What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-06 · 115 added, 114 removed, 202 unchanged (53% of the section changed)

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We are advancing two separate routes of administration of RGX-314 to the eye, through a standardized subretinal delivery procedure as well as by delivery to the suprachoroidal space using the SCS Microinjector™ licensed from Clearside Biomedical, Inc.

We have enrolled 42 patients in the Phase I/IIa clinical trial of RGX-314 for the treatment of wet AMD and have reported data for all five dose level cohorts.

We expect to initiate a pivotal program for the subretinal delivery of RGX-314 for the treatment of wet AMD in the second half of 2020.

We expect to dose the first patient in a Phase II trial for the suprachoroidal delivery of RGX-314 using the SCS Microinjector for the treatment of wet AMD (AAVIATE) in the third quarter of 2020 and plan to report interim data from the first cohort of the trial by the end of 2020.

Additionally, we expect to initiate a Phase II trial of the suprachoroidal delivery of RGX-314 using the SCS Microinjector for the treatment of DR in the second half of 2020, and expect to report interim data in 2021.

We have enrolled 42 patients in the Phase I/IIa clinical trial for the subretinal delivery of RGX-314 for the treatment of wet AMD and have reported data for all five dose level cohorts.

We expect to initiate a pivotal program for the subretinal delivery of RGX-314 for the treatment of wet AMD in the first quarter of 2021.

We have begun dosing patients in a Phase II trial for the suprachoroidal delivery of RGX-314 using the SCS Microinjector for the treatment of wet AMD (AAVIATE).

We expect to complete enrollment of the first cohort by the end of 2020, and report initial safety data in early 2021.

Additionally, the Phase II trial of the suprachoroidal delivery of RGX-314 using the SCS Microinjector for the treatment of DR (ALTITUDE) is active and we expect to begin enrolling patients by the end of 2020.

We expect to report interim data from this trial in 2021.

AAV-Mediated Antibody Expression for the Treatment of Hereditary Angioedema (HAE):

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HAE is a chronic and severe disease characterized by recurring severe swelling (angioedema), most commonly in the face, airway, intestines and limbs.

We expect to provide a program update in the second half of 2020.

We expect to provide a program update in 2021.

AAV-Mediated Antibody Expression for the Treatment of Neurodegenerative Diseases:

We continue to collaborate with Neurimmune AG (Neurimmune) to jointly develop novel gene therapies using NAV Vectors to deliver human antibodies for chronic neurodegenerative diseases, with an initial focus on diseases associated with the accumulation and deposition of the microtubule-associated protein tau (tauopathies) and alpha-synuclein (alpha-synucleinopathies).

We expect to provide a program update in the second half of 2020.

We expect to provide a program update in 2021.

Gene therapy programs for the potential treatment of rare monogenic diseases

We are developing RGX-121 for the treatment of the neurological symptoms of Mucopolysaccharidosis Type II (MPS II), a severe genetic lysosomal storage disease caused by deficiency of iduronate-2-sulfatase (IDS), an enzyme that is responsible for breakdown of cellular waste products.

Initial data from the first cohort demonstrated consistent and sustained reduction in heparan sulfate (HS) in the cerebral spinal fluid (CSF) and available data support early signs of neurocognitive stability.

We have completed enrollment in the second cohort and expect to report interim data from both cohorts and a program update in the second half of 2020.

On September 30, 2020, we announced the expansion of the RGX-121 program for MPS II.

Eight patients have now been dosed across two dose cohorts in the ongoing Phase I/II trial of RGX-121 in severe MPS II patients under the age of 5 years old.

The first two patients in the expanded Cohort 2 were dosed in October 2020 via intracisternal delivery of RGX-121 at a dose of 6.5x10 10 genome copies per gram (GC/g) of brain mass.

We anticipate further updates from this trial by the end of 2020.

In addition, we plan to begin a second Phase I/II multicenter, open-label trial of RGX-121 for the treatment of pediatric patients with severe MPS II over the age of 5 years old.

Up to six patients may be enrolled, and RGX-121 will be administered at a dose level of 6.5x1010 GC/g of brain mass.

We also announced a new prospective observational study designed to provide detailed characterization of neurocognitive development and key biomarkers in patients with severe MPS II.

We are developing RGX-111 for the treatment of the neurological symptoms of Mucopolysaccharidosis Type I (MPS I), a severe genetic lysosomal storage disease caused by deficiency of α-l-iduronidase (IDUA), an enzyme required for breakdown of cellular waste products.

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We are developing RGX-181 for the treatment of late-infantile neuronal ceroid lipofuscinosis type 2 (CLN2) disease, one of the most common forms of Batten disease, caused by mutations in the tripeptidyl peptidase 1 (TPP1) gene.

We expect to submit an Investigational New Drug (IND) application for the intracisternal delivery of RGX-181 by the end of 2020, and plan to initiate enrollment in a Phase I/II trial in the first half of 2021.

We expect to submit an Investigational New Drug (IND) application for the intracisternal delivery of RGX-181 in the first quarter of 2021, and we plan to initiate enrollment in a Phase I/II trial in the first half of 2021.

RGX-381 is a new program targeting the ocular manifestations of CLN2 disease in patients and is designed to use the AAV9 vector to deliver the TPP1 gene directly to the retina.

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There is currently no available treatment for ocular manifestations of CLN2 disease.

We expect to submit an IND application for a Phase I/II study of RGX-381 in patients with CLN2 disease in the second half of 2020 and initiate enrollment in the first half of 2021.

We have discontinued internal clinical development of RGX-501 for the treatment of homozygous familial hypercholesterolemia (HoFH) and plan to evaluate strategic alternatives to support the continued advancement of this program.

We expect to submit an IND application for a Phase I/II study of RGX-381 in patients with CLN2 disease by the end of 2020 and initiate enrollment in the first half of 2021.

Gene Therapy Research Program for the Treatment of Neuromuscular Disorders:

We expect to announce plans for the clinical development of a potential treatment for a neuromuscular disorder in the second half of 2020.

We expect to announce plans for the clinical development of a potential treatment for a neuromuscular disorder in 2021.

In addition to our lead product candidates described above, we have also funded, and plan to continue to fund, preclinical research on potential product candidate programs that may become part of our internal product development pipeline.

We have partnered with a number of leading academic institutions and will continue to seek partnerships with innovative institutions to develop novel NAV gene therapy product candidates.

RGX-314 Interim Update

In our Phase I/IIa trial for RGX-314, all 42 patients with wet AMD had received a single administration of RGX-314 across five dose cohorts.

To qualify for inclusion in the trial, participants were required to have a history of frequent anti-vascular endothelial growth factor (VEGF) treatments (including at least four anti-VEGF injections in the eight months preceding trial enrollment) and a documented history of response to anti-VEGF therapy.

The trial design included doses of 3 x 10 9 (Cohort 1), 1 x 10 10 (Cohort 2), 6 x 10 10 (Cohort 3), 1.6 x 10 11 (Cohort 4) and 2.5 x 10 11 (Cohort 5) genome copies (GC)/eye.

Patients will be assessed every four weeks to the six-month primary endpoint, with long-term follow-up continuing for two years.

Below is a summary of the interim results of our Phase I/IIa trial as of July 13, 2020:

RGX-314 was generally well-tolerated at all dose levels, with one possibly drug-related serious adverse event (SAE) of significant decrease in vision reported in Cohort 5.

In Cohorts 4 and 5, durable treatment effect was observed, with stable to improved visual acuity and retinal thickness, and meaningful reductions in anti-VEGF treatment burden were demonstrated over one year.

Patients in Cohort 4 and Cohort 5 at one year after administration of RGX-314 demonstrated stable visual acuity with a mean BCVA change of +4 letters and -2 letters from baseline, respectively, as well as decreased retinal thickness, with a mean change in CRT of -61 µm and -79 µm, respectively.

Patients in Cohort 4 received a mean of 4.1 injections over one year following administration of RGX-314, a 61% reduction in treatment burden.

Patients in Cohort 5 received a mean of 1.4 injections over one year following administration of RGX-314, a reduction in treatment burden of 85%.

In Cohort 4, three out of twelve (25%) patients received no anti-VEGF injections over one year, and these patients demonstrated a mean BCVA improvement of +6 letters and a mean reduction in CRT of -62 µm at one year.

In Cohort 5, eight out of the eleven (73%) patients observed through one year have received no anti-VEGF injections after administration of RGX-314 and these patients demonstrated a stable mean BCVA change of 0 letters and a mean reduction in CRT of -95 µm at one year.

Intraocular RGX-314 protein levels at one year demonstrated dose-dependent expression across cohorts.

Overview of Our NAV Technology Platform

In addition to our internal product development efforts, we also selectively license the NAV Technology Platform to other leading biotechnology and pharmaceutical companies, which we refer to as NAV Technology Licensees.

As of June 30, 2020, our NAV Technology Platform was being applied in one commercially approved product (Zolgensma®), and many partnered product candidates are in development, several of which are in active clinical development.

As of September 30, 2020, our NAV Technology Platform was being applied in one commercially approved product (Zolgensma®), and many partnered product candidates are in development, several of which are in active clinical development.

Licensing the NAV Technology Platform allows us to maintain our internal product development focus on our core disease indications and therapeutic areas while still expanding the NAV gene therapy pipeline, developing a greater breadth of treatments for patients, providing additional technological and potential clinical proof-of-concept for our NAV Technology Platform, and creating potential additional revenue.

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Our offices, laboratories, clinical trial sites, prospective clinical trial sites, contract research organizations (CROs), contract manufacturing organizations (CMOs) and other collaborators and partners are located in jurisdictions where quarantines, executive orders, shelter-in-place orders, guidelines, and other similar orders and restrictions intended to control the spread of the disease have been put in place by governmental authorities.

We have implemented a work-from-home policy for all employees who are not essential to be onsite, and we may take further actions that alter our operations, as may be required by federal, state or local authorities or which we determine are in the best interests of our employees.

We have implemented a work-from-home policy for all employees who are not

essential to be onsite, and we may take further actions that alter our operations, as may be required by federal, state or local authorities or which we determine are in the best interests of our employees.

The COVID-19 pandemic could require us to delay or prevent us from proceeding with our clinical trials and other business initiatives, such as preclinical development and manufacturing operations.

For example, the ongoing construction of our future corporate, manufacturing and research headquarters in Rockville, Maryland is expected to be delayed due to various government orders and restrictions relating to the COVID-19 pandemic .

For example, the ongoing construction of our future corporate, manufacturing and research headquarters in Rockville, Maryland is expected to be delayed from our original estimates due to various government orders and restrictions relating to the COVID-19 pandemic .

In addition, if the business and operations of our licensees are adversely affected by the COVID-19 pandemic, our revenues could in turn be adversely affected.

We are proactively taking measures to mitigate or reduce any adverse impact of the COVID-19 pandemic on the progress of our clinical trials and other business initiatives.

Our results of operations for the three and six months ended June 30, 2020 were not significantly impacted by the COVID-19 pandemic.

However, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition in the future is unknown at this time and will depend on future developments that are highly unpredictable at this time.

Our results of operations for the three and nine months ended September 30, 2020 were not significantly impacted by the COVID-19 pandemic.

Please refer to the “Risk Factors” section of this Quarterly Report on Form 10-Q for further discussion of the risks we face as a result of the COVID-19 pandemic.

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(AveXis), a wholly owned subsidiary of Novartis AG (Novartis), for the treatment of spinal muscular atrophy (SMA).

Zolgensma is a licensed product under our March 2014 License with AveXis for the development and commercialization of treatments for SMA.

Zolgensma is a licensed product under our March 2014 license agreement with AveXis for the development and commercialization of treatments for SMA.

Future license and royalty revenues are dependent on the successful development and commercialization of licensed products by our licensees, which is uncertain, and revenues may fluctuate significantly from period to period.

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Sublicense fees are based on a percentage of license fees received by us from NAV Technology Licensees and are recognized in the period that the underlying license revenue is recognized.

Milestone payments are payable to licensors upon the achievement of specified milestones by NAV Technology Licensees and are recognized in the period the milestone is achieved or deemed probable of achievement.

Milestone payments are payable to licensors upon the achievement of specified milestones by NAV Technology Licensees and are recognized in the period the milestone is achieved or deemed probable of

Royalties are based on a percentage of net sales of licensed products by NAV Technology Licensees and are recognized in the period that the underlying sales occur.

Future costs of revenues are uncertain due to the nature of our license agreements and significant fluctuations in cost of revenues may occur from period to period.

Future cost s of revenue s are uncertain due to the nature of our license agreements and significant fluctuations in cost of revenue s may occur from period to period.

Research and Development Expense

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a Phase I/IIa clinical trial and a planned pivotal program to evaluate the safety and efficacy of the subretinal delivery of RGX-314 for the treatment of wet AMD;

planned Phase II clinical trials to evaluate the safety and efficacy of the suprachoroidal delivery of RGX-314 using the SCS Microinjector for the treatment of wet AMD (AAVIATE) and DR;

Phase II clinical trials to evaluate the safety and efficacy of the suprachoroidal delivery of RGX-314 using the SCS Microinjector for the treatment of wet AMD (AAVIATE) and DR (ALTITUDE);

a Phase I/II clinical trial to evaluate the safety and efficacy of RGX-121 for the treatment of MPS II;

a Phase I/II clinical trial to evaluate the safety and efficacy of RGX-111 for the treatment of MPS I;

preclinical research and development and a planned clinical trial for RGX-181 for the treatment of CLN2 disease;

preclinical research and development and a planned clinical trial for RGX-381 for the treatment of ocular manifestations of CLN2 disease;

preclinical research and development and a planned Phase I/II clinical trial for RGX-181 for the treatment of CLN2 disease;

preclinical research and development and a planned Phase I/II clinical trial for RGX-381 for the treatment of ocular manifestations of CLN2 disease;

preclinical research and development for potential product candidates to treat HAE;

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preclinical research and development for potential product candidates to treat neuromuscular disorders;

completion of a long-term follow-up study for patients dosed in the Phase I/II clinical trial for RGX-501 as we evaluate strategic alternatives to support the continued advancement of this program;

completion of a long-term follow-up study for patients dosed in the Phase I/II clinical trial for RGX-501 for the treatment of homozygous familial hypercholesterolemia (HoFH) as we evaluate strategic alternatives to support the continued advancement of this program;

preclinical research and development for potential product candidates addressing other diseases across a range of therapeutics areas;

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continued acquisition and manufacture of clinical trial materials in support of our anticipated clinical trials.

The following table summarizes our research and development expenses incurred during the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

The following table summarizes our research and development expenses incurred during the three and nine months ended September 30 , 2020 and 2019 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Direct Expenses

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We do not allocate personnel and other internal costs, such as facilities and other overhead costs, to specific product candidates or development programs.

We have discontinued internal clinical development of RGX-501 for the treatment of HoFH and plan to evaluate strategic alternatives to support the continued advancement of this program.

Planned future research and development costs related to RGX-501 primarily relate to the completion of a long-term follow-up study for patients dosed to date.

General and Administrative Expense

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We expect that our general and administrative expense will continue to increase as we continue to develop, and potentially commercialize, our product candidates.

Other Income (Loss)

Interest Income from Licensing

In accordance with our revenue recognition policy, interest income from licensing consists of imputed interest recognized from significant financing components identified in our license agreements with NAV Technology Licensees as well as interest income accrued on unpaid balances due from licensees.

Investment Income

Investment Income (Loss)

Investment income consists of interest income earned and gains and losses realized from our cash equivalents and marketable securities, as well as unrealized gains and losses on marketable equity securities.

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Results of Operations

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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General and administrative

Other operating expenses (income)

Provision for credit losses and other

Total operating expenses

Loss from operations

Income (loss) from operations

Other Income (Loss)

Interest income from licensing

Investment income

Total other income

Loss before income taxes

Investment income (loss)

Total other income (loss)

Income (loss) before income taxes

Income Tax Benefit

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

Net income (loss)

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

License and Royalty Revenue.

License and royalty revenue increased by $8.7 million, from $7.9 million for the three months ended June 30, 2019 to $16.6 million for the three months ended June 30, 2020.

The increase was primarily attributable to an $11.0 million increase in Zolgensma royalty revenue.

Commercial sales of Zolgensma commenced in the second quarter of 2019, and we are eligible to receive a milestone payment of $80.0 million from AveXis upon the achievement of $1.0 billion in cumulative net sales of Zolgensma.

Cumulative net sales of Zolgensma through June 30, 2020 were more than $735.0 million.

The increase in license and royalty revenue for the three months ended June 30, 2020 was partially offset by non-recurring revenue recognized during the three months ended June 30, 2019 resulting from license options exercised by licensees during the period.

License and royalty revenue increased by $84.2 million, from $14.7 million for the three months ended September 30, 2019 to $98.9 million for the three months ended September 30, 2020.

The increase was primarily attributable to the following:

an increase of $9.6 million in Zolgensma royalty revenue, from $9.2 million for the third quarter of 2019 to $18.8 million for the third quarter of 2020, as sales of Zolgensma for the third quarter of 2020 increased by 82% as compared to the third quarter of 2019;

an $80.0 million milestone fee recognized as revenue during the three months ended September 30, 2020 as a result of the achievement of $1.0 billion in cumulative net sales of Zolgensma in the third quarter of 2020.

Upon the achievement of this milestone, there are no further development or sales-based milestones remaining under the March 2014 license agreement with AveXis.

The increase in license and royalty revenue for the three months ended September 30, 2020 was partially offset by non-recurring revenue recognized during the three months ended September 30, 2019 resulting from new licenses we granted to licensees during the period.

Research and Development Expense.

Research and development expenses increased by $8.6 million, from $29.5 million for the three months ended June 30, 2019 to $38.1 million for the three months ended June 30, 2020.

Research and development expenses increased by $8.3 million, from $35.7 million for the three months ended September 30, 2019 to $44.0 million for the three months ended September 30, 2020.

The increase was primarily attributable to the following:

an increase of $3.8 million for external costs associated with preclinical studies and other early-stage research and development;

an increase of $2.3 million for personnel-related costs as a result of increased headcount of research and development personnel, including a $0.5 million increase in stock-based compensation expense;

an increase of $1.7 million for external costs associated with clinical trial and regulatory activities;

an increase of $1.5 million for laboratory costs and facilities used by research and development personnel, including a $0.3 million increase in depreciation expense allocated to research and development functions;

an increase of $0.9 million for external costs associated with manufacturing-related services to support the ongoing development of our product candidates and process development activities.

an increase of $0.6 million for external costs associated with preclinical studies and other early-stage research and development.

General and Administrative Expense.

General and administrative expenses increased by $2.1 million, from $13.4 million for the three months ended June 30, 2019 to $15.6 million for the three months ended June 30, 2020.

General and administrative expenses increased by $3.5 million, from $12.4 million for the three months ended September 30, 2019 to $15.9 million for the three months ended September 30, 2020.

The increase was primarily attributable to the following:

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an increase of $0.5 million for personnel-related costs as a result of increased headcount of general and administrative personnel, including a $0.4 million increase in stock-based compensation expense.

Investment Income .

Investment income decreased by $28.8 million, from $34.5 million for the three months ended June 30, 2019 to $5.7 million for the three months ended June 30, 2020.

The decrease was primarily attributable to an unrealized gain of $31.7 million recognized during the three months ended June 30, 2019 related to our marketable equity securities of Prevail Therapeutics Inc.

We acquired the securities as consideration for a commercial license to the NAV Technology Platform granted to Prevail in August 2017.

Prevail completed its initial public offering (IPO) in June 2019.

Prior to Prevail’s IPO, the securities were accounted for as non-marketable equity securities without a readily determinable fair value and had a carrying value of $0.4 million.

Upon Prevail’s IPO in June 2019, the securities were reclassified to marketable securities and are measured at fair value.

The decrease in investment income was partially offset by net realized and unrealized gains of $4.4 million recognized during the three months ended June 30, 2020 related to our marketable equity securities of Prevail.

As of June 30, 2020, our marketable equity securities of Prevail had a fair value of $24.3 million.

Significant fluctuations in the fair value of the securities may continue to occur from period to period.

Comparison of the Six Months Ended June 30, 2020 and 2019

Provision for Credit Losses and Other .

Provision for credit losses and other increased by $7.8 million during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

The increase was primarily attributable to a provision for credit losses of $7.7 million recognized during the three months ended September 30, 2020 related to our accounts receivable from Abeona Therapeutics Inc.

As of September 30, 2020, we had recorded total accounts receivable from Abeona of $30.1 million and a related allowance for credit losses of $7.7 million.

For further information regarding the provision for credit losses recognized during the three months ended September 30, 2020, refer to Note 7, “License and Royalty Revenue—Abeona Therapeutics Inc.” to the accompanying unaudited consolidated financial statements.

Investment Income (Loss) .

Investment loss was $6.6 million for the three months ended September 30, 2020 as compared to investment income of $0.4 million for the three months ended September 30, 2019, a change of $7.0 million.

The change was primarily attributable to an increase in net realized and unrealized losses of $5.3 million related to our marketable equity securities of Prevail Therapeutics Inc.

(Prevail), as well as a decrease of $1.8 million in investment income on marketable debt securities.

As of September 30, 2020, our marketable equity securities of Prevail had a fair value of $11.5 million, and significant fluctuations in the fair value of the securities may continue to occur from period to period.

Comparison of the Nine Months Ended September 30, 20 20 and 201 9

License and Royalty Revenue.

License and royalty revenue increased by $25.4 million, from $8.8 million for the six months ended June 30, 2019 to $34.2 million for the six months ended June 30, 2020.

The increase was primarily attributable to a $21.0 million increase in Zolgensma royalty revenue.

Cumulative net sales of Zolgensma through June 30, 2020 were more than $735.0 million.

License and royalty revenue increased by $109.7 million, from $23.5 million for the nine months ended September 30, 2019 to $133.1 million for the nine months ended September 30, 2020.

The increase was primarily attributable to the following:

an increase of $30.6 million in Zolgensma royalty revenue, from $10.1 million for the nine months ended September 30, 2019 to $40.7 million for the nine months ended September 30, 2020, as commercial sales of Zolgensma did not commence until the second quarter of 2019;

an $80.0 million milestone fee recognized as revenue during the nine months ended September 30, 2020 as a result of the achievement of $1.0 billion in cumulative net sales of Zolgensma in the third quarter of 2020.

Upon the achievement of this milestone, there are no further development or sales-based milestones remaining under the March 2014 license agreement with AveXis.

Research and Development Expense.

Research and development expenses increased by $20.5 million, from $54.7 million for the six months ended June 30, 2019 to $75.1 million for the six months ended June 30, 2020.

Research and development expenses increased by $28.7 million, from $90.4 million for the nine months ended September 30, 2019 to $119.1 million for the nine months ended September 30, 2020.

The increase was primarily attributable to the following:

an increase of $11.5 million for personnel-related costs as a result of increased headcount of research and development personnel, including a $2.9 million increase in stock-based compensation expense;

an increase of $3.6 million for external costs associated with manufacturing-related services to support the ongoing development of our product candidates and process development activities;

an increase of $5.4 million for external costs associated with clinical trial and regulatory activities;

an increase of $3.2 million for laboratory costs and facilities used by research and development personnel, including a $0.5 million increase in depreciation expense allocated to research and development functions;

an increase of $5.3 million for external costs associated with preclinical studies and other early-stage research and development;

an increase of $4.5 million for external costs associated with manufacturing-related services to support the ongoing development of our product candidates and process development activities;

an increase of $3.4 million for laboratory costs and facilities used by research and development personnel, including a $0.7 million increase in depreciation expense allocated to research and development functions.

General and Administrative Expense.

General and administrative expenses increased by $5.4 million, from $25.0 million for the six months ended June 30, 2019 to $30.4 million for the six months ended June 30, 2020.

General and administrative expenses increased by $8.9 million, from $37.4 million for the nine months ended September 30, 2019 to $46.2 million for the nine months ended September 30, 2020.

The increase was primarily attributable to the following:

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an increase of $2.5 million for personnel-related costs as a result of increased headcount of general and administrative personnel, including a $1.5 million increase in stock-based compensation expense.

Investment Income .

Investment income decreased by $35.0 million, from $37.5 million for the six months ended June 30, 2019 to $2.5 million for the six months ended June 30, 2020.

The decrease was primarily attributable to an unrealized gain of $31.7 million recognized during the six months ended June 30, 2019 related to our marketable equity securities of Prevail.

Provision for Credit Losses and Other .

Provision for credit losses and other increased by $7.9 million during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

The increase was primarily attributable to a provision for credit losses of $7.7 million recognized during the nine months ended September 30, 2020 related to our accounts receivable from Abeona.

As of September 30, 2020, we had recorded total accounts receivable from Abeona of $30.1 million and a related allowance for credit losses of $7.7 million.

For further information regarding the provision for credit losses recognized during the nine months ended September 30, 2020, refer to Note 7, “License and Royalty Revenue—Abeona Therapeutics Inc.” to the accompanying unaudited consolidated financial statements.

Investment Income (Loss) .

Investment loss was $4.1 million for the nine months ended September 30, 2020 as compared to investment income of $38.0 million for the nine months ended September 30, 2019, a change of $42.0 million.

The change was primarily attributable to an unrealized gain of $29.4 million recognized during the nine months ended September 30, 2019 related to our marketable equity securities of Prevail, as well as net realized and unrealized losses of $8.3 million recognized during the nine months ended September 30, 2020 related to these securities.

We acquired the securities as consideration for a commercial license to the NAV Technology Platform granted to Prevail in August 2017.

Prevail completed its IPO in June 2019.

Prevail completed its initial public offering (IPO) in June 2019.

Prior to Prevail’s IPO, the securities were accounted for as non-marketable equity securities without a readily determinable fair value and had a carrying value of $0.4 million.

Upon Prevail’s IPO in June 2019, the securities were reclassified to marketable securities and are measured at fair value.

As of June 30, 2020, our marketable equity securities of Prevail had a fair value of $24.3 million.

Significant fluctuations in the fair value of the securities may continue to occur from period to period.

The change in investment income (loss) also includes a decrease of $4.4 million in investment income on marketable debt securities.

Liquidity and Capital Resources

As of June 30, 2020, we had cash, cash equivalents and marketable securities of $339.2 million, which were primarily derived from the sale of our common stock as well as revenues generated from the licensing of our NAV Technology Platform.

We expect that our cash, cash equivalents and marketable securities as of June 30, 2020 will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of this report, based on our current business plan.

Commercial sales of Zolgensma commenced in the second quarter of 2019, upon which we began recognizing royalty revenue on net sales of the licensed product.

We are eligible to receive a milestone payment of $80.0 million from AveXis upon the achievement of $1.0 billion in cumulative net sales of Zolgensma.

Cumulative net sales of Zolgensma through June 30, 2020 were more than $735.0 million.

However, there is no guarantee that the net sales milestone will be achieved.

We intend to devote the majority of our current capital to clinical development, seeking regulatory approval of our product candidates and capital expenditures to build out additional office, laboratory and manufacturing capacity, including the buildout of our future corporate, manufacturing and research headquarters at 9804 Medical Center Drive.

As of September 30, 2020, we had cash, cash equivalents and marketable securities of $289.8 million, which were primarily derived from the sale of our common stock as well as revenues generated from the licensing of our NAV Technology Platform.

We expect that our cash, cash equivalents and marketable securities as of September 30, 2020 will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of this report, based on our current business plan.

AveXis achieved cumulative net sales of Zolgensma of $1.0 billion in the third quarter of 2020, which triggered the payment of an $80.0 million milestone fee in accordance with our license agreement.

We recorded the $80.0 million milestone fee as accounts receivable as of September 30, 2020, and received the payment in full from AveXis in October 2020.

Upon the payment of this milestone fee, there are no further development or sales-based milestone payments remaining under the March 2014 license agreement with AveXis.

Because of the numerous risks and uncertainties associated with the development and commercialization of gene therapy product candidates, we are unable to estimate the total amount of operating expenditures and capital outlays necessary to complete the development of our product candidates.

Additionally, our estimates are based on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect.

Furthermore, given the uncertainty and rapidly changing market and economic conditions caused by the COVID-19 pandemic, as well as potential for further effects due to a resurgence in COVID-19 infections, we will continue to monitor the nature and extent of the impact of the COVID-19 pandemic on our liquidity and capital resources.

Six Months Ended June 30,

Furthermore, given the continuing uncertainty and volatile market and economic conditions caused by the COVID-19 pandemic, as well as potential for further effects due to a resurgence in COVID-19 infections, we will continue to monitor the nature and extent of the impact of the COVID-19 pandemic on our liquidity and capital resources.

Nine Months Ended September 30,

(in thousands)

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Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

and restricted cash

Net increase in cash and cash equivalents and restricted cash

Cash Flows from Operating Activities

Our net cash used in operating activities for the six months ended June 30, 2020 increased by $4.0 million from the six months ended June 30, 2019.

The increase was primarily attributable to an increase in operating expenses of $32.2 million during the six months ended June 30, 2020, offset primarily by an increase in license and royalty payments received during this period.

Our net cash used in operating activities for the nine months ended September 30, 2020 increased by $11.3 million from the nine months ended September 30, 2019.

The increase was primarily attributable to an increase in operating expenses of $66.6 million during the nine months ended September 30, 2020, offset primarily by an increase in Zolgensma royalty payments received during this period.

The increase in operating expenses during the period was primarily attributable to increased employee headcount and external research and development expenses as we continue the development and advancement of our lead product candidates and other research programs.

For the six months ended June 30, 2020, our net cash used in operating activities of $57.1 million consisted of a net loss of $73.8 million and changes in working capital of $3.1 million, offset by $19.8 million in adjustments for non-cash items.

The changes in working capital include an increase in accounts receivable of $2.7 million which was largely driven by an increase in unbilled Zolgensma royalties during the period.

For the nine months ended September 30, 2020, our net cash used in operating activities of $93.5 million consisted of a net loss of $65.0 million and changes in working capital of $73.9 million, offset by $45.4 million in adjustments for non-cash items.

The changes in working capital include an increase in accounts receivable of $89.4 million which was largely driven by an increase in unbilled receivables for Zolgensma royalties and an $80.0 million sales-based milestone fee earned during the third quarter which was recorded in accounts receivable at the end of the period.

Other changes in working capital were incurred in the normal course of business, primarily as a result of the timing of invoices from and payments to suppliers, prepayments to suppliers, and accrued liabilities for unbilled goods and services from suppliers and personnel-related costs.

Adjustments for non-cash items primarily consisted of stock-based compensation expenses of $16.3 million, depreciation and amortization expense of $4.1 million, and an unrealized loss on our marketable equity securities of Prevail, net of realized gains, of $0.7 million, and were partially offset by imputed interest earned from our license agreements of $1.9 million.

For the six months ended June 30, 2019, our net cash used in operating activities of $53.0 million consisted of a net loss of $33.7 million, $17.2 million in adjustments for non-cash items and changes in working capital of $2.2 million.

Adjustments for non-cash items primarily consisted of stock-based compensation expenses of $24.4 million, depreciation and amortization expense of $6.3 million, an unrealized loss on our marketable equity securities of Prevail, net of realized gains, of $8.3 million, and a provision for credit losses on accounts receivable of $7.7 million.

For the nine months ended September 30, 2019, our net cash used in operating activities of $ 82.2 million consisted of a net loss of $ 68.3 million, $ 7.1 million in adjustments for non-cash items and changes in working capital of $ 6.9 million.

Adjustments for non-cash items primarily consisted of an unrealized gain on our marketable equity securities of Prevail of $ 29.4 million, imputed interest earned from our license agreements of $ 2.1 million and net accretion of discounts on marketable debt securities of $ 1.1 million, and were partially offset by stock-based compensation expenses of $ 20.0 million and depreciation and amortization expense of $ 5.2 million.

The changes in working capital include an increase in accounts receivable of $1.4 million and a decrease in deferred revenue of $0.6 million, which were largely driven by new licenses we granted as a result of license options exercised by licensees during the period.

Other changes in working capital were incurred in the normal course of business, primarily as a result of the timing of invoices

from and payments to suppliers, prepayments to suppliers, and accrued liabilities for unbilled goods and services from suppliers and personnel -related costs.

The change s in working capital include an increase in accounts receivable of $ 10.7 million which was largely driven by an increase in unbilled receivables for Zolgensma royalties .

Other changes in working capital were incurred in the normal course of business , primarily as a result of the timing of invoices from and payments to suppliers, prepayments to suppliers, and accrued liabilities for unbilled goods and services from suppliers and personnel -related costs.

Cash Flows from Investing Activities

For the six months ended June 30, 2020, net cash provided by investing activities consisted of $155.8 million in sales and maturities of marketable securities, offset by $70.7 million to purchase marketable securities and $7.9 million to purchase property and equipment.

We expect capital expenditures to increase in the second half of 2020 and in 2021 as a result of the buildout of our future corporate, manufacturing and research headquarters at 9804 Medical Center Drive in Rockville, Maryland.

For the nine months ended September 30, 2020, net cash provided by investing activities consisted of $204.5 million in sales and maturities of marketable securities, offset by $79.4 million to purchase marketable securities and $14.0 million to purchase property and equipment.

We expect capital expenditures to increase for the remainder of 2020 and in 2021 as a result of the buildout of our future corporate, manufacturing and research headquarters at 9804 Medical Center Drive in Rockville, Maryland.

Total remaining capital expenditures related to the build out of the facility at 9804 Medical Center Drive, net of amounts to be reimbursed by the landlord under our tenant improvement allowance, are expected to be in the upper double-digit millions (USD) and are expected to be incurred through 2022.

However, the actual amount and timing of these capital expenditures are uncertain and may differ materially from our current estimates.

For the six months ended June 30, 2019, net cash provided by investing activities consisted of $141.3 million in sales and maturities of marketable securities, offset by $106.1 million to purchase marketable securities and $8.0 million to purchase property and equipment.

For the nine months ended September 30, 2019, net cash provided by investing activities consisted of $218.0 million in sales and maturities of marketable securities, offset by $127.9 million to purchase marketable securities and $10.7 million to purchase property and equipment.

Cash Flows from Financing Activities

For the six months ended June 30, 2020, net cash provided by financing activities consisted of $4.6 million in proceeds received from the exercise of stock options and issuance of common stock under our employee stock purchase plan.

For the six months ended June 30, 2019, net cash provided by financing activities consisted of $5.5 million in proceeds received from the exercise of stock options and issuance of common stock under our employee stock purchase plan..

For the nine months ended September 30, 2020, net cash provided by financing activities consisted of $6.0 million in proceeds received from the exercise of stock options and issuance of common stock under our employee stock purchase plan.

For the nine months ended September 30, 2019, net cash provided by financing activities consisted of $6.8 million in proceeds received from the exercise of stock options and issuance of common stock under our employee stock purchase plan.

Future Funding Requirements

We have incurred cumulative losses since our inception and had an accumulated deficit of $251.6 million as of June 30, 2020.

We have incurred cumulative losses since our inception and had an accumulated deficit of $242.8 million as of September 30, 2020.

Our transition to recurring profitability is dependent upon achieving a level of revenues adequate to support our cost structure, which depends heavily on the successful development, approval and commercialization of our product candidates.

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S ubject to obtaining regulatory approval for our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution.

Additionally, we expect our capital expenditures will increase significantly in the future for costs associated with building out additional office, laboratory and manufacturing capacity to further support the development of our product candidates and potential commercialization efforts.

As a result, we will need significant additional capital to fund our operations, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements.

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Contractual Obligations, Commitments and Contingencies

There have been no material changes to our contractual obligations, commitments and contingencies as of June 30, 2020 from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

There have been no material changes to our contractual obligations, commitments and contingencies as of September 30, 2020 from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

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Quantitative and Qualitative Disclosures about Market Risk.

For information regarding market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our most recent Annual Report on Form 10-K for the year ended December 31, 2019.

There have been no material changes to our exposure to market risk during the six months ended June 30, 2020.

For information regarding market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

There have been no material changes to our exposure to market risk during the nine months ended September 30, 2020.

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