AVIDITY BIOSCIENCES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q and with our audited financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations, both of which are contained in our annual report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission , orSEC , onMarch 15, 2021 .
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategies and plans, research and development plans, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and planned clinical trials for our product candidates, the timing and likelihood of regulatory filings and approvals for our product candidates, the impact of COVID-19 on our business, the timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated product development efforts, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," or the negative of these terms or other comparable terminology. These forward-looking statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors." The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Overview
We are pioneering a new class of oligonucleotide-based therapies called Antibody Oligonucleotide Conjugates, or AOCs, designed to overcome the current limitations of oligonucleotide therapies in order to treat a wide range of serious diseases. We utilize our proprietary AOC platform to design, engineer and develop therapeutics that combine the specificity of monoclonal antibodies and the precision of oligonucleotide therapies in order to access previously undruggable tissue and cell types and more effectively target underlying genetic drivers of diseases. We are initially focused on muscle diseases to demonstrate the capabilities of our AOCs, and our muscle franchise consists of over five programs. Our lead product candidate, AOC 1001, is designed to treat myotonic dystrophy type 1, a rare monogenic muscle disease. We plan to initiate a Phase 1/2 clinical trial of AOC 1001 in the second half of 2021. We also intend to advance AOC product candidates in our other muscle programs focused on the treatment of facioscapulohumeral muscular dystrophy, Duchenne muscular dystrophy, muscle atrophy and Pompe disease. In addition to our muscle franchise, we have development efforts focused on immune cells, cardiac tissue and other cell types. Since our inception in 2012, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing our proprietary AOC platform, identifying potential product candidates, establishing our intellectual property portfolio and conducting research and preclinical studies, and providing other general and administrative support for these operations. We have not generated any revenue from product sales. InJune 2020 , we completed our initial public offering, or IPO, of 16,560,000 shares of our common stock at a price to the public of$18.00 per share, including the exercise in full by the underwriters of their option to purchase 2,160,000 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were$274.1 million , net of underwriting discounts, commissions and offering costs. Since our inception throughMarch 31, 2021 , other sources of capital raised to fund our operations were comprised of aggregate gross proceeds of$131.6 million from the sale and issuance of convertible preferred stock/units and convertible notes,$31.5 million from funding under collaboration and research services agreements, and$7.0 million from loans fromSilicon Valley Bank , or SVB, under a Loan and Security Agreement, as amended, or the LSA. As ofMarch 31, 2021 , we had cash, cash equivalents and marketable securities of$307.9 million . 20 -------------------------------------------------------------------------------- We have incurred operating losses in each year since inception. Our net losses were$44.4 million and$24.7 million for the years endedDecember 31, 2020 and 2019, respectively, and$23.8 million for the three months endedMarch 31, 2021 . As ofMarch 31, 2021 , we had an accumulated deficit of$90.4 million . We expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned preclinical studies and clinical trials, continue our research and development activities, utilize third parties to manufacture our product candidates and related raw materials, hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company, including audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance premiums, and investor relations costs. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies and clinical trials and our expenditures on other research and development activities, as well as the generation of any collaboration and services revenue. Based upon our current operating plans, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least 12 months from the date of the filing of this Form 10-Q. While we may generate revenue under our current and/or future collaboration agreements, we do not expect to generate any revenues from product sales until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and may never occur. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed, on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
COVID-19
The COVID-19 outbreak inthe United States has caused significant business disruption. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and its impact on our preclinical studies and clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. In response to the COVID-19 outbreak, we have closed our executive offices with our administrative employees continuing their work remotely and have limited the number of staff in our research and development laboratories. To date, we have not experienced material disruptions in our business operations. However, a prolonged outbreak could have a material adverse impact on our financial results and business operations, including the timing of and our ability to complete certain clinical trials and other efforts required to advance the development of our product candidates and raise additional capital. In response to the pandemic, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was signed into law onMarch 27, 2020 . The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. To date, the CARES Act has not impacted our income tax provision. We currently do not expect to apply for loans or grants under the CARES Act.
Research Collaboration and License Agreement with Eli Lilly and Company
InApril 2019 , we entered into a Research Collaboration and License Agreement, or the Lilly Agreement, with Eli Lilly and Company, or Lilly, for the discovery, development and commercialization of AOC products in immunology and other select indications on a worldwide basis. Under the Lilly Agreement, we and Lilly will collaborate on preclinical research and discovery activities for such products, with Lilly being responsible for funding the cost of such activities by both parties. Lilly will also lead the clinical development, regulatory approval and commercialization of all such products, at its sole cost. We granted Lilly an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under our technology to research, develop, manufacture, and sell products containing AOCs that are directed to up to six mRNA targets. We retain the right to use our technology to perform our obligations under the agreement and for all purposes not granted to Lilly. Lilly paid us an upfront license fee of$20.0 million in 2019, and we are eligible to receive up to$60.0 million in development milestone payments, up to$140.0 million in regulatory milestone payments and up to$205.0 million in commercialization milestone payments per target. We are eligible to receive a tiered royalty ranging from the mid-single to low-double digits from Lilly on worldwide annual net sales of licensed products, subject to specified and capped reductions for the market entry of biosimilar products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory. Concurrently with the Lilly Agreement, we issued a convertible promissory note to Lilly, or the Lilly Note, and received cash proceeds of$15.0 million in 2019. The Lilly Note accrued simple interest of 8.0% per annum and, if not converted, would have matured inOctober 2020 . In connection with the sale of our Series C convertible preferred stock inNovember 2019 , all outstanding principal and interest accrued under the Lilly Note converted into 4,576,342 shares of our Series C 21
-------------------------------------------------------------------------------- convertible preferred stock, at a conversion price equal to 80% of the per share cash price paid by the investors in the Series C convertible preferred stock financing. In connection with our IPO inJune 2020 , the Series C convertible preferred stock related to the Lilly Note converted into 2,169,396 shares of our common stock.
Components of Results of Operations
Revenue
Our revenue to date has been derived from payments received under the Lilly Agreement and other license and research agreements. For the foreseeable future, we may generate revenue from reimbursements of services under the Lilly Agreement, as well as a combination of upfront payments and milestone payments under our current and/or future collaboration agreements. We do not expect to generate any revenue from the sale of products unless and until such time that our product candidates have advanced through clinical development and regulatory approval, if ever. We expect that any revenue we generate, if at all, will fluctuate from quarter-to-quarter as a result of the timing and amount of payments relating to such services and milestones and the extent to which any of our products are approved and successfully commercialized. If we fail to complete preclinical and clinical development of product candidates or obtain regulatory approval for them, our ability to generate future revenues and our results of operations and financial position would be adversely affected.
Operating Expenses
Research and Development
Research and development expenses consist of external and internal costs associated with our research and development activities, including our discovery and research efforts, and the preclinical and clinical development of our product candidates. Our research and development expenses include:
• external costs, including expenses incurred under arrangements with third
parties, such as contract research organizations, contract manufacturers,
consultants and our scientific advisors; and
• internal costs, including;
• employee-related expenses, including salaries, benefits and
stock-based compensation;
• the costs of laboratory supplies and acquiring, developing and
manufacturing preclinical study materials; and
• facilities, information technology and depreciation, which include
direct and allocated expenses for rent and maintenance offacilities
and depreciation of leasehold improvements and equipment.
Research and development costs, including costs reimbursed under the Lilly
Agreement, are expensed as incurred, with reimbursements of such amounts being
recognized as revenue. We account for nonrefundable advance payments for goods
and services that will be used in future research and development activities as
expenses when the service has been performed or when the goods have been
received.
At any one time, we are working on multiple programs. Our internal resources,
employees and infrastructure are not directly tied to any one research or drug
discovery program and are typically deployed across multiple programs. As such,
we do not track internal costs on a specific program basis. The following table
summarizes our external costs and internal costs for the periods presented (in
thousands):
Three Months Ended March 31,
2021 2020
External costs $ 12,378 $ 3,006
Internal costs:
Employee-related expenses 6,473 1,582
Facilities, lab supplies and other costs 1,826 956
Total internal costs 8,299
2,538
Total research and development expenses
We expect our research and development expenses to increase for the foreseeable
future as we continue to conduct our ongoing research and development
activities, advance our preclinical research programs toward clinical
development, including conducting IND-enabling studies, and conduct clinical
trials. The process of conducting preclinical studies and clinical trials
necessary to obtain regulatory approval is costly and time consuming. We may
never succeed in achieving marketing approval for any of our product candidates.
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The timelines and costs associated with research and development activities are
uncertain, can vary significantly for each product candidate and development
program, and are difficult to predict. We anticipate we will make determinations
as to which programs to pursue and how much funding to direct to each program on
an ongoing basis in response to preclinical and clinical results, regulatory
developments, ongoing assessments as to each program's commercial potential, and
our ability to maintain or enter into new collaborations, to the extent we
determine the resources or expertise of a collaborator would be beneficial for a
given program. We will need to raise substantial additional capital in the
future. In addition, we cannot forecast which development programs may be
subject to future collaborations, when such arrangements will be secured, if at
all, and to what degree such arrangements would affect our development plans and
capital requirements.
Our development costs may vary significantly based on factors such as:
• the number and scope of clinical, preclinical and IND-enabling studies;
• per patient trial costs; • the number of trials required for approval; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the number of patients that participate in the trials; • the number of doses that patients receive; • the drop-out or discontinuation rates of patients;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up; • the cost and timing of manufacturing our product candidates; • the phase of development of our product candidates; and • the efficacy and safety profile of our product candidates.
General and Administrative
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation, for employees in our executive, finance, accounting, legal, business development and support functions. Other general and administrative expenses include allocated facility, information technology and depreciation related costs not otherwise included in research and development expenses and professional fees for auditing, tax, intellectual property and legal services. Costs related to filing and pursuing patent applications are recognized as general and administrative expenses as incurred since recoverability of such expenditures is uncertain. We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company. These increased costs will likely include increased expenses related to audit, legal, regulatory and tax services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance premiums and investor relations costs associated with operating as a public company.
Other Income (Expense)
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents and marketable securities.
Interest Expense
Interest expense consists of cash and noncash interest expense associated with our previously outstanding debt under the LSA.
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Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the periods
presented (in thousands):
Three Months Ended March 31, Increase
2021 2020 (decrease)
Revenue $ 2,704 $ 1,358 $ 1,346
Research and development expenses 20,677 5,544 15,133
General and administrative expenses 5,884 1,964 3,920
Other income (expense) 13 65 (52 )
Revenue
Revenue was
Research and Development Expenses
Research and development expenses were$20.7 million for the three months endedMarch 31, 2021 compared to$5.5 million for the three months endedMarch 31, 2020 . The increase was primarily driven by the advancement of AOC 1001 and our other programs, as well as costs related to the expansion of our overall research capabilities.
General and Administrative Expenses
General and administrative expenses were$5.9 million for the three months endedMarch 31, 2021 compared to$2.0 million for the three months endedMarch 31, 2020 . The increase was primarily due to higher personnel costs (including noncash stock-based compensation), professional fees and insurance costs related to being a public company.
Liquidity and Capital Resources
Sources of Liquidity
InJune 2020 , we completed our IPO of 16,560,000 shares of our common stock at a price to the public of$18.00 per share, including the exercise in full by the underwriters of their option to purchase 2,160,000 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were$274.1 million , net of underwriting discounts, commissions and offering costs. Since our inception throughMarch 31, 2021 , other sources of capital raised to fund our operations were comprised of aggregate gross proceeds of$131.6 million from the sale and issuance of convertible preferred stock/units and convertible notes,$31.5 million from funding under collaboration and research services agreements, and$7.0 million from loans from SVB under the LSA. As ofMarch 31, 2021 , we had cash, cash equivalents and marketable securities of$307.9 million .
Convertible Promissory Notes
InJuly 2018 andFebruary 2019 , we issued convertible promissory notes to certain of our existing investors, or the 2018 Notes and 2019 Notes, respectively, and received proceeds of$3.0 million and$4.5 million , respectively. The 2018 Notes and 2019 Notes accrued simple interest at a rate of 8% and 10% per annum, respectively, and had a maturity date inDecember 2020 , subject to earlier conversion.
In addition, in
InNovember 2019 , in connection with our Series C financing transaction, all outstanding amounts of principal and accrued interest from the 2018 Notes, 2019 Notes andLilly Note , which totaled$23.8 million , were converted into an aggregate of 6,893,036 shares of our Series C convertible preferred stock, which subsequently converted into shares of our common stock in connection with our IPO. 24
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SVB Loan and Security Agreement
InJune 2017 , we entered into an amendment to the LSA with SVB, or the First LSA Amendment, which provided up to$7.0 million in available borrowings in two tranches. In 2017, we drew the first tranche of$5.0 million , of which$4.6 million was used to repay our existing debt obligations to SVB. InAugust 2018 , we drew the second tranche of$2.0 million . Interest accrued on the unpaid principal balance at an adjustable annual rate of the prime rate per theWall Street Journal plus 0.20%. In addition to our monthly payments of principal and interest, our repayment obligations included a final payment of 6.5% of the original principal advanced, which was due upon final maturity of the loan inJune 2021 . OnJune 30, 2020 , we voluntarily prepaid the outstanding principal balance of$2.8 million and final payments and accrued interest of$0.5 million under the LSA, and the LSA was terminated. In connection with execution of the LSA, we issued SVB a warrant to purchase 16,474 shares of our Series A convertible preferred stock at an exercise price of$2.2615 per share, exercisable at any time following issuance with a term of ten years. In connection with the completion of our IPO inJune 2020 , the preferred stock warrant was adjusted to become a warrant exercisable for 7,809 shares of common stock at an exercise price of$4.77 per share. In connection with the First LSA Amendment inJune 2017 , we issued SVB an additional warrant to purchase 9,442 shares of common stock at an exercise price of$0.53 per share, exercisable at any time following issuance with a term of seven years. OnJune 17, 2020 , the warrants were cashless exercised for an aggregate of 15,833 shares of common stock. Future Capital Requirements As ofMarch 31, 2021 , we had cash, cash equivalents and marketable securities of$307.9 million . Based upon our current operating plans, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least 12 months from the date of the filing of this Form 10-Q. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting preclinical studies and testing product candidates in clinical trials is costly, and the timing of progress and expenses in these studies and trials is uncertain.
Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
• the type, number, scope, progress, expansions, results, costs and timing
of discovery, preclinical studies and clinical trials of our product
candidates that we are pursuing or may choose to pursue in the future;
• the costs and timing of manufacturing for our product candidates andcommercial manufacturing if any product candidate is approved;
• the costs, timing and outcome of regulatory review of our product candidates;
• the terms and timing of establishing and maintaining collaborations,
licenses and other similar arrangements;
• the costs of obtaining, maintaining and enforcing our patents and other
intellectual property rights;
• our efforts to enhance operational systems and hire additional personnel
to satisfy our obligations as a public company, including enhanced
internal controls over financial reporting;
• the costs associated with hiring additional personnel and consultants as
our preclinical and clinical activities increase;
• the timing and amount of the milestone or other payments made to us under
the Lilly Agreement or any future collaboration agreements;
• the costs and timing of establishing or securing sales and marketing
capabilities if any product candidate is approved;
• our ability to achieve sufficient market acceptance, coverage and adequate
reimbursement from third-party payors and adequate market share and
revenue for any approved products; and
• costs associated with any products or technologies that we may in-license
or acquire.
While we may generate revenue under our current and/or future collaboration
agreements, we do not expect to generate any revenues from product sales until
we successfully complete development and obtain regulatory approval for one or
more of our product candidates, which we expect will take a number of years and
may never occur. If we obtain regulatory approval for any of our product
candidates, we expect to incur significant commercialization expenses related to
product sales, marketing, manufacturing and distribution. Accordingly, until
such time as we can generate significant
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revenue from sales of our product candidates, if ever, we expect to finance our
cash needs through equity offerings, debt financings or other capital sources,
including current and potential future collaborations, licenses and other
similar arrangements. However, we may be unable to raise additional funds or
enter into such other arrangements when needed, on favorable terms or at all. In
addition, we may seek additional capital due to favorable market conditions or
strategic considerations even if we believe we have sufficient funds for our
current or future operating plans. Our failure to raise capital or enter into
such other arrangements when needed would have a negative impact on our
financial condition and could force us to delay, limit, reduce or terminate our
product development or future commercialization efforts or grant rights to
develop and market product candidates that we would otherwise prefer to develop
and market ourselves.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Three Months Ended March 31,
2021 2020
Net cash provided by (used in):
Operating activities $ (19,681 ) $ (7,140 )
Investing activities (525 ) (10 )
Financing activities 17 1,323Net decrease in cash, cash equivalents
and restricted cash$ (20,189 ) $ (5,827 ) Operating Activities Net cash used in operating activities was$19.7 million and$7.1 million for the three months endedMarch 31, 2021 and 2020, respectively, which consisted primarily of cash used to fund our operations related to the development of AOC 1001 and our other programs. Investing Activities Net cash used in investing activities was$0.5 million and$10,000 for the three months endedMarch 31, 2021 and 2020, respectively, which consisted primarily of cash used to purchase property and equipment.
Financing Activities
Net cash provided by financing activities was$17,000 for the three months endedMarch 31, 2021 , which consisted primarily of proceeds from the exercise of stock options. Net cash provided by financing activities was$1.3 million for the three months endedMarch 31, 2020 , which consisted primarily of net proceeds from the sale of shares of our Series C convertible preferred stock, partially offset by payments related to the LSA and payment of deferred financing costs.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles, or GAAP. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. As ofMarch 31, 2021 , there have been no material changes to our critical accounting policies and estimates from those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates," included in our annual report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onMarch 15, 2021 .
Contractual Obligations and Commitments
As ofMarch 31, 2021 , there have been no material changes outside the ordinary course of our business to the contractual obligations we reported in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments," included in our annual report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onMarch 15, 2021 . 26
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Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC . JOBS Act As an emerging growth company under the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We also intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of our IPO; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least$1.07 billion ; (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700.0 million as of the last business day of the second fiscal quarter of such year; or (iv) the date on which we have issued more than$1.0 billion in nonconvertible debt securities during the prior three-year period.
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