UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2018

OR

For the transition period from                      to                      .

Commission File No. 001-36276

 

ULTRAGENYX PHARMACEUTICAL INC.

(Exact name of registrant as specified in its charter)

 

 

 

(415) 483-8800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  ☑     NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  ☑   NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ☐    NO  ☑

As of May 3, 2018, the registrant had 49,772,297 shares of common stock issued and outstanding.

 

 

 

 

 

---

ULTRAGENYX PHARMACEUTICAL INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2018

INDEX

 

 

 

 

 

---

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words, or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those discussed under Part II, Item 1A. Risk Factors and discussed elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

1

---

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

ULTRAGENYX PHARMACEUTICAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

 

See accompanying notes.

 

 

 

2

---

ULTRAGENYX PHARMACEUTICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share amounts)

 

See accompanying notes.

 

 

 

3

---

ULTRAGENYX PHARMACEUTICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

See accompanying notes.

 

 

 

4

---

ULTRAGENYX PHARMACEUTICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

See accompanying notes.

 

 

 

5

---

ULTRAGENYX PHARMACEUTICAL INC.

Notes to Condensed Consolidated Financial Statements

 

Ultragenyx Pharmaceutical Inc. (the Company) is a biopharmaceutical company and was incorporated in California on April 22, 2010. The Company subsequently reincorporated in the state of Delaware in June 2011.

The Company is focused on the identification, acquisition, development, and commercialization of novel products for the treatment of rare and ultra-rare diseases, with a focus on serious, debilitating genetic diseases. The Company has two approved therapies. Crysvita® (burosumab) is approved by the U.S. Food and Drug Administration (FDA) for the treatment of X-linked hypophosphatemia (XLH) in adult and pediatric patients one year of age and older, and has received European conditional marketing authorization for the treatment of XLH with radiographic evidence of bone disease in children 1 year of age and older and adolescents with growing skeletons. The Company has also received FDA approval for Mepsevii™ (vestronidase alfa), the first medicine approved for the treatment of children and adults with MPS VII, also known as Sly syndrome.

The Company is conducting Phase 2 and Phase 3 studies of Crysvita, an antibody targeting fibroblast growth factor 23 (FGF23), in pediatric and adult patients with XLH and a Phase 2 study in tumor induced osteomalacia (TIO), both rare diseases that impair bone mineralization; a Phase 3 study for UX007 in patients with glucose transporter type-1 deficiency syndrome (Glut1 DS), a brain energy deficiency, who are experiencing movement disorders; a Phase 2 clinical study of UX007 in patients severely affected by long-chain fatty acid oxidation disorders (LC-FAOD), a genetic disorder in which the body is unable to convert long chain fatty acids into energy; a Phase 1/2 open label clinical study of DTX 301, an adeno-associated virus 8 (AAV8) gene therapy product candidate designed for the treatment of patients with ornithine transcarbamylase (OTC) deficiency, the most common urea cycle disorder; and has an active IND for DTX 401, an AAV8 gene therapy clinical candidate for the treatment of patients with glycogen storage disease type Ia, or GSDIa. The Company operates as one reportable segment.

The Company has sustained operating losses and expects such annual losses to continue over the next several years. The Company’s ultimate success depends on the outcome of its research and development activities. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan. Through March 31, 2018, the Company has relied primarily on the proceeds from equity offerings to finance its operations.

The Company intends to raise additional capital through the issuance of equity, borrowings, or strategic alliances with partner companies. However, if such financing is not available at adequate levels, the Company will need to reevaluate its operating plans.

     

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the amounts of the Company and our wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the preceding fiscal year contained in the Company’s Annual Report on Form 10-K filed on February 21, 2018 with the United States Securities and Exchange Commission (SEC).

The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018. The condensed consolidated balance sheet as of March 31, 2018 has been derived from audited financial statements at that date, but does not include all of the information required by GAAP for complete financial statements.

Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to sales return reserves, clinical trial accruals, fair value of assets and liabilities, income taxes, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

 

6

---

Cash, Cash Equivalents and Restricted Cash

Restricted cash primarily consists of money market accounts as collateral for its obligations under its facility leases.

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. The Company adopted the standard as of January 1, 2018 on a retrospective basis, wherein the statement of cash flow of each period presented was adjusted to reflect the effects of applying the new guidance. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows (in thousands):

 

 

Goodwill

In January 2017, the FASB issued ASU No. 2017-04, Goodwill and Other - Simplifying the Test for Goodwill Impairment, which eliminated the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under this guidance, goodwill impairment testing shall be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company had early adopted the new goodwill guidance as of January 1, 2018 on a prospective basis. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date.

Revenue Recognition

Product sales

The Company sells Mepsevii through a limited number of distributors. Under Accounting Standards Codification (ASC) 606, revenue from product sales is recognized at the point in time when the delivery is made and when title and risk of loss transfers to these distributors. The Company also recognizes revenue from sales of Mepsevii and UX007 on a “named patient” basis, which are allowed in certain countries prior to the commercial approval of the product in the territory. Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Product sales are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions.

Provisions for returns and other adjustments are provided for in the period the related revenue is recorded. Historical data are not yet readily available and reliable for use in estimating the amount of the reduction in gross revenue. The estimates applied are periodically reviewed and will be adjusted as necessary.

Collaboration and license revenue

The Company has certain license and collaboration agreements that are within the scope of ASC 808, Collaborative Agreements, which provides guidance on the presentation and disclosure of collaborative arrangements. Funding received related to research and development services and pre-commercialization costs are classified as a reduction of research and development expenses and selling, general and administrative expenses, respectively in the consolidated statement of operations because the provision of such services for collaborative partners are not considered to be part of the Company’s ongoing major or central operations. 

The Company also receives royalty revenues under certain of the Company’s license or collaboration agreements in exchange for license of intellectual property. If the Company does not have any future performance obligations under these license or collaborations agreements, royalty revenue is recorded as the underlying sales occur.

The Company also recognizes collaboration and license revenue under certain of the Company’s license or collaboration agreements that are within the scope of ASC 606. The terms of these agreements may contain multiple performance obligations, which may include licenses and research and development activities. The Company evaluates these agreements under ASC 606 to determine the distinct performance obligations.

7

---

Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.

If there are multiple distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The standalone selling price is generally determined based on the prices charged to customers or using expected cost plus margin. Revenue is recognized by measuring the progress toward complete satisfaction of the performance obligations using an input measure.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires an entity that is a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. This guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted. The Company is evaluating the effect that this guidance will have on its Consolidated Financial Statements and related disclosures.

Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The following tables set forth the fair value of the Company’s financial assets remeasured on a recurring basis based on the three-tier fair value hierarchy (in thousands):

 

 

 

8

---

At March 31, 2018, the remaining contractual maturities of available-for-sale securities were less than two years. There have been no significant realized gains or losses on available-for-sale securities for the periods presented. All marketable securities with unrealized losses at March 31, 2018 have a loss that was considered to be temporary in nature. The Company does not intend to sell the investments that are in an unrealized loss position before recovery of their amortized cost basis.

 

Inventory

Inventory consists of the following (in thousands):

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

Kyowa Hakko Kirin Collaboration and License Agreement

In August 2013, the Company entered into a collaboration and license agreement with Kyowa Hakko Kirin Co., Ltd. (KHK). Under the terms of this collaboration and license agreement, as amended, the Company and KHK will collaborate on the development and commercialization of Crysvita in the field of orphan diseases in the United States and Canada, or the profit share territory, and in the European Union and Switzerland, or the European territory, and the Company will have the right to develop and commercialize such products in the field of orphan diseases in Mexico and Central and South America, or Latin America. In the field of orphan diseases, and except for ongoing studies being conducted by KHK, the Company will be the lead party for development activities in the profit share territory and in the European territory until the applicable transition date; the Company will also be the lead party for core development activities conducted in Japan and Korea, for which the core development plan is limited to clinical trials mutually agreed to by the Company and KHK. The Company will share the costs for development activities in the profit share territory and the European territory conducted pursuant to the development plan before the applicable transition date equally with KHK, and KHK shall be responsible for 100% of the costs for development activities in Japan and Korea. On the applicable transition date in the profit share territory and the European territory, KHK will become the lead party and be responsible for the costs of the development activities. However, the Company will continue to share the costs of the studies commenced prior to the applicable transition date equally with KHK. The Company has the primary responsibility for conducting certain research and development services. Crysvita was approved in the European Union in November 2017 and was approved by the FDA in April 2018. The Company and KHK will share commercial responsibilities and profits in the profit share territory until the applicable transition date and KHK will commercialize Crysvita in the European territory. The Company will develop and commercialize Crysvita in Latin America.

KHK will manufacture and supply Crysvita for clinical use globally and will manufacture and supply Crysvita for commercial use in the profit share territory and Latin America. The remaining profit or loss from commercializing products in the profit-share territory, until the applicable transition date, will be shared between the Company and KHK on a 50/50 basis. Thereafter, the Company will be entitled to receive a tiered double-digit revenue share in the mid-to-high 20% range in the profit share territory. Net proceeds from any sale of the priority review voucher issued in connection with the approval of Crysvita will be shared equally with KHK. The Company will also be entitled to receive a royalty of up to 10% on net sales in the European territory. In Latin America, the Company will pay to KHK a low single-digit royalty on net sales.

In May 2017, the Company signed an agreement with a wholly-owned subsidiary of KHK pursuant to which the Company was granted the right to commercialize Crysvita in Turkey. KHK’s subsidiary has the option to assume responsibility for commercialization efforts from the Company, after a certain minimum period.            

9

---

The Company is accounting for the agreement as a collaboration agreement as defined in ASC 808, Collaborative Agreements. The Company’s expenses were reduced by $8.2 million and $7.4 million for the three months ended March 31, 2018 and 2017, respectively, for KHK’s share of the research and development expenses and were reduced by $3.8 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively, for KHK’s share of the selling, general and administrative expenses. As of March 31, 2018 and December 31, 2017, the Company had receivables in the amount of $12.3 million and $10.3 million, respectively, for this collaboration arrangement.

 

Takeda License and Collaboration and Purchase Agreements

In June 2016, the Company executed a collaboration and license agreement with Takeda Pharmaceutical Company Limited (Takeda). Pursuant to the agreement, which became effective in July 2016, the Company obtained an exclusive license for a pre-clinical compound from Takeda in a pre-determined field of use. The Company is responsible for the development costs for the pre-clinical compound and the identified option product pursuant to an initial development plan. Because the license to the pre-clinical compound has no alternative future use, the estimated fair value of $0.7 million was recorded as a research and development expense upon acquisition. Any products resulting from the pre-clinical compound or the identified option product is referred to in this report as the “licensed product.” The Company discontinued the development efforts on the pre-clinical compound in the pre-determined field of use and the identified option product.

As part of the agreement, the Company and Takeda established a five-year research collaboration whereby the parties may mutually agree to add additional option products candidates to the collaboration, in which case the Company will bear the cost of the development activities, with certain exceptions.  

In July 2016, the Company consummated a common stock purchase agreement, executed in conjunction with the collaboration and license agreement, whereby Takeda purchased 374,590 shares of the Company’s common stock for $40.0 million in cash. The fair market value of the common stock issued to Takeda was $27.3 million, based on the closing stock price of $72.95 on the date of issuance, resulting in a $12.7 million premium paid to the Company. The Company also received a put option to require Takeda to purchase an additional $25.0 million in shares of the Company’s common stock which was exercised in October 2016, whereby Takeda purchased 352,530 shares of the Company’s common stock for $25.0 million in cash. Takeda is subject to a five-year standstill (subject to customary exceptions or release). The Company estimated the fair value of the put options to be $0.9 million and recorded the put options in additional paid-in capital.

The research and license agreement and the stock purchase agreement are being accounted for as one arrangement because they were entered into at the same time with interrelated financial terms. The Company analogized to Topic 606 for the accounting for the arrangements. The Company concluded that there are multiple promised goods and services under the collaboration agreement, including obligations related to research and development services with respect to licensed products as well as committee participation, which were determined to represent distinct performance obligations. The total consideration received from Takeda was $14.3 million and was comprised of the $12.7 million premium on the sale of the common stock, the $0.9 million estimated fair value of the put options, and the $0.7 million estimated fair value of the pre-clinical compound.

The Company is responsible for the costs under the initial development plan. A significant portion of this work is performed by Takeda which is substantively complete as of March 31, 2018. The Company concluded that the payment to Takeda is not in return for a distinct service that Takeda transfers to the Company, therefore, the payment made to Takeda is accounted for as a reduction in the transaction price. As of March 31, 2018, the Company concluded that $3.3 million of the estimated transaction price should not be constrained because it is probable that a significant reversal in the amount to be recognized will not occur. The unconstrained transaction price was allocated to the distinct performance obligations on a relative standalone selling price basis. The Company recorded $0.8 million for the three months ended March 31, 2018 and none for the three months ended March 31, 2017 as a reduction of research and development expenses by measuring the progress toward complete satisfaction of the individual performance obligation using an input measure. The Company will continue to re-evaluate the application of the constraint to the transaction price at each reporting period end date.

Costs incurred by the Company associated with co-development activities performed under this collaboration are included in research and development expense in the accompanying consolidated statements of operations. As of March 31, 2018 and December 31, 2017, the Company had a repayment liability in the amount of $3.5 million and $3.7 million, respectively, and no contract liability as of March 31, 2018 and a $0.6 million contract liability as of December 31, 2017.

Bayer HealthCare LLC

The Company has an agreement with Bayer Healthcare LLC (Bayer) to research, develop and commercialize adeno-associated virus gene therapy products for treatment of hemophilia A (DTX 201). Under this agreement, Bayer has been granted an exclusive license to develop and commercialize one or more novel gene therapies for hemophilia A. The Company is responsible for the development of DTX201 under the agreement through a proof-of-concept (POC) clinical trial, in accordance with the mutually agreed upon research budget. Upon the successful demonstration of clinical POC, the agreement requires that Bayer use commercially reasonable efforts to manage and fund any subsequent clinical trials and commercialization of gene therapy products for treatment of hemophilia A. Bayer will have worldwide rights to commercialize the potential future product.

10

---

Bayer is responsible to fund certain research and development services performed by the Company in the performance of its obligations under the annual research plan and budget. Under the terms of the agreement with Bayer, the Company is eligible to receive development and commercialization milestone payments of up to $232.0 million, as well as, royalty payments ranging in the high single-digit to low double-digit percentages, not exceeding the mid-teens, of net sales of licensed products. In December 2017, the first milestone was achieved and the Company subsequently received the $5.0 million milestone from Bayer.

As of the acquisition date of November 7, 2017, the Company valued the contract under ASC 805, Business Combinations, and recorded an intangible asset of $13.5 million. The intangible asset will be amortized to research and development expense over the remainder of the research term which is expected to be complete in 2019. The Company recorded a research and development expense of $4.4 million for the three months ended March 31, 2018 for the amortization of the intangible asset.

The Company evaluated the agreement under ASC 606 Revenue from Contracts with Customers, and recorded a contract liability as of November 7, 2017 of $2.5 million. It was determined that the performance obligations under the agreement includes (i) research and development services to be provided over the research term, (ii) a development and commercialization license and (iii) the Company’s participation in certain committees. It was determined that these performance obligations are not distinct in the context of the contract and therefore are a single performance obligation. The Company calculated the transaction price by including the unconstrained milestones along with the estimated payments for research and development services and recorded $9.3 million as collaboration and license revenue for the three months ended March 31, 2018, by measuring the progress toward complete satisfaction of the performance obligation using an input measure. The performance obligation under the contract is expected to be substantially complete by end of 2019. As of March 31, 2018 and December 31, 2017, the Company had a $0.8 million of contract asset and a $5.4 million of contract liability, respectively.

  

The 2014 Incentive Plan (the 2014 Plan) provides for automatic annual increases in shares available for grant, beginning on January 1, 2015 through January 1, 2024. As of March 31, 2018, there were 1,828,073 shares reserved under the 2014 Plan for the future issuance of equity awards and 2,292,906 shares reserved for the 2014 Employee Stock Purchase Plan.

The table below sets forth the stock-based compensation expense for the periods presented (in thousands):

 

 

Basic net income (loss) per share has been computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares of common stock and potential dilutive securities outstanding during the period. For the three months ended March 31, 2017, there was no difference between basic and diluted net loss per share since the effect of the dilutive securities would be antidilutive and therefore were excluded from the diluted net loss per share calculation. The following table sets forth the computation of the basic and diluted net income (loss) per share (in thousands, except share and per share data):

 

11

---

The following weighted-average outstanding common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

 

 

In July 2017, the Company entered into an At-The-Market, or ATM, sales agreement with Cowen and Company, LLC (Cowen), whereby the Company can sell up to $150.0 million in aggregate proceeds of common stock from time to time, through Cowen as its sales agent. In March 2018, the Company and Cowen entered into an amendment to the ATM sales agreement to sell, from time to time, the remaining $72.6 million in common stock under the sales agreement under the Company’s new registration statement that was filed with the SEC on February 21, 2018. During the three months ended March 31, 2018, 240,417 shares were sold pursuant to the sales agreement, resulting in net proceeds of approximately $11.8 million, after commissions and other offering costs.

In January 2018, the Company completed an underwritten public offering in which 5,043,860 shares of common stock were sold, which includes 657,895 shares purchased by the underwriters pursuant to an option granted to them in connection with the offering, at a public offering price of $57.00 per share. The total proceeds that the Company received from the offering were approximately $271.0 million, net of underwriting discounts and commissions.

 

Total accumulated other comprehensive income (loss) consisted of the following (in thousands):

 

 

On January 10, 2018, the Company completed the sale of a Rare Pediatric Disease Priority Review Voucher (PRV) to Novartis Pharma AG for $130.0 million. The Company received the PRV from the FDA in connection with the approval of Mepsevii. The full amount was received and recorded as a gain from sale of PRV as the PRV did not have a carrying value at the time of the sale.

 

12

---

Item 2. 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 the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”).

Overview

We are a biopharmaceutical company focused on the identification, acquisition, development, and commercialization of novel products for the treatment of serious rare and ultra-rare diseases, with a focus on serious, debilitating genetic diseases. We target diseases for which the unmet medical need is high, the biology for treatment is clear, and for which there are no currently approved therapies. Since our inception in 2010, we have in-licensed potential treatments for multiple rare genetic disorders. Our strategy, which is predicated upon time- and cost-efficient drug development, allows us to pursue multiple programs in parallel with the goal of delivering safe and effective therapies to patients with the utmost urgency.

Approved Therapies and Clinical Product Candidates

Our current approved therapies and clinical-stage pipeline consist of three product categories: biologics, small-molecule substrate replacement therapies, and gene therapy product candidates. Enzymes are proteins that the body uses to process materials needed for normal cellular function, and substrates are the materials upon which enzymes act. When enzymes or substrates are missing, the body is unable to perform its normal cellular functions, often leading to significant clinical disease. Several of our therapies are intended to replace deficient enzymes or substrates. Gene therapy is a therapeutic approach in which an isolated gene sequence or segment of DNA is administered to a patient, most commonly for the purpose of treating a genetic disease that is caused by mutations. Gene therapy aims to address the disease-causing effects of absent or dysfunctional genes by delivering functional copies of the gene to the patient’s cells, offering the potential for durable therapeutic benefit.

Our biologic products include approved therapies Crysvita® (burosumab) and Mepsevii™ (vestronidase alfa):

Crysvita is also being developed for the treatment of tumor-induced osteomalacia, or TIO. TIO results from typically benign tumors that produce excess levels of FGF23, which can lead to severe hypophosphatemia, osteomalacia, fractures, fatigue, bone and muscle pain, and muscle weakness. We expect 48-week data from our Phase 2 TIO study in mid-2018.

We are collaborating with Kyowa Hakko Kirin, or KHK, and Kyowa Kirin International, or Kyowa Kirin, a wholly owned subsidiary of KHK, on the development and commercialization of Crysvita globally, based on the collaboration and license agreement between us and KHK.

Our substrate replacement therapy pipeline includes UX007 in clinical development for the treatment of two diseases:

13

---

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

The following table summarizes our approved products and advanced product candidate pipeline:

14

---

Recent program updates

CRYSVITA for the treatment of XLH

In April 2018 we and Kyowa Kirin announced the FDA approval and commercial launch of Crysvita for the treatment of XLH in adult and pediatric patients one year of age and older. With the approval of Crysvita, the FDA issued a Rare Pediatric Disease Priority Review Voucher, or PRV, which confers priority review to a subsequent drug application that would not otherwise qualify for priority review. If we sell the PRV, the proceeds from the sale would be split evenly with KHK.

In February 2018 we and Kyowa Kirin announced that Crysvita received a positive European Commission decision granting a conditional marketing authorization to Kyowa Kirin for the treatment of X-linked hypophosphatemia (XLH) with radiographic evidence of bone disease in children 1 year of age and older and adolescents with growing skeletons.

In February 2018, we reported 64 week data from our Phase 2 study in children less than five years old (mean age 2.9 years), showing continued improvement in rickets and bowing. These longer term data from this study demonstrated that outcomes with Crysvita treatment were consistent with and further improved from what was seen at 40 weeks. These included sustained improvements in serum phosphorus levels, and a progressive reduction into the normal range of alkaline phosphatase. There were continued improvements in bowing and rickets scores at 64 weeks. The safety profile observed in this study was consistent with other Crysvita studies.

In February 2018, we reported that bone biopsy data from adult patients in our bone quality study demonstrated continued improvement in osteomalacia. At 48 weeks, all ten patients with evaluable paired bone biopsies demonstrated meaningful improvements from baseline in mean osteoid volume/bone volume. The mean decrease from 26.1% to 11.2% among these patients represents a 57% improvement from baseline in mean osteoid volume/bone volume which is the gold standard for the evaluation of osteomalacia. The patients also demonstrated mean improvements of 32% and 26% in osteoid thickness and osteoid surface/bone surface parameters respectively, and a meaningful improvement in mineralization lag time. These results, including safety, are consistent with the data provided to the FDA in the first 6 of these 10 patients showing a substantial reduction in osteomalacia.

Mepsevii for the treatment of MPSVII

With the approval of Mepsevii in November 2017, the FDA issued a PRV, and we completed the sale of the PRV in January 2018 for $130.0 million. 

UX007 for the treatment of LC-FAOD

In January 2018, we announced an update to our development plan for UX007 in LC-FAOD. Following an end-of-phase 2 meeting, we are working to provide additional information to submit to FDA for consideration of an early filing based on the positive results from the Phase 2 study.

The clinical effect observed in the Phase 2 study was considered important, but it was not clear if there were dietary or other changes in the regimen as each patient crossed over onto UX007 that might have accounted for the improvement. We are working to provide additional information to FDA to support that the improvement demonstrated was likely due to UX007 and not any other changes. After this information is submitted and evaluated by FDA, we plan to determine with the FDA whether an early submission could be pursued. We are simultaneously finalizing a full protocol for a Phase 3, randomized, controlled study examining major clinical events as the primary endpoint as discussed with the FDA. This study would provide additional information that would be important in utilization and reimbursement long-term for UX007. If the FDA agrees to an early submission based on the Phase 2 study, the Phase 3 study would serve as a post-approval commitment for label expansion. Alternatively, the Phase 3 study could serve as a registrational study if an early filing is not possible.

UX007 for the treatment of Glut1 DS

In February 2018, we completed enrollment of, and randomized, 43 patients in the Phase 3 study of UX007 for the treatment of Glut1 DS patients with the movement disorder phenotype. The study is a randomized, double-blind, placebo-controlled, cross-over study designed to assess the efficacy and safety of UX007 in patients who are experiencing disabling paroxysmal movement disorders associated with Glut1 DS. Movement disorder events are defined as disabling if they affect or limit a patient's ability to perform activities of daily living. Eligible patients were randomized in a 1:1 ratio to one of two treatment sequences. Patients in the first group will begin a two-week titration period followed by an 8-week treatment period on UX007. Patients then begin a 2-week washout period, followed by a 2-week titration period and 8-week period on placebo. Patients in the second group follow the same schedule except that they begin with placebo and then cross over to UX007. The primary endpoint compares the frequency of disabling paroxysmal movement disorder events during the 8-week treatment period with UX007, to the frequency of disabling movement disorder events during the 8-week placebo treatment period as recorded by a daily electronic diary. Secondary endpoints include the duration of disabling paroxysmal movement disorder events; walking capacity and endurance measured by the 12-minute walk test; patient-reported health-related quality of life assessments of physical function, mobility, upper extremity function, fatigue and pain; cognitive function and safety. Following the 22-week blinded crossover study period, patients may roll into the open-label extension period to continue on UX007 treatment. We expect data from this study in the second half of 2018.

15

---

DTX301 for the treatment of OTC deficiency

In March 2018, we announced positive safety and efficacy data from the first dose cohort of the Phase 1/2 study of DTX301 in OTC deficiency. All three patients in the first, lowest-dose cohort received a single DTX301 dose of 2.0 × 10^12 GC/kg, and the pre-defined endpoint for efficacy evaluation occurred 12 weeks after dosing. The first patient’s rate of ureagenesis was normalized, maintained and then substantially increased over 24 weeks. The rate of ureagenesis at baseline was 67% of normal (200 umol/kg/hr), with the normal rate of ureagenesis defined as 300 umol/kg/hr. The patient had an initial peak effect at 6 weeks at 112% of normal (67% increase from baseline to 335 umol/kg/hr), and then declined at week 12 to 87% of normal (30% increase from baseline to 261 umol/kg/hr,) during the steroid regimen that was used to treat the patient’s mild alanine aminotransferase, or ALT, elevations. After steroids were weaned, ureagenesis began to rebound to 91% of normal at week 20 (36% increase from baseline to 273 umol/kg/hr) and then substantially increased to 134% of normal at week 24 (100.8% increase from baseline to 402 umol/kg/hr). The protocol allows for the tapering or discontinuation of alternate urea-cycle pathway medications. At week 24, all alternate urea-cycle pathway medications were discontinued based on Patient 1 choice and with investigator concurrence. In the 3 weeks since stopping these medications, the patient has been doing well clinically as reported by the investigator. The second and third patients did not show a clinically meaningful change in rate of ureagenesis over 20 weeks and 12 weeks, respectively. As of the February 15, 2018 cutoff date, there have been no infusion-related adverse events and no serious adverse events reported. All adverse events have been Grade 1 or 2 and have resolved. The only treatment-related adverse events were the previously-reported mild, clinically asymptomatic and manageable elevations in ALT in two patients, peaking at 45 (Patient 1) and 118 IU/L (Patient 2). These ALT elevations were mild and similar to what has been observed in other programs using adeno-associated virus, or AAV, gene therapy. Both patients completed a standard tapering course of corticosteroids as outpatients to treat the ALT elevations. Their ALT levels have remained in the normal range (below 40 U/L) since completing the tapering course. The third patient’s ALT levels remained in the normal range through twelve weeks. All three patients have remained clinically and metabolically stable.

The DMC completed its review of the Cohort 1 data, and we are proceeding to the second, higher-dose cohort of the study. Three patients will be enrolled in Cohort 2 and will each receive a single DTX301 dose of 6.0 × 10^12 GC/kg. Data from the second cohort are expected in the second half of 2018.

DTX401 for the treatment of GSDIa

In April 2018 we announced the FDA’s acceptance of our IND for DTX401for the treatment of patients with GSDIa. We expect data from the first cohort of the Phase 1/2 study in the second half of 2018.

Financial Operations Overview

We are a biopharmaceutical company with a limited operating history. To date, we have invested substantially all of our efforts and financial resources in identifying, acquiring, and developing our products and product candidates, including conducting clinical studies and providing selling, general and administrative support for these operations. To date, we have funded our operations primarily from the sale of equity securities.

We have incurred net losses in each year since inception. Our net income (loss) was $30.3 million and $(68.3) million for the three months ended March 31, 2018 and 2017, respectively. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant and material changes in our critical accounting policies during the three months ended March 31, 2018, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report.

16

---

Results of Operations

Comparison of the three months ended March 31, 2018 to the three months ended March 31, 2017:

Revenue (dollars in thousands)

 

*not meaningful

We recognized $9.4 million in collaboration and license revenue primarily from our research arrangement with Bayer and $1.3 million in product sales for sales of Mepsevii and UX007 for the three months ended March 31, 2018. The increase in collaboration and license revenue is due to our acquisition of Dimension Therapeutics Inc., or Dimension, and the assumption of the agreement with Bayer through the acquisition. The increase in product sales is primarily due to the approval of Mepsevii in November 2017.

Cost of Sales (dollars in thousands)

We recognized $0.2 million in cost of sales related to Mepsevii, which was approved by the FDA in November 2017, which includes a reserve of $0.2 million recorded for excess inventory. Prior to the approval, manufacturing and related costs were expensed; accordingly, these costs were not capitalized and as a result are not fully reflected in the costs of sales during the current period. If manufacturing and related costs were capitalized prior to the approval period, we expect that cost of sales for the three months ended March 31, 2018 would have been approximately $0.4 million for our commercial product sales, which includes $0.2 million of excess inventory reserves recorded for the three months ended March 31, 2018. We expect cost of sales to increase in relation to product revenues as we deplete these previously expensed inventories and in turn, the inventory cost of Mepsevii will increase as we produce and then sell Mepsevii product that has an inventory cost that reflects the full cost of manufacturing similar biologic products.

Research and Development Expenses (dollars in thousands)

 

 

Research and development expenses increased $24.2 million for the three months ended March 31, 2018 compared to the same period in 2017. The increase in research and development expenses is primarily due to:

17

---

We expect our research and development expenses to increase in the future as we advance our product candidates through clinical development. The timing and amount of expenses incurred will depend largely upon the outcomes of current or future clinical studies for our product candidates as well as the related regulatory requirements, manufacturing costs, and any costs associated with the advancement of our preclinical programs.

Selling, General and Administrative Expenses (dollars in thousands)

 

 

Selling, general and administrative expenses increased $12.8 million for the three months ended March 31, 2018 compared to the same period in 2017. The increase in selling, general and administrative expenses was primarily due to increases in commercial planning costs, professional services costs, stock-based compensation, and personnel costs resulting from an increase in the number of employees in support of our activities.

We expect selling, general and administrative expenses to increase to support our organizational growth and for our expected staged build out of our commercial organization over the next several years related to our approved products and multiple late-stage product candidates.

Interest Income (dollars in thousands)

 

 

Interest income increased $0.7 million for the three months ended March 31, 2018 compared to the same period in 2017, primarily due to an increase in our balance of invested funds and due to an increase in yields on our investment portfolio.

Gain from Sale of Priority Review Voucher (dollars in thousands)

 

The gain from sale of the PRV of $130.0 million for the three months ended March 31, 2018 was due to the completion of the sale of the PRV we received from the FDA in connection with the approval of Mepsevii.

Other Income (Expense) (dollars in thousands)

 

18

---

Other income (expense) decreased $5.5 million for the three months ended March 31, 2018 compared to the same period in 2017. The expense recognized during the three months ended March 31, 2018 was primarily due to the recognition of cumulative foreign currency translation losses related to the substantial liquidation of subsidiaries with a functional currency other than the U.S. Dollar. These recognized foreign currency losses are substantially offset by the reclassification adjustment reported as a component of other comprehensive income (loss).

Liquidity and Capital Resources

We have funded our operations primarily from the sale of equity securities. In July 2017, we entered into an at-the-market sales agreement with Cowen and Company, LLC, or Cowen, under which we may offer and sell from time to time common stock having aggregate gross proceeds of up to $150.0 million. In March 2018, we amended our sales agreement with Cowen to allow us to sell, from time to time, the remaining $72.6 million in common stock remaining under the sales agreement. During the three months ended March 31, 2018, the proceeds from the offering were approximately $11.8 million, after commissions and other offering costs. In January 2018, we completed an underwritten public offering in which we sold 5,043,860 shares of common stock and received net proceeds of approximately $271.0 million.

As of March 31, 2018, we had $571.3 million in available cash, cash equivalents, and investments. We believe that our existing capital resources will be sufficient to fund our projected operating requirements for at least the next twelve months. Our cash, cash equivalents and investments are held in a variety of deposit accounts, interest-bearing accounts, corporate bond securities, U.S government securities and money market funds. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and credit risk.

The following table summarizes our cash flows for the periods indicated (in thousands):

 

Cash Used in Operating Activities

Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures. Due to our significant research and development expenditures, we have generated significant operating losses since our inception. Cash used to fund operating expenses is affected by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

Cash used in operating activities for the three months ended March 31, 2018 was $89.5 million and reflected net income of $30.3 million, non-cash charges of $18.8 million for stock-based compensation and $6.2 million for depreciation and amortization of intangible asset acquired, offset by $130.0 million for the gain from sale of the PRV, and $0.2 million for the amortization of discount paid on purchased investments. There was also $4.8 million of non-cash foreign currency remeasurement losses in connection with the substantial liquidation of subsidiaries due to a change in the Company’s tax structure and fluctuations of exchange rates related to intercompany transactions with foreign subsidiaries that are denominated in our reporting currency. Cash used in operating activities also reflected a $5.1 million increase in prepaid expenses and other current assets, a $0.3 million increase in other assets, a $1.3 million decrease in accounts payable primarily due to the timing of payments and receipt of invoices, and a $12.6 million decrease in accrued expenses and other liabilities primarily as a result of a decrease in accrued bonus due to the payout of the 2017 annual bonus and accrued expenses due to the timing of the receipt of invoices.

Cash used in operating activities for the three months ended March 31, 2017 was $61.2 million and reflected a net loss of $68.3 million, offset by non-cash charges of $14.5 million for stock-based compensation, $0.5 million for the amortization of premium paid on purchased investments, and $1.2 million for depreciation and amortization. There was also $0.6 million for a foreign currency remeasurement gain due to an intercompany transaction exposure increase and the strengthening of the respective foreign exchange rates. Cash used in operating activities also reflected a $0.9 million decrease in prepaid expenses and other current assets primarily due to decreases in receivables, prepaid manufacturing and a prepayment related to collaboration activities offset by increases in prepaid insurance and subscriptions, a $3.0 million increase in accounts payable primarily due to the timing of payments and receipt of invoices, offset by a $12.5 million decrease in accrued expenses and other liabilities primarily as a result of a decrease in accrued bonus due to the payout of the 2016 annual bonus and accrued expenses due to the receipt of invoices.

19

---

Cash Used in Investing Activities

Cash used in investing activities for the three months ended March 31, 2018 was $71.0 million and related to purchases of investments of $260.8 million and purchases of property and equipment of $0.5 million, offset by proceeds from the sale of PRV of $130.0 million, and proceeds from maturities of investments of $60.3 million.

Cash used in investing activities for the three months ended March 31, 2017 was $10.6 million and related to purchases of investments of $87.5 million and purchases of property and equipment of $0.5 million, offset by proceeds from maturities of investments of $65.0 million, and the sale of investments of $12.4 million.

Cash Provided by Financing Activities

Cash provided by financing activities for the three months ended March 31, 2018 was $286.4 million and was comprised of $271.0 million from the sale of common stock in our underwritten public offering $11.8 million from the sale of common stock in our ATM offering, and $3.6 million in net proceeds from the issuance of common stock pursuant to equity awards.

Cash provided by financing activities for the three months ended March 31, 2017 was $69.0 million and was comprised of $67.6 million from the sale of common stock in our ATM offering, and $1.4 million in net proceeds from the issuance of common stock upon the exercise of stock options.

Funding Requirements

We anticipate, excluding non-recurring items, that we will continue to generate annual losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize our approved products. Due to certain non-recurring or infrequent items like the sale of priority review vouchers, we may have income or lower levels of losses in the near term in quarterly periods that may not be indicative of future periods or trends. We will likely require additional capital to fund our operations, complete our ongoing and planned clinical studies and commercialize our products, and funding may not be available to us on acceptable terms or at all.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may be required to delay, limit, reduce the scope of, or terminate one or more of our clinical studies, research and development programs, future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our future funding requirements will depend on many factors, including the following:

We expect to satisfy future cash needs through existing capital balances and through some combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, and other marketing and distribution arrangements. Please see “Risk Factors—Risks Related to Our Financial Condition and Capital Requirements.”

Contractual Obligations and Commitments

During the three months ended March 31, 2018, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

20

---

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to interest earned on our cash equivalents and investments. The primary objective of our investment activities is to preserve our capital to fund operations. A secondary objective is to maximize income from our investments without assuming significant risk. Our investment policy provides for investments in low-risk, investment-grade debt instruments. As of March 31, 2018, we had cash, cash equivalents,