Sarepta Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the section contained in our Annual Report on Form 10-K for the year ended December 31, 2020 under the caption “Part II-Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This discussion contains certain forward-looking statements, which are often identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “could,” “continue,” “ongoing,” “predict,” “potential,” “likely,” “seek” and other similar expressions, as well as variations or negatives of these words. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to • the expected or potential impact of the ongoing COVID-19 pandemic on our business, including our commercial sales, ongoing and planned clinical trials, manufacturing and operations; • our belief that our proprietary technology platforms and collaborations can be used to develop novel pharmaceutical products to treat a broad range of diseases; • our intention to leverage our technology platforms, organizational capabilities, collaborations and resources to lead the field of precision genetic medicines, including the treatment of rare, neuromuscular and other diseases, with a diversified portfolio of product candidates; • our technologies and programs, including those with strategic partners, and their respective potential benefits, including our PMO based compounds’ potential to be designed to create more, less, or none of certain proteins, or produce analogues of endogenous proteins; the potential of our PPMO to be tailored to reach other organs beyond muscle and result in enhanced delivery into the cell with less frequent dosing than PMOs; and the benefits of the AAVrh.74 vector, the MHCK7 promoter and the transgene; • our expectation that our partnerships with manufacturers will support our clinical and commercial manufacturing capacity for our micro-dystrophin Duchenne muscular dystrophy gene therapy programs and Limb-girdle muscular dystrophy programs, while also acting as a manufacturing platform for potential future gene therapy programs, and our belief that our current network of manufacturing partners are able to fulfil the requirements of our commercial plan; • our plan to continue building out our network for commercial distribution in jurisdictions in which our products are approved; • estimated timelines and milestones for 2021 and beyond, including discussing with the U.S. Food and Drug Administration (“FDA”) the path for the commencement of Part B of Study 5051-201, announcing additional results from Part 2 of Study SRP-9001-102 in the first quarter of 2022, reporting expression and safety results from Study SRP-9001-103 in the second quarter of 2021, completing GMP runs for SRP-9003 in 2021, and seeking the FDA confirmation to initiate our pivotal trial for SRP-9003 in 2021; • our plan to expand our pipeline through internal research and development and through strategic transactions; • the timely completion and satisfactory outcome of our post-marketing requirements and commitments, including verification of a clinical benefit for our products in confirmatory trials; • our plan to evaluate future engagement with the European Medicines Agency (the “EMA”) on potential next steps for EMA approval of our products; • our ability to further secure long-term supply of our commercial products and our product candidates to satisfy our planned commercial, early access programs (“EAP”) and clinical needs; • the impact of regulations and regulatory decisions by the FDA and other regulatory agencies on our business, as well as the development of our product candidates and our financial and contractual obligations; • the possible impact of any competing products on the commercial success of our products and our product candidates and our ability to compete against such products; • our ability to enter into research, development or commercialization alliances with universities, hospitals, independent research centers, non-profit organizations, pharmaceutical and biotechnology companies and other entities for specific molecular targets or selected disease indications and our ability to selectively pursue opportunities to access certain intellectual property rights that complement our internal portfolio through license agreements or other arrangements; 19 • our expectations regarding the potential benefits of the partnership, licensing and/or collaboration arrangements and other strategic arrangements and transactions we have entered into or may enter into in the future; our plans and ability to file and progress to issue additional patent applications to enhance and protect our new and existing technologies and programs; • our belief that our owned and licensed patents and patent applications provide us with a competitive advantage; • our estimates regarding how long our currently available cash and cash equivalents will be sufficient to finance our operations and business plans and statements about our future capital needs; • our estimates regarding future revenues, research and development expenses, other expenses, capital requirements and payments to third parties; • our expectations relating to potential funding from government and other sources for the development of some of our product candidates; • our expectation regarding the impact of environmental laws and regulations on our business; and • our beliefs and expectations regarding milestone, royalty or other payments that could be due to third parties under existing agreements. We undertake no obligation to update any of the forward-looking statements contained in this Quarterly Report on Form 10-Q after the date of this report, except as required by law or the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) . We caution readers not to place undue reliance on forward-looking statements. Our actual results could differ materially from those discussed in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q, and other written and oral forward-looking statements made by us from time to time, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements, including the risks, uncertainties and assumptions identified under the heading “Risk Factors” in this Quarterly Report on Form 10-Q. 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 Duchenne muscular dystrophy (“DMD”), Limb-girdle muscular dystrophies (“LGMDs”), and other neuromuscular and central nervous system (“CNS”) related disorders. We commercialize three products that were approved by the FDA: EXONDYS 51 (eteplirsen) Injection (“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 phosphorodiamidate morpholino oligomer (“PMO”) chemistry and exon-skipping technology to skip exon 51 of the dystrophin gene. VYONDYS 53 (golodirsen) Injection (“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. AMONDYS 45 (casimersen) Injection (“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. We are in the process of conducting various EXONDYS 51, VYONDYS 53 and AMONDYS 45 clinical trials, including studies that are required to comply with our post-marketing FDA requirements/commitments to verify and describe the clinical benefit of these products. A summary description of our main 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. In May 2021, we announced results from the 30 mg/kg cohort of Part A of Study 5051-201. We will discuss with the FDA the path for the commencement of Part B of Study 5051-201. 20 • SRP-9001 (DMD, micro-dystrophin gene therapy program), aims to express micro-dystrophin – a smaller but 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 investigational new drug (“ 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. In October 2018, Nationwide Children’s Hospital (“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 have dosed all 41 participants in that trial and are 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 com pleted dosing in Study 103, an open-label study evaluating the safety and expression of commercially representative material for SRP-9001, and expect to report expression and safety results from Study 103 in the second quarter of 2021. • 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. 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 plan 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. Manufacturing, Supply and Distribution We have developed proprietary state-of-the-art Chemistry, Manufacturing and Controls (“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 which will in part utilize these capabilities to support production of certain of our 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 Good Manufacturing Practices (“GMP”) manufacturing capabilities to produce our products and product candidates for commercial and/or clinical use. For our current and future manufacturing needs, we have entered into supply agreements with specialized contract manufacturing organizations (each a “CMO”) to produce custom raw materials, the active pharmaceutical ingredients (“APIs”), drug product and finished goods for our products and product candidates for both commercial and clinical use. All of our CMO partners have extensive technical expertise, GMP experience and experience manufacturing our specific technology. For our commercial DMD program, we have worked with our existing CMOs to increase product capacity from mid-scale to large-scale. While there are a limited number of companies that can produce raw materials and APIs in the quantities and with the quality and purity that we require for our commercial products, based on our diligence to date, we believe our current network of CMOs are able to fulfill these requirements, and are capable of expanding capacity as needed. Additionally, we have, and will continue to evaluate further relationships with additional suppliers to increase overall capacity as well as further reduce risks associated with reliance on a limited number of suppliers for manufacturing. 21 Our commercial products are distributed in the U.S. through a limited network of home infusion specialty pharmacy providers that deliver the medication to patients and a specialty distributor that distributes our products to hospitals and hospital outpatient clinics. With respect to the pre-commercial distribution of our products to patients outside of the U.S., we have contracted with third party distributors and service providers to distribute our products in certain countries through our EAPs. We plan to continue building out our network for commercial distribution in jurisdictions in which our products are approved. Our gene therapy manufacturing capabilities have been greatly enhanced through partnerships with Thermo Fisher Scientific Inc. (“Thermo”), Catalent, Inc. (“Catalent”) and Aldevron LLC (“Aldevron”). We have adopted a hybrid development and manufacturing strategy in which we are building internal manufacturing expertise relative to all aspects of AAV-based manufacturing, including gene therapy and gene editing supply, while closely partnering with first-in-class manufacturing partners to expedite development and commercialization of our gene therapy programs. We expect that our partnerships with Thermo and Catalent will support our clinical and commercial manufacturing capacity for our micro-dystrophin DMD gene therapy programs and LGMD programs, while also acting as a manufacturing platform for potential future gene therapy programs. The collaboration integrates process development, clinical production and testing, and commercial manufacturing. Aldevron is expected to provide GMP-grade plasmid for our SRP-9001 micro-dystrophin DMD gene therapy program and LGMD programs, as well as plasmid source material for future gene therapy programs, such as Charcot-Marie-Tooth (“CMT”) and other neuromuscular and CNS related disorders. Manufacturers and suppliers of our commercial products and product candidates are subject to the FDA’s current GMP (“cGMP”) requirements and other rules and regulations prescribed by foreign regulatory authorities. We depend on our third-party partners for continued compliance with cGMP requirements and applicable foreign standards. Cash, Cash Equivalents and Investments As of March 31, 2021, we had approximately $1,747.1 million of cash, cash equivalents and investments, consisting of $1,481.8 million of cash and cash equivalents, $256.0 of short-term investments, and $9.3 million of long-term restricted cash and investments. We believe that our balance of cash, cash equivalents and investments is sufficient to fund our current operational plan for at least the next twelve months. 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, the risks associated with government sponsored programs and the complex regulatory environment in which we operate. 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. 22 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 the Risk Factors of this Quarterly Report on Form 10-Q. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements included elsewhere in this report. The preparation of our unaudited condensed 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 unaudited condensed 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 the most critical to the judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements: • revenue recognition; • inventory; and • income tax. Aside from the removal of valuation of product options as a critical accounting policy as of January 1, 2021, there have been no changes to our critical accounting policies and significant estimates as detailed in our Annual Report on Form 10-K for the year ended December 31, 2020. 23 Results of Operations for the Three Months Ended March 31, 2021 and 20 20 The following tables set forth selected unaudited condensed consolidated statements of operations data for each of the periods indicated: For the Three Months Ended March 31, 2021 2020 Change Change (in thousands, except per share amounts) $ % Revenues: Products, net $ 124,926 $ 100,448 $ 24,478 24 % Collaboration 22,005 13,226 8,779 66 % Total revenues 146,931 113,674 33,257 29 % Costs and expenses: Cost of sales (excluding amortization of in-licensed rights) 22,346 12,622 9,724 77 % Research and development 195,149 136,144 59,005 43 % Selling, general and administrative 71,131 82,768 (11,637 ) (14 )% Settlement and license charges 10,000 — 10,000 NM* Amortization of in-licensed rights 170 166 4 2 % Total cost and expenses 298,796 231,700 67,096 29 % Operating loss (151,865 ) (118,026 ) (33,839 ) 29 % Other (loss) income: Other expense, net (15,528 ) (7,420 ) (8,108 ) 109 % Gain from sale of Priority Review Voucher — 108,069 (108,069 ) (100 )% Total other (loss) income (15,528 ) 100,649 (116,177 ) (115 )% Loss before income tax (benefit) expense (167,393 ) (17,377 ) (150,016 ) NM* Income tax (benefit) expense (143 ) 115 (258 ) (224 )% Net loss $ (167,250 ) $ (17,492 ) $ (149,758 ) NM* Net loss per share - basic and diluted $ (2.10 ) $ (0.23 ) $ (1.87 ) NM* * NM = Not Meaningful Revenues Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from Medicaid rebates, governmental chargebacks including Public Health Services chargebacks, prompt pay 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 payments are required of us) or a current liability (if a payment is required of us). Our estimates take into consideration current contractual and statutory requirements. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received or paid may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and net loss in the period such variances become known. Net product revenues for our products for the three months ended March 31, 2021, increased by $24.5 million compared with the three months ended March 31, 2020. These increases primarily reflects increasing demand for our products in the U.S. Collaboration revenue relates to our collaboration arrangement with Roche. For the three months ended March 31, 2021 and 2020, we recognized $22.0 million and $13.2 million of collaboration revenue, respectively. For more information, please read Note 3, Collaboration and License Agreements within our Annual Report on Form 10-K for the year ended December 31, 2020. 24 Cost of Sales (excluding amortization of in-licensed rights) Our cost of sales (excluding amortization of in-licensed rights) primarily consists of royalty payments to BioMarin Pharmaceuticals, Inc. (“BioMarin”) and the University of Western Australia (“UWA”) , inventory costs that relate to sales of our products and the related overhead costs. Prior to receiving regulatory approval for EXONDYS 51, VYONDYS 53, and AMONDYS 45 by the FDA in September 2016, December 2019, and February 2021, respectively, we expensed such manufacturing and material costs as research and development expenses. For AMONDYS 45 sold in the three months ended March 31, 2021, and VYONDYS 53 sold in the three months ended March 31, 2020, 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 VYONDYS 53 sold in the three months ended March 31, 2021, and EXONDYS 51 sold in the three months ended March 31, 2021 and 2020, 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 receiving FDA approval, the incremental inventory costs related to our products sold would have been approximately $6.3 million and $5.6 million for the three months ended March 31, 2021 and 2020, respectively. For the Three Months Ended March 31, 2021 2020 Change Change (in thousands) $ % Inventory costs related to products sold $ 14,329 $ 6,221 $ 8,108 130 % Royalty payments 8,017 6,401 1,616 25 % Total cost of sales $ 22,346 $ 12,622 $ 9,724 77 % The cost of sales for the three months ended March 31, 2021 increased by $9.7 million, or 77%, compared with the same period in 2020. The changes were primarily driven by the following: • $8.1 million increase in inventory costs related to products sold primarily as a result of increasing demand for our products as well as the write-offs of certain batches of our products not meeting our quality specifications for the three months ended March 31, 2021, with no similar activity for the three months ended March 31, 2020; and • $1.6 million increase in royalty payments to BioMarin and UWA 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. For the Three Months Ended March 31, 2021 2020 Change Change (in thousands) $ % Micro-dystrophin $ 59,373 $ 44,069 $ 15,304 35 % Other gene therapies 33,955 15,196 18,759 123 % Casimersen (exon 45) 13,501 9,815 3,686 38 % Golodirsen (exon 53) 13,494 15,853 (2,359 ) (15 )% PPMO platform 9,090 3,528 5,562 158 % Eteplirsen (exon 51) 6,510 5,810 700 12 % Collaboration cost-sharing 6,200 2,642 3,558 135 % Up-front, milestone, and other expenses 4,000 8,533 (4,533 ) (53 )% Other projects 4,637 969 3,668 NM* Internal research and development expenses 57,517 46,173 11,344 25 % Roche collaboration reimbursement (13,128 ) (16,444 ) 3,316 (20 )% Total research and development expenses $ 195,149 $ 136,144 $ 59,005 43 % * NM = Not Meaningful 25 For the Three Months Ended March 31, 2021 2020 Change Change (in thousands) $ % Manufacturing expenses $ 89,321 $ 62,264 $ 27,057 43 % Compensation and other personnel expenses 30,196 26,119 4,077 16 % Clinical trial expenses 28,591 18,556 10,035 54 % Facility- and technology-related expenses 17,186 13,251 3,935 30 % Stock-based compensation 11,126 9,249 1,877 20 % Collaboration cost-sharing 6,200 2,642 3,558 135 % Pre-clinical expenses 5,236 642 4,594 NM* Up-front, milestone, and other expenses 4,000 8,533 (4,533 ) (53 )% Professional services 2,648 4,500 (1,852 ) (41 )% Research and other 13,773 6,832 6,941 102 % Roche collaboration reimbursement (13,128 ) (16,444 ) 3,316 (20 )% Total research and development expenses $ 195,149 $ 136,144 $ 59,005 43 % * NM = Not Meaningful Research and development expenses for the three months ended March 31, 2021, increased by $59.0 million, or 43%, compared with the three months ended March 31, 2020. The increase was primarily driven by the following: • $27.1 million increase in manufacturing expenses primarily due to a continuing ramp-up of our gene therapy programs; • $4.1 million increase in compensation and other personnel expenses primarily due to a net increase in headcount; • $10.0 million increase in clinical trial expenses primarily due to increased patient enrollment for our ESSENCE program as well as certain start-up activities for our micro-dystrophin program; • $3.9 million increase in facility- and technology-related expenses due to our continuing expansion efforts; • $1.9 million increase in stock-based compensation expense primarily driven by increases in headcount and changes in stock price; • $3.6 million increase in collaboration cost sharing with Genethon on its micro-dystrophin drug candidates and Lysogene on its MPS IIIA drug candidate; • $4.6 million increase in pre-clinical expenses primarily due to an increase of toxicology studies in our PPMO platforms; • $4.5 million decrease in up-front, milestone and other expenses primarily due to $4.0 million of milestone expense incurred in the three months ended March 31, 2021, offset by $8.8 million of milestone expense accrued to an academic institution during the same period of 2020; • $1.9 million decrease in professional service expenses primarily due to a decrease in reliance on third-party research and development contractors as a result of an increase in hiring and headcount; • $6.9 million increase in research and other primarily driven by an increase in sponsored research with academic institutions during the three months ended March 31, 2021; and • $3.3 million increase in the offset to expense associated with a collaboration reimbursement from Roche primarily due to continuing development of our micro-dystrophin gene therapy. 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. 26 For the Three Months Ended March 31, 2021 2020 Change Change (in thousands) $ % Compensation and other personnel expenses $ 28,129 $ 26,792 $ 1,337 5 % Stock-based compensation 17,382 14,775 2,607 18 % Professional services 15,518 31,124 (15,606 ) (50 )% Facility- and technology-related expenses 7,350 7,050 300 4 % Other 2,986 3,027 (41 ) (1 )% Roche collaboration reimbursement (234 ) — (234 ) NM* Total selling, general and administrative expenses $ 71,131 $ 82,768 $ (11,637 ) (14 )% * NM = Not Meaningful Selling, general and administrative expenses for the three months ended March 31, 2021 decreased by $11.6 million, or 14%, compared with the three months ended March 31, 2020. This was primarily driven by the following: • $1.3 million increase in compensation and other personnel expenses primarily due to a net increase in headcount; • $2.6 million increase in stock-based compensation primarily due to increases in headcount and changes in stock price; and • $15.6 million decrease in professional services primarily due to a decrease in reliance on third-party selling, general and administrative contractors as a result of an increase in hiring and headcount, as well as a transaction fee for the Roche transaction incurred during the three months ended March 31, 2020, with no similar activity incurred during the three months ended March 31, 2021. Settlement and License Charges In February 2021, we recognized a $10.0 million settlement charge related to contingent settlement payments to BioMarin as a result of the approval of AMONDYS 45. This was a result of a settlement and license agreement with BioMarin in July 2017. There was no such expense recognized during the same period of 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, VYONDYS 53 in December 2019 and AMONDYS 45 in February 2021, we recorded an in-licensed right asset of $1.0 million, $0.5 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 life of the patent from the first commercial sale of each product. For both the three months ended March 31, 2021 and 2020, we recorded amortization of in-licensed rights of approximately $0.2 million. 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 unrealized gain or loss 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 includes interest accrued on our convertible notes and term loan. For the three months ended March 31, 2021, other expense, net, increased by approximately $8.1 million compared with the three months ended March 31, 2020. The increase primarily reflected an increase in interest expense incurred on our term loan debt facilities due to an increase in the outstanding balance partially offset by a reduction of interest expense incurred on our convertible debt related to the adoption of ASU 2020-06, 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. As a result of the adoption of ASU 2020-06, interest expense was reduced by $5.4 million for the three months ended March 31, 2021. 27 Gain from s ale of Priority Review Voucher In February 2021, we entered into an agreement to sell the rare pediatric disease Priority Review Voucher (“PRV”) we received from the FDA in connection with the approval of AMONDYS 45 for consideration of $102.0 million. The closing of the transaction is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary conditions. The transaction closed on April 13, 2021 and the net proceeds will be recorded as a gain from sale of the PRV as it does not have a carrying value at the time of the sale during the quarter ended June 30, 2021. In February 2020, we entered into an agreement to sell the rare pediatric disease 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. Income tax (benefit) expense Income tax benefit for the three months ended March 31, 2021 was approximately $0.1 million. Income tax expense for the three months ended March 31, 2020 was approximately $0.1 million. Income tax (benefit) expense for all periods presented relate to state taxes. Liquidity and Capital Resources The following table summarizes our financial condition for each of the periods indicated: As of March 31, 2021 As of December 31, 2020 Change Change (in thousands) $ % Financial assets: Cash and cash equivalents $ 1,481,836 $ 1,502,648 $ (20,812 ) (1 )% Short-term investments 255,997 435,923 (179,926 ) (41 )% Restricted cash and investments 9,315 9,315 — (— )% Total cash, cash equivalents and investments $ 1,747,148 $ 1,947,886 $ (200,738 ) (10 )% Borrowings: Term loan $ 529,030 $ 527,731 $ 1,299 (— )% Convertible debt 562,080 464,762 97,318 21 % Total borrowings $ 1,091,110 $ 992,493 $ 98,617 10 % Working capital Current assets $ 2,271,350 $ 2,485,196 $ (213,846 ) (9 )% Current liabilities 364,736 416,026 (51,290 ) (12 )% Total working capital $ 1,906,614 $ 2,069,170 $ (162,556 ) (8 )% For the periods ended March 31, 2021, and December 31, 2020, our principal sources of liquidity were primarily derived from our collaboration arrangement with Roche, net proceeds from sale of the PRV and product sales of our products. 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. The changes in our total borrowings reflect the adoption of ASU 2020-06 as of January 1, 2021, which resulted in the convertible debt being accounted for as a single liability measured at its amortized cost. For more information on the adoption and impact of ASU 2020-06, please read Note 11, Indebtedness. Our working capital changes reflect that current assets are lower primarily as a result of reductions in short-term investments, reflecting overall use of cash in operating activities. Our current liabilities decrease primarily reflects decreases in accounts payable due to decreased obligations as a result of our operating activities. 28 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, AMONDYS 45 and potential future products; • the timing and costs associated with our expansion efforts; • 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; • 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, debt securities, 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 For the Three Months Ended March 31, 2021 2020 Change Change (in thousands) $ % Cash (used in) provided by Operating activities $ (180,371 ) $ 627,790 $ (808,161 ) (129 )% Investing activities 156,666 (17,680 ) 174,346 NM* Financing activities 2,893 319,022 (316,129 ) (99 )% (Decrease) increase in cash and cash equivalents $ (20,812 ) $ 929,132 $ (949,944 ) (102 )% * NM = Not Meaningful Operating Activities Cash used in operating activities was $180.4 million for the three months ended March 31, 2021. Cash provided by operating activities for the three months ended March 31, 2020 was $627.8 million. The unfavorable change was primarily driven by the following items: • $41.7 million increase in net loss, excluding the gain from the sale of the PRV, primarily driven by an increase in research and development expense, offset by increases in net product revenues and collaboration revenue and a decrease in selling, general and administrative expense; and • $842.4 million net decrease in the change in deferred revenue primarily as a result of the collaboration arrangement with Roche being executed during the three months ended March 31, 2020, with no similar activity during the three months ended March 31, 2021. The decreases were partially offset by: • $7.8 million net increase in non-cash adjustments; and • $68.2 million net decrease in use of operating assets and liabilities, excluding deferred revenue. 29 Investing Activities Cash provided by investing activities was $156.7 million for the three months ended March 31, 2021. Cash used in investing activities was $17.7 million for the three months ended March 31, 2020. The favorable change was primarily driven by the following: • $335.4 million decrease in purchase of available-for-sale securities during the three months ended March 31, 2021. The changes were partially offset by: • $108.1 million decrease in net proceeds from the sale of the PRV during the three months ended March 31, 2021; • $40.0 million decrease in proceeds from the sale or maturity of available-for-sale securities during the three months ended March 31, 2021; and • $12.0 million increase in purchase of property and equipment during the three months ended March 31, 2021. Financing Activities Cash provided by financing activities decreased by $316.1 million for the three months ended March 31, 2021 compared with the three months ended March 31, 2020, primarily driven by the following: • $316.3 million decrease in net proceeds from the issuance of common stock to Roche; and • $1.5 million increase in taxes paid related to net share settlement of equity awards. The changes were partially offset by: • $1.7 million increase in proceeds from the exercise of options and the purchase of stock under our Employee Stock Purchase Program. 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 acquisition of technology access rights, among others. The following table presents contractual obligations arising from these arrangements as of March 31, 2021: Payment Due by Period Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years (in thousands) Debt obligations (1) $ 1,306,773 $ 55,949 $ 356,008 $ 894,816 $ — Lease obligations (2) 55,009 13,693 23,082 17,948 286 Manufacturing obligations (3) 1,452,791 628,067 412,429 218,792 193,503 Total contractual obligations and contingencies $ 2,814,573 $ 697,709 $ 791,519 $ 1,131,556 $ 193,789 (1) Interest is included. (2) Lease obligations only include real estate leases. The leases embedded in certain supply agreements are included in the manufacturing obligations. (3) Manufacturing obligations include agreements to purchase goods and services that are enforceable and legally binding or subject to cancellation fees and that specify all significant terms. Manufacturing obligations relate primarily to our commercialization of EXONDYS 51, VYONDYS 53 and AMONDYS 45, and clinical programs for DMD as well as our gene therapy programs. 30 Milestone Obligations For 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, commercial and up-front royalty and sales milestone payments associated with our license and collaboration 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 March 31, 2021, such contingencies have not been recorded in our unaudited condensed 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 sales milestones. Recent Accounting Pronouncements For additional information, please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements of the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.