 1a/1b clinical study of H2158 at EASL 2020.

ABI-H3733 (H3733), our third core inhibitor product candidate in the HBV Cure program :

Continuation of a Phase 1 clinical study, ABI-H3733-101, to evaluate safety, tolerability, and pharmacokinetics (PK) of H3733 in healthy subjects.

Upcoming HBV presentations at the American Association for the Study of Liver Diseases (AASLD) Annual Meeting (The Liver Meeting®), November 13 to 16, 2020:

“Analysis of the longer-term safety profile of the hepatitis B virus core inhibitor ABI-H0731 in an open-label extension study”;

“Persistently detectable serum HBV pgRNA is associated with subsequent hepatocellular carcinoma development in chronic HBV patients receiving chronic NrtI treatment”;

“Amino acid substitutions in the inhibitor binding pocket of HBV core protein confer differential changes in susceptibility to three generations of HBV core inhibitors”;

“Changes in viral antigens are more strongly associated with HBV pgRNA than HBV DNA in studies of VBR and NrtI in treatment-naïve patients with chronic HBV infection.”

Triple Combination HBV Studies :

Entry into a Clinical Trial Collaboration Agreement (Triple Combination Collaboration Agreement) with Arbutus to evaluate VBR in combination with Arbutus’ proprietary GalNAc delivered RNAi compound AB-729 and NrtI therapy for the treatment of patients with chronic HBV infection.

Initiation of a Phase 2 triple combination study evaluating the addition of interferon to VBR and NrtI expected in the first half of 2021.

Microbiome Program

Continuation of process identifying strategic alternatives to continue development of the Microbiome programs following the return of rights to such programs from Allergan Pharmaceuticals International Limited (Allergan) upon termination of the Research, Development, Collaboration and License Agreement (Allergan Agreement).

Corporate Highlights

Appointment of Gina Consylman to our Board of Directors (the Board) and the Board’s Audit Committee.

HBV Cure Program

Over 250 million people worldwide are chronically infected with HBV.

Our HBV Cure program is pursuing multiple drug candidates that inhibit the HBV lifecycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of increasing the current low cure rate for patients with HBV.

We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core protein.

VBR, our lead core inhibitor product candidate in the HBV Cure program, is licensed from Indiana University.

The conduct of the Phase 2 studies, Study 201 and 202, is now complete, and our open-label extension study, Study 211, is ongoing.

We continue to present interim updates on our clinical studies at conferences, including EASL 2020 in August 2020 and AASLD 2020 in November 2020.

The stopping criteria for transitioning patients off therapy in Study 211 were discussed with our lead investigators and reviewed and agreed upon by the FDA.

All patients who met the stopping criteria are off treatment and being observed for SVR.

Patients who stopped therapy in Study 211 have not achieved meaningful SVR rates as 39 of 41 patients have now relapsed.

We continue to collect and analyze Study 211 data and intend to submit more detailed findings to a future medical meeting.

When enrolled patients are unable to come to the clinic as a result of the COVID-19 pandemic, study drug is shipped to their homes, and sites conduct telehealth visits.

All currently enrolled patients are continuing with normal study visits, and we continue to monitor for a potential impact of the COVID-19 pandemic on the study.

H2158, our second-generation core inhibitor product candidate in the HBV Cure program, was internally discovered and developed and is chemically distinct from VBR.

We reported the final data from dose-ranging cohorts of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study at EASL 2020.

Based on data from the Phase 1b dose-ranging study, we initiated a Phase 2 clinical study in June 2020 using a 300 mg dose of H2158.

This study will be conducted in approximately ten countries in Asia, North America and Europe.

While we will continue to monitor the situation closely, at this time, we do not expect our timelines for this study to be significantly impacted by the COVID-19 pandemic.

H3733, our third core inhibitor product candidate in the HBV Cure program, has completed Investigational New Drug (IND) enabling studies.

H3733 has a novel chemical scaffold separate from both H0731 and H2158.

To date, our current and future planned clinical and nonclinical studies have not been subject to significant impact as a result of the COVID-19 pandemic.

As previously announced, in January 2021, we wound down our Microbiome program to prioritize and focus our resources on discovering and developing finite and curative therapies for chronic HBV infection.

Our Primary Focus:

Targeting HBV Core Protein to Achieve a Cure

HBV is a DNA virus that infects hepatocytes and establishes a reservoir of cccDNA, a unique viral DNA species that resides in the nucleus of HBV-infected hepatocytes and is associated with viral persistence and chronic infection.

No currently approved oral therapies target cccDNA activity directly, which makes molecules that can modulate cccDNA generation or disrupt its function highly sought in the HBV field.

As a result, most of our research and development efforts to date have focused on discovering and developing compounds targeting the core protein, a viral protein involved in numerous aspects of the HBV replication cycle, including the generation of HBV cccDNA.

Through our research efforts, we have discovered several chemically distinct series of small molecule core inhibitors that directly target and allosterically inhibit core protein functions.

Vebicorvir (VBR), our lead core inhibitor product candidate, is licensed from Indiana University.

The conduct of our initial Phase 2 studies, Study 201 and 202, is complete.

Our open-label extension study, Study 211, involved treating patients with VBR plus nucelos(t)ide analog reverse transcriptase inhibitors (NrtIs) and ultimately transitioning patients who met the requisite stopping criteria, as determined with our lead investigators and the U.S.

Food and Drug Administration (FDA), off of therapy to test for sustained virologic response (SVR).

SVR refers to sustained viral suppression (more than six months) of HBV DNA below the lower limit of quantification (LLOQ) and would be consistent with a successful finite treatment for chronic HBV infection.

In November 2020, it became clear that patients who stopped therapy in Study 211 had not achieved meaningful SVR rates, as 39 of 41 patients relapsed, meaning they had detectable HBV, and that dual combination therapy of VBR plus NrtIs is insufficient to cure chronic HBV infection.

Based on these results, we terminated Study 211 in the fourth quarter of 2020.

We plan to present additional follow-up from Study 211 related to virologic response, safety and resistance following treatment discontinuation, at the European Association for the Study of the Liver’s (EASL) International Liver Congress TM in June 2021 (EASL 2021).

Based on discussions with leading viral hepatitis experts, global regulatory discussions and feedback and, with respect to the China territory, discussions and agreement with our collaboration partner, BeiGene, Ltd.

we recently decided to not move forward with the global registrational studies for VBR as a chronic suppressive treatment (CST) with NrtI s .

The decision was made to focus on the greatest unmet medical need of patients, which lies predominantly in cure, rather than CST.

In connection with focusing our efforts with VBR moving forward in combination with NrtI s and additional mechanisms targeting finite and curative combination therapy , we terminated Study 205 in the first quarter of 2021.

Study 205 had been initiated to evaluate treatment intensification with VBR in patients with chronic HBV infection who are only partially virologically suppressed on NrtI .

Our second-generation core inhibitor product candidate, ABI-H2158 (2158), was internally discovered and developed and is chemically distinct from VBR.

We reported the final data from dose-ranging cohorts of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study at EASL in August 2020.

Based on data from the Phase 1b dose-ranging study, we initiated a Phase 2 clinical study in June 2020 using a 300 mg daily dose of 2158.

This study is being conducted in approximately ten countries in Asia, North America and Europe.

We expect interim data from this study in the second half of 2021.

While we will continue to monitor the situation closely, we do not currently expect our timelines for this study to be significantly impacted by the COVID-19 pandemic.

Our third core inhibitor product candidate, ABI-H3733 (3733), has completed Investigational New Drug (IND) enabling studies.

3733 has a novel chemical scaffold separate from both VBR and 2158.

We presented a preclinical profile of this candidate in the first quarter of 2019.

In the first quarter of 2020, we initiated a Phase 1 clinical study to evaluate safety, tolerability and PK following single ascending dose and multiple ascending dose administration of H3733 in healthy subjects in New Zealand.

After a short delay in enrollment of the study due to the government-mandated shutdown of all clinical studies unrelated to COVID-19, we resumed enrollment during the second quarter of this year.

This delay did not have a significant impact on our clinical development timelines for H3733 .

Other Product Candidates

In addition to our three clinical-stage product candidates, our research discovery team is actively focused on identifying and developing additional product candidates for our HBV Cure program.

Collaboration Agreements

China HBV Collaboration Agreement

In July 2020, we entered into a Collaboration Agreement with BeiGene, granting BeiGene an exclusive, royalty-bearing license to develop and commercialize products containing VBR, H2158 and H3733 (the BeiGene Agreement) in the People’s Republic of China, Hong Kong, Taiwan and Macau (the Territory).

Under the BeiGene Agreement, we and BeiGene will collaborate on development activities with respect to the licensed products in accordance with a mutually agreed upon development plan.

A registrational study is expected to initiate in the first half of 2021 and will initially focus on vebicorvir in combination with NrtI as chronic suppressive therapy.

Pursuant to the terms of the BeiGene Agreement , BeiGene paid us an upfront amount of $40 .0 million, and we are eligible to receive up to approximately $500 .0 million in milestone payments, comprised of up to $11 3.8 million in development and regulatory and $385 .0 million in net sales milestone payments.

In addition, we are eligible to receive tiered royalties at percentages ranging from the mid-teens to the low 30s of net sales.

BeiGene has also agreed to pay all development and regulatory costs up to an aggregate of $45 .0 million in the territory for VBR, H2158 and H3733 .

Following this initial investment, we and BeiGene will share development costs for the T erritory equally.

The BeiGene Agreement also contains provisions such as representations and warranties of the parties, terms as to governance of the collaboration, commercialization and regulatory responsibilities of the parties, and manufacturing and supply, including potential adjustments in the event supply costs exceed certain levels.

In addition, during the term of the BeiGene Agreement, neither party will commercialize any competing products in the Territory.

If, after H2158 and H3733 reach the end of Phase 2 clinical trials, we and BeiGene are unable to mutually agree on the terms of a Phase 3 global study, BeiGene may elect to terminate the BeiGene Agreement solely as it relates to that compound, as applicable.

Such a termination would result in us regaining all rights to the applicable compound in the Territory.

In addition, BeiGene may terminate the BeiGene Agreement for convenience at any time upon 90 days’ advance written notice to us.

The BeiGene Agreement also contains customary provisions for termination by either party, including in the event of breach of the BeiGene Agreement, subject to cure.

Triple Combination HBV Collaboration

In August 2020, we entered into the Triple Combination Collaboration Agreement, pursuant to which we and Arbutus will conduct a randomized, multi-center, open-label Phase 2 clinical trial to explore the safety, PK and antiviral activity of the triple combination of VBR, AB-729 and an NrtI compared to the double combinations of VBR with an NrtI and AB-729 with an NrtI.

This clinical trial is projected to initiate in the first half of 2021 and enroll approximately 60 virologically suppressed patients with HBeAg negative or positive chronic HBV infection.

Microbiome Program

In recent years, there has been increasing scientific evidence suggesting the therapeutic potential of the human microbiome—the billions of microbes living in and on people—to impact health and disease.

Our Microbiome program builds upon experience reported in the literature of successfully treating various disease indications with fecal microbiota transplants and seeks to provide a pharmacologically relevant therapy using a “drug like” approach that delivers targeted and specific microbiome therapies in an oral capsule.

Our Microbiome program consists of a fully integrated platform that includes a biological-function-based strain isolation, identification, characterization and selection process, methods for strain purification and growth under conditions compliant with cGMP requirements, and a licensed patented delivery system, GEMICEL®, which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower GI tract.

Our Microbiome program’s lead candidate, M201, is in a multi-center, randomized, double-blind, placebo-controlled Phase 1b clinical trial to evaluate its safety and efficacy in patients with mildly to moderately active ulcerative colitis (UC) who are being treated with mesalamine.

The study’s primary objective is safety and tolerability, and its secondary objectives focus on the effect of M201 treatment on disease activity measures in patients with UC.

This Phase 1b study is ongoing.

Enrollment had been delayed due to the COVID-19 pandemic and the limitations placed on some trial sites to conduct certain procedures as part of the patient screening process.

Enrollment has resumed, and we continue to monitor the situation closely.

When enrolled patients are unable to come to the clinic, study drug or placebo is shipped to their homes and sites are conducting telehealth monitoring and home health nurse visits.

Preclinical data from the M201 program was selected for presentation as a poster at Digestive Disease Week (DDW) in May 2020;

however, DDW 2020 was cancelled due to the COVID-19 pandemic.

M201 was initially developed as part of the Allergan Agreement , which provide d for the development and commercialization of microbiome gastrointestinal programs.

While we explore strategic alternatives for continued development of our Microbiome programs, the Phase 1b study of M201 will continue despite the termination of the Allergan Agreement .

See “— Allergan Agreement .”

In the first quarter of 2020, we initiated a Phase 1a clinical study to evaluate safety, tolerability and pharmacokinetics (PK) following single ascending dose and multiple ascending dose administration of 3733 in healthy subjects in New Zealand.

Conduct for the study was completed in the fourth quarter of 2020 and preliminary data indicate that 3733 was generally well-tolerated and had favorable PK.

We expect to present observations on the enhanced potency and target coverage for both antiviral inhibition and inhibition of cccDNA generation for our next generation core inhibitors 2158 and 3733 at EASL 2021.

Additional Product Candidates

Using our microbiome platform capabilities, we are also exploring additional product candidates for other disease indications, including Crohn’s disease and irritable bowel syndrome in connection with the Allergan Agreement, as well as immune-mediated and metabolic disorders and oncology, which indications we will pursue either internally or in collaboration with other third parties.

Preclinical data from our immuno-oncology microbiome program was presented as an e-poster at AACR in June 2020.

Allergan Agreement

In May 2020, AbbVie Inc.

(AbbVie) completed its acquisition of Allergan.

In June 2020, AbbVie notified us that it decided to terminate the Allergan Agreement.

This decision was not based on any efficacy, safety or other data related to collaboration programs.

On October 10, 2020, the termination became effective, and we regained worldwide rights to all microbiome candidates subject to the collaboration, including M201.

We have begun exploring strategic alternatives to continue development of the Microbiome programs following the return of the related intellectual property rights.

We currently have corporate and administrative offices and research laboratory space in South San Francisco, California and research, development and small-scale manufacturing activities in Groton, Connecticut.

We also currently have an administrative office and research laboratory space in Shanghai, China and a regulatory office in Beijing, China.

Since our inception, we have had no revenue from product sales and have funded our operations principally through equity financings and collaborations.

Our operations to date have been primarily limited to organizing and staffing our company, licensing our product candidates, discovering and developing our product candidates, establishing small-scale manufacturing capabilities for certain of our product candidates, maintaining and improving our patent portfolio and raising capital.

We have generated significant losses to date, and we expect to continue to generate losses as we continue to develop our product candidates.

As of September 30, 2020, we had an accumulated deficit of $462.2 million.

Because we do not generate revenue from any of our product candidates, our losses will continue as we further develop, seek regulatory approval for and commercialize our product candidates.

In addition to our three clinical-stage product candidates, our research discovery team is actively focused on identifying and selecting a fourth core inhibitor candidate, which we anticipate in the first half of 2021.

Multi-Drug Combination Studies

We believe that core inhibitors and NrtIs will be central to finite and curative therapies for chronic HBV infection.

Therefore, as we continue to develop and advance our current and future core inhibitors through clinical studies, we have begun to conduct multi-drug combination studies in parallel that add additional drugs (or compounds) with non-overlapping mechanisms of action to the core inhibitor + NrtI antiviral backbone.

Specifically, we plan to only incorporate our current and future core inhibitors that have demonstrated they are well-tolerated and effective in clinical studies in dual combination with NrtI.

As the 300 mg daily dose of VBR has been observed to be well-tolerated in all studies conducted to date, with no serious adverse effects or dose-limiting toxicities identified and no pattern of treatment-emergent clinical or laboratory abnormalities observed, we are exploring the 300mg VBR + NrtI antiviral backbone in two triple combination studies.

Our first triple combination study is being conducted pursuant to a Clinical Trial Collaboration Agreement with Arbutus Biopharma Corporation (Arbutus Biopharma) and consists of a randomized, multi-center, open-label Phase 2 clinical study to explore the safety, PK and antiviral activity of the triple combination of VBR, NrtI and AB-729 (Arbutus Biopharma’s investigational RNAi candidate) compared to the dual combinations of VBR + NrtI and AB-729 + NrtI in virologically suppressed subjects.

Our second triple combination study evaluates VBR and NrtI in combination with pegylated interferon alfa in treatment-naïve HBeAg positive subjects.

Both studies initiated in the first quarter of 2021.

In addition to the above studies, we expect to pursue additional multi-drug combinations that include other or additional non-overlapping mechanisms of action to the core inhibitor + NrtI antiviral backbone.

Beyond Core Inhibitors

In addition to the development and advancement of our core inhibitor portfolio and our current and future multi-drug combination studies, our research and development team is working on discovering and developing a potent fourth core inhibitor, cccDNA disruptors and small molecules targeting novel undisclosed targets to add to the core inhibitor + NrtI antiviral backbone to achieve finite and curative therapies.

In November 2020, we entered into an exclusive, two-year collaboration and option agreement with Door Pharmaceuticals (Door Pharma) focused on the development of a novel class of HBV inhibitors.

Door Pharma’s discovery platform targets functions of HBV core protein distinct from viral assembly and has the potential to interfere with viral nucleic acid, including intra-nuclear cccDNA.

Together with Door Pharma, we are working on identifying cccDNA disruptors, which will be aimed at inhibiting different intra-nuclear steps in the viral replication cycle that complement the activity of our core inhibitors.

Under the terms of the agreement, Door Pharma will build upon its previous efforts to lead and conduct new discovery research, which we will fund.

In return for an up-front payment and success-based milestones and royalties, we received an exclusive option to license compounds arising from the collaboration and will be responsible for the continued development and commercialization of optioned compounds.

We currently have corporate and administrative offices and research laboratory space in South San Francisco, California and a small office in China.

Until the lease expires in June 2021, we also have administrative office and laboratory space in Groton, Connecticut that was used by our Microbiome program prior to the program being wound down.

Since our inception, we have had no revenue from product sales and have funded our operations principally through debt financings prior to our initial public offering in 2010 and through equity financings and collaborations since then.

Our operations to date have been primarily limited to organizing and staffing our company, licensing our product candidates, discovering and developing our product candidates, maintaining and improving our patent portfolio and raising capital.

We have generated significant losses to date, and we expect to continue to generate losses as we develop our product candidates.

As of March 31, 2021, we had an accumulated deficit of $528.8 million.

Because we do not generate revenue from any of our product candidates, our losses will continue as we further develop and seek regulatory approval for, and commercialize, our product candidates.

As a result, our operating losses are likely to be substantial over the next several years as we continue the development of our product candidates and thereafter if none are approved or successfully launched.

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In mid-March 2020, as a result of the COVID-19 pandemic, six San Francisco Bay Area counties announced a shelter-in-place order, restricting all residents to their homes, with few exceptions.

Within a week, both California and Connecticut issued state-wide stay-at-home orders.

Within a week, California issued a statewide stay-at-home order.

As a biotechnology company, we were exempt from such orders.

California’s state-wide and local orders remain in place.

Connecticut’s order expired in May 2020.

Because of the exemptions described above, there has not been any significant interruption to date of essential activities at our offices, including work in our laboratories in both South San Francisco and Groton with proper protections and procedures in place.

While California has begun reopening on a tiered county-by-county basis, with counties assigned to tiers based on positivity rate, adjusted case rate and a health equity metric, both the statewide and local orders remain in place.

Because of the exemptions described above, there has not been any significant interruption to date of essential activities at our offices, including work in our laboratories with proper protections and procedures in place.

While we have experienced some shipping delays or shortages of personal protective equipment (PPE) that are important to maintaining normal workflows in our laboratories, we have been able to continue our critical research activities through schedule shifts, use of PPE on-hand and reallocation of certain resources that allow our employees to practice “social distancing” and comply with applicable laws.

Notwithstanding the expiration of Connecticut’s stay-at-home order, substantially all of our U.S.-based non-research employees at both our South San Francisco and Groton facilities have been working from their homes since mid-March 2020.

Clinical study-related impacts of the COVID-19 pandemic to date have been limited to short enrollment delays for our Phase 1 study of H3733 and our Phase 1b study of M201.

We cannot currently predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our ongoing and planned research efforts, clinical trials and other business operations.

We continue to monitor the situation regularly for additional potential delays, or modifications to our ongoing and planned trials and, if circumstances warrant, we may adjust our budget and operating plan.

Substantially all of our U.S.-based non-research employees have been working from their homes since mid-March 2020.

Clinical study-related impacts of the COVID-19 pandemic to date have been limited to short enrollment delays for our Phase 1 study of 3733.

We continually work with our contract research organizations (CROs) and other vendors to ensure, to the extent possible, that services are provided in a timely manner while also identifying alternative vendors and strategies to utilize in the event that COVID or third party-related delays threaten our ability to meet our timelines.

We cannot currently predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our ongoing and planned research efforts, clinical studies and other business operations.

We continue to monitor the situation regularly for additional potential delays, or modifications to our ongoing and planned studies and, if circumstances warrant, we may adjust our budget and operating plan.

Critical Accounting Policies and Significant Judgments and Estimates

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Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

Comparison of the Three Months Ended March 31, 2021 and 2020

Collaboration Revenue

The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages):

Three Months Ended September 30,

Three Months Ended March 31,

Collaboration revenue

Collaboration revenue for the three months ended September 30, 2020 includes the recognition of $31.0 million recognized for the transfer of the VBR License upon entering into the BeiGene Agreement as well as reimbursements incurred under the Allergan Agreement.

Collaboration revenue for the three months ended March 31, 2020 includes the recognition of deferred revenue and reimbursements incurred under Research, Development, Collaboration and License Agreement (the Allergan Agreement) that we entered into with Allergan Pharmaceuticals Limited (Allergan).

Following its acquisition of Allergan, AbbVie, Inc.

(AbbVie) gave written notice of termination of the Allergan Agreement in June 2020 which became effective October 2020.

Research and Development Expense

The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages):

Three Months Ended September 30,

Three Months Ended March 31,

Program/Description

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Total research and development expenses

(1) Expenses presented for the Microbiome program exclude collaboration revenue related to expense reimbursements under the Allergan Agreement as discussed in Note 8 to the Condensed Consolidated Financial Statements.

Research and development expense s were $ 26.9 million for the three months ended September 30, 2020 compared to $ 21.7 million for the same period in 2019 .

The increase was due to an increase of $ 4.0 million in research and development expenses related to the HBV Cure program and an increase of $ 1.2 million in research and development expenses related to the Microbiome program.

These increases were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support VBR, 2158, 3733 and microbiome clinical trials and increased salary and benefits due to additional employees.

Research and development expenses include non-cash stock-based compensation expenses of $ 2.8 million for the three months ended September 30, 2020 and $ 2.5 million for the same period in 2019 .

Research and development expenses were $18.6 million for the three months ended March 31, 2021 compared to $23.0 million for the same period in 2020.

The decrease was due to a decrease of $8.2 million in research and development expenses related to the Microbiome program due to the wind-down of the Microbiome program and includes the reversal of $2.4 million of previously recognized stock-based compensation expense related to forfeited awards of terminated employees.

This decrease was partially offset by an increase of $3.7 million in research and development expenses related to the HBV program, which were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support our clinical studies and increased salary and benefits due to additional employees.

Research and development expenses include $2.1 million in a net reversal of non-cash

stock-based compensation expense as a result of forfeited awards for the three months ended March 31, 2021 compared to $ 1.9 million of non-cash stock-based compensation expense for the same period in 2020 .

General and Administrative Expense

The following table summarizes the period-over-period changes in our general and administrative expenses (in thousands, except for percentages):

Three Months Ended September 30,

Three Months Ended March 31,

General and administrative expenses

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services, accounting and tax services, insurance and travel expenses, as well as stock-based compensation expense associated with equity awards to our employees, consultants, and directors.

General and administrative expenses were $11.7 million for the three months ended September 30, 2020 compared to $8.5 million for the same period in 2019.

The increase was primarily due to an increase of $2.7 million in professional fees due to the amortized incremental contract costs associated with entering into the BeiGene Agreement, $0.3 million in equipment rental, $0.4 million in stock-based compensation expense and $0.1 million in salary and benefits due to additional employees.

These increases were partially offset by a decrease of $0.2 million in travel related expenses due to state and local laws restricting travel in response to the COVID-19 pandemic.

General and administrative expenses include non-cash stock-based compensation expenses of $3.3 million for the three months ended September 30, 2020 and $2.9 million for the same period in 2019.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Collaboration Revenue

The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages):

Nine Months Ended September 30,

Collaboration revenue

Collaboration revenue for the nine months ended September 30, 2020 includes the recognition of $31.0 million recognized for the transfer of the VBR License upon entering into the BeiGene Agreement.

It also includes the remaining deferred revenue balance and reimbursements incurred under the Allergan Agreement, for which AbbVie (formerly Allergan pre-acquisition) gave written notice of termination in June 2020.

Research and Development Expense

The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages):

Nine Months Ended September 30,

Program/Description

HBV Cure program

Microbiome program (1)

Total research and development expenses

Research and development expenses were $73.3 million for the nine months ended September 30, 2020 compared to $63.1 million for the same period in 2019.

The increase was due to an increase of $7.7 million in research and development expenses related to the HBV Cure program and an increase of $2.4 million in research and development expenses related to the Microbiome program.

Research and development expenses include non-cash stock-based compensation expenses of $8.3 million for both the nine months ended September 30, 2020 and 2019.

General and Administrative Expense

The following table summarizes the period-over-period changes in our general and administrative expenses (in thousands, except for percentages):

Nine Months Ended September 30,

General and administrative expenses

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services, accounting and tax services, insurance and travel expenses, as well as the stock-based compensation expense associated with equity awards to our employees, consultants, and directors.

General and administrative expenses were $29.9 million for the nine months ended September 30, 2020 compared to $22.1 million for the same period in 2019.

The increase was primarily driven by an increase of $2.7 million in professional fees due to the amortized incremental contract costs associated with entering into the BeiGene Agreement, $1.3 million in salary and benefits, $4.1 million in stock-based compensation expense, $0.4 million in equipment rental and $0.1 million in recruitment expenses due to additional employees partially offset by a decrease of $0.7 million in travel related expenses due to state and local laws restricting travel in response to the COVID-19 pandemic.

General and administrative expenses include non-cash stock-based compensation expenses of $9.8 million for the nine months ended September 30, 2020 and $5.7 million for the same period in 2019.

Stock-based compensation expense for the nine months ended September 30, 2019 includes the reversal of previously recognized expense of $3.6 million related to forfeited awards resulting from the departure of one of the Company’s former officers during the period.

General and administrative expenses were $8.7 million for both the three months ended March 31, 2021 and 2020.

General and administrative expenses include non-cash stock-based compensation expenses of $1.8 million for the three months ended March 31, 2021 and $3.0 million for the same period in 2020.

The decrease in stock-based compensation expense of $1.2 million was in part due to the reversal of $0.5 million of previously recognized expense related to forfeited awards from terminated employees as well as a decrease in the grant-date fair value of recent option grants.

This decrease in stock-based compensation expense was offset by increases of $0.2 million in salary and benefits and $0.2 million in recruitment expenses due to additional employees and $0.7 million in lease-related costs largely attributable to asset impairment and other charges in connection with restructurings.

Liquidity and Capital Resources

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As a result of our significant research and development expenditures and the lack of any FDA-approved products to generate product sales revenue, we have not been profitable and have generated operating losses since we were incorporated in October 2005.

We have funded our operations through September 30, 2020 principally through equity financings, raising an aggregate of $546.4 million in net proceeds, and strategic collaborations, raising an aggregate of $90.0 million through upfront payments.

Cash Flows for the Nine Months Ended September 30, 2020 and 2019

We have funded our operations through March 31, 2021 principally through equity financings, raising an aggregate of $586.0 million in net proceeds, and strategic collaborations, raising an aggregate of $90.0 million through upfront payments.

Cash Flows for the Three Months Ended March 31, 2021 and 2020

The following table summarizes our cash flow activities (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Cash provided by (used in):

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Net Cash from Operating Activities

Net cash used in operating activities was $37.7 million for the nine months ended September 30, 2020.

This was primarily due to a $22.7 million net loss, $0.1 million of accretion of discount of marketable securities and a decrease of $36.8 million of operating assets and liabilities, which includes the recognition of the remaining deferred revenue balance of $36.0 million as revenue during the nine months ended September 30, 2020 in connection with AbbVie’s decision to terminate the Allergan Agreement as discussed in Note 8.

These decreases were partially offset by $18.1 million non-cash expense recorded for stock-based compensation, $3.5 million of amortization of operating lease right-of-use (ROU) assets and $0.4 million of depreciation and amortization expense.

Net cash used in operating activities was $63.5 million for the nine months ended September 30, 2019.

This was primarily due to a $70.6 million net loss, $1.5 million of accretion of discount of marketable securities and a decrease of $9.3 million of operating assets and liabilities, which were offset by $14.0 million non-cash expense recorded for stock-based compensation, $3.3 million of amortization of operating lease ROU assets and $0.4 million of depreciation and amortization expense.

Net cash used in operating activities was $33.3 million for the three months ended March 31, 2021.

This was primarily due to a $27.2 million net loss, $0.1 million of accretion of discount of marketable securities and a decrease of $8.8 million of operating assets and liabilities.

These decreases were partially offset by $1.1 million amortization of operating lease right-of-use (ROU) assets, $0.3 million net reversal of non-cash stock-based compensation recognized as a result of forfeited awards from terminated employees, $0.1 million depreciation and amortization expense and a $1.6 million loss on the sale of purchased leased equipment in connection with the wind-down of the Microbiome program.

Net cash used in operating activities was $25.2 million for the three months ended March 31, 2020.

This was primarily due to a $26.7 million net loss, $0.1 million accretion of discount of marketable securities and a decrease of $4.6 million of operating assets and liabilities, which were offset by $4.9 million non-cash stock-based

compensation expense, $ 1.2 million amortization of operating lease ROU assets and $ 0.1 million depreciation and amortization expense.

Net Cash from Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2020 was $47.4 million due to $165.3 million of redemptions of marketable securities and $35.6 million of sale of marketable securities, which were partially offset by the purchase of $153.0 million of marketable securities and $0.5 million of property and equipment.

Net cash provided by investing activities for the nine months ended September 30, 2019 was $44.7 million primarily due to $166.9 million of redemptions of marketable securities and $28.7 million of sale of marketable securities, which were partially offset by the purchase of $149.3 million of marketable securities and $1.5 million of property and equipment.

Net cash provided by investing activities for the three months ended March 31, 2021 was $18.0 million due to $66.5 million of redemptions of marketable securities and $3.0 million of sale of marketable securities, which were partially offset by the purchase of $49.2 million of marketable securities.

Additionally, the Company purchased leased equipment for $3.1 million that it sold for $0.9 million in connection with the wind-down of the Microbiome program.

Net cash provided by investing activities for the three months ended March 31, 2020 was $20.7 million due to $55.0 million of redemptions of marketable securities and $10.0 million of sale of marketable securities, which were partially offset by the purchase of $44.2 million of marketable securities and $0.1 million of property and equipment.

Net Cash from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2020 was $1.9 million resulting from the exercise of stock options to purchase 172,779 shares of common stock and the issuance of 42,266 shares of common stock under our ESPP.

Net cash provided by financing activities for the nine months ended September 30, 2019 was $2.2 million resulting from the exercise of stock options to purchase 243,481 shares of common stock and the issuance of 36,804 shares of common stock under our ESPP.

Net cash provided by financing activities for the three months ended March 31, 2021 was $34.1 million resulting from sale of 6.0 million shares of our common stock through “at-the-market” offerings, net of commissions and fees.

Net cash provided by financing activities for the three months ended March 31, 2020 was $0.1 million resulting from the exercise of stock options to purchase 16,834 shares of common stock.

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical studies of our product candidates and pursue our intellectual property strategy.

Furthermore, we expect to continue to incur additional costs associated with operating as a public company.

Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.

If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We will need to obtain substantial additional funding in connection with our continuing operations.

If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We monitor our cash needs and the status of the capital markets on a continuous basis.

From time to time, we opportunistically raise capital and have done so numerous times by issuing equity securities, most recently in December 2019.

We intend to continue to raise capital when and as needed and at the time and in the manner most advantageous to us.

Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed.

We expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.

From time to time, we opportunistically raise capital and have done so numerous times since our initial public offering by issuing equity securities, most recently in March 2021.

We expect to continue to raise capital when and as needed and at the time and in the manner most advantageous to us.

We expect that our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months.

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

the scope, progress, timing, results and costs of our ongoing drug discovery, nonclinical development, laboratory testing and clinical studies of our product candidates and any additional clinical studies we may conduct in the future;

the scope, progress, results and costs of our ongoing drug discovery, nonclinical development, laboratory testing and clinical studies of our product candidates and any additional clinical studies we may conduct in the future;

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

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

the costs and timing of recruiting additional employees to support the growth of our business;

the costs of preparing, filing and prosecuting patent applications in the United States and abroad, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

our ability to establish and maintain collaborations on favorable terms, if at all.

Identifying potential product candidates and conducting nonclinical testing and clinical studies is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales.

results required to obtain marketing approval and achieve product sales.

In addition, our product candidates, if approved, may not achieve commercial success.

Our commercial revenues, if any, will be derived from sales of therapeutics that we do not expect to be commercially available for many years, if at all.

Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for years, if at all.

Accordingly, we will need to continue to rely on additional financings to achieve our business objectives.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis