Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the section of this Annual Report entitled “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report.
This discussion and analysis generally covers our financial condition and results of operations for the year ended December 31, 2020, including year-over-year comparisons versus the year ended December 31, 2019. Our Annual Report on Form 10-K for the year ended December 31, 2019 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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
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 certain data from our gene therapy product candidates was delayed as a result of the COVID-19 pandemic. 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. The continuing outbreak has caused delays in delivery of ancillary clinical trial materials as 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. 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 2021 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. We have three commercially approved products, Crysvita® (burosumab) for the treatment of XLH and TIO, Mepsevii® (vestronidase alfa) for the treatment of MPSVII or Sly Syndrome, and Dojolvi® (triheptanoin) for the treatment of LC-FAOD, and we anticipate having six product candidates in the clinical pipeline in 2021. Please see “Part I. Item 1. Business” above for a description of our approved products and our clinical stage pipeline products.
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 our equity securities, the sale of certain future royalties, and strategic collaboration arrangements.
We have incurred net losses in each year since inception. Our net losses were $186.6 million and $402.7 million for the years ended December 31, 2020 and 2019. Net loss for the years ended December 31, 2020 and 2019 included a $170.4 million and $13.4 million gain, respectively, resulting from changes in fair value of our investments in Arcturus Therapeutics Holdings Inc. (Arcturus)
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and Solid Biosciences Inc. (Solid) 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 year ended December 31, 2020, our total revenues increased to $271.0 million, compared to $103.7 million for the same period in 2019. Revenue for the year ended December 31, 2020 included $89.2 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 December 31, 2020, we had $1,212.0 million in available cash, cash equivalents and marketable debt securities.
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 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. We periodically review our estimates as a result of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate. Our significant accounting policies are more fully described in Note 2 to our financial statements included elsewhere in this Annual Report.
We define our critical accounting policies as those GAAP accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. We believe the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments are as follows:
Valuation of Acquired Intangible Assets
We have recorded acquired intangible assets related to our acquisition of Dimension Therapeutics, Inc., or Dimension, in November 2017. Intangible assets with definite useful lives are amortized over their estimated useful lives or other systematic basis and reviewed for impairment if certain events occur.
Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment. Impairment testing is performed at least annually in the fourth quarter or when a triggering event occurs that could indicate a potential impairment. If the carrying value of the assets is not expected to be recovered, the assets are written down to their estimated fair values with the related impairment charge recognized in our consolidated statements of operations in the period in which the impairment occurs. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these assets.
If projects are not successfully developed, our sales and profitability may be adversely affected in future periods. Additionally, the value of the acquired intangible assets, including IPR&D, may become impaired if the underlying projects do not progress as we initially estimated. We believe that the assumptions used in developing our estimates of intangible asset values were reasonable at the time of the acquisition. However, the underlying assumptions used to estimate expected project sales, development costs, profitability, or the events associated with such projects, such as clinical results, may not occur as we estimated at the acquisition date.
Accrued Research and Development, and Research and Development Expenses
As part of the process of preparing consolidated financial statements, we are required to estimate and accrue expenses, the largest of which is related to accrued research and development expenses. This process involves reviewing contracts and purchase orders, identifying services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual costs.
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We record accruals for estimated costs of research, preclinical and clinical studies, and manufacturing development. These costs are a significant component of our research and development expenses. A substantial portion of our ongoing research and development activities is conducted by third-party service providers. We accrue the costs incurred under our agreements with these third parties based on actual work completed in accordance with agreements established with these third parties. We determine the actual costs through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrual balance in each reporting period. As actual costs become known, we adjust our accruals. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. Our accrual is dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party vendors.
Research and development costs are expensed as incurred and consist of salaries and benefits, stock-based compensation, lab supplies, materials and facility costs, as well as fees paid to other nonemployees and entities that conduct certain research and development activities on our behalf. Amounts incurred in connection with collaboration and license agreements are also included in research and development expense. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
To date, there have been no material differences from our accrued estimated expenses to the actual clinical trial expenses; however, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities.
Revenue Recognition
Collaboration and License Revenue
We have certain license and collaboration agreements that are within the scope of Accounting Standards Codification (ASC) 808, Collaborative Agreements , which provides guidance on the presentation and disclosure of collaborative arrangements. Generally, the classification of the transactions under the collaborative arrangements is determined based on the nature of contractual terms of the arrangement, along with the nature of the operations of the participants. We record our share of collaboration revenue, net of transfer pricing related to net sales in the period in which such sales occur, if we are considered as an agent in the arrangement. We are considered an agent when the collaboration partner controls the product before transfer to the customers and has the ability to direct the use of and obtain substantially all of the remaining benefits from the product. Funding received related to research and development services and commercialization costs is generally classified as a reduction of research and development expenses and selling, general and administrative expenses, respectively, in the consolidated statement of operations, because the provision of such services for collaborative partners are not considered to be part of our ongoing major or central operations.
We also record royalty revenues under certain of our license or collaboration agreements in exchange for license of intellectual property. If we do not have any future performance obligations for these license or collaboration agreements, royalty revenue is recorded as the underlying sales occur.
In order to record collaboration revenue, we utilize certain information from our collaboration partners , including revenue from the sale of the product, associated reserves on revenue, and costs incurred for development and sales activities. For the periods covered in the financial statements presented, there have been no material changes to prior period estimates of revenues and expenses.
The terms of our collaboration and license agreements may contain multiple performance obligations, which may include licenses and research and development activities. We evaluate these agreements under ASC 606, Revenue from Contracts with Customers (ASC 606), to determine the distinct performance obligations. We analogize to ASC 606 for the accounting for distinct performance obligations for which there is a customer relationship. Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Total consideration may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.
If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on our relative standalone selling price. The standalone selling price is generally determined based on the prices charged to customers or using expected cost-plus margin. We estimate the efforts needed to complete the performance obligations and recognizes revenue by measuring the progress towards complete satisfaction of the performance obligations using input measures.
Product sales
We sell our approved products through a limited number of distributors. Under ASC 606, revenue from product sales is recognized at the point in time when the delivery is made and when title and risk of loss transfers to these distributors. We also
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recognize revenue from sales of certain products on a “named patient” basis, which are allowed in certain countries prior to the commercial approval of the product. Prior to recognizing revenue, we make estimates of the transaction price, including any variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Product sales are recorded net of estimated government-mandated rebates and chargebacks, estimated product returns, and other deductions.
Provisions for returns and other adjustments are provided for in the period the related revenue is recorded, as estimated by management. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are reviewed periodically and adjusted as necessary. Our estimates of government mandated rebates, chargebacks, estimated product returns, and other deductions depends on the identification of key customer contract terms and conditions, as well as estimates of sales volumes to different classes of payors. If actual results vary, we may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.
Non-cash collaboration royalty revenue
Effective January 1, 2020, we sold the right to receive certain royalty payments from net sales of Crysvita in the European territories to RPI Finance Trust (RPI), an affiliate of Royalty Pharma. We record the royalty revenue from the net sales of Crysvita in the applicable European territories on a prospective basis as non-cash royalty revenue in the Consolidated Statements of Operations over the term of the arrangement.
Inventory
We expense costs associated with the manufacture of our products prior to regulatory approval. Typically, capitalization of such costs begin when we have received the regulatory approval of the product. Prior to the FDA approval of Mepsevii in November 2017, Crysvita in April 2018, and Dojolvi in June 2020, manufacturing and related costs were expensed; accordingly, these costs were not capitalized and as a result are not reflected in the costs of sales after the regulatory approval date. We expect inventory to increase as we produce products and capitalize the full costs of manufacturing the products. Similarly, we expect cost of sales to increase in relation to product revenues as we deplete the previously expensed inventories prior to receiving FDA approval.
Inventory that is manufactured after regulatory approval is valued at the lower of cost and net realizable value and cost is determined using the average-cost method.
We periodically review our inventories for excess amounts or obsolescence and write down obsolete or otherwise unmarketable inventory to the estimated net realizable value.
Liability Related to the Sale of Future Royalties
In December 2019, we entered into a Royalty Purchase Agreement with RPI Finance Trust (RPI), an affiliate of Royalty Pharma. Pursuant to the agreement, RPI paid us $320.0 million in consideration for the Company’s right to receive royalty payments on the net sales of Crysvita in the European Union, the United Kingdom, and Switzerland effective January 1, 2020 under the terms of our Collaboration and License Agreement with KKC. The agreement with RPI will automatically terminate, and the payment of royalties to RPI will cease, in the event aggregate royalty payments received by RPI are equal to or greater than the capped amount of $608.0 million prior to December 31, 2030, or in the event aggregate royalty payments received by RPI are less than $608.0 million prior to December 31, 2030, when aggregate royalty payments received by RPI are equal to $800.0 million.
Proceeds from the transaction was recorded as a liability related to sale of future royalties on the balance sheet. We will amortize $320.0 million, net of transaction costs of $5.8 million using the effective interest method over the estimated life of the arrangement. In order to determine the amortization of the liability, we estimate the total amount of future royalty payments to be received by us and paid to RPI, subject to the capped amount, over the life of the arrangement. The aggregate future estimated royalty payments, less the $314.2 million of net proceeds, will be recorded as non-cash interest expense over the life of the arrangement. Consequently, we estimate an imputed interest on the unamortized portion of the liability and record interest expense relating to the transaction. We will continue to record the royalty revenue arising from the net sales of Crysvita in the applicable European territories as non-cash royalty revenue in our Consolidated Statements of Operations over the term of the arrangement.
We periodically assess the expected royalty payments using a combination of historical results, internal projections and forecasts from external sources. To the extent future expected royalty payments are greater or less than our initial estimates or the timing of such payments is materially different than its original estimates, we will prospectively adjust the amortization of the liability and the effective interest rate. For the three months ended December 31, 2020, our effective annual interest rate was approximately 9.8%.
There are a number of factors that could materially affect the amount and timing of royalty payments from KKC in the applicable European territories, most of which are not within our control. Such factors include, but are not limited to, the success of KKC’s sales and promotion of Crysvita, changing standards of care, the introduction of competing products, pricing for reimbursement in various European territories, manufacturing or other delays, intellectual property matters, adverse events that result
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in governmental health authority imposed restrictions on the use of Crysvita, significant changes in foreign exchange rates as the royalty payments are made in U.S. dollars (USD) while significant portions of the underly ing European sales of Crysvita are made in currencies other than USD, and other events or circumstances that could result in reduced royalty payments from European sales of Crysvita, all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the arrangement. Conversely, if sales of Crysvita in Europe are more than expected, the non-cash royalty revenues and the non-cash interest expense recorded by us would be greater over the term of the arrangement.
Stock-Based Compensation
Stock-based compensation costs related to equity awards granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value of options, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense will likely increase. The Black-Scholes option-pricing model requires the use of certain subjective assumptions which determine the estimated fair value of stock-based awards.
•
Expected Term — The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the midpoint between the vesting date and the end of the contractual term).
•
Expected Volatility— The expected volatility is based on historical volatility over the look-back period corresponding to the expected term.
In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our awards. We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis and will revise in subsequent periods, if actual forfeitures differ from those estimates.
For restricted stock units (RSUs) and performance stock units (PSUs), the fair value is based on the market value of our common stock on the date of grant. Stock-based compensation expense for RSUs is recognized on a straight-line basis over the requisite service period. PSUs are subject to vest only if certain specified criteria are achieved and the employees’ continued service with the Company after achievement of the specified criteria. For certain PSUs, the number of PSUs that may vest are also subject to the achievement of certain specified criteria. Compensation expense for PSUs is recognized only after the achievement of the specified criteria is considered probable and recognized on a straight-line basis between the grant date and the expected vest date, with a catch-up for previously unrecognized expense, if any, recognized in the period the achievement criteria is deemed probable.
For the years ended December 31, 2020, 2019, and 2018 stock-based compensation expense was $85.7 million, $82.0 million and $80.1 million, respectively. As of December 31, 2020, we had $155.6 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, which we expect to recognize over a weighted-average period of 2.48 years.
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
In conjunction with the Dimension acquisition in 2017, we recorded a deferred tax liability reflecting the tax impact of the difference between the book basis and tax basis of acquired IPR&D. Such deferred income tax liability was not used to offset deferred tax assets when analyzing our valuation allowance as the acquired IPR&D is considered to have an indefinite life until we complete or abandon development of the acquired IPR&D.
We recognize benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.
As of December 31, 2020, our total deferred tax assets were $561.1 million, excluding the deferred tax liability generated from the Dimension acquisition. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses and tax credit carryforwards. Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to historical or future ownership percentage change rules provided by the Internal Revenue Code of 1986, and similar state provisions. The annual limitation may result in the expiration of certain net operating loss and tax credit carryforwards before their utilization.
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Results of Operations
Comparison of Years Ended December 31, 2020 and 2019
Revenues (dollars in thousands)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Collaboration and license revenue:
Crysvita collaboration revenue in profit-share
territory
$
128,597
$
74,869
$
53,728
72
%
Crysvita royalty revenue in European territory
1,498
8,120
(6,622
)
(82
%)
Daiichi Sankyo
89,220
—
89,220
*
Bayer
—
504
(504
)
(100
%)
Total collaboration and license revenue
219,315
83,493
135,822
163
%
Product sales:
Crysvita
10,350
4,286
6,064
141
%
Mepsevii
15,342
12,634
2,708
21
%
Dojolvi
13,028
3,301
9,727
295
%
Total product sales
38,720
20,221
18,499
91
%
Crysvita non-cash collaboration royalty revenue
12,995
—
12,995
*
Total revenues
$
271,030
$
103,714
$
167,316
161
%
* not meaningful
For the year ended December 31 , 2020, the Company’s share of Crysvita collaboration revenue in the profit-share territory increased by $53.7 million, as compared to the same period 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 recorded the royalty revenue as non-cash royalty revenues. During the year ended December 31, 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 the 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 year ended December 31 , 2020, we recognized $89.2 million as collaboration and license revenue from this arrangement. As of December 31, 2020, we expect to recognize a substantial majority of the remaining contract liabilities balance of $66.6 million as revenue over the technology transfer service period, which is currently estimated to be complete by the end of 2021.
The decrease in collaboration and license revenue from our research arrangement with Bayer was due to the transition of the clinical development to Bayer as part of the research arrangement.
The increase in product sales of $18.5 million for the year ended December 31, 2020 compared to the same period in 2019 was primarily due to the launch of Dojolvi in the United States in the third quarter of 2020, continuing increase in demand for Crysvita and Mepsevii, and an increase in sales of Dojolvi under our named patient program in certain countries.
Cost of Sales (dollars in thousands)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Cost of sales
$
6,129
$
9,008
$
(2,879
)
(32
%)
Cost of sales related to our approved products decreased by $2.9 million for the year ended December 31, 2020, compared to the same period in 2019. The cost of sales for the year ended December 31, 2020 included a credit for the manufacturing of future inventory batches with an estimated value of $4.6 million 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 $5.7 million on these inventory batches during the year ended December 31, 2019. For the year ended December 31, 2020, we recorded an additional $3.0 million in reserves related to inventory in excess of our forecasted demand. The decrease in cost of sales for the year ended December 31, 2020 compared to the same period in 2019 was due to the reserve on inventory batches recorded in 2019 and related manufacturing credit recorded in 2020, partially offset by an increase in demand for our approved products, the launch of Dojolvi in the third quarter of 2020, and the increase in reserve for excess inventory.
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Prior to the approval of our 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 year ended December 31, 2020 . 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 years ended December 31, 2020 and 2019 would have been approximately $ 11.4 million and $ 9.7 million, respectively, for our commercial product sales. These estimates include the additional $ 3.0 million and $ 5.7 million of reserves on inventory for the year ended December 31, 20 20 and 201 9 , respectively . We expect our gross margin percentage to decrease as we produce approved products that reflect the full costs of manufacturing and as we deplete inventories that we had expensed prior to receiving approval.
Research and Development Expenses (dollars in thousands)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Crysvita
$
29,270
$
37,872
$
(8,602
)
(23
%)
Mepsevii
13,738
17,299
(3,561
)
(21
%)
Dojolvi
34,678
36,652
(1,974
)
(5
%)
DTX401
39,235
33,245
5,990
18
%
DTX301
39,193
39,191
2
0
%
GTX102
28,100
20,172
7,928
39
%
Translational research
103,087
57,300
45,787
80
%
Other research costs
124,783
115,624
9,159
8
%
Total research and development expenses
$
412,084
$
357,355
$
54,729
15
%
Research and development expenses increased $54.7 million for the year ended December 31, 2020 compared to the same period in 2019. The increase in research and development expenses was primarily due to:
•
for Crysvita, a decrease of $8.6 million 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 $3.6 million 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 $2.0 million primarily related to the impact of inventory capitalization of commercial manufacturing costs post-approval by the FDA in June 2020 and NDA filing costs incurred in 2019;
•
for DTX401, a net increase of $6.0 million, primarily related to close out costs for one of our manufacturing sites, as well as 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 in 2020 with one of our manufacturers due to certain batches that did not meet specified quality standards, in addition to increased internal and clinical vendor expenses in preparation for our Phase 3 trial;
•
for DTX301, a nominal increase, primarily related to the timing of clinical drug substance manufacturing activities and drug product batch releases;
•
for GTX102, an increase of $7.9 million, primarily due to the $25.0 million option extension payment to GeneTx that occurred in 2020, compared to the $20.0 million upfront payment to GeneTx that occurred in 2019;
•
for translational research, an increase of $45.8 million primarily related to research, process development, and manufacturing activities, including the progression of our UX701, UX053, and UX068 programs toward IND filings; and in 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; and
•
an increase of $9.2 million in other research and development costs primarily related to the one-time in-process R&D expense of $13.2 million related to the Solid Collaboration and License Agreement incurred in October 2020 and increases in general operating, facilities, IT, and other overhead expenses in support of our clinical and research program pipeline, partially offset by reduced clinical trial expense for the wind-down of the UX007 Glut 1 program.
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We expect our annual research and development expenses to continue to increase in the future as we advance our product candidate s such as UX143 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)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Selling, general and administrative
$
182,933
$
161,524
$
21,409
13
%
Selling, general and administrative expenses increased $21.4 million for the year ended December 31, 2020 compared to the same period 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)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Interest income
$
7,038
$
13,238
$
(6,200
)
(47
%)
Interest income decreased $6.2 million for the year ended December 31, 2020 compared to the same period in 2019, primarily due to lower portfolio yields as a result of lower interest rates during the year ended December 31, 2020.
Change in Fair Value of Equity Investments (dollars in thousands)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Change in fair value of equity investments
$
170,403
$
13,413
$
156,990
1170
%
The increase in the fair value of our equity investments of $157.0 million for the year ended December 31, 2020 was due to the increase in our unrealized gains from the remeasurement of the Arcturus common stock, and the realized gains from the sale of a portion of the Company’s Arcturus common stock holdings, resulting in an increase in net change of $124.5 million, and the unrealized gains on our investment in Solid common stock of $32.5 million. Given the historic volatility of the publicly traded stock price of Arcturus and Solid, the fair value adjustments of our equity investments may be subject to wide fluctuations which may have a significant impact on our earnings in future periods.
Non-cash Interest Expense on Liability Related to the Sale of Future Royalties (dollars in thousands)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Non-cash interest expense on liability related to the
sale of future royalties
$
33,291
$
1,135
$
32,156
2833
%
The increase in the non-cash interest expense on liability related to the sale of future royalties of $32.2 million for the year ended December 31, 2020 was 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)
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Other income (expense)
$
607
$
(787
)
$
1,394
(177
%)
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Other income (expense) increased $1.4 million for the year ended December 31, 2020 compared to the same period in 2019. The fluctuations were primarily due to fluctuations in foreign exchange rates.
Provision for income taxes
Year Ended December 31,
Dollar
%
2020
2019
Change
Change
Provision for income taxes
$
(1,207
)
$
(3,283
)
$
2,076
(63
%)
The provision for incomes taxes decreased by $2.1 million for the year ended December 31, 2020 compared to the same period in 2019. The decrease was primarily due to changes in state tax apportionment which resulted in an increase in the deferred tax liability from the acquisition of Dimension that was recorded in 2019.
Liquidity and Capital Resources
To date, we have funded our operations primarily from the sale of our equity securities, the sale of certain future royalties, and strategic collaboration arrangements.
As of December 31, 2020, we had $1,212.0 million in available cash, cash equivalents, and marketable debt securities. 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 marketable debt securities 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 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. In November 2020, we completed an underwritten public offering in which we sold 5,111,110 shares of common stock and received net proceeds of $435.6 million. In December 2020, we sold 800,000 shares of Arcturus common stock and received net proceeds of $79.8 million. During the year ended December 31 , 2020, the proceeds from our at-the-market, or ATM, offering was $20.4 million, after commissions and other offering costs. As of December 31 , 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):
Year Ended December 31,
2020
2019
2018
Cash used in operating activities
$
(132,220
)
$
(345,383
)
$
(290,566
)
Cash used in investing activities
(179,121
)
(13,039
)
(33,331
)
Cash provided by financing activities
600,272
679,306
336,853
Effect of exchange rate changes on cash
1,119
(165
)
(472
)
Net increase in cash, cash equivalents, and restricted
cash
$
290,050
$
320,719
$
12,484
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 year ended December 31, 2020 was $132.2 million and reflected a net loss of $186.6 million, $170.4 million for a change in fair value of equity investments from Arcturus and Solid and $13.0 million for non-cash collaboration royalty revenues related to the sale of future royalties to RPI, offset by non-cash charges of $85.7 million for stock-based compensation, $12.3 million for depreciation, $0.8 million for the amortization of the premium paid on purchased investments, and $33.3 million for non-cash interest incurred on the liability related to the sale of future royalties to RPI . Cash used in operating activities also reflected a $1.3 million decrease due to an increase in inventory for Mepsevii and Dojolvi. These decreases were offset by a $9.8 million increase due to a decrease in accounts receivable primarily related to change in the timing of billing to a collaboration partner , a $2.7 million increase due to decrease in prepaid expenses and other assets primarily related to a change in the timing of billing to a collaboration partner, a $26.9 million increase in accounts payable, accrued, and other liabilities primarily due to an increase in annual accrued bonus due to higher employee headcount and attainment of company goals , and an increase of $66.6 million in contract liabilities, net, related to the license agreements with Daiichi Sankyo .
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Cash used in operating activities for the year ended December 31, 2019 was $345.4 million and reflected a net loss of $402.7 million, $6.2 million for the amortization of the discount paid on purchased investments, and $13.4 million for an unrealized gain in the Arcturus equity investment , offset by non-cash charges of $82.0 million for stock-based compensation, $8.5 million for depreciation and amortization, $0.7 million 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 $1.1 million for non-cash interest incurred on the liability related to the sale of future royalties to RPI . Cash used in operating activities also reflected a $20.1 million decrease due to an increase in accounts receivable from the commercialization of Mepsevii and Crysvita, a $4.5 million decrease due to an increase in inventory as we build out our commercial inventory supplies as we commercialize Mepsevii, and a $ 8.2 million decrease 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 . These decreases were offset by a $ 13.3 million increase in accounts payable , accrued, and other liabilities primarily due to increased commercial and research activities and the timing of payments and receipt of invoices offset by the derecognition of deferred rent obligations for the new lease accounting guidance and a $2.1 million increase in deferred tax liabilities due to adjustments made related to the Dimension acquisition.
Cash Used in Investing Activities
Cash used in investing activities for the year ended December 31, 2020 was $179.1 million and related to purchases of property, plant, and equipment of $43.9 million, which includes $21.1 million paid for the acquisition of the land and ongoing construction costs for the gene therapy manufacturing plant in Bedford, Massachusetts, purchases of marketable debt securities of $813.2 million, purchases of equity investments of $37.1 million primarily related to $26.8 million for the purchase of Solid shares and $9.6 million for the exercise of the option to purchase additional Arcturus shares, and other activities of $5.6 million that included $3.3 million for the purchase of a convertible notes receivable and the milestone payments of $2.3 million recorded as an intangible asset resulting from the FDA approval of Dojolvi , offset by proceeds from maturities of marketable debt securities of $589.8 million, the sale of Arcturus common stock of $79.8 million, and the sale of marketable debt securities of $51.0 million.
Cash used in investing activities for the year ended December 31, 2019 was $13.0 million and related to purchases of property, plant, and equipment of $24.8 million, purchases of marketable debt securities of $692.8 million, and the purchase of the Arcturus equity investment of $14.3 million, offset by proceeds from maturities of marketable debt securities of $676.2 million and the sale of marketable debt securities of $42.7 million.
Cash Flows Provided by Financing Activities
Cash provided by financing activities for the year ended December 31, 2020 was $600.3 million and was comprised of $435.6 million in net proceeds from the issuance of sale of common stock in our underwritten public offering, $55.3 million in net proceeds from the issuance of common stock in connection with the license agreement with Daiichi Sankyo in March 2020, $20.4 million in net proceeds from the issuance of common stock from our ATM offering, and $89.3 million in net proceeds from the issuance of common stock upon the exercise of warrants and stock options, net of taxes withheld from the vesting of restricted stock units, offset by other activities of $0.2 million in principal repayments of finance leases.
Cash provided by financing activities for the year ended December 31, 2019 was $679.3 million and was comprised of $314.2 million related to net proceeds from the sale of future royalties to Royalty Pharma, $330.4 million in net proceeds from the issuance of common stock in our underwritten public offering, $24.8 million in net proceeds from the issuance of common stock from our ATM offering, and $9.8 million in net proceeds from the issuance of common stock upon the exercise of stock options, offset by taxes withheld from the vesting of restricted stock units.
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 construction of our 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.
74
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;
•
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
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 December 31, 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
$
11,931
$
24,784
$
16,566
$
3,456
$
56,737
Manufacturing and service contracts
4,330
472
—
—
4,802
Land and building construction agreement
26,078
382
—
—
26,460
License and collaboration agreement*
50,000
—
—
—
50,000
Total
$
92,339
$
25,638
$
16,566
$
3,456
$
137,999
* Includes a $50.0 million purchase commitment with Mereo BioPharma Group plc under the license and collaboration agreement which was subsequently paid in January 2021 upon the closing of the transaction
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, which potential obligations are further described in Notes 9 and 15 to the accompanying Consolidated Financial Statements.
Recent Accounting Pronouncements
None
Off-Balance Sheet Arrangements
Since our inception in April 2010, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
75