The following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K. In addition to historical information, this report contains forward-looking statements that involve risks and uncertainties which may cause our actual results to differ materially from plans and results discussed in forward-looking statements. We encourage you to review the risks and uncertainties discussed in the sections entitled Item 1A. "Risk Factors" and "Forward-Looking Statements" included at the beginning of this Annual Report on Form 10-K. The risks and uncertainties can cause actual results to differ significantly from those forecast in forward-looking statements or implied in historical results and trends. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of theSEC , to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Overview We are a biotechnology company committed to researching, developing, and commercializing potentially transformative gene therapies for severe genetic diseases and cancer. We have built an integrated product platform with broad therapeutic potential in a variety of indications based on our lentiviral gene addition platform, gene editing and cancer immunotherapy capabilities. We believe that gene therapy for severe genetic diseases has the potential to change the way patients living with these diseases are treated by addressing the underlying genetic defect that is the cause of their disease, rather than offering treatments that only address their symptoms. Our gene therapy programs include LentiGlobin for ?-thalassemia; LentiGlobin for SCD; and Lenti-D for CALD. Our programs in oncology are focused on developing novel T cell-based immunotherapies, including CAR and TCR T cell therapies. bb2121 (idecabtagene vicleucel, or ide-cel), and bb21217 are CAR-T cell product candidates for the treatment of multiple myeloma and partnered under our collaboration arrangement with Bristol-Myers Squibb, or BMS. We are commercializing ZYNTEGLO in theEuropean Union and expect to begin to generate product revenue in the first half of 2020. We are engaged with theU.S. Food and Drug Administration , or FDA, and theEuropean Medicines Agency , or EMA, in discussions regarding our proposed development plans for ZYNTEGLO in patients with TDT and a ?0/?0 genotype. We are engaged with the FDA in discussions regarding the requirements and timing for providing certain information regarding various release assays for LentiGlobin for ?-thalassemia, and subject to these ongoing discussions, we are currently planning to complete the BLA submission in the second half of 2020. We are engaged with the FDA and EMA in discussions regarding our proposed development plans, and anticipate a potential first submission in 2022 for marketing approval of LentiGlobin for the treatment of patients with SCD on the basis of our clinical data from our ongoing HGB-206 and HGB-210 studies. Based on our discussions with the FDA and EMA, we believe that we may be able to seek approval for our Lenti-D product candidate for the treatment of patients with CALD on the basis of our clinical data from our ongoing Starbeam study, and the ongoing ALD-103 observational study. We anticipate a potential first submission in 2020 for regulatory approval of our Lenti-D product candidate for the treatment of patients with CALD. In collaboration with BMS (which acquired Celgene inNovember 2019 ), we are developing ide-cel and the bb21217 product candidates as treatments for multiple myeloma, a hematologic malignancy that develops in the bone marrow and is fatal if untreated. We are co-developing and co-promoting ide-cel inthe United States with BMS and we have exclusively licensed to BMS the development and commercialization rights for ide-cel outside ofthe United States . We and BMS anticipate a potential first submission in the first half of 2020 for regulatory approval of ide-cel as a treatment for relapsed and refractory multiple myeloma. We have exclusively licensed the development and commercialization rights for the bb21217 product candidate to BMS, with an option for us to elect to co-develop and co-promote bb21217 withinthe United States . Since our inception in 1992, we have devoted substantially all of our resources to our development efforts relating to our product candidates, including activities to manufacture product candidates in compliance with good manufacturing practices, or GMP, to conduct clinical studies of our product candidates, to provide selling, general and administrative support for these operations and to protect our intellectual property. We have not generated any revenue from product sales. We have funded our 82 -------------------------------------------------------------------------------- Table of Contents operations primarily through the sale of common stock in our public offerings, private placements of preferred stock and warrants and through collaborations. As ofDecember 31, 2019 , we had cash, cash equivalents and marketable securities of approximately$1.24 billion . We have never been profitable and have incurred net losses in each year since inception. Our net losses were$789.6 million for the year endedDecember 31, 2019 and our accumulated deficit was$2.28 billion as ofDecember 31, 2019 . Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing and planned activities, as we: •conduct clinical studies for our clinical programs in ?-thalassemia, SCD, and ALD, fund our share of the costs of clinical studies for our program in multiple myeloma in collaboration with BMS, and advance our preclinical programs into clinical development; •increase research and development-related activities for the discovery and development of product candidates in severe genetic diseases and oncology; •continue our research and development efforts internally and through our collaborations with external partners, such as with Regeneron; •manufacture clinical study materials and establish the infrastructure necessary to support and develop large-scale manufacturing capabilities; •seek regulatory approval for our product candidates; •add personnel to support our product development and commercialization efforts; and •increase activities associated with the commercial launch of ZYNTEGLO in multiple markets. We do not expect to generate revenue from product sales until the first half of 2020. While we are in the process of completing construction and qualification of our internal lentiviral vector manufacturing capacity, currently all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party contract research organizations, or CROs, to carry out our clinical development activities. As we seek to obtain regulatory approval for our product candidates and begin to commercialize ZYNTEGLO, we expect to incur significant commercialization expenses, in addition to our significant and increasing research and development expenses, as we prepare for product sales, marketing, manufacturing, and distribution. Accordingly, until we generate significant revenues from product sales, we will seek to fund our operations through public or private equity or debt financings, strategic collaborations, or other sources. 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 as and when needed would have a negative impact on our financial condition and our ability to develop our products. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenues from the sale of our products, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations. Financial operations overview Revenue To date, we have not generated any revenues from the sale of products. Our revenues have been derived from collaboration arrangements, out-licensing arrangements, research fees, and grant revenues. EffectiveJanuary 1, 2018 , we adopted Accounting Standards Codification ("ASC"), Topic 606, Revenue from Contracts with Customers ("Topic 606"), using the modified retrospective transition method. To date, our collaboration revenue has been primarily generated from our collaboration arrangement with BMS. The terms of the arrangement with respect to ide-cel contain multiple promised goods or services, which include at inception: (i) research and development services, (ii) a license to ide-cel, and (iii) manufacture of vectors and associated payload for incorporation into ide-cel under the license. As ofSeptember 2017 , the collaboration also included the following promised goods or services with respect to bb21217: (i) research and development services, (ii) a license to bb21217, and (iii) manufacture of vectors and associated payload for incorporation into bb21217 under the license. InMarch 2018 , we entered into an agreement with BMS 83 -------------------------------------------------------------------------------- Table of Contents to co-develop and co-promote ide-cel in which both parties will share equally inU.S. costs and profits. Collaboration revenue is recognized as the performance obligations are satisfied. We analyze our collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements ("ASC 808") to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808, we first determine which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of Topic 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606. Amounts that are owed to collaboration partners are recognized as an offset to collaboration revenues as such amounts are incurred by the collaboration partner. Where amounts owed to a collaboration partner exceed our collaboration revenues in a quarterly period, such amounts in excess are classified as research and development expense. For those elements of the arrangement that are accounted for pursuant to Topic 606, we apply the five-step model prescribed in Topic 606. Nonrefundable license fees are recognized as revenue upon delivery of the license provided there are no unsatisfied performance obligations in the arrangement. License revenue has historically been generated from our out-license agreements withNovartis Pharma AG , or Novartis, andOrchard Therapeutics Limited , or Orchard. Under our out-licensing agreements we may also recognize revenue from potential future milestone payments and royalties. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. Research and development expenses Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include: •employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; •expenses incurred under agreements with CROs and clinical sites that conduct our clinical studies; •costs of acquiring, developing, and manufacturing inventory, which includes pre-launch inventory; •reimbursable costs to our partners for collaborative activities; •facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, information technology, insurance, and other supplies in support of research and development activities; •costs associated with our research platform and preclinical activities; •milestones and upfront license payments to acquire and maintain intellectual property rights pertaining to aspects of our technologies; •costs associated with our regulatory, quality assurance and quality control operations; and •amortization of certain intangible assets. Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites. We cannot determine with certainty the duration and completion costs of the current or future clinical studies of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may not succeed in achieving regulatory approval for all of our product candidates. The duration, costs, and timing of clinical studies and development of our product candidates will depend on a variety of factors, any of which could mean a significant change in the costs and timing associated with the development of our product candidates including: •the advancement of our preclinical programs into clinical development; 84 -------------------------------------------------------------------------------- Table of Contents •the scope, rate of progress, and expense of our ongoing as well as any additional clinical studies and other research and development activities we undertake; •future clinical study results; •uncertainties in clinical study enrollment rates; •changing standards for regulatory approval; and •the timing and receipt of any regulatory approvals. We plan to increase our research and development expenses for the foreseeable future as we continue to conduct our clinical development programs in ?-thalassemia, SCD, CALD, and multiple myeloma (including funding our share of the costs in our collaboration with BMS), advance our preclinical programs in severe genetic diseases and oncology into clinical development, and continue the research and discovery of new product candidates in the fields of severe genetic diseases and oncology. Our research and development expenses include expenses associated with the following activities: •Northstar-2 Study (HGB-207) - a multi-site, international phase 3 study to examine the safety and efficacy of LentiGlobin for TDT in the treatment of patients with TDT and a non-?0/?0 genotype. •Northstar-3 Study (HGB-212) - a multi-site, international phase 3 study to examine the safety and efficacy of LentiGlobin for TDT in the treatment of patients with TDT and a ?0/?0 genotype or an IVS-I-110 mutation. •HGB-206 study - a multi-site phase 1/2 study inthe United States to study the safety and efficacy of LentiGlobin for SCD in the treatment of patients with SCD. •HGB-210 study - our multi-site, international phase 3 study of LentiGlobin for SCD in the treatment of patients with SCD and a history of vaso-occlusive events. •HGB-211 study - our planned multi-site phase 3 study of LentiGlobin for SCD in the treatment of patients with SCD and elevated stroke risk We plan to initiate this study in 2020. •Starbeam Study (ALD-102) - a multi-site, international phase 2/3 study to examine the safety and efficacy of our Lenti-D product candidate in the treatment of patients with CALD. •ALD-104 study - our multi-site, international phase 3 study to examine the safety and efficacy of our Lenti-D product candidate in the treatment of patients with CALD after myeloablative conditioning using busulfan and fludarabine . •CRB-401 study - an open label, single-arm, multi-center, phase 1 study to examine the safety and efficacy of ide-cel in the treatment of patients with relapsed and refractory multiple myeloma. •KarMMA study - an open label, single-arm, multi-center phase 2 study to examine the efficacy and safety of ide-cel in the treatment of patients with relapsed and refractory multiple myeloma. •KarMMa-2 study - a multi-cohort, open-label, multicenter phase 2 study to examine the safety and efficacy of ide-cel in the treatment of patients with relapsed and refractory multiple myeloma and in high-risk multiple myeloma. •KarMMa-3 study - a multicenter, randomized, open-label phase 3 study comparing the efficacy and safety of ide-cel versus standard triplet regimens in patients with relapsed and refractory multiple myeloma. •KarMMa-4 study -, a multi-cohort, open-label, multicenter phase 1 study intended to determine the optimal target dose and safety of ide-cel in subjects with newly-diagnosed multiple myeloma. •CRB-402 study - an open label, single-arm, multicenter, phase 1 study to examine the safety and efficacy of the bb21217 product candidate in the treatment of patients with relapsed and refractory multiple myeloma. •Costs related to the manufacture of clinical study materials in support of our clinical studies. •Support for strategic collaborations in early pipeline activities, including in our severe genetic disease and oncology programs. •Support for academic collaborations in early pipeline activities, including investigator-initiated proof-of-concept clinical trials in our severe genetic disease and oncology programs. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical studies, and costs related to acquiring and manufacturing clinical study materials. We allocate salary and benefit costs directly related to specific programs. We do not allocate personnel-related discretionary bonus or stock-based compensation costs, costs associated with our general discovery 85 -------------------------------------------------------------------------------- Table of Contents platform improvements, depreciation or other indirect costs that are deployed across multiple projects under development and, as such, the costs are separately classified as other research and development expenses in the table below: Year ended December 31, 2019 2018 2017 (in thousands) LentiGlobin (including ZYNTEGLO)(1)$ 124,692 $ 125,058 $ 85,710 Lenti-D 40,352 38,244 16,223 Ide-cel 121,182 75,667 32,144 bb21217(2) 19,827 15,624 7,402 Preclinical programs(2) 49,700 50,115 40,167
Total direct research and development expense 355,753 304,708
181,646
Employee- and contractor-related expenses 52,617 35,697
23,698
Stock-based compensation expense 80,139 54,422 26,633 Platform-related expenses 19,229 18,187 15,414 Facility expenses 67,274 32,158 24,700 Other expenses 7,401 3,417 949
Total other research and development expenses 226,660 143,881
91,394
Total research and development expense
(1) Following our receipt of conditional approval for the marketing authorization of ZYNTEGLO by theEuropean Commission inJune 2019 , all manufacturing costs associated with the production of LentiGlobin for use in the commercial sale of ZYNTEGLO in theEuropean Union will be evaluated for capitalization as inventory on our consolidated balance sheets. (2) The costs associated with our bb21217 program were included in preclinical programs in the table shown above throughJune 30, 2017 . The costs associated with our bb21217 program are presented separately in the table above beginning in the third quarter of 2017 as we initiated the first clinical study for bb21217 in the third quarter of 2017. Selling, general and administrative expenses Selling, general and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, business development, commercial, information technology, and human resource functions. Other selling, general and administrative expenses include facility-related costs, professional fees for accounting, tax, legal and consulting services, directors' fees and expenses associated with obtaining and maintaining patents. We anticipate that our selling, general and administrative expenses, including payroll and sales and marketing expenses, will increase in the future as we increase our headcount and continue to develop and commercialize our product candidates. Cost of license and royalty revenue Cost of license and royalty revenue represents expense associated with amounts owed to third party licensors as a result of revenue recognized under our out-license arrangements with Novartis and Orchard. We anticipate that our cost of license and royalty revenue will increase in the future contingent upon the achievement of regulatory milestones by Novartis or Orchard. Additionally, we anticipate that our cost of license and royalty revenue will increase in the future as we expect to continue to recognize royalty revenue related to Novartis' commercial sale of tisagenlecleucel. Change in fair value of contingent consideration OnJune 30, 2014 , we acquiredPrecision Genome Engineering, Inc. , or Pregenen. The agreement provided for up to$135.0 million in future contingent cash payments by us upon the achievement of certain preclinical, clinical and commercial milestones related to the Pregenen technology. 86 -------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2019 , there are$120.0 million in future contingent cash payments, of which$20.1 million relates to clinical milestones and$99.9 million relates to commercial milestones. We estimate future contingent cash payments have a fair value of$8.0 million as ofDecember 31, 2019 , all of which is classified as a non-current liability on our consolidated balance sheet. Interest income (expense), net For the year endedDecember 31, 2019 , interest income (expense), net consists primarily of interest income earned on investments. For the years endedDecember 31, 2018 and 2017, interest income (expense), net consisted primarily of interest income earned on investments and interest expense on the financing lease obligation for our headquarters at60 Binney Street inCambridge, Massachusetts . Upon adoption of ASU 2016-02, Leases (Topic 842) ("ASU 2016-02" or "ASC 842") onJanuary 1, 2019 , we de-recognized the financing lease obligation and, as a result, no longer recognize interest expense associated with the financing lease obligation. Please refer to Note 2, Summary of significant accounting policies and basis of presentation, and Note 8, Leases, in the Notes to Consolidated Financial Statements for further information. Other (expense) income, net Other (expense) income, net consists primarily of unrealized gains and losses on equity securities, gains and losses on disposal of fixed assets, realized gains and losses on debt securities, and gains and losses on foreign currency transactions. Critical accounting policies and significant judgments and estimates Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in theU.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies. While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this annual report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements. Revenue recognition Revenue recognition EffectiveJanuary 1, 2018 , we adopted Accounting Standards Codification ("ASC"), Topic 606, Revenue from Contracts with Customers ("Topic 606"), using the modified retrospective transition method. Under this method, we have recognized the cumulative effect of the adoption as an adjustment to the opening balance of accumulated deficit in the current period consolidated balance sheet. We have not revised our consolidated financial statements for prior periods. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as collaboration arrangements and leases. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services 87 -------------------------------------------------------------------------------- Table of Contents that are exercisable at a customer's discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes. We assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices ("SSP") on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. We assessed each of our revenue generating arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of our arrangements. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time, and if over time recognition is based on the use of an output or input method. 88 -------------------------------------------------------------------------------- Table of Contents Collaboration revenue To date, collaboration revenue has been primarily generated from our collaboration arrangement with BMS, which was originally entered into inMarch 2013 and was subsequently amended inJune 2015 , as further described in Note 11, Collaborative arrangements in the Notes to Consolidated Financial Statements. InAugust 2018 , we entered into a collaboration arrangement with Regeneron, and began recognizing collaboration revenue under this arrangement in the fourth quarter of 2018. We analyze our collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements ("ASC 808") to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, we first determine which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of Topic 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606. Amounts that are owed to collaboration partners are recognized as an offset to collaboration revenues as such amounts are incurred by the collaboration partner. Where amounts owed to a collaboration partner exceed our collaboration revenues in each quarterly period, such amounts are classified as research and development expense. For those elements of the arrangement that are accounted for pursuant to Topic 606, we apply the five-step model described above. The recognition of collaboration revenue (expense) requires management judgment due to the fact that the terms of our collaboration arrangements are complicated and the nature of the collaborative activities change over time. This process includes the identification of costs that we incur that relate to each particular collaboration arrangement, evaluating the nature of these costs (for example, whether the costs relate to a particular geography or territory or whether the costs relate to clinical or commercial activities), and applying the terms of the respective collaborative arrangement to determine the portion of such costs that are the responsibility of the collaboration partner, which in certain circumstances requires significant judgment. Leases EffectiveJanuary 1, 2019 , we adopted ASU 2016-02, Leases (Topic 842), ("ASU 2016-02" or "ASC 842"), using the required modified retrospective approach and utilizing the effective date as the date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases ("ASC 840"). At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. We do not have material financing leases. Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rate to discount lease payments, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. To estimate our incremental borrowing rate, a credit rating applicable to us is estimated using a synthetic credit rating analysis since we do not currently have a rating agency-based credit rating. Prospectively, we will adjust the right-of-use assets for straight-line rent expense or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date. We have elected not to recognize leases with an original term of one year or less on the balance sheet. We typically only includes an initial lease term in our assessment of a lease arrangement. Options to renew a lease are not included in our assessment unless there is reasonable certainty that we will renew. Assumptions that we made at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. 89 -------------------------------------------------------------------------------- Table of Contents ASC 842 transition practical expedients and application of transition provisions to leases at the transition date We elected the following practical expedients, which must be elected as a package and applied consistently to all of our leases at the transition date (including those for which we are a lessee or a lessor): i) we did not reassess whether any expired or existing contracts are or contain leases; ii) we did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840 are classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases); and iii) we did not reassess initial direct costs for any existing leases. For leases that existed prior to the date of initial application of ASC 842 (which were previously classified as operating leases), a lessee may elect to use either the total lease term measured at lease inception under ASC 840 or the remaining lease term as of the date of initial application of ASC 842 in determining the period for which to measure its incremental borrowing rate. In transition to ASC 842, we utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates. Application of ASC 842 policy elections to leases post adoption We have made certain policy elections to apply to our leases executed post adoption, or subsequent toJanuary 1, 2019 , as further described below. In accordance with ASC 842, components of a lease should be split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components. Entities may elect not to separate lease and non-lease components. Rather, entities would account for each lease component and related non-lease component together as a single lease component. We have elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only. ASC 842 allows for the use of judgment in determining whether the assumed lease term is for a major part of the remaining economic life of the underlying asset and whether the present value of lease payments represents substantially all of the fair value of the underlying asset. We apply the bright line thresholds referenced in ASC 842-10-55-2 to assist in evaluating leases for appropriate classification. The aforementioned bright lines are applied consistently to our entire portfolio of leases. Accrued research and development expenses As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We recognize expenses related to clinical studies based on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period and adjust accordingly. Other examples of estimated accrued research and development expenses include fees paid to: •investigative sites in connection with clinical studies; •vendors in connection with preclinical development activities; and •vendors related to the development, manufacturing, and distribution of clinical trial materials. 90 -------------------------------------------------------------------------------- Table of Contents Stock-based compensation We issue stock-based awards to employees and non-employees, generally in the form of stock options and restricted stock units. We account for our stock-based awards in accordance with FASB ASC Topic 718, Compensation-Stock Compensation, or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of employee stock options and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. Prior to the adoption of Accounting Standards Update ("ASU") No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), the measurement date for non-employee awards was generally the date the services are completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting terms for changes in the fair value of the awards. After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. Our stock-based awards are subject to either service or performance-based vesting conditions. Compensation expense related to awards to employees, non-employees, and directors, with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Compensation expense related to awards to employees and non-employees with performance-based vesting conditions is recognized based on the grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. We estimate the probability that certain performance criteria will be met and do not recognize compensation expense until it is probable that the performance-based vesting condition will be achieved. We estimate the fair value of our stock-based awards to employees, non-employees, and directors, using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including (i) the expected volatility of our stock, (ii) the expected term of the award, (iii) the risk-free interest rate, and (iv) expected dividends. Due to the lack of company specific historical and implied volatility data, we based our estimate of expected volatility on the estimate and expected volatilities of a representative group of publicly traded companies. For these analyses, we select companies with comparable characteristics to ours including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies' shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We estimate the expected life of our employee stock options using the "simplified" method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option were based on theU.S. Treasury yield curve in effect during the period the options were granted. Recent accounting pronouncements See Note 2, Summary of significant accounting policies and basis of presentation, in the Notes to Consolidated Financial Statements for a description of recent accounting pronouncements applicable to our business. 91 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the years endedDecember 31, 2019 and 2018: Year ended December 31, 2019 2018 Change (in thousands) Revenue: Collaboration revenue$ 36,469 $ 52,353 $ (15,884) License and royalty revenue 8,205 2,226 5,979 Total revenues 44,674 54,579 (9,905) Operating expenses: Research and development 582,413 448,589 133,824 Selling, general and administrative 271,362 174,129 97,233 Cost of license and royalty revenue 2,978 885 2,093 Change in fair value of contingent consideration 2,747 2,999 (252) Total operating expenses 859,500 626,602 232,898 Loss from operations (814,826) (572,023) (242,803) Interest income (expense), net 34,761 14,624 20,137 Other (expense) income, net (10,088) 1,961 (12,049) Loss before income taxes (790,153) (555,438) (234,715) Income tax benefit (expense) 545 (187) 732 Net loss$ (789,608) $ (555,625) $ (233,983) Revenue. Total revenue was$44.7 million for the year endedDecember 31, 2019 , compared to$54.6 million for the year endedDecember 31, 2018 . The decrease of$9.9 million was primarily attributable to a decrease in collaboration revenue recognized for the ide-cel license and manufacturing services under our agreement with BMS. This decrease was partially offset by an increase in license and royalty revenue and an increase in collaboration revenue under our agreement with Regeneron. Research and development expenses. Research and development expenses were$582.4 million for the year endedDecember 31, 2019 , compared to$448.6 million for the year endedDecember 31, 2018 . The increase of$133.8 million was primarily attributable to the following: •$66.1 million of increased employee compensation, benefit, and other headcount related expenses, which is primarily driven by an increase in research and development headcount to support overall growth, including an increase of$25.7 million in stock-based compensation expense. Refer to Note 14, Stock-based compensation, in the Notes to Consolidated Financial Statements for discussion of stock-based compensation expense recognized on the performance-based restricted stock units; •$34.8 million of increased IT and facility related costs, which includes the impact of adopting ASU 2016-02; •$26.3 million of increased collaboration research funding costs; •$13.1 million of increased laboratory expenses, material production, and other platform costs; •$9.7 million of increased research consulting and medical research costs; and •$3.6 million of increased clinical trial costs. These increased costs were partially offset by$20.6 million of decreased license and milestone fees. Selling, general and administrative expenses. Selling, general and administrative expenses were$271.4 million for the year endedDecember 31, 2019 , compared to$174.1 million for the year endedDecember 31, 2018 . The increase of$97.2 million was primarily due to the following: •$65.3 million of increased employee compensation, benefit, and other headcount related expenses, which is primarily driven by an increase in selling, general, and administrative headcount to support overall growth, including an increase of$24.1 million in stock-based compensation expense. Refer to Note 14, Stock-based compensation, in the Notes to 92 -------------------------------------------------------------------------------- Table of Contents Consolidated Financial Statements for discussion of stock-based compensation expense recognized on the performance-based restricted stock units; •$18.4 million of increased costs related to commercial-readiness activities; and •$13.2 million of increased consulting fees. Cost of license and royalty revenue. Cost of license and royalty revenue was$3.0 million for the year endedDecember 31, 2019 , compared to$0.9 million for the year endedDecember 31, 2018 . The increase is attributable to increased royalty revenue in the same periods. Change in fair value of contingent consideration. The change in fair value of contingent consideration is driven by changes in assumptions related to estimated milestone achievement dates or probabilities of achievement. Interest income (expense), net. The change in interest income (expense), net was primarily related to increased interest income earned on investments, as well as a decrease in interest expense incurred due to the de-recognition of the financing lease obligation associated with our corporate headquarters at60 Binney Street related to the adoption of ASU 2016-02 onJanuary 1, 2019 . Other (expense) income, net. The change in other (expense) income, net was primarily related to changes in fair value on equity securities. Comparison of the years endedDecember 31, 2018 and 2017: Year ended December 31, 2018 2017 Change (in thousands) Revenue: Collaboration revenue$ 52,353 $ 22,207 $ 30,146 License and royalty revenue 2,226 13,220 (10,994) Total revenues 54,579 35,427 19,152 Operating expenses: Research and development 448,589 273,040 175,549 Selling, general and administrative 174,129 93,550 80,579 Cost of license and royalty revenue 885 1,527 (642) Change in fair value of contingent consideration 2,999 (525) 3,524 Total operating expenses 626,602 367,592 259,010 Loss from operations (572,023) (332,165) (239,858) Interest income (expense), net 14,624 (2,001) 16,625 Other income (expense), net 1,961 (1,267) 3,228 Loss before income taxes (555,438) (335,433) (220,005) Income tax benefit (expense) (187) (210) 23 Net loss$ (555,625) $ (335,643) $ (219,982) Revenue. Total revenue was$54.6 million for the year endedDecember 31, 2018 , compared to$35.4 million for the year endedDecember 31, 2017 . The increase of$19.2 million was primarily attributable to collaboration revenue recognized associated with the ide-cel license and manufacturing services under our agreement with BMS, of which$13.9 million is attributable to differences resulting from the application of Topic 606 and ASC 605 to our arrangement with BMS during the year endedDecember 31, 2018 and 2017, respectively, offset by a decrease in license and royalty revenue. Research and development expenses. Research and development expenses were$448.6 million for the year endedDecember 31, 2018 , compared to$273.0 million for the year endedDecember 31, 2017 . The increase of$175.5 million was primarily attributable to the following: •$84.5 million of increased costs incurred for material production, laboratory expenses, and collaboration research; 93 -------------------------------------------------------------------------------- Table of Contents •$61.1 million of increased employee compensation, benefit, and other headcount related expenses, of which$27.8 million is stock based compensation expense, primarily due to an increase in headcount to support overall growth; •$17.8 million of increased facility related costs and professional and consulting fees; •$10.5 million of increased clinical trial-related costs to support the advancement of our clinical programs; and •$1.3 million of increased license and milestone fees (exclusive of any costs recorded in cost of license and royalty revenue) and increased grants and scholarships. Selling, general and administrative expenses. Selling, general and administrative expenses were$174.1 million for the year endedDecember 31, 2018 , compared to$93.6 million for the year endedDecember 31, 2017 . The increase of approximately$80.6 million was primarily due to the following: •$47.4 million of increased employee compensation and benefits, inclusive of$29.8 million of increased stock-based compensation expense; •$10.1 million of increased commercial-related costs, primarily attributed to market research costs; •$14.6 million due to increased consultant and professional services expenses; •$5.7 million in other headcount related costs; and •$4.3 million of increased office expenses. These increases were offset by decreased facility-related costs of$1.7 million . Cost of license and royalty revenue. Cost of license and royalty revenue was$0.9 million for the year endedDecember 31, 2018 , compared to$1.5 million for the year endedDecember 31, 2017 . The decrease is attributable to decreased license and royalty revenue in the same periods. Change in fair value of contingent consideration. The change in fair value of contingent consideration is driven by changes in assumptions related to estimated milestone achievement dates or probabilities of achievement. Interest income (expense), net. The change in interest income (expense), net was primarily related to increased interest income earned on investments due to the increase in investment in marketable securities, partially offset by interest expense on the 60 Binney financing obligation. Other income (expense), net. Other income, net was$2.0 million for the year endedDecember 31, 2018 , compared to other expense, net of$1.3 million for the year endedDecember 31, 2017 . The change is primarily related to an unrealized gain recognized on equity securities as well as fluctuations in foreign currency exchange rates. Liquidity and Capital Resources As ofDecember 31, 2019 , we had cash, cash equivalents and marketable securities of approximately$1.24 billion . We expect cash, cash equivalents, marketable securities, anticipated collaboration payments, and payments from sales of our current and potential future product candidates to fund planned operations into the second half of 2021. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. As ofDecember 31, 2019 , our funds are primarily held inU.S. Treasury securities,U.S. government agency securities, equity securities, certificates of deposit, corporate bonds, commercial paper, and money market accounts. We have incurred losses and cumulative negative cash flows from operations since our inception inApril 1992 , and as ofDecember 31, 2019 , we had an accumulated deficit of$2.28 billion . We expect that our research and development and selling, general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through public or private equity or debt financings, strategic collaborations, or other sources. The likelihood of our long-term success must be considered in light of the expenses, difficulties, and potential delays to be encountered in the development and commercialization of new pharmaceutical products, competitive factors in the marketplace and the complex regulatory environment in which we operate. We may never achieve significant revenue or profitable operations. We have funded our operations principally from the sale of common stock in public offerings and through our collaborations with BMS and Regeneron as outlined below: 94 -------------------------------------------------------------------------------- Table of Contents •InJune 2017 , we sold 4.4 million shares of common stock (inclusive of 0.6 million shares of common stock sold by us pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$105.00 per share for aggregate net proceeds to us of$436.8 million . •InDecember 2017 , we sold 3.2 million shares of common stock (excluding any shares sold by us pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$185.00 per share for aggregate net proceeds to us of$569.8 million . •InJanuary 2018 , we sold 0.3 million shares of common stock pursuant to the partial exercise of an overallotment option granted to the underwriters in connection with theDecember 2017 underwritten public offering at a price of$185.00 per share for aggregate net proceeds of$48.7 million . •InJuly 2018 , we sold 3.9 million shares of common stock through an underwritten public offering at a price of$162.50 per share for aggregate net proceeds to us of$600.6 million . •InAugust 2018 , we sold 0.4 million shares of common stock to Regeneron in connection with our collaboration arrangement at a price of$238.10 per share for aggregate net proceeds to us of$100.0 million , of which$45.5 million was attributed to a prepayment of joint research activities. See Note 11, Collaborative arrangements, in the Notes to Consolidated Financial Statements for more information. Sources of Liquidity Cash Flows The following table summarizes our cash flow activity: Year ended December 31, 2019 2018 2017 (in thousands) Net cash used in operating activities$ (564,384) $ (413,426) $ (280,553) Net cash provided by (used in) investing activities 507,807 (679,435) (316,630) Net cash provided by financing activities 21,187 737,692 1,076,174 (Decrease) increase in cash, cash equivalents and restricted cash$ (35,390)
Operating Activities. The net cash used in operating activities was$564.4 million for the year endedDecember 31, 2019 and primarily consisted of a net loss of$789.6 million adjusted for non-cash items including stock-based compensation of$160.6 million and depreciation and amortization of$17.4 million , as well as the change in our net working capital. The net cash used in operating activities was$413.4 million for the year endedDecember 31, 2018 and primarily consisted of a net loss of$555.6 million adjusted for non-cash items including stock-based compensation of$110.8 million and depreciation and amortization of$17.2 million , as well as the change in our net working capital. The net cash used in operating activities was$280.6 million for the year endedDecember 31, 2017 and primarily consisted of a net loss of$335.6 million adjusted for non-cash items including stock-based compensation of$53.3 million and depreciation and amortization of$13.5 million , as well as the change in our net working capital. Investing Activities. Net cash provided by investing activities for the year endedDecember 31, 2019 was$507.8 million and was primarily due to proceeds from the maturities of available-for-sale marketable securities of$1.34 billion offset by the purchase of$756.6 million of marketable securities and the purchase of$71.0 million of property, plant and equipment. Net cash used in investing activities for the year endedDecember 31, 2018 was$679.4 million and was primarily due to the purchase of$1.52 billion of marketable securities and the purchase of$55.7 million of property, plant and equipment offset by proceeds from the maturities of available-for-sale marketable securities of$894.3 million . Net cash used in investing activities for the year endedDecember 31, 2017 was$316.6 million and was primarily due to the purchase of$686.2 million of available-for-sale marketable securities and the purchase of$62.2 million of property, plant and equipment offset by proceeds from the maturities of available-for-sale marketable securities of$431.8 million . Financing Activities: Net cash provided by financing activities for the year endedDecember 31, 2019 was$21.2 million and was primarily due to net cash proceeds from employee option exercises and ESPP contributions. 95 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities for the year endedDecember 31, 2018 was$737.7 million and was primarily due to net cash proceeds from ourJanuary 2018 andJuly 2018 common stock offerings, as well as our issuance of common stock to Regeneron. Net cash provided by financing activities for the year endedDecember 31, 2017 was$1.1 billion and was primarily due to net cash proceeds from ourJune 2017 andDecember 2017 common stock offerings. Contractual Obligations and Commitments The following table summarizes our contractual obligations atDecember 31, 2019 , which excludes potential milestone payments. 2021 2023 2025 through through and Total 2020 2022 2024 after (in thousands) Operating leases$ 251,553 $ 33,257 $ 66,868 $ 63,092 $ 88,336 Contract manufacturing 247,947 129,950 46,907 71,090 -
Total contractual obligations(1)
(1)We are subject to several in-licenses that include annual license maintenance fee payments and minimum royalties. The future obligations related to maintenance fee payments and minimum royalties in license agreements are not considered material and are not included in the table above. Operating leases60 Binney Street lease OnSeptember 21, 2015 , we entered into a lease agreement for office and laboratory space located at60 Binney Street ,Cambridge, Massachusetts . Under the terms of the lease, starting onOctober 1, 2016 , we leased approximately 253,108 square feet of office and laboratory space at$72.50 per square foot per year, or$18.4 million per year in base rent, which is subject to scheduled annual rent increases of 1.75% plus certain operating expenses and taxes. The Company currently maintains a$13.8 million collateralized letter of credit and, subject to the terms of the lease and certain reduction requirements specified therein, including market capitalization requirements, this amount may decrease to$9.2 million over time. The lease will continue untilMarch 31, 2027 . Pursuant to a work letter entered into in connection with the lease, the landlord contributed an aggregate of$42.4 million toward the cost of construction and tenant improvements for the building.50 Binney Street sublease InApril 2019 , we entered into a sublease agreement for office space located at50 Binney Street inCambridge, Massachusetts (the "50 Binney Street Sublease") to supplement our corporate headquarters located at60 Binney Street inCambridge, Massachusetts . Under the terms of the 50 Binney Street Sublease, we will lease 267,278 square feet of office space for$99.95 per square foot, or$26.7 million per year in base rent subject to certain operating expenses, taxes and annual rent increases of approximately 3%. The lease will commence when the space is available for use, which is anticipated to be in the second half of 2021, and end onDecember 31, 2030 , unless we earlier occupy the premises or other conditions specified in the 50 Binney Street Sublease occur. The sublessor has the right to postpone the commencement date untilJanuary 1, 2022 by providing us not less than nine months' prior written notice. Upon signing the 50 Binney Street Sublease, we executed a$40.1 million cash-collateralized letter of credit, which may be reduced in the future subject to the terms of the 50 Binney Street Sublease and certain reduction requirements specified therein. The$40.1 million of cash collateralizing the letter of credit is classified as restricted cash and other non-current assets on our consolidated balance sheets. Payments will commence at the earlier of (i) the date which is 90 days following the commencement date and (ii) the date we take occupancy of all or any portion of the premises. In connection with the execution of the50 Binney Street Sublease, we also entered into a Purchase Agreement for furniture and equipment (the "Furniture Purchase Agreement") located on the premises upon lease commencement. Upon execution of the Furniture Purchase Agreement, we made an upfront payment of$7.5 million , all of which was recorded within restricted cash and other non-current assets on our consolidated balance sheets as ofDecember 31, 2019 .Seattle, Washington leases 96 -------------------------------------------------------------------------------- Table of Contents InJuly 2018 , we entered into a lease agreement for office and laboratory space located in a portion of a building inSeattle, Washington . The lease was amended inOctober 2018 to increase the total rentable space to approximately 36,126 square feet at$54.00 per square foot in base rent per year, which is subject to scheduled annual rent increases of 2.5% plus certain operating expenses and taxes. The lease commenced onJanuary 1, 2019 and the lease term will continue throughJanuary 31, 2027 . The Company moved into the facility inJune 2019 . The lease allowed for a tenant improvement allowance of up to$215.00 per square foot, or approximately$8.0 million . We utilized the$8.0 million tenant improvement allowance and it has been fully reimbursed by the landlord as ofDecember 31, 2019 . InSeptember 2019 , we entered into a second amendment to the lease (the "Second Amendment"). The Second Amendment added approximately 22,188 square feet to the existing space and extended the lease term of the entire premises by 16 months, or untilApril 2028 . Fixed monthly rent for the expanded space will be incurred at a rate of$62.80 per square foot per year beginning inJanuary 2021 , subject to annual increases of 2.5%. The Second Amendment includes a five-year option to extend the term. Embedded leases OnJune 3, 2016 , we entered into a manufacturing agreement for the future commercial production of our Lenti-D and LentiGlobin product candidates with a contract manufacturing organization. Under this 12 year agreement, the contract manufacturing organization will complete the design, construction, validation and process validation of the leased suites prior to anticipated commercial launch of the product candidates. During construction, we were required to pay$12.5 million upon the achievement of certain contractual milestones, and may pay up to$8.0 million in additional contractual milestones if we elect our option to lease additional suites. We paid$5.0 million for the achievement of the first and second contractual milestones during 2016 and paid$5.5 million for the third and fourth contractual milestones achieved during 2017. InMarch 2018 ,$1.5 million of the possible$2.0 million related to the fifth contractual milestone was achieved and was paid in the second quarter of 2018. Given that construction was completed inMarch 2018 , beginning inApril 2018 we will pay$5.1 million per year in fixed suite fees as well as certain fixed labor, raw materials, testing and shipping costs for manufacturing services, and may pay additional suite fees if it elects its option to reserve or lease additional suites. We may terminate this agreement at any time upon payment of a one-time termination fee and up to 24 months of fixed suite and labor fees. We concluded that this agreement contains an embedded lease as the suites are designated for our exclusive use during the term of the agreement. We concluded that we are not the deemed owner during construction nor is it a capital lease under ASC 840-10, Leases - Overall. As a result, in prior periods we accounted for the agreement as an operating lease under ASC 840 and recognized straight-line rent expense over the non-cancellable term of the embedded lease. As part of our adoption of ASC 842, effectiveJanuary 1, 2019 , we carried forward the existing lease classification under ASC 840. Additionally, we recorded a right-of-use asset and lease liability for this operating lease on the effective date and are recognizing rent expense on a straight-line basis throughout the remaining term of the embedded lease. Contingent Consideration Related to Business Combinations In connection with the Pregenen acquisition, we agreed to make contingent cash payments to the former equity holders of Pregenen. In accordance with accounting guidance for business combinations, these contingent cash payments are recorded as contingent consideration liabilities on our consolidated balance sheets at fair value. During the second quarter of 2017, a$5.0 million preclinical milestone was achieved, which resulted in a$5.0 million payment to the former equityholders of Pregenen during the third quarter of 2017. The aggregate remaining undiscounted amount of contingent consideration potentially payable is$120.0 million . We have not included these payments in the table above because the achievement and timing of these milestones is not fixed and determinable. As ofDecember 31, 2019 , and 2018,$8.0 million and$5.2 million , respectively, is reflected as a non-current liability in the consolidated balance sheet, which represents the fair value of our contingent consideration obligations as of this date. Contingent Milestone and Royalty Payments We also have obligations to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing of a BLA, approval by the FDA or product launch). We have not included these commitments on our balance sheet or in the table above because the achievement and timing of these milestones is not fixed and determinable. Based on our development plans as ofDecember 31, 2019 , we may be obligated to make future development, regulatory and commercial milestone payments and royalty payments on future sales of specified products associated with our 97 -------------------------------------------------------------------------------- Table of Contents collaboration and license agreements. Payments under these agreements generally become due and payable upon achievement of such milestones or sales. Because the achievement of these milestones or sales had not occurred as ofDecember 31, 2019 , such contingencies have not been recorded in our financial statements. Amounts related to contingent milestone payments and sales-based royalties are not yet considered contractual obligations as they are contingent upon success. •Under a license agreement withInserm-Transfert pursuant to which we license certain patents and know-how for use in adrenoleukodystrophy therapy, we will be required to make payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate payments we may be obligated to pay for each of these milestone categories per product is €0.3, €0.2 and €1.6 million, respectively. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. •Under a license agreement withInstitut Pasteur pursuant to which we license certain patents for use in ex vivo gene therapy, we will be required to make payments per product covered by the in-licensed intellectual property upon the achievement of development and regulatory milestones, depending on the indication and the method of treatment. The maximum aggregate payments we may be obligated to pay for each of these milestone categories per product is €1.5 and €2.0 million, respectively. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits, which varies slightly depending on the indication of the product. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of such license income varying from the low single digits to mid-range double digits depending on the nature of the sublicense and stage of development. We are required to make an annual maintenance payment, which is creditable against royalty payments on a year-by-year basis. OnApril 1, 2015 , we amended this license agreement withInstitut Pasteur , which resulted in a payment of €3.0 million that was paid during the second quarter of 2015. During the year endedDecember 31, 2019 we paidInstitut Pasteur €0.5 million in connection with amounts owed to us by sublicensees and €0.5 million for milestones reached. •Under a license agreement with theBoard of Trustees of theLeland Stanford Junior University , orStanford , pursuant to which we license the HEK293T cell line for use in gene therapy products, we are required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits that varies with net sales. The royalty is reduced for each third-party license that requires payments by us with respect to a licensed product, provided that the royalty toStanford is not less than a specified percentage that is less than one percent. We have been payingStanford an annual maintenance fee, which will be creditable against our royalty payments. •Under a license agreement with theMassachusetts Institute of Technology , orMIT , pursuant to which we license various patents, we will be required to make a payment of$0.1 million based upon a regulatory filing milestone. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property by us or our sublicensees. The royalty is in the low single digits and is reduced for royalties payable to third parties, provided that the royalty toMIT is not less than a specified percentage that is less than one percent. We have the right to sublicense our rights under this agreement, and we will be required to pay a percentage of such license income varying from the mid-single digits to low double digits. We are required to payMIT an annual maintenance fee based on net sales of licensed products, which is creditable against our royalty payments. •Under a license agreement withResearch Development Foundation pursuant to which we license patents that involve lentiviral vectors, we will be required to make payments of$1.0 million based upon a regulatory milestone for each product covered by the in-licensed intellectual property. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits, which is reduced by half if during the ten years following first marketing approval the last valid claim within the licensed patent that covers the licensed product expires or ends. During the year endedDecember 31, 2019 we paidResearch Development Foundation $1.0 million upon receiving milestones reached for a product covered by in-licensed intellectual property. •Under a license agreement with Biogen Inc., pursuant to which we license certain patents and patent applications related to our ide-cel and bb21217 product candidates, we will be required to make certain payments related to certain development milestone obligations and must report on our progress in achieving these milestones on a periodic basis. We may be obligated to pay up to$23.0 million in the aggregate for each licensed product upon the achievement of remaining milestones. Upon commercialization of our products covered by the in-licensed intellectual property, we will be obligated to pay a percentage of net sales as a royalty in the low single digits. 98 -------------------------------------------------------------------------------- Table of Contents •Under a license agreement with theNational Institutes of Health , orNIH , pursuant to which we license certain patent applications related to our ide-cel and bb21217 product candidates, we have agreed to certain development and regulatory milestone obligations and must report on our progress in achieving these milestones on a periodic basis. We may be obligated to pay up to$9.7 million in the aggregate for a licensed product upon the achievement of these milestones. Upon commercialization of our products covered by the in-licensed intellectual property, we will be obligated to payNIH a percentage of net sales as a royalty in the low single digits. The royalties payable under this license agreement are subject to reduction for any third party payments required to be made, with a minimum floor in the low single digits. During the year endedDecember 31, 2019 we paidNIH $0.9 million upon milestones reached for a product covered by in-licensed intellectual property. •Under a license agreement withSIRION Biotech GmbH , or Sirion, pursuant to which we license certain patents directed to manufacturing related to our LentiGlobin product candidate, we will be required to make certain payments related to certain development milestone obligations and must report on our progress in achieving these milestones on a periodic basis. We may be obligated to pay up to$13.4 million in the aggregate for each product covered by the in-licensed intellectual property. Upon commercialization of our products covered by the in-licensed intellectual property, we will be obligated to pay Sirion a percentage of net sales as a royalty in the low single digits. The royalties payable under this license agreement are subject to reduction for any third party payments required to be made, with a minimum floor in the low single digits. During the year endedDecember 31, 2019 we paid Sirion$4.0 million upon milestones reached for a product covered by in-licensed intellectual property. Other Funding Commitments We enter into contracts in the normal course of business with CROs for preclinical research studies and clinical trials, research supplies and other services and products for operating purposes. We have also entered into multi-year agreements with manufacturing partners inthe United States andEurope (Brammer Bio , now part of Thermo Fisher Scientific, Inc.,Novasep and SAFC Carlsbad, Inc. , or SAFC, a subsidiary ofMilliporeSigma ), which are partnering with us on production of lentiviral vector across all of our programs. In addition, we have entered into multi-year agreements withLonza Houston, Inc. and apceth Biopharma, or apceth, to produce drug product for Lenti-D, LentiGlobin and bb21217. Currently, SAFC is the sole manufacturer of the lentiviral vector and apceth is the sole manufacturer of the drug product to support commercialization of ZYNTEGLO inEurope for the treatment of TDT. In our manufacturing agreement with SAFC, we are required to provide rolling forecasts for products on a quarterly basis, a portion of which will be considered a binding, firm order, subject to a purchase commitment. In our manufacturing agreement with apceth, we reserve production capacity for the manufacture of our drug product. BMS manufactures drug product for ide-cel. We believe our team of technical personnel has extensive manufacturing, analytical and quality experience as well as strong project management discipline to effectively oversee these contract manufacturing and testing activities, and to compile manufacturing and quality information for our regulatory submissions and potential commercial launch. We are engaging with apheresis centers, which we refer to as qualified treatment centers, that will be the centers for collection of HSCs from the patient and for infusion of drug product to the patient. For the treatment of patients with our drug product in the commercial setting, we are entering into agreements with participating qualified treatment centers in the jurisdictions where we plan to commercialize our products. These contracts generally provide for termination on notice. Wherever contracts include stipulated commitment payments, we have included such payments in the table of contractual obligations and commitments. Off-Balance Sheet Arrangements As ofDecember 31, 2019 , we did not have any off-balance sheet arrangements as defined in the rules and regulations of theSEC . 99
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