Ultragenyx Pharmaceutical Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”). Overview Ultragenyx Pharmaceutical Inc. (we or the Company) is a biopharmaceutical company focused on the identification, acquisition, development, and commercialization of novel products for the treatment of serious rare and ultra-rare genetic diseases. We target diseases for which the unmet medical need is high, the biology for treatment is clear, and for which there are typically no approved therapies treating the underlying disease. Our strategy, which is predicated upon time- and cost-efficient drug development, allows us to pursue multiple programs in parallel with the goal of delivering safe and effective therapies to patients with the utmost urgency. Impact of COVID-19 Pandemic The continuing COVID-19 outbreak, which was declared a pandemic by the World Health Organization in March 2020, and the governmental efforts to mitigate the spread of the pandemic, has caused significant volatility and uncertainty in U.S. and international markets and could materially and adversely affect our business and operating results. As with so many other companies throughout the U.S. and globally, our business operations have been and continue to be affected by the COVID-19 pandemic. In addition to some impact on our preclinical manufacturing activities and certain regulatory interactions, we have experienced interruptions to our clinical trial activities, primarily due to delays or disruptions to patient enrollment and dosing as a result of shelter-in-place orders or quarantines, and we anticipate that certain data from our gene therapy product candidates may be delayed as a result of the COVID-19 pandemic. For instance, dosing using prophylactic steroids for our fourth cohort of patients in our Phase 1/2 study for DTX301is currently on hold as a result of COVID-19. Although we have not experienced significant supply interruptions to date, certain of our third-party manufacturers or suppliers have prioritized and allocated more resources and capacity to supply drug product or raw materials to other companies engaged in the study of potential treatments or vaccinations for COVID-19. In response to these events, we are currently seeking alternative sources of supply of drug product or raw materials in an attempt to avoid future potential delays in supply of product, which may result in additional expenses. Social distancing measures and travel limitations in response to the pandemic have also made it difficult for us to identify new patients for our commercialized products, which may result in loss of revenue. We have also restricted access to our facilities to personnel and third parties who perform critical activities that must be performed on-site and as a result, most of our personnel currently work remotely. Such remote working policies may negatively impact productivity and disrupt our business operations. As the COVID-19 global pandemic continues, we may experience lower revenue and increased expenses as a result of disruptions to our clinical trial, commercialization and regulatory activities, in addition to delays or shortages of drug product and raw materials. The magnitude and extent to which the pandemic may impact our business operations and operating results will continue to remain highly dependent on future developments, which are very uncertain and cannot be predicted with confidence. As a result, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our financial statements in the second quarter and beyond . See Item 1A: "Risk Factors" for additional details. Approved Therapies and Clinical Product Candidates Our current approved therapies and clinical-stage pipeline consist of four product categories: biologics, small molecules, gene therapy, and nucleic acid product candidates. Our biologic products include approved therapies Crysvita® (burosumab) and Mepsevii® (vestronidase alfa): • Crysvita is an antibody targeting fibroblast growth factor 23, or FGF23, developed for the treatment of X-linked hypophosphatemia, or XLH, and tumor-induced osteomalacia, or TIO, both of which are disorders characterized by renal phosphate wasting caused by excess FGF23 production. Crysvita is approved in the United States for the treatment of XLH, a rare, hereditary, progressive and lifelong musculoskeletal disorder, in adult and pediatric patients six months of age and older, and in Canada for the treatment of XLH in adult and pediatric patients one year of age and older. In the European Union, or the EU, and the United Kingdom, Crysvita is conditionally approved for the treatment of XLH with radiographic evidence of bone disease in children one year of age and older and adolescents with growing skeletons. On July 24, 2020, the Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion to expand the use of Crysvita for the treatment of XLH in adolescents and adults. This could lead to an expansion of the current market authorization for the treatment XLH in children 1 year of age and older and adolescents with growing skeletons. A formal decision from the European Commission is expected in the second half of 2020. In Brazil, Crysvita is approved for treatment of XLH in adult and pediatric patients one year of age and older. We have submitted regulatory filings in various other Latin American countries. Crysvita was approved by the U.S. Food and Drug Administration (FDA) on June 18, 2020 for the treatment of FGF23-related hypophosphatemia in tumor-induced osteomalacia, or TIO, associated with phosphaturic mesenchymal tumors that 20 cannot be curatively resected or localized in adults and pediatric patients 2 years of age and older. TIO can lead to severe hypophosphatemia, osteomalacia, fractures, fatigue, bone and muscle pain, and muscle weakness. We are collaborating with Kyowa Kirin Co., Ltd., or KKC (formerly Kyowa Hakko Kirin Co., Ltd., or KHK), and Kyowa Kirin, a wholly owned subsidiary of KKC, on the development and commercialization of Crysvita globally. • Mepsevii is an intravenous, or IV, enzyme replacement therapy, developed for the treatment of Mucopolysaccharidosis VII, also known as MPS VII or Sly syndrome, a rare lysosomal storage disease that often leads to multi-organ dysfunction, pervasive skeletal disease, and death. Mepsevii is approved in the United States for the treatment of children and adults with MPS VII. In the EU and the United Kingdom, Mepsevii is approved under exceptional circumstances for the treatment of non-neurological manifestations of MPS VII for patients of all ages. In Brazil, Mepsevii is approved for the treatment of MPS VII for patients of all ages. Our small molecule products include the approved therapy Dojolvi™ (triheptanoin): • Dojolvi, formerly known as UX007, is a highly purified, synthetic, 7-carbon fatty acid triglyceride specifically designed to provide medium-chain, odd-carbon fatty acids as an energy source and metabolite replacement for people with long-chain fatty acid oxidation disorders, or LC-FAOD, which is a set of rare metabolic diseases that prevents the conversion of fat into energy and can cause low blood sugar, muscle rupture, and heart and liver disease. The FDA approved Dojolvi as a source of calories and fatty acids for the treatment of pediatric and adult patients with molecularly confirmed LC-FAOD on June 30, 2020 and in July 2020, we announced that the product is commercially available in the United States. We have submitted Dojolvi to the Brazilian Health Regulatory Agency (ANVISA) seeking marketing authorization. In Canada, we have been granted priority review have filed a new drug submission. We are also continuing discussions with EU regulatory authorities. Our gene therapy pipeline includes DTX301 and DTX401 in clinical development for the treatment of two diseases: • DTX301 is an adeno-associated virus 8, or AAV8 gene therapy product candidate designed for the treatment of patients with ornithine transcarbamylase, or OTC, deficiency. OTC is part of the urea cycle, an enzymatic pathway in the liver that converts excess nitrogen, in the form of ammonia, to urea for excretion. OTC deficiency is the most common urea cycle disorder and leads to increased levels of ammonia. Patients with OTC deficiency suffer from acute hyperammonemic episodes that can lead to hospitalization, adverse cognitive and neurological effects, and death. We estimate that there are approximately 10,000 patients in the developed world with OTC deficiency, of which we estimate approximately 80% are classified as late-onset, our target population. DTX301 has received Orphan Drug Designation in both the United States and in the EU and the United Kingdom and Fast Track Designation in the United States. We have reported positive data from the three dose cohorts of the Phase 1/2 study, with six responders of the nine patients dosed in the study and all three patients at the highest dose cohort. A fourth cohort of three patients at the same cohort 3 dose of 1.0 × 10^13 GC/kg is planned using prophylactic steroids. Dosing is delayed due to COVID-19 but we currently expect to release data by the end of 2020 . • DTX401 is an AAV8 gene therapy clinical candidate for the treatment of patients with glycogen storage disease type Ia, or GSDIa, a disease that arises from a defect in G6Pase, an essential enzyme in glycogen and glucose metabolism. GSDIa is the most common glycogen storage disease , with an estimated 6,000 patients in the developed world affected by GSDIa. DTX401 has been granted Orphan Drug Designation in both the United States and in the EU and the United Kingdom, Regenerative Medicine Advanced Therapy (RMAT) designation and Fast Track designation in the United States . We have reported positive data from three cohorts at two dose levels of the Phase 1/2 study, with all patients showing a clinical response with improvements in glucose control and other metabolic parameters compared to baseline. The confirmatory expansion cohort of three patients at the second cohort dose of 6.0 × 10^12 GC/kg dose is ongoing, and we expect longer-term data to be available from this cohort in the second half of 2020. Our nucleic acid pipeline includes the option to acquire GTX-102 in clinical development for the treatment of Angelman syndrome: • GTX-102 is an antisense oligonucleotide, or ASO, that is being developed for the treatment of Angelman syndrome, a debilitating and rare neurogenetic disorder caused by loss-of-function of the maternally inherited allele of the UBE3A gene. There are an estimated 60,000 patients in the developed world affected by Angelman syndrome. GTX-102 was granted Fast Track designation, Orphan Drug Designation and Rare Pediatric Disease Designation from the FDA. GTX-102 is being developed in collaboration with GeneTx Biotherapeutics LLC, or GeneTx. The first two cohorts in the Phase 1/2 study have been fully enrolled with all patients having received multiple doses. Safety and efficacy data from the first two dose escalating cohorts are currently being evaluated and enrollment and dosing at the next dose levels are expected to resume shortly. Preliminary data from the first cohorts of the study are expected in the first half of 2021, provided the COVID-19 pandemic does not cause delays in additional site activation or delays in data collection. 21 The following table summarizes our approved products and clinical product candidate pipeline: Recent Clinical Program Updates Crysvita for the treatment of tumor-induced osteomalacia, or TIO In June 2020 we and Kyowa Kirin announced the FDA approval of Crysvita for the treatment of fibroblast growth factor 23 (FGF23)-related hypophosphatemia in tumor-induced osteomalacia (TIO) associated with phosphaturic mesenchymal tumors that cannot be curatively resected or localized in adults and pediatric patients 2 years of age and older. On July 24, 2020, the CHMP issued a positive opinion to expand the use of Crysvita for the treatment of XLH in adolescents and adults. This could lead to an expansion of the current market authorization for the treatment XLH in children 1 year of age and older and adolescents with growing skeletons. A formal decision from the European Commission is expected in the second half of 2020. Dojolvi for the treatment of Long-Chain Fatty Acid Oxidation Disorders (LC-FAOD) In June 2020 we announced the FDA approval of Dojolvi for the treatment of pediatric and adult patients for all forms of LC-FAOD with a molecularly-confirmed diagnosis. Dojolvi is the first FDA-approved therapy for these lifelong and life-threatening genetic disorders. Dojolvi has been submitted for approval with ANVISA in Brazil. In Canada, a new drug submission was filed in July 2020 and Dojolvi has been granted priority review by Health Canada. DTX301 for the treatment of ornithine transcarbamylase, or OTC, deficiency In June 2020, we announced updated positive data from the ongoing Phase 1/2 study at the American Society of Gene & Cell Therapy (ASGCT) annual meeting. The updated data confirmed that all three patients in the third dose cohort (1.0 x 10^13 GC/kg) are responders to DTX301 as shown by sustained meaningful increases in the rate of ureagenesis or reductions in ammonia levels. Six of nine patients across all three cohorts have now responded to the gene therapy, including three females and three males. All three 22 complete responders, those who have discontinued all ammonia scavengers and liberalized their diets, remain clinically and metabolically stable after longer-term follow-up , up to 130 weeks for the longest patient . A fourth cohort of three patients at the same Cohort 3 dose is planned using prophylactic steroids. Dosing is delayed due to COVID-19 but we currently expect to release data by the end of 2020. We intend to hold an end-of-phase 2 meeting with the FDA based on the first three cohorts, with Phase 3 study initiation currently expected in the first half of 2021. DTX401 for the treatment of glycogen storage disease type Ia, or GSDIa In May 2020, we announced positive data from the confirmatory cohort in the ongoing Phase 1/2 study at the ASGCT annual meeting. The data demonstrated increased time to hypoglycemia and substantial reductions in cornstarch usage. Prolonged periods of hyperglycemia were observed in Cohort 3 with the implementation of continuous glucose monitoring (CGM), which is indicative of early transgene expression and glucose release from the liver. The early transgene expression resulted in faster cornstarch reductions in Cohort 3, with a mean reduction of 57% at week 12 compared with 38% and 14% in the first and second cohorts, respectively. Across all three cohorts in the study, 100 percent of patients have demonstrated meaningful and sustained cornstarch regimens over time and significant increases in time to hypoglycemia. After longer-term follow- up, four of six patients in the first two cohorts have discontinued daytime cornstarch. Additional data on Cohort 3 are expected to be released in the second half of 2020, barring delays related to COVID-19. We also intend to hold an end-of-Phase 2 meeting with the FDA and potentially initiate a Phase 3 study in early 2021, depending on the restrictions and limitations due to COVID-19. GTX-102 for the treatment of Angelman Syndrome In May 2020, we announced that the FDA granted Fast Track designation to GTX-102 for the treatment of Angelman syndrome. Other Developments Corporate Update In May 2020, we exercised our option to purchase 600,000 shares of Arcturus’ common stock at $16.00 per share; accordingly, after the exercise of the option, we owned 3,000,000 shares of Arcturus’ outstanding common stock. The purchase was made pursuant to the equity purchase agreement between the parties entered into in June 2019 in connection with the amendment to the research collaboration and license agreement between the two companies focused on nucleic acid therapies for rare diseases that was initiated in 2015. Financial Operations Overview We are a biopharmaceutical company with a limited operating history. To date, we have invested substantially all of our efforts and financial resources in identifying, acquiring, and developing our products and product candidates, including conducting clinical studies and providing selling, general and administrative support for these operations. To date, we have funded our operations primarily from the sale of equity securities and the sale of certain future royalties. We have incurred net losses in each year since inception. Our net income was $25.3 million for the three months ended June 30, 2020 and our net loss was $93.7 million for the six months ended June 30, 2020, and $99.2 million and $195.9 million for the three and six months ended June 30, 2019, respectively. Net income for the three months ended June 30, 2020 and net loss for the six months ended June 30, 2020 included $95.2 million and $102.9 million, respectively, of changes in fair value of our investment in Arcturus equity securities. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations. For the three months ended June 30, 2020, our total revenues increased to $61.7 million, compared to $24.1 million for the same period in 2019 and for the six months ended June 30, 2020, increased to $98.0 million, compared to $42.3 million for the same period in 2019. Revenue for the three and six months ended June 30, 2020 included $18.9 million in revenue from our collaboration and license agreement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) which we executed in March 2020. The remainder of the increase was driven by higher revenue from Crysvita collaboration revenue in the profit-share territory, increase in revenue for our approved products and an increase in collaboration royalty revenue. As of June 30, 2020, we had $817.5 million in available cash, cash equivalents and available-for-sale investments. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the 23 carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes in our critical accounting policies during the six months ended June 30 , 2020 , as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report. Results of Operations Comparison of the three and six months ended June 30, 2020 to the three and six months ended June 30, 2019: Revenue (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Collaboration and license revenue: Crysvita collaboration revenue in profit-share territory $ 29,806 $ 17,248 $ 12,558 73 % Royalty revenue in European territory 1,498 1,931 (433 ) -22 % Daiichi Sankyo 18,857 — 18,857 * Bayer — 68 (68 ) -100 % Total collaboration and license revenue 50,161 19,247 30,914 161 % Product sales: Crysvita 2,549 1,006 1,543 153 % Mepsevii 4,185 3,240 945 29 % UX007 1,332 656 676 103 % Total product sales 8,066 4,902 3,164 65 % Non-cash collaboration royalty revenue 3,482 — 3,482 * Total revenues $ 61,709 $ 24,149 $ 37,560 156 % * not meaningful Six Months Ended June 30, Dollar % 2020 2019 Change Change Collaboration and license revenue: Crysvita collaboration revenue in profit-share territory $ 57,021 $ 29,187 $ 27,834 95 % Royalty revenue in European territory 1,498 3,946 (2,448 ) -62 % Daiichi Sankyo 18,857 — 18,857 * Bayer — 352 (352 ) -100 % Total collaboration and license revenue 77,376 33,485 43,891 131 % Product sales: Crysvita 4,159 1,594 2,565 161 % Mepsevii 7,610 5,913 1,697 29 % UX007 2,776 1,329 1,447 109 % Total product sales 14,545 8,836 5,709 65 % Non-cash collaboration royalty revenue 6,097 — 6,097 * Total revenues $ 98,018 $ 42,321 $ 55,697 132 % For the three months and six months ended June 30, 2020, the Company’s share of Crysvita collaboration revenue in the profit-share territory increased by $12.6 million and $27.8 million, respectively, as compared to the same periods in 2019. The increase primarily reflects the continuing increase in demand for Crysvita. In December 2019, we sold the rights to the royalty payments in the European territory, including the United Kingdom and Switzerland, to Royalty Pharma. Beginning in 2020, we record the royalty revenue as non-cash royalty revenues. During the three months ended June 30, 2020, there was a change in estimate of the revenue reserves related to sales made prior to January 1, 2020, as a result, we recorded $1.5 million as royalty revenue in European territory . In March 2020, we executed a license agreement with Daiichi Sankyo, pursuant to which we granted Daiichi Sankyo a non-exclusive license to intellectual property, including know-how and patent applications, with respect to our HeLa PCL and HEK293 transient transfection manufacturing technology platforms for AAV-based gene therapy products. We will also provide certain technical assistance and technology transfer services during the technology transfer period of three years to enable Daiichi Sankyo to use the technologies for its internal gene therapy programs. For the three and six months ended June 30, 2020, we recognized $18.9 million as collaboration and license revenue from this arrangement. We expect to recognize a substantial majority of the $183.8 million transaction price as revenue over the technology transfer service period, which is currently estimated to be substantially complete by the end of 2021. 24 The decrease s in collaboration and license revenue from our research arrangement with Bayer were due to the transition of the clinical development to Bayer as part of the research arrangement. The increases in product sales of $3.2 million and $5.7 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 were primarily due to the continuing increase in demand for our products and increase in sales of certain products under our named patient program in certain countries. Cost of Sales (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Cost of sales $ 1,803 $ 766 $ 1,037 135 % Six Months Ended June 30, Dollar % 2020 2019 Change Change Cost of sales $ (1,700 ) $ 1,218 $ (2,918 ) -240 % Cost of sales related to our approved products increased by $1.0 million for the three months ended June 30, 2020 and decreased by $2.9 million for the six months ended June 30, 2020, compared to the same periods in 2019. The increase in cost of sales reflect an increase in demand for our approved products. The cost of sales for the six months ended June 30, 2020 included a credit for the manufacturing of future inventory batches with an estimated value of $4.6 million that was agreed to during the period with one of our manufacturers due to certain inventory batches that did not meet specified quality standards. The Company previously recorded reserves of $5.7 million on these inventory batches during the second half of the year ended December 31, 2019, which did not impact cost of sales for the six months ended June 30, 2019. Prior to the approval of our approved products, manufacturing and related costs were expensed; accordingly, these costs were not capitalized and as a result are not fully reflected in the costs of sales during the current period. If manufacturing and related costs were capitalized prior to the approval period and the credit of $4.6 million as noted above were excluded, we estimate that cost of sales for the three and six months ended June 30, 2020 would have been approximately $1.9 million and $3.1 million, respectively, and for the three and six months ended June 30, 2019 would have been approximately $1.0 million and $1.7 million, respectively, for our commercial product sales. We expect our gross margin percentage to decrease as we produce approved products at costs that reflect the full costs of manufacturing similar to other biologic products and as we deplete inventories that we had expensed prior to receiving FDA approval. Research and Development Expenses (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Crysvita $ 7,427 $ 10,210 $ (2,783 ) -27 % Mepsevii 4,208 4,197 11 0 % UX007 9,506 10,407 (901 ) -9 % DTX301 8,226 7,722 504 7 % DTX401 3,295 7,581 (4,286 ) -57 % GTX102 607 — 607 * Translational Research 20,670 15,127 5,543 37 % Other research costs 26,770 40,801 (14,031 ) -34 % Total research and development expenses $ 80,709 $ 96,045 $ (15,336 ) -16 % Six Months Ended June 30, Dollar % 2020 2019 Change Change Crysvita $ 15,099 $ 20,531 $ (5,432 ) -26 % Mepsevii 7,210 9,655 (2,445 ) -25 % UX007 19,437 22,775 (3,338 ) -15 % DTX301 17,445 19,849 (2,404 ) -12 % DTX401 9,899 16,393 (6,494 ) -40 % GTX102 26,073 — 26,073 * Translational Research 47,207 25,017 22,190 89 % Other research costs 51,300 59,930 (8,630 ) -14 % Total research and development expenses $ 193,670 $ 174,150 $ 19,520 11 % 25 Research and development expenses de creased $ 15.3 million and increased $ 19.5 million f or the three and six months ended June 30 , 2020 and 2019, respectively , compared to the same period s in 2019 . The changes in research and development expenses was primarily due to: • for Crysvita, a decrease of $2.8 million and $5.4 million for the three and six months ended June 30, 2020, respectively, primarily related to reduced clinical trial activity with the progressive completion of our extension studies and reduced allocation of employees and contractors to R&D support activities, net of KKC reimbursement; • for Mepsevii , a nominal increase and a decrease of $2.4 million for the three and six months ended June 30, 2020, respectively, primarily related to reduced clinical trial activity with the progressive completion of our extension studies and reduced allocation of employees and contractors to R&D support activities; • for UX007, a decrease of $0.9 million and $3.3 million for the three and six months ended June 30, 2020, respectively, primarily related to reduced clinical trial expense for the wind-down of the Glut 1 program, net of increased manufacturing expense due to the timing of drug substance production for the FAOD program; • for DTX301, an increase of $0.5 million and a decrease of $2.4 million for the three and six months ended June 30, 2020, respectively, primarily related to the timing of clinical drug substance manufacturing activities and drug product batch releases; • for DTX401, a decrease of $4.3 million and $6.5 million for the three and six months ended June 30, 2020, respectively, primarily related to the timing of clinical drug substance manufacturing activities and drug product batch releases, including a credit for the manufacturing of future batches with an estimated value of $2.9 million that was agreed to during the three months ended June 30, 2020 with one of our manufacturers due to certain batches that did not meet specified quality standards; • for GTX102, an increase of $0.6 million and $26.1 million for the three and six months ended June 30, 2020 , respectively, primarily due to the $25.0 million option extension payment to GeneTx that occurred during the first quarter of 2020; • for translational research, an increase of $5.5 million and $22.2 million for the three and six months ended June 30, 2020, respectively, related to research, process development, and manufacturing activities, including the progression of our UX701, UX053, and UX068 programs toward IND filings; and during the first quarter of 2020, the $7.0 million payment to REGNEXBIO for exclusive, worldwide rights to NAV AAV8 and AAV9 vectors for the development and commercialization of gene therapy treatments for a rare metabolic disorder; • for other research and development costs, a decrease of $14.0 million and $8.6 million for the three and six months ended June 30, 2020, respectively, primarily related to the one-time in-process R&D expense of $15.6 million related to the Arcturus Equity Purchase Agreement and amendment to the Research Collaboration and License Agreement incurred in June 2019, net of increases in general operating, facilities, IT, and other overhead expenses in support of our clinical and research program pipeline. We expect our annual research and development expenses to continue to increase in the future as we advance our product candidates through clinical development. The timing and amount of expenses incurred will depend largely upon the outcomes of current or future clinical studies for our product candidates as well as the related regulatory requirements, manufacturing costs, and any costs associated with the advancement of our preclinical programs. Selling, General and Administrative Expenses (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Selling, general and administrative $ 42,252 $ 39,812 $ 2,440 6 % Six Months Ended June 30, Dollar % 2020 2019 Change Change Selling, general and administrative $ 89,768 $ 78,641 $ 11,127 14 % Selling, general and administrative expenses increased $2.4 million and $11.1 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019. The increases in selling, general and administrative expenses were primarily due to increases in personnel costs resulting from an increase in the number of employees in support of our commercial activities, commercialization costs, and professional services costs. We expect selling, general and administrative expenses to continue to increase in the future to support our organizational growth and for our expected staged build out of our commercial organization over the next several years related to our approved products and multiple clinical-stage product candidates. Interest Income (dollars in thousands) 26 Three Months Ended June 30, Dollar % 2020 2019 Change Change Interest income $ 1,797 $ 4,063 $ (2,266 ) -56 % Six Months Ended June 30, Dollar % 2020 2019 Change Change Interest income $ 4,716 $ 7,149 $ (2,433 ) -34 % Interest income decreased $2.3 million and $2.4 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to lower portfolio yields as a result of federal reserve interest rate cuts that were made over the past year. Change in Fair Value of Investment in Arcturus Equity Securities (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Change in fair value of investment in Arcturus equity securities $ 95,200 $ 9,828 $ 85,372 869 % Six Months Ended June 30, Dollar % 2020 2019 Change Change Change in fair value of investment in Arcturus equity securities $ 102,868 $ 9,828 $ 93,040 947 % The increases in the fair value of our investment in Arcturus equity securities of $85.4 million and $93.0 million for the three and six months ended June 30, 2020, respectively, were due to the remeasurement to fair value of the Arcturus common stock and the exercise of the option to purchase additional Arcturus stock. Given the historic volatility of the publicly traded stock price of Arcturus, the fair value adjustments of our investments in Arcturus may be subject to wide fluctuations which may have a significant impact on our earnings in future periods. See Item 1A: "Risk Factors" for additional details. Non-cash Interest Expense on Liability Related to the Sale of Future Royalties (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Non-cash interest expense on liability related to the sale of future royalties $ (8,429 ) $ — $ (8,429 ) * Six Months Ended June 30, Dollar % 2020 2019 Change Change Non-cash interest expense on liability related to the sale of future royalties $ (16,511 ) $ — $ (16,511 ) * The non-cash interest expense on liability related to the sale of future royalties of $8.4 million and $16.5 million for the three and six months ended June 30, 2020, respectively, were due to the interest accreted on the liability related to the sale of future royalties for net sales of Crysvita in the European territory pursuant to the Royalty Purchase Agreement entered into with RPI in December 2019. To the extent the royalty payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, we will prospectively adjust the effective interest rate. Other Income (Expense) (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Other income (expense) $ 217 $ (376 ) $ 593 -158 % Six Months Ended June 30, Dollar % 2020 2019 Change Change Other income (expense) $ (239 ) $ (788 ) $ 549 -70 % Other income (expense) increased by $0.6 million and $0.5 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019. The fluctuations were primarily due to fluctuations in foreign exchange rates. 27 Provision for Income Taxes (dollars in thousands) Three Months Ended June 30, Dollar % 2020 2019 Change Change Provision for income taxes $ (415 ) $ (213 ) $ (202 ) 95 % Six Months Ended June 30, Dollar % 2019 2018 Change Change Provision for income taxes $ (824 ) $ (429 ) $ (395 ) 92 % The provision for incomes taxes increased by $0.2 million and $0.4 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019. This was primarily due to the increase in commercialization activities in Europe and Latin America. We are assessing but do not currently anticipate any material impact from the Coronavirus Aid Relief and Economic Security (CARES) Act on our future income tax provisions. Liquidity and Capital Resources To date, we have funded our operations primarily from the sale of equity securities and the sale of certain future royalties. As of June 30, 2020, we had $817.5 million in available cash, cash equivalents, and available-for-sale investments. We believe that our existing capital resources will be sufficient to fund our projected operating requirements for at least the next twelve months. Our cash, cash equivalents, and available-for-sale investments are held in a variety of deposit accounts, interest-bearing accounts, corporate bond securities, U.S government securities, asset-backed securities, and money market funds. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and credit risk. In February 2019, we completed an underwritten public offering in which we sold 5,833,333 shares of common stock and received net proceeds of approximately $330.4 million. In December 2019, we received net proceeds of $314.2 million from the sale of future royalties to RPI. In March 2020, we received $75.0 million in cash from the sale of 1,243,913 shares of our common stock to Daiichi Sankyo and in April 2020, we received $125.0 million in an upfront payment related to the Daiichi Sankyo License Agreement. During the three and six months ended June 30, 2020, the proceeds from our at-the-market, or ATM, offering were $20.4 million, after commissions and other offering costs. As of June 30, 2020 , we had completed the sale of all available amounts under our ATM facility. The following table summarizes our cash flows for the periods indicated (in thousands): Six Months Ended June 30, 2020 2019 Cash used in operating activities $ (7,801 ) $ (184,838 ) Cash used in investing activities (181,264 ) (159,619 ) Cash provided by financing activities 91,426 362,959 Effect of exchange rate changes on cash (198 ) (30 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ (97,837 ) $ 18,472 Cash Used in Operating Activities Our primary use of cash is to fund operating expenses, which consist primarily of research and development and commercial expenditures. Due to our significant research and development expenditures, we have generated significant operating losses since our inception. Cash used to fund operating expenses is affected by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. Cash used in operating activities for the six months ended June 30, 2020 was $7.8 million and reflected a net loss of $93.7 million, $0.1 million for the amortization of the discount paid on purchased investments, $102.9 million for an unrealized gain in the Arcturus equity securities, and $6.1 million for non-cash collaboration royalty revenues related to the sale of future royalties to Royalty Pharma , offset by non-cash charges of $42.6 million for stock-based compensation, $6.0 million for depreciation, and $16.5 million for non-cash interest incurred on the liability related to the sale of future royalties to Royalty Pharma . Cash used in operating activities also reflected a decrease of $6.1 million due to an increase in prepaid expenses and other current assets primarily due to an increase in prepaid manufacturing, a decrease of $8.5 million primarily due to a receivable related to the license agreement with Daiichi Sankyo in June 2020, a $6.8 million decrease due to the addition of the right-of-use assets net of amortization during the period, and a $8.8 million decrease in accounts payable, accrued liabilities, and other liabilities primarily due to a decrease in accrued bonus due to the payout of the 2019 annual bonus, offset by $18.0 million increase due to a decrease in accounts receivable primarily related to change in the timing of billing to a collaboration partner, a $0.5 million increase due to a decrease in inventory, an increase of $134.9 million in contract liabilities related to the license agreements with Daiichi Sankyo, and a $6.7 million increase due to the addition of lease liabilities net of amortization during the period. 28 Cash used in operating activities for the six months ended June 30, 2019 was $ 184.8 million and reflected a net loss of $ 195.9 million , $ 3.0 million for the amortization of the discount paid on purchased investments , and $9.8 million for an unrealized gain in the Arcturus equity securities, offset by non-cash charges of $ 42.4 million for stock-based compensation , $ 4.2 million for depreciation and amortization of an intangible asset acquired, and $0.6 million of non-cash foreign currency remeasurement losses in connection with fluctuations of exchange rates related to intercompany transactions with foreign subsidiaries that are denominated in our reporting currency . Cash used in operating activities also reflected a $8.2 million decrease due to an increase in accounts receivable due to the commercialization of Mepsevii and Crysvita, a $6.0 million decrease due to an increase in inventory as we build out our commercial inventory supplies as we commercialize Mepsevii, a decrease of $ 3.3 million due to an in crease in prepaid expenses and other assets primarily due to an increase in general receivables, amounts due from a collaboration partner, and amounts owed for a tenant improvement allowance, a $17.2 million decrease due to the addition of the right-of-use assets net of amortization during the period, a $ 7.1 million decrease in accounts payable , accrued expenses, and other liabilities primarily due to a decrease in accrued bonus due to the payout of the 2018 annual bonus, the derecognition of deferred rent obligations for the new lease accounting guidance, and accrued expenses due to the timing of the receipt of invoices, offset by a $18.5 million increase due to the addition of lease liabilities net of amortization during the period . Cash Used in Investing Activities Cash used in investing activities for the six months ended June 30, 2020 was $181.3 million and related to purchases of property and equipment of $18.2 million, purchases of investments of $456.3 million, and the exercise of the option to purchase additional Arcturus shares for $9.6 million, offset by proceeds from the sale of investments of $28.9 million and maturities of investments of $274.0 million. Cash used in investing activities for the six months ended June 30, 2019 was $159.6 million and related to purchases of property and equipment of $8.3 million, purchases of investments of $461.1 million, and purchases of Arcturus equity securities of $14.3 million, offset by proceeds from the sale of investments of $22.6 million and maturities of investments of $301.5 million. Cash Provided by Financing Activities Cash provided by financing activities for the six months ended June 30, 2020 was $91.4 million and was comprised of $55.3 million from the sale of common stock in connection with the license agreement with Daiichi Sankyo in March 2020, $20.4 million in net proceeds f rom the sale of common stock in our ATM offering, and $15.9 million in net proceeds from the issuance of common stock pursuant to the exercise of warrants and equity plan awards, offset by $0.1 million in principal repayments of finance leases. Cash provided by financing activities for the six months ended June 30, 2019 was $363.0 million and was comprised of $330.4 million from the sale of common stock in our underwritten public offering in February 2019, $24.8 million from the sale of common stock in our ATM offering, and $7.7 million in net proceeds from the issuance of common stock pursuant to equity awards. Funding Requirements We anticipate that, excluding non-recurring items, we will continue to generate annual losses for the foreseeable future as we continue the development of, and seek regulatory approvals for, our product candidates, and continue with commercialization of approved products. We will likely require additional capital to fund our operations, to complete our ongoing and planned clinical studies, to commercialize our products, to continue investing in early-stage research capabilities to promote our pipeline growth, to continue to acquire or invest in businesses or products that complement or expand our business, and to further develop our general infrastructure, including building our own Good Manufacturing Practices, or GMP gene therapy manufacturing facility, and such funding may not be available to us on acceptable terms or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may be required to delay, limit, reduce the scope of, or terminate one or more of our clinical studies, research and development programs, future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our future funding requirements will depend on many factors, including the following: • the scope, rate of progress, results and cost of our clinical studies, nonclinical testing, and other related activities; • the cost of manufacturing clinical supplies, and establishing commercial supplies, of our product candidates, products that we have begun to commercialize, and any products that we may develop in the future, including the potential development of our own GMP gene therapy manufacturing plant; • the number and characteristics of product candidates that we pursue; • the cost, timing, and outcomes of regulatory approvals; 29 • the cost and timing of establishing our commercial infrastructure, and distribution capabilities; • the magnitude and extent to which the COVID-19 pandemic impacts our business operations and operating results, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors – Risks Related to Our Business Operations”; and • the terms and timing of any collaborative, licensing, marketing, distribution, acquisition (including whether we exercise our option to acquire GeneTx pursuant to the terms of our Unitholder Option Agreement with them) and other arrangements that we may establish, including any required upfront milestone, royalty, reimbursements or other payments thereunder. We expect to satisfy future cash needs through existing capital balances and through some combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, and other marketing and distribution arrangements. Please see “Risk Factors—Risks Related to Our Financial Condition and Capital Requirements.” Contractual Obligations and Commitments We have contractual obligations from our operating and finance leases, manufacturing and service contracts, licenses, royalties, development and collaboration arrangements, and other research and development activities. The following table summarizes our significant binding contractual obligations at June 30, 2020 (in thousands): Payments due by period Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Operating and finance leases $ 10,338 $ 20,917 $ 16,924 $ 6,051 $ 54,230 Manufacturing and service contracts 7,579 49 — — 7,628 Total $ 17,917 $ 20,966 $ 16,924 $ 6,051 $ 61,858 The terms of certain of our licenses, royalties, development and collaboration agreements, as well as other research and development activities, require us to pay potential future milestone payments based on product development success. The above table excludes such obligations as the amount and timing of such obligations are unknown or uncertain. Off-Balance Sheet Arrangements We have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.