What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-27 compared with 2020-07-30 · 137 added, 131 removed, 174 unchanged (61% of the section changed)

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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.

The FDA has also delayed certain key meetings or discussions with us related to one of our product candidates, which may adversely impact the progression of our clinical study for such product candidate.

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.

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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 .

As a result, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our financial statements in the fourth quarter and beyond .

"Risk Factors" for additional details.

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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 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 October 5, 2020 Kyowa Kirin Co., Ltd., or KKC (formerly Kyowa Hakko Kirin Co., Ltd., or KHK) announced the European Commission (EC) approved Crysvita for the treatment of XLH in older adolescents and adults.

Crysvita was previously approved by the EC for the treatment of XLH with radiographic evidence of bone disease in children one year of age and older and adolescents with growing skeletons.

With this expanded approval, adolescents with radiographic evidence of bone disease, regardless of growth status, as well as adults with XLH are now also eligible for treatment with Crysvita in the European Union (EU).

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

cannot be curatively resected or localized in adults and pediatric patients 2 years of age and older.

Crysvita is also approved in the United States for the treatment of FGF23-related hypophosphatemia in tumor-induced osteomalacia, or TIO, associated with phosphaturic mesenchymal tumors that 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.

We are collaborating with 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.

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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.

Dojolvi 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 and 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.

In Canada, we have been granted priority review and have filed a new drug submission.

Discussions with EU regulatory authorities are ongoing.

Our gene therapy pipeline includes DTX301 and DTX401 in clinical development for the treatment of two diseases:

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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 .

A fourth cohort of three patients at the same cohort 2 and 3 dose of 1.0 × 10^13 GC/kg is underway using prophylactic steroids A fourth cohort of three patients at the same cohort 3 dose of 1.0 × 10^13 GC/kg is ongoing using prophylactic steroids.

Data from this cohort are expected by the end of 2020.

Phase 3 initiation is expected in 2021.

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.

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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.

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 by the end of 2020.

A fourth cohort of three patients is ongoing at 6.0 x 10^12 GC/kg with a prophylactic steroid regimen.

Data from this cohort is not expected to impact the timing of a Phase 3 study, which is expected to initiate in the first half of 2021.

Our nucleic acid pipeline includes the option to acquire GTX-102 in clinical development for the treatment of Angelman syndrome:

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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.

GTX-102 is being developed in collaboration with GeneTx Biotherapeutics LLC (GeneTx).

With our partner GeneTx, we have reported positive interim data from the ongoing Phase 1/2 study indicating substantial improvements in all patients in at least two disease domains including communication, behavior, sleep, gross motor function, and fine motor function as measured by the Clinical Global Impression of Improvement Scale for Angelman Syndrome, or CGI-I-AS for Patients 1 through 4 at day 128, and Patient 5 at Day 86 .

At the highest doses , all five patients experienced a serious adverse event (SAE) of lower extremity weakness believed to be related to local inflammation due to GTX-102.

Following these events, the companies paused enrollment and dosing.

These SAEs were assessed as mild or moderate in severity and have generally improved over a period of a few weeks while disease domain improvements have been sustained for three months .

We and GeneTx plan to amend the study protocol to reduce the dose-level range and modify the administration process, which we expect to reduce further drug-related SAEs.

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.

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.

Crysvita for the treatment of X-linked hypophosphatemia, or XLH

On October 5, 2020 KKC announced the European Commission (EC) approved Crysvita for the treatment of XLH in older adolescents and adults.

Crysvita was previously approved by the EC for the treatment of XLH with radiographic evidence of bone disease in children one year of age and older and adolescents with growing skeletons.

With this expanded approval, all adolescents with radiographic evidence of bone disease, regardless of growth status, as well as adults with XLH are now also eligible for treatment with Crysvita in the EU.

DTX301 for the treatment of ornithine transcarbamylase, or O TC, deficiency

A fourth cohort of three patients at the same cohort 3 dose of 1.0 × 10^13 GC/kg is ongoing using prophylactic steroids.

Data from this cohort are expected by the end of 2020.

We are also continuing Phase 3 planning and discussions with the FDA, with the intent to start the Phase 3 study in 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.

In October 2020, we announced that a fourth cohort of three patients is ongoing at 6.0 x 10^12 GC/kg, the same dose as cohorts two and three, with a prophylactic steroid regimen .

Data from this cohort is not expected to impact the timing of a potential Phase 3 study.

Additional data on Cohort 3, dosed at 6.0 x 10^12 GC/kg with an optimized reactive steroid regimen, are expected to be released in the fourth quarter of 2020.

Following meetings with the FDA and finalization of the study design, we plan to initiate the study in the first half of 2021.

GTX-102 for the treatment of Angelman Syndrome, partnered with GeneTx

In October 2020, we, along with our partner GeneTx, announced positive interim data from the ongoing Phase 1/2 study of GTX-102, an investigational antisense oligonucleotide for the treatment of Angelman Syndrome.

Preliminary results from the Phase 1/2 study indicate substantial improvements in all patients in at least two disease domains including communication, behavior, sleep, gross motor function, and fine motor function as measured by the CGI-I-AS for Patients 1 through 4 at day 128, and Patient 5 at Day 86.

At the highest doses, all five patients experienced a SAE of lower extremity weakness believed to be related to local inflammation due to GTX-102.

Following these events, the companies paused enrollment and dosing.

These SAEs were assessed as mild or moderate in severity and have generally improved over a period of a few weeks while disease domain improvements have been sustained for three months.

We and GeneTx plan to amend the study protocol to reduce the dose-level range and modify the administration process, which we expect to reduce further drug-related SAEs.

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.

In September 2020, we announced the hire of Ernie Meyer, Chief Human Resources Officer and Executive Vice President.

In this newly created role, Mr.

Meyer will lead all aspects of the Global Human Resources and Facilities operations.

He will report to Emil D.

Kakkis and will serve on the Executive Leadership Team.

In September 2020, we also announced the hire of Mardi C.

Dier, Chief Financial Officer (CFO) and Executive Vice President.

In this role, Ms.

Dier will be responsible for leading the corporate finance, strategy, investor relations, corporate communications, and information technology functions.

She will report to Emil D.

Kakkis and will serve on the Executive Leadership Team.

Business Development Update

In October 2020, we announced a strategic collaboration with Solid Biosciences, Inc.

(Solid) to develop and commercialize new gene therapies for Duchenne Muscular Dystrophy.

This collaboration combines Solid’s differentiated microdystrophin construct and our HeLa Producer Cell Line, or PCL, manufacturing platform for use with AAV8 and variants.

Under terms of the collaboration, Solid received a $40.0 million payment for our investment and may receive up to $255.0 million in cumulative milestone payments per product upon achievement of specified milestone events, and tiered royalties on worldwide net sales at low double-digit to mid-teens percentages.

Upon achievement of proof-of-concept, Solid has the right to opt-in to co-fund collaboration programs in return for participation in a profit share or increased royalty payments.

Financial Operations Overview

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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.

Our net loss was $68.8 million and $162.6 million for the three and nine months ended September 30, 2020, respectively, and $113.0 million and $308.9 million for the three and nine months ended September 30, 2019, respectively.

Net loss for the three and nine months ended September 30, 2020 included a $11.5 million loss and a $91.3 million gain, respectively, resulting from 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.

For the three months ended September 3 0 , 2020, our total revenues increased to $ 81.5 million, compared to $ 25.8 million for the same period in 2019 and for the nine months ended September 30, 2020, increased to $ 179.5 million, compared to $ 68.1 million for the same period in 2019.

Revenue for the three and nine months ended September 30, 2020 included $ 32.9 million and $ 51.7 million , respectively, 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.

Th e 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 September 30, 2020, we had $765.5 million in available cash, cash equivalents and available-for-sale investments.

Critical Accounting Policies and Significant Judgments and Estimates

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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.

carrying value of assets and liabilities that are not readily apparent from other sources.

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 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.

There have been no material changes in our critical accounting policies during the nine months ended September 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:

Comparison of the three and nine months ended September 30, 2020 to the three and nine months ended September 30, 2019:

Revenue (dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Collaboration and license revenue:

Crysvita collaboration revenue in profit-share

Royalty revenue in European territory

Crysvita royalty revenue in European territory

Daiichi Sankyo

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Total product sales

Non-cash collaboration royalty revenue

Crysvita non-cash collaboration royalty revenue

Total revenues

* not meaningful

Six Months Ended June 30,

Nine Months Ended September 30,

Collaboration and license revenue:

Crysvita collaboration revenue in profit-share

Royalty revenue in European territory

Crysvita royalty revenue in European territory

Daiichi Sankyo

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Total product sales

Non-cash collaboration royalty revenue

Crysvita non-cash collaboration royalty revenue

Total revenues

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.

For the three months and nine months ended September 30, 2020, the Company’s share of Crysvita collaboration revenue in the profit-share territory increased by $14.5 million and $42.4 million, respectively, as compared to the same periods in 2019.

The increase primarily reflects the continuing increase in demand for Crysvita due to an increase in the number of patients on therapy.

In December 2019, we sold the rights to the Crysvita 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 .

During the nine months ended September 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 an additional $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.

For the three and nine months ended September 30, 2020, we recognized $32.9 million and $51.7 million, respectively, as collaboration and license revenue from this arrangement.

We expect to recognize a substantial majority of the $183.6 million transaction price as revenue over the technology transfer service period, which is currently estimated to be substantially complete by the end of 2021.

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.

The decreases 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 $7.0 million and $12.7 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019 were primarily due to the launch of Dojolvi in the United States in the third quarter of 2020, continuing increase in demand for our other 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,

Three Months Ended September 30,

Cost of sales

Six Months Ended June 30,

Nine Months Ended September 30,

Cost of sales

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.

Cost of sales related to our approved products decreased by $0.3 million and $3.3 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The cost of sales for the nine months ended September 30, 2020 includes a credit for the manufacturing of future inventory batches with an estimated value of $4.6 million, which was recorded during the first quarter of 2020, and 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 $1.9 million on these inventory batches during the three months ended September 30, 2019.

The decrease in cost of sales for the three months ended September 30, 2020 compared to the same period in 2019 was due to the reserve on these inventory batches recorded in 2019, offset by an increase in demand for our approved products and the launch of Dojolvi in the third quarter of 2020.

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.

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 nine months ended September 30 , 2020 would have been approximately $ 2.5 million and $ 5.6 million, respectively, and for the three and nine months ended September 30, 2019 would have been approximately $ 2.7 million and $ 4.4 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,

Three Months Ended September 30,

Translational research

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Total research and development expenses

Six Months Ended June 30,

Nine Months Ended September 30,

Translational research

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Total research and development expenses

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 .

Research and development expenses decreased $12.8 million and increased $6.7 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods 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;

for Crysvita, a decrease of $2.5 million and $7.9 million for the three and nine months ended September 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 decrease of $0.9 million and $3.3 million for the three and nine months ended September 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 Dojolvi, a decrease of $2.9 million and $0.9 million for the three and nine months ended September 30, 2020, respectively, primarily related to the net impact of inventory capitalization of commercial manufacturing costs post-approval by the FDA in June 2020, NDA filing costs incurred in 2019, and the expense related to pre-approval manufacturing costs;

for DTX301, a decrease of $4.4 million and $6.8 million for the three and nine months ended September 30, 2020, respectively, primarily related to the timing of clinical drug substance manufacturing activities and drug product batch releases;

for DTX401, an increase of $2.6 million and a decrease of $3.8 million for the three and nine months ended September 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 second quarter of 2020 with one of our manufacturers due to certain batches that did not meet specified quality standards;

for GTX102, a de crease of $ 19.1 million and an increase of $ 6.9 million f or the three and nine months ended September 30, 2020 , respectively, primarily due to the $25.0 million option extension payment to GeneTx that occurred during the first quarter of 2020, offset by the $20.0 million upfront payment to GeneTx that occurred during the third quarter of 2019;

for translational research, an increase of $12.4 million and $34.6 million for the three and nine months ended September 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.

for other research and development costs, an increase of $1.9 million and a decrease of $12.0 million for the three and nine months ended September 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 and reduced clinical trial expense for the wind-down of the UX007 Glut 1 program, 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.

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Selling, General and Administrative Expenses (dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Selling, general and administrative

Six Months Ended June 30,

Nine Months Ended September 30,

Selling, general and administrative

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.

Selling, general and administrative expenses increased $1.1 million and $12.2 million for the three and nine months ended September 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, partially offset by lower travel and related expenses due to travel restrictions in connection with the COVID-19 pandemic.

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)

Three Months Ended June 30,

Three Months Ended September 30,

Interest income

Six Months Ended June 30,

Nine Months Ended September 30,

Interest income

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,

Change in fair value of investment in Arcturus

equity securities

Six Months Ended June 30,

Change in fair value of investment in Arcturus

equity securities

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.

Interest income decreased $2.0 million and $4.4 million for the three and nine months ended September 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 Investments in Equity Securities (dollars in thousands)

Three Months Ended September 30,

Change in fair value of investments in equity

Nine Months Ended September 30,

Change in fair value of investments in equity

The fair value of our investments in equity securities decreased by $13.7 million and increased by $79.4 million for the three and nine months ended September 30, 2020, respectively, 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.

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Non-cash Interest Expense on Liability Related to the Sale of Future Royalties (dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Non-cash interest expense on liability related to the

sale of future royalties

Six Months Ended June 30,

Nine Months Ended September 30,

Non-cash interest expense on liability related to the

sale of future royalties

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.

The non-cash interest expense on liability related to the sale of future royalties of $8.6 million and $25.1 million for the three and nine months ended September 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,

Three Months Ended September 30,

Other income (expense)

Six Months Ended June 30,

Nine Months Ended September 30,

Other income (expense)

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.

Other income (expense) increased by $0.7 million and $1.2 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The fluctuations were primarily due to fluctuations in foreign exchange rates.

Provision for Income Taxes (dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Provision for income taxes

Six Months Ended June 30,

Nine Months Ended September 30,

Provision for income taxes

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.

The provision for incomes taxes increased by a nominal amount and $0.4 million for the three and nine months ended September 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.

We have assessed and have determined there is no expected 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.

As of September 30, 2020, we had $765.5 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.

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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.

During the three and nine months ended September 30, 2020, the proceeds from our at-the-market, or ATM, offering were none and $20.4 million, respectively, after commissions and other offering costs.

As of September 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,

Nine Months Ended September 30,

Cash used in operating activities

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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.

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 operating activities for the nine months ended September 30, 2020 was $69.8 million and reflected a net loss of $162.6 million, $91.3 million for an unrealized gain in equity securities from Arcturus, and $9.4 million for non-cash collaboration royalty revenues related to the sale of future royalties to Royalty Pharma , offset by non-cash charges of $62.9 million for stock-based compensation, $0.2 million for the amortization of the premium paid on purchased investments, $9.1 million for depreciation, $0.2 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, and $25.1 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 $2.6 million decrease due to an increase in inventory for Mepsevii and Dojolvi, a $12.5 million decrease due to an increase in prepaid expenses and other current assets primarily due to an increase in prepaid manufacturing, and a $7.3 million decrease primarily due to the addition of the right-of-use assets net of amortization during the period, offset by $5.1 million increase due to a decrease in accounts receivable primarily related to change in the timing of billing to a collaboration partner, a $2.8 million increase in accounts payable, accrued liabilities, and other liabilities primarily due to completion of laboratory construction amounts that were accrued at the beginning of the year, net of a decrease in accrued bonus due to the payout of the 2019 annual bonus, an increase of $102.9 million in contract liabilities, net, related to the license agreements with Daiichi Sankyo, and a $7.6 million increase due to the addition of lease liabilities, net of amortization during the period.

Cash used in operating activities for the nine months ended September 30, 2019 was $273.3 million and reflected a net loss of $308.9 million, $4.9 million for the amortization of the discount paid on purchased investments, and $12.0 million for an unrealized gain in the Arcturus equity securities, offset by non-cash charges of $62.3 million for stock-based compensation, $6.4 million for depreciation and amortization of an intangible asset acquired, and $0.9 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 $10.4 million decrease due to an increase in accounts receivable due to the commercialization of our products, a $6.6 million decrease due to an increase in inventory as we build out our commercial inventory supplies as we commercialize Mepsevii, a decrease of $5.9 million due to an increase 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, and a $15.6 million decrease due to the addition of the right-of-use assets net of amortization during the period, offset by a $4.0 million increase in accounts payable, accrued liabilities, and other liabilities primarily due to increased commercial and research activities and the timing of the receipt of invoices, and $17.1 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 used in investing activities for the nine months ended September 30, 2020 was $277.0 million and related to purchases of property and equipment of $22.0 million, purchases of investments of $648.5 million, the purchase of investments in equity securities of $10.2 million related to $9.6 million for the exercise of the option to purchase additional Arcturus shares and $0.6 million related to the DiaCarta warrant, purchase of a convertible notes receivable of $1.9 million from DiaCarta, and the payment of $2.3 million on the FDA approval of Dojolvi recorded as intangible assets, offset by proceeds from the sale of investments of $40.4 million and maturities of investments of $367.4 million.

Cash used in investing activities for the nine months ended September 30, 2019 was $80.3 million and related to purchases of investments of $610.3 million, purchases of property and equipment of $13.3 million, and purchases of equity securities from Arcturus of $14.3 million, offset by proceeds from maturities of investments of $522.5 million and the sale of investments of $35.1 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.

Cash provided by financing activities for the nine months ended September 30, 2020 was $110.6 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 $35.1 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 nine months ended September 30, 2019 was $363.9 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 $8.6 million in net proceeds from the issuance of common stock pursuant to equity awards.

Funding Requirements

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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):

The following table summarizes our significant binding contractual obligations at September 30, 2020 (in thousands):

Payments due by period

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis