Sarepta Therapeutics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Please review our legend titled “Forward-Looking Information” at the beginning of this Annual Report on Form 10-K which is incorporated herein by reference. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. Throughout this discussion, unless the context specifies or implies otherwise, the terms “Sarepta”, “we”, “us” and “our” refer to Sarepta Therapeutics, Inc. and its subsidiaries. This section discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 have been excluded from this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Overview We are a commercial-stage biopharmaceutical company focused on helping patients through the discovery and development of unique RNA-targeted therapeutics, gene therapy and other genetic therapeutic modalities for the treatment of rare diseases. Applying our proprietary, highly-differentiated and innovative technologies, and through collaborations with our strategic partners, we are developing potential therapeutic candidates for a broad range of diseases and disorders, including DMD, LGMDs, and other CNS related disorders. Our first commercial product, EXONDYS 51, was granted accelerated approval by the FDA on September 19, 2016. EXONDYS 51 is indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 skipping. EXONDYS 51 uses our PMO chemistry and exon-skipping technology to skip exon 51 of the dystrophin gene. Our second commercial product, VYONDYS 53, was granted accelerated approval by the FDA on December 12, 2019. VYONDYS 53 is indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 53 skipping. VYONDYS 53 uses our PMO chemistry and exon-skipping technology to skip exon 53 of the dystrophin gene. Our third commercial product, AMONDYS 45, was granted accelerated approval by the FDA on February 25, 2021. AMONDYS 45 is indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 45 skipping. AMONDYS 45 uses our PMO chemistry and exon-skipping technology to skip exon 45 of the dystrophin gene. A summary description of our key product candidates, including those in collaboration with our strategic partners, is as follows: • SRP-5051 uses our next-generation chemistry platform, PPMO, and our exon-skipping technology to skip exon 51 of the dystrophin gene. SRP-5051, a peptide conjugated PMO, is designed to bind to exon 51 of dystrophin pre-mRNA, resulting in exclusion of this exon during mRNA processing in patients with genetic mutations that are amenable to exon 51 skipping. Exon skipping is intended to promote the production of an internally truncated but functional dystrophin protein. In the fourth quarter of 2017, we commenced a first-in-human, single ascending dose, study for the treatment of DMD in patients who are amenable to exon 51 skipping. In 2019, we commenced Study 5051-201. In December 2020, we announced an interim analysis on clinical results from the 10 mg/kg and 20 mg/kg dose cohorts of Part A of Study 5051-201. We expect to announce results from the next cohort of Part A of Study 5051-201 at 30 mg/kg in the second quarter of 2021. • SRP-9001 (DMD, micro-dystrophin gene therapy program) , aims to express micro-dystrophin – a smaller but still functional version of dystrophin. A unique, engineered micro-dystrophin is used because naturally-occurring dystrophin is too large to fit in an AAV vector. In the fourth quarter of 2017, an IND application for the micro-dystrophin gene therapy program was cleared by the FDA, and a Phase 1/2a clinical trial in individuals with DMD was initiated (Study 101). In October 2018, Nationwide presented results from the Phase 1/2a clinical trial in four individuals with DMD enrolled in the trial. In March 2019, we presented nine-month functional and creatine kinase (“CK”) data from baseline from these four individuals, and twelve-month CK data from baseline from one of these individuals. In June 2020, we announced that functional, safety and tolerability data at twelve-months from baseline from these four individuals had been published in JAMA Neurology. In September 2020, we presented functional, safety and tolerability data at 24 months from these four individuals. In the fourth quarter of 2018, we commenced a randomized, double-blind, placebo-controlled trial of SRP-9001 with the goal to establish the functional benefits of micro-dystrophin expressions (Study 102). We dosed all 41 participants in Study 102 and have begun dosing participants in the crossover phase of the study. In January 2021, we released top-line results for Part 1 of Study 102 (the 48-week assessment of 41 participants) and interim expression results from Part 2 of Study 102 (the crossover phase). We expect additional results from Part 2 of Study 102 in the first quarter of 2022. We have commenced dosing in Study 103, an open-label study evaluating the safety and expression of commercially representative material for SRP-9001, and expect to report biomarker and safety results from Study 103 in the second quarter of 2021. -71- • SRP-9003 (LGMD, gene therapy program) . We are developing gene therapy programs for various forms of LGMDs. The most advanced of our LGMD product candidates, SRP-9003, is designed to transfer a gene that codes for and restores beta-sarcoglycan protein with the goal of restoring the dystrophin associated protein complex. It utilizes the AAVrh.74 vector system, the same vector used in the micro-dystrophin gene therapy program we are developing with Nationwide. A Phase 1/2a trial of SRP-9003 was commenced in the fourth quarter of 2018. In February 2019, we announced positive two-month biopsy data from the first three-patient low-dose cohort dosed in the SRP-9003 trial, and in October 2019, we announced positive nine-month functional data from these three patients. We have recently dosed one additional cohort of three patients at a higher dose per the study protocol. In June 2020, we announced safety and expression results from three clinical trial participants in the high-dose cohort measured at 60 days, and one-year functional data from three clinical trial participants in the low-dose cohort. In September 2020, we announced six-month functional data from three clinical trial participants in the high-dose cohort, and eighteen-month functional data from three clinical trial participants in the low-dose cohort. We expect to complete GMP runs for SRP-9003 in 2021. We also expect to seek FDA confirmation to initiate our pivotal trial in 2021. Our pipeline includes more than 40 programs in various stages of pre-clinical and clinical development, reflecting our multifaceted approach and expertise in precision genetic medicine to make a profound difference in the lives of patients suffering from rare diseases. We have developed proprietary state-of-the-art CMC and manufacturing capabilities that allow synthesis and purification of our products and product candidates to support both clinical development as well as commercialization. Our current main focus in manufacturing is to continue scaling up production of our PMO-based therapies and optimizing manufacturing for PPMO and gene therapy-based product candidates. We have entered into certain manufacturing and supply arrangements with third-party suppliers and will utilize these capabilities to support production of certain of our products and product candidates and their components. In 2017, we opened a facility in Andover, Massachusetts, which significantly enhanced our research and development manufacturing capabilities. However, we currently do not have internal large scale GMP manufacturing capabilities to produce our products and product candidates for commercial and/or clinical use. The likelihood of our long-term success must be considered in light of the expenses, difficulties and delays frequently encountered in the development and commercialization of new pharmaceutical products, competitive factors in the marketplace and the complex regulatory environment in which we operate. We may never achieve significant revenue or profitable operations. COVID-19 Pandemic The COVID-19 pandemic has presented a substantial public health and economic challenge around the world. Our business operations and financial condition and results have been impacted to varying degrees, and we expect the impact will continue in future quarters. Commercialization : We have activated business continuity plans to minimize disruption to patients. The response to COVID-19 by healthcare providers has made it difficult for some patients, especially those dependent on a hospital setting, to receive infusions or initiate treatment with our commercial products. In addition, as a result of the pandemic, some patients may choose to delay or stop treatment to avoid a visit to a hospital or a visit of a third party in their homes to minimize the risk of infection. The impact of COVID-19 may also result in delays in processing reauthorizations and modifications to program benefits by insurers, making it difficult for patients to obtain or maintain favorable coverage decisions for our products. In addition, the increase in unemployment due to the pandemic has resulted in decreased insurance coverage for many individuals. These challenges may continue for the duration of the COVID-19 pandemic, which is uncertain, and are expected to reduce our revenue and cash flows. Clinical Trials : The impact of COVID-19 has caused disruptions and may cause delays in some of our clinical trials. Missing data could undermine data integrity and probability of success. The response to COVID-19 by healthcare providers and regulatory agencies could delay the commencement of trials, site initiation, compliance in the trials, the completion of trials, including the completion of post-marketing requirements and commitments, slow down enrollment, and make the ongoing collection of data for patients enrolled in studies more difficult or intermittent. We are implementing certain strategy and technology in an attempt to mitigate this risk in the event of subsequent outbreaks. In addition, as COVID-19 continues to spread, some participants and clinical investigators may be unable or unwilling to comply with clinical trial protocols. For example, quarantines or other travel limitations (whether voluntary or required) have been implemented in many countries, and may impede participant movement, affect sponsor access to study sites, or interrupt healthcare services, which may negatively impact the execution of clinical trials. Significant delays or disruptions to our clinical trials could adversely affect our ability to timely initiate studies, conduct successful studies, obtain or maintain regulatory approvals, or commercialize our product candidates. -72- Operations : On March 13, 2020, to protect the health of our employees and their families, and our communities, and in accordance with direction from state and local government authorities, we instituted mandatory work-from-home for all employees and contingent workers other than those who are facility-dependent . Facility-dependent employees, including those needed to maintain manufacturing and clinical research, are reporting to work under strict protocols designed to help those employees remain healthy. Our increased reliance on personnel working from home may negatively impact productivity or disrupt, delay or otherwise adversely impact our business. To date, our remote working arrangements have not impacted our ability to maintain critical business operations. In addition, remote working could increase our cyber security risk. General protective measures put into place at various governmental levels, including quarantines, travel restrictions and business shutdowns, may also negatively affect our operations. Further, if the spread of the COVID-19 pandemic continues and our operations are adversely impacted, including due to an outbreak in a facility, we risk a delay, default and/or nonperformance under existing agreements. Manufacturing : A significant outbreak at one of our partner sites could lead to delays in the manufacturing of our products and product candidates. In addition, the need to prioritize rated orders issued by the Federal Emergency Management Agency pursuant to the U.S. Defense Production Act could impact the manufacturing, supply chain and distribution of our products and product candidates. We are continuing to assess the potential impact of the COVID-19 pandemic on our business, operations and financial condition and results. Despite careful tracking and planning, however, we are unable to accurately predict the extent of the impact of the pandemic on our business, results of operations and financial condition due to the uncertainty of future developments. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. For additional information on the various risks posed by the COVID-19 pandemic, refer to Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities for the periods presented. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. We believe that the estimates and judgments upon which we rely are reasonable based upon historical experience and information available to us at the time that we make these estimates and judgments. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. Although we believe that our judgments and estimates are appropriate, actual results may differ from these estimates. We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements: • revenue recognition; • valuation of product options; • i nventory; and • income tax. Revenue Recognition To determine revenue recognition for arrangements within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), we perform the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as we satisfy a performance obligation. -73- Product Revenue Product revenues are recorded at the net sales price (transaction price) which includes estimated reserves for variable consideration, such as Medicaid rebates, governmental chargebacks, including PHS chargebacks, prompt payment discounts, co-pay assistance and distribution fees. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if no payment is required by us) or a current liability (if a payment is required by us). These reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contracts. Additional details relating to variable consideration follows: • Medicaid rebates relate to our estimated obligations to states under established reimbursement arrangements. Rebate reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses. • Governmental chargebacks, including PHS chargebacks, relate to our estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices that we charge to wholesalers. The wholesaler charges us for the difference between what the wholesaler pays for the products and the ultimate selling price to the qualified healthcare providers. Chargeback reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider from the wholesaler, and we generally issue credits for such amounts within a few weeks of receiving notification of resale from the wholesaler. • Prompt payment discounts relate to our estimated obligations for credits to be granted to specialty pharmacies for remitting payment on their purchases within established incentive periods. Reserves for prompt payment discounts are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. • Co-pay assistance relates to financial assistance provided to qualified patients, whereby we may assist them with prescription drug co-payments required by the patient’s insurance provider. Reserves for co-pay assistance are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses. • Distribution fees relate to fees paid to customers in the distribution channel that provide us with inventory management, data and distribution services and are generally accounted for as a reduction of revenue. To the extent that the services received are distinct from our sale of products to the customer, these payments are accounted for as selling, general and administrative expenses. Reserves for distribution fees result in an increase in a liability if payments are required of us or a reduction of accounts receivable if no payments are required of us. Please read Note 7, Accounts Receivable and Reserves for Product Sales to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a further discussion of revenue recognition. Collaboration Revenue Our collaboration revenue is primarily generated from our collaboration arrangement with Roche. For more information, please read Note 3, Collaboration and License Agreements . At the inception of a collaboration arrangement, we first assess whether the contractual arrangement is within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”), to determine whether the arrangement involves a joint operating activity and involves two (or more) parties that are both active participants in the activity and exposed to significant risks and rewards dependent on the commercial success of such activities. Then we determine whether the collaboration arrangement in its entirety represents a contract with a customer as defined by ASC 606. If only a portion of the collaboration arrangement is potentially with a customer, we apply the distinct good or service unit-of-account guidance in ASC 606 to determine whether there is a unit of account that should be accounted for under ASC 606. For the units of account in the collaboration arrangement that do not represent a vendor-customer relationship, we will (i) consider applying other GAAP, including by analogy, or (ii) if there is no appropriate analogy, consistently apply a reasonable and rational accounting policy election. In general, by analogy to ASC 606, we identify the performance obligations within the collaboration arrangement and identify and allocate the transaction price we expect to receive on a relative standalone selling price basis to each performance obligation. Variable consideration, consisting of development and regulatory milestones, will be included in the transaction price only if we expect to receive such consideration and if it is probable that the inclusion of the variable consideration will not result in a significant reversal in the cumulative amount of revenue recognized under the arrangement. Sales-based royalty and milestone payments are excluded from the transaction price we expect to receive until the underlying sales occur because the license to our intellectual property is deemed to be the predominant item to which the royalties or milestones relate as it is the primary driver of value in its collaboration arrangement. For the recognition of revenue associated with each performance obligation, if we determine ASC 606 is not appropriate to apply by analogy, we will apply a reasonable, rational, and consistently applied accounting policy election to faithfully depict the transfer of services to the collaboration partner over the estimated performance period. Up-front payments from a collaboration partner are recognized as deferred revenue when received and recognized as revenue over the estimated performance period. Reimbursement payments from a collaboration partner associated with research and development cost sharing provisions in a collaboration arrangement are recognized as the related expense is incurred and classified as an offset to research and development expense. -74- Valuation of Product Options Our collaboration arrangements may contain options which provide the collaboration partner with the right to obtain additional licenses. If an arrangement contains product options, by analogy to ASC 606, we evaluate the product options to determine whether they represent material rights, which may include options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent material rights, they are recognized as a separate performance obligation at inception of the arrangement. We allocate a portion of the transaction price of the collaboration arrangement to material rights based on the relative standalone selling price. Amounts allocated to material rights are not recognized as revenue until related options are exercised or expire. Key assumptions to determine the standalone selling price of product options in a collaboration arrangement include, but are not limited to, forecasted revenues, development timelines, incremental costs related to the arrangement, discount rates and likelihood of technical and regulatory success. Inventory Valuation Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis. We capitalize inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. EXONDYS 51 and VYONDYS 53 inventory that may be used in clinical development programs is charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes. We periodically analyze our inventories for excess amounts or obsolescence and write down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Additionally, though our products are subject to strict quality control and monitoring, which we perform throughout the manufacturing processes, certain batches or units of product may not meet quality specifications resulting in a charge to cost of sales. Income Tax We recognize the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. The calculation of our tax liabilities resulting from uncertain tax positions can involve significant judgment. Further, the calculation may involve the application of complex tax regulations in a foreign jurisdiction. Although we believe that we have adequately provided for tax liabilities resulting from uncertain tax positions, the actual amounts paid, if any, could have a material impact on our results of operations. Interest and penalties associated with uncertain tax positions are classified as a component of income tax expense. Please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a further discussion of our critical accounting policies and estimates. -75- The following table sets forth selected consolidated statements of operations data for each of the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands, except per share amounts) $ % Revenues: Products, net $ 455,865 $ 380,833 $ 75,032 20 % Collaboration 84,234 — 84,234 NM* Total revenues 540,099 380,833 159,266 42 % Cost and expenses: Cost of sales (excluding amortization of in-licensed rights) 63,382 56,586 6,796 12 % Research and development 722,343 560,909 161,434 29 % Selling, general and administrative 317,875 284,812 33,063 12 % Acquired in-process research and development — 173,240 (173,240 ) 0% Settlement and license charges — 10,000 (10,000 ) 0% Amortization of in-licensed rights 662 849 (187 ) (22 )% Total cost and expenses 1,104,262 1,086,396 17,866 2 % Operating loss (564,163 ) (705,563 ) 141,400 (20 )% Other income (loss): Gain from sale of Priority Review Voucher 108,069 — 108,069 NM* Loss on contingent consideration (45,000 ) — (45,000 ) NM* Other expense, net (51,971 ) (8,317 ) (43,654 ) NM* Total other income (loss) 11,098 (8,317 ) 19,415 (233 )% Loss before income tax expense (553,065 ) (713,880 ) 160,815 (23 )% Income tax expense 1,063 1,195 (132 ) (11 )% Net loss $ (554,128 ) $ (715,075 ) $ 160,947 (23 )% Net loss per share — basic and diluted $ (7.11 ) $ (9.71 ) $ 2.61 (27 )% * NM: not meaningful Revenues Net product revenues for our products for 2020 increased by $75.0 million compared with 2019. The increase primarily reflects the launch of a new product in December 2019 in the U.S., VYONDYS 53, and increasing demand for our products in the U.S. Collaboration revenue primarily relates to our collaboration arrangement with Roche. In February 2020, we received an aggregate of approximately $1.2 billion in cash consideration from Roche, consisting of an up-front payment and an equity investment in our company. Of that amount, $348.7 million is recorded as deferred revenue and is being recognized as collaboration revenue on a straight-line basis over the performance period, estimated to be through the fourth quarter of 2023. For the year ended December 31, 2020 we recognized $84.2 million of collaboration revenue. For more information, please read Note 3, Collaboration and License Agreements . There was no such transaction in 2019. Cost of sales (excluding amortization of in-licensed rights) Our cost of sales (excluding amortization of in-licensed rights) consists of royalty payments primarily to BioMarin and UWA and inventory costs that relate to sales of our products. Prior to receiving regulatory approval for EXONDYS 51 and VYONDYS 53 by the FDA in September 2016 and December 2019, respectively, we expensed such manufacturing and material costs as research and development expenses. For VYONDYS 53 sold in 2020 and 2019, the majority of related manufacturing costs incurred had previously been expensed as research and development expenses, as such costs were incurred prior to the FDA approval of the products. For EXONDYS 51 sold in 2020 and 2019, only part of the related manufacturing costs incurred had previously been expensed as research and development expenses. If product related costs had not previously been expensed as research and development expenses prior to FDA approval, the incremental inventory costs related to our products sold in 2020 and 2019 would have been approximately $25.9 million and $12.4 million, respectively. -76- Th e following table summarizes the components of our cost of sales for the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands) $ % Inventory costs related to products sold $ 34,323 $ 33,663 $ 660 2 % Royalty payments 29,059 22,923 6,136 27 % Total cost of sales $ 63,382 $ 56,586 $ 6,796 12 % The cost of sales for 2020 increased $6.8 million, or 12%, compared with 2019. The increase was primarily driven by a $6.1 million increase in royalty payments to BioMarin and UWA that reflects increasing demand for our products. Research and development expenses Research and development expenses consist of costs associated with research activities as well as costs associated with our product development efforts, conducting pre-clinical trials, clinical trials and manufacturing activities. Direct research and development expenses associated with our programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants, up-front fees and milestones paid to third parties in connection with technologies that have not reached technological feasibility and do not have an alternative future use, and other external services, such as data management and statistical analysis support, and materials and supplies used in support of clinical programs. Indirect costs of our clinical programs include salaries, stock-based compensation and allocation of our facility- and technology-related costs. Research and development expenses represent a substantial percentage of our total operating expenses. We do not maintain or evaluate and, therefore, do not allocate internal research and development costs on a project-by-project basis. As a result, a significant portion of our research and development expenses are not tracked on a project-by-project basis, as the costs may benefit multiple projects. The following table summarizes our research and development expenses by project for each of the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands) $ % Micro-dystrophin $ 289,877 $ 84,490 $ 205,387 243 % Other gene therapies 67,650 38,720 28,930 75 % Casimersen (exon 45) 58,179 27,095 31,084 115 % Up-front, milestone, and other expenses 47,280 103,162 (55,882 ) (54 )% Golodirsen (exon 53) 36,650 21,390 15,260 71 % Eteplirsen (exon 51) 32,371 47,042 (14,671 ) (31 )% PPMO platform 31,633 19,082 12,551 66 % Collaboration cost-sharing 13,105 9,416 3,689 39 % Other projects 4,566 3,262 1,304 40 % Internal research and development expenses 206,912 207,250 (338 ) (0 )% Roche collaboration reimbursement (65,880 ) — (65,880 ) NM* Total research and development expenses $ 722,343 $ 560,909 $ 161,434 29 % * NM: not meaningful -77- The following table summarizes our research and development expenses by category for each of the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands) $ % Manufacturing expenses $ 366,867 $ 142,937 $ 223,930 157 % Compensation and other personnel expenses 107,149 89,639 17,510 20 % Clinical expenses 95,367 79,241 16,126 20 % Facility- and technology-related expenses 55,372 46,556 8,816 19 % Up-front, milestone, and other expenses 47,280 103,162 (55,882 ) (54 )% Stock-based compensation 41,671 27,681 13,990 51 % Professional services 18,325 22,965 (4,640 ) (20 )% Collaboration cost-sharing 13,105 9,416 3,689 39 % Pre-clinical expenses 10,139 11,729 (1,590 ) (14 )% Research and other 32,948 27,583 5,365 19 % Roche collaboration reimbursement (65,880 ) — (65,880 ) NM* Total research and development expenses $ 722,343 $ 560,909 $ 161,434 29 % * NM: not meaningful Research and development expenses for 2020 increased by $161.4 million, or 29%, compared with 2019. The increase was primarily driven by the following: • $223.9 million increase in manufacturing expenses primarily due to a continuing ramp-up of our micro-dystrophin gene therapy program as well as other gene therapy programs in our pipeline; • $17.5 million increase in compensation and other personnel expenses primarily due to a net increase in headcount; • $16.1 million increase in clinical expenses primarily due to increased patient enrollment in our ESSENCE program as well as certain start-up activities for our micro-dystrophin program; • $8.8 million increase in facility- and technology-related expenses due to our continuing global expansion efforts; • $55.9 million decrease in up-front, milestone, and other expenses, primarily due to $9.3 million of milestone expense related to payments accrued to an academic institution and $38.0 million of up-front payments as a result of the execution of certain research, option and license agreements during 2020. This was offset primarily by $46.9 million of up-front payments to StrideBio and a $28.0 million up-front payment to Genethon as a result of the execution of a license and collaboration agreement with each company, respectively, and $25.6 million of up-front and milestone payments made to various academic institutions throughout 2019 ; • $14.0 million increase in stock-based compensation expense primarily driven by increases in headcount and stock price; • $4.6 million decrease in professional services primarily due to a decrease in reliance on third-party research and development contractors as a result of an increase in hiring and headcount ; • $3.7 million increase in collaboration cost-sharing with Genethon on its micro-dystrophin drug candidates and Lysogene on its Mucopolysaccharidosis type IIIA (“MPS IIIA”) drug candidate; • $1.6 million decrease in pre-clinical expenses primarily due to completion of certain toxicology studies in our PPMO platform, offset by an increase of toxicology studies in our gene therapy programs ; • $5.4 million increase in research and other primarily driven by an increase in sponsored research with academic institutions during 2020; and • $65.9 million offset to expense incurred during 2020 associated with a collaboration reimbursement from Roche related to the micro-dystrophin project. Selling, general and administrative expenses Selling, general and administrative expenses consist of salaries, benefits, stock-based compensation and related costs for personnel in our executive, finance, legal, information technology, business development, human resources, commercial and other general and administrative functions. Other general and administrative expenses include an allocation of our facility- and technology-related costs and professional fees for legal, consulting and accounting services. -78- The following table summarizes our selling, general and administrative expenses by category for each of the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands) $ % Professional services $ 106,571 $ 91,384 $ 15,187 17 % Compensation and other personnel expenses 105,233 105,998 (765 ) (1 )% Stock-based compensation 66,399 50,921 15,478 30 % Facility- and technology-related expenses 28,615 27,249 1,366 5 % Roche collaboration reimbursement (604 ) — (604 ) NM* Other 11,661 9,260 2,401 26 % Total selling, general and administrative expenses $ 317,875 $ 284,812 $ 33,063 12 % * NM: not meaningful Selling, general and administrative expenses for 2020 increased by $33.1 million, or 12%, compared with 2019. This was primarily driven by the following: • $15.2 million increase in professional services primarily due to continuing global expansion; • $15.5 million increase in stock-based compensation primarily due to increases in headcount and stock price ; and • $1.4 million increase in facility- and technology-related expense primarily due to continuing global expansion. Acquired in-process research and development As a result of the Myonexus acquisition, we recorded acquired in-process research and development expense of approximately $173.2 million during the second quarter of 2019. There was no such transaction during 2020 . Settlement and license charges In December 2019, we recognized a $10.0 million settlement charge related to contingent settlement payments to BioMarin as a result of the approval of VYONDYS 53. This was a result of a settlement and license agreement with BioMarin in July 2017. There was no such expense recognized during 2020. Amortization of in-licensed rights Amortization of in-licensed rights relates to the agreements we entered into with BioMarin and UWA in July 2017 and April 2011, respectively. We recorded an in-licensed right asset of approximately $6.6 million in 2017 as a result of the settlement and license agreements with BioMarin. Additionally, following the first sale of EXONDYS 51 in September 2016 and VYONDYS 53 in December 2019, we recorded an in-licensed right asset of $1.0 million and $0.5 million, respectively, related to the license agreement with UWA. Each in-licensed right is being amortized on a straight-line basis over the remaining life of the patent from the first commercial sale of each product. For the years ended December 31, 2020 and 2019, we recorded amortization of in-licensed rights of approximately $0.7 million and $0.8 million, respectively. Gain from sale of Priority Review Voucher In February 2020, we entered into an agreement with Vifor (International) Ltd. to sell the rare pediatric disease Priority Review Voucher (“PRV”) we received from the FDA in connection with the approval of VYONDYS 53. Following the early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in March 2020, we completed our sale of the PRV and received proceeds of $108.1 million, net of commission, which was recorded as a gain from sale of the PRV as it did not have a carrying value at the time of the sale. There was no similar activity during 2019. Loss on contingent consideration The loss on contingent consideration relates to the fair value adjustment of the Company’s contingent consideration derivative liability related to regulatory-related contingent payments to Myonexus selling shareholders as well as to academic institutions under separate license agreements that meet the definition of a derivative. For the year ended December 31, 2020, we recognized $45.0 million of expense to adjust the fair value of the contingent consideration liabilities. There was no similar activity during 2019. For further information on our contingent considerations, please read Note 5, Fair Value Measurements. -79- Other expense , net Other expense, net, primarily consists of interest income on our cash, cash equivalents and investments, interest expense on our debt facilities, amortization of investment discount, and fair value adjustment from our investment in Lysogene. Our cash equivalents and investments consist of money market funds, government and government agency debt securities and certificates of deposit. Interest expense primarily includes interest accrued on our convertible notes and term loan. Other expense, net, for 2020 increased by approximately $43.7 million compared with 2019. The increase primarily reflected an increase in the interest expense on our debt facilities as well as a decrease in interest income and the amortization of investment discounts due to the investment mix of the Company’s investment portfolio . Income tax expense Income tax expense for 2020 and 2019 was approximately $1.1 million and $1.2 million, respectively. Income tax expense for all periods presented relate to state and foreign income taxes. Liquidity and Capital Resources The following table summarizes our financial condition for each of the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands) $ % Financial assets: Cash and cash equivalents $ 1,502,648 $ 835,080 $ 667,568 80 % Short-term investments 435,923 289,668 146,255 50 % Restricted cash and investments 9,315 9,566 (251 ) (3 )% Total cash, cash equivalents and investments $ 1,947,886 $ 1,134,314 $ 813,572 72 % Borrowings: Term loan $ 527,731 $ 240,004 $ 287,727 120 % Convertible debt 464,762 441,896 22,866 5 % Total borrowings $ 992,493 $ 681,900 $ 310,593 46 % Working capital Current assets $ 2,485,196 $ 1,468,913 $ 1,016,283 69 % Current liabilities 416,026 264,767 151,259 57 % Total working capital $ 2,069,170 $ 1,204,146 $ 865,024 72 % For the year ended December 31, 2020, our principal sources of liquidity were primarily derived from our collaboration arrangement with Roche, net proceeds from draw-down of our debt facility, net proceeds from sale of the PRV and product sales of our products. For the year ended December 31, 2019, our principal source of liquidity was derived from proceeds from product sales of our products and debt and equity financings. Our principal uses of cash are research and development expenses, selling, general and administrative expenses, investments, capital expenditures, business development transactions and other working capital requirements. Our future expenditures and capital requirements may be substantial and will depend on many factors, including but not limited to the following: • our ability to continue to generate revenues from sales of EXONDYS 51, VYONDYS 53, and potential future products; • the timing and costs associated with our global expansion; • the timing and costs of building out our manufacturing capabilities; • the timing of advanced payments related to our future inventory commitments and manufacturing obligations; • the timing and costs associated with our clinical trials and pre-clinical trials; • the attainment of milestones and our obligations to make milestone payments to Myonexus’ selling shareholders, StrideBio, BioMarin, Lysogene, Lacerta, Nationwide, UWA and other institutions; -80- • repayment of outstanding debt; and • the costs of filing, prosecuting, defending and enforcing patent claims and our other intellectual property rights. Our cash requirements are expected to continue to increase as we advance our research, development and commercialization programs and we expect to seek additional financings primarily from, but not limited to, the sale and issuance of equity and debt securities, or the licensing or sale of our technologies or additional government contracts. We cannot provide assurances that financing will be available when and as needed or that, if available, the financings will be on favorable or acceptable terms. If we are unable to obtain additional financing when and if we require, this would have a material adverse effect on our business and results of operations. To the extent we issue additional equity securities, our existing stockholders could experience substantial dilution. Cash Flows The following table summarizes our cash flow activity for each of the periods indicated: For the Year Ended December 31, 2020 2019 Change Change (in thousands) $ % Cash provided by (used in) Operating activities $ 107,466 $ (456,463 ) $ 563,929 (124 )% Investing activities (121,721 ) 286,725 (408,446 ) (142 )% Financing activities 682,323 642,554 39,769 6 % Increase in cash and cash equivalents $ 668,068 $ 472,816 $ 195,252 41 % Operating Activities Cash provided by operating activities was $107.5 million for 2020. Cash used in operating activities for 2019 was $456.5 million. The favorable change was primarily driven by the following: • $749.4 million net increase in deferred revenue primarily as a result of the collaboration with Roche; • $45.0 million increase in the mark-to-market loss on the contingent consideration; • $29.5 million increase in stock-based compensation due to year-over-year increases in headcount and stock price; and • $18.3 million net increase in other non-cash adjustments. The increases were partially offset by: • $120.4 million increase in net loss excluding acquired in-process research and development expense, and the gain from the sale of the PRV, primarily driven by increases in research and development expense and selling, general and administrative expense partially offset by an increase in net product revenues and collaboration revenue; • $29.4 million decrease related to the issuance of common shares to StrideBio at no cost in 2019; • $14.6 million net increase in inventory primarily from our continuing build-up of inventory purchased in 2020 as the demand for our products increased; and • $113.8 million net increase in use of other operating assets and liabilities, excluding deferred revenue. Investing Activities Cash used in investing activities was $121.7 million for 2020. Cash provided by investing activities for 2019 was $286.7 million. The unfavorable change was primarily due to the following: • $526.1 million decrease in proceeds from the maturity or sale of available-for-sale securities; • $139.9 million increase in purchase of available-for-sale securities; and • $22.6 million increase in purchase of property and equipment. -81- The decreases were partially offset by: • $172.6 million decrease in net payments as a result of the acquisition of Myonexus during 2019; and • $108.1 million increase in net proceeds from the sale of the PRV during 2020. Financing Activities Cash provided by financing activities increased by $39.8 million for 2020 compared with 2019, primarily driven by the following: • $312.1 million increase in net proceeds from the issuance of common stock Roche; • $47.4 million increase in proceeds from the exercise of options and our employee stock purchase program; and • $45.5 million increase in net proceeds from debt financings. The increases were partially offset by: • $365.4 million decrease in net proceeds from the sale of common stock. Off-Balance Sheet Arrangements During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose. Contractual Payment Obligations In our continuing operations, we have entered into long-term contractual arrangements from time to time for our facilities, the provision of goods and services, and issuance of debt securities, among others. The following table presents contractual obligations arising from these arrangements as of December 31, 2020: Payment Due by Period Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years (in thousands) Debt obligations (1) $ 1,320,597 $ 55,949 $ 361,249 $ 903,399 $ — Lease obligations (2) 58,134 13,873 23,181 20,509 571 Manufacturing obligations (3) 1,294,435 632,257 316,097 207,864 138,217 Total contractual obligations $ 2,673,166 $ 702,079 $ 700,527 $ 1,131,772 $ 138,788 (1) Interest is included. (2) Lease obligations only include real estate leases that had commenced prior to December 31, 2020. The leases embedded in certain supply agreements are included in the manufacturing obligations caption. (3) Manufacturing obligations include agreements to purchase goods and services that are enforceable and legally binding or subject to cancellation penalties and that specify all significant terms. Manufacturing obligations relate primarily to our commercialization of EXONDYS 51 and VYONDYS 53, and clinical programs for DMD as well as our gene therapy programs. Milestone Obligations For products and product candidates that are currently in various research and development stages, we may be obligated to make up to $3.9 billion of future development, regulatory, up-front royalty and sales milestone payments associated with our collaboration and license agreements. Payments under these agreements generally become due and payable upon achievement of certain development, regulatory or commercial milestones. Because the achievement of these milestones is not probable and payment is not required as of December 31, 2020, such contingencies have not been recorded in our consolidated financial statements. Amounts related to contingent milestone payments are not yet considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones. -82- Other Funding Commitments We have several on-going clinical trials in various stages. Our most significant clinical trial expenditures are to contract research organizations (“CROs”). The CRO contracts are generally cancellable at our option. As of December 31, 2020, we had approximately $280.9 million in cancellable future commitments based on existing CRO contracts. Recent Accounting Pronouncements Please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.