TRANSLATE BIO, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , or the 2020 Annual Report, that was filed with theSecurities and Exchange Commission , orSEC , onMarch 1, 2021 . In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Part II, Item 1A. and elsewhere in this report, and in the 2020 Annual Report. Objective The purpose of this Management's Discussion and Analysis is to better allow our investors to understand and view our company from our management's perspective. We are providing an overview of our business and strategy, followed by a discussion of our financial condition and results of operations. As further discussed below, our vision is to continue building a leading messenger RNA, or mRNA, product company, leveraging our extensive experience with proprietary mRNA product development, delivery, manufacturing and process development. However, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. We believe that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure requirements into 2024. Pending Transaction withSanofi S.A. OnAugust 2, 2021 , we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Sanofi, a French société anonyme , orSanofi S.A. , andVector Merger Sub, Inc. , aDelaware corporation and an indirect wholly owned subsidiary ofSanofi S.A. , or the Merger Sub. On the terms and subject to the conditions of the Merger Agreement, Merger Sub will commence a cash tender offer, or the Tender Offer, to acquire all of the outstanding shares of our common stock for$38.00 per share, in cash, without interest and subject to any withholding of taxes required by applicable legal requirements. Following the completion of the Tender Offer, Merger Sub will merge with and intoTranslate Bio, Inc. , withTranslate Bio, Inc. continuing as the surviving corporation and as an indirect wholly owned subsidiary ofSanofi S.A. If the Merger Agreement is terminated by us under specified circumstances, we will be required to paySanofi S.A. a termination fee of$96.0 million . Although we anticipate closing the transaction in the third quarter of 2021, the closing of the Merger Agreement is subject to customary closing conditions, and we may not complete this pending transaction withSanofi S.A. within the time frame we anticipate, or at all. Business Overview We are a clinical-stage mRNA therapeutics company developing a new class of potentially transformative medicines to treat diseases caused by protein or gene dysfunction, or to prevent infectious diseases by generating protective immunity. Using our proprietary mRNA therapeutic platform, or MRT platform, we create mRNA that encodes functional proteins. Our mRNA is designed to be delivered to the target cell where the cell's own machinery recognizes it and translates it, restoring or augmenting protein function to treat or prevent disease. We believe the mRNA design, delivery and manufacturing capabilities of our MRT platform provide us with the most advanced platform for developing product candidates that deliver mRNA encoding functional proteins for therapeutic uses. We believe our MRT platform is broadly applicable across multiple diseases in which the production of a desirable protein can have a therapeutic effect. We are primarily focused on applying our MRT platform to treat pulmonary diseases caused by insufficient protein production or where production of proteins can modify disease. In addition, we are pursuing discovery efforts in diseases that affect the liver. We are also pursuing the applicability of our MRT platform for the development of mRNA vaccines for infectious diseases under a collaboration withSanofi Pasteur Inc. , or Sanofi, the vaccine global business unit ofSanofi S.A. We are developing mRNA therapeutics for the treatment of cystic fibrosis, or CF with two programs, MRT5005, a clinical-stage program, and a preclinical next-generation CF program. Our mRNA therapeutic candidates for CF are designed to deliver mRNA encoding fully functional cystic fibrosis transmembrane conductance regulator, or CFTR, protein to the lung. We have designed our mRNA therapeutic candidates for CF to be inhaled via a handheld nebulizer. Once the inhaled treatment has entered the epithelial cells lining the patient's lungs, our therapeutic mRNA uses the cells' own machinery for translation and expression of fully functional CFTR protein, thereby restoring this essential ion channel, which we believe will address the pathology of CF directly. Currently approved CFTR modulating therapies are limited to patients with specific genetic mutations; therefore, there remains a significant unmet medical need for patients with CF who have genetic mutations non-amenable to currently approved CFTR modulating therapies. Additionally, patients treated with these current therapies still suffer from a long-term decline in lung function and exacerbations that require hospitalization. Our mRNA therapeutic candidates for CF are being developed to treat the underlying cause of CF, regardless of the specific genetic mutation, including in patients with limited or no CFTR protein. 21 -------------------------------------------------------------------------------- Table of Contents Our clinical-stage CF candidate in development is MRT5005. We believe MRT5005 is the first mRNA product candidate to be administered via inhalation to patients with CF. TheU.S. Food and Drug Administration , or FDA, has granted orphan drug designation, fast track designation and rare pediatric disease designation for MRT5005 for the treatment of CF. We are conducting a Phase 1/2 clinical trial to evaluate the safety and tolerability of single- and multiple-ascending doses of MRT5005. The clinical trial is investigating several groups receiving five once-weekly doses, as well as a group receiving five daily doses. Percent predicted forced expiratory volume in one second, or ppFEV 1 , which is a well-defined and accepted endpoint measuring lung function, is also being measured at pre-defined timepoints throughout the trial as a safety measure. Target enrollment for each dose group consists of four patients total, three patients receiving MRT5005 and one receiving placebo. In evaluating safety and tolerability, the primary outcome measure, data to date from the ongoing Phase 1/2 clinical trial suggested that repeat dosing of MRT5005 was generally safe and well tolerated. For patients receiving MRT5005, ppFEV 1 was not negatively impacted; there was no pattern of treatment-associated increases in ppFEV 1 . There was no clinically relevant immunogenicity as measured by anti-CFTR antibodies, anti-PEG antibodies or T-cell sensitization to CFTR. Detection of mRNA and lipid in the blood suggests that MRT5005 crosses the mucus layer, delivering mRNA to the lung of CF patients. The clinical trial is ongoing with the evaluation of the remaining dose groups, which include a 20 mg multiple-ascending dose group and the daily dosing cohort, and we anticipate reporting the interim findings from the clinical trial at theNorth American Cystic Fibrosis Conference , or NACFC, being heldSeptember 30, 2021 throughOctober 2, 2021 . We are conducting translational studies with MRT5005 and a next-generation CF candidate to support and optimize future clinical development, including research into dosing, formulation and nebulization. We have a next-generation CF discovery program that incorporates mRNA codon optimization and advances in lipid nanoparticle, or LNP, chemistry. Preclinical data generated demonstrates CFTR protein expression in the lungs of animals after the delivery of the next-generation CF product candidate using the intended inhaled route of administration. This and other preclinical data generated support the planned initiation of investigational new drug, or IND,-enabling studies in the second half of 2021. We anticipate reporting preclinical data for the next-generation CF program at NACFC. We are leveraging our lung delivery platform and focusing our preclinical research efforts on identifying lead product candidates in additional pulmonary diseases with unmet medical need, including primary ciliary dyskinesia, or PCD, pulmonary arterial hypertension and respiratory infectious diseases. We are developing a novel mRNA-based therapeutic designed to treat PCD, a rare genetic disease for which there is no cure. Mutations in the genes that cause PCD result in ineffective mucociliary clearance which can lead to lung disease. While PCD can result from a mutation in one of more than 30 genes involved in ciliary function, DNAI1 is one of the more frequently mutated genes. Our mRNA therapeutic candidate is designed to be delivered to the lungs, providing the cells the instructions to produce fully functional DNAI1 protein, which could potentially restore mucociliary clearance. InMay 2021 , we reported preclinical data from our PCD program including assessments of the level and distribution of protein expression as well as ciliary activity which suggests the potential for an mRNA therapeutic to correct ciliary function in people with PCD due to a mutation in the DNAI1 gene. These data support continued advancement of this program and we anticipate initiating IND-enabling studies in the second half of 2021. Additionally, we have early discovery efforts ongoing in other areas of unmet medical need. Our research includes discovery efforts in diseases that affect the liver. We have also begun to explore ways to apply our mRNA and delivery platform expertise to diseases where the degradation of a protein would lead to therapeutic benefit. We believe that using mRNA to enable the production of a molecule that can help tag a target protein for destruction within the cell may have advantages over other protein degradation approaches, including the ability to reach previously undruggable therapeutic targets and increase target selectivity. We are also leveraging our mRNA technology to encode therapeutic antibodies. Additionally, we are leveraging the broad applicability of our platform through a collaboration with Sanofi to develop infectious disease vaccines using our mRNA technology. In the case of vaccines, the mRNA instructs certain cells in the body to produce an antigen that will induce an immune response to an infectious pathogen. Under the collaboration with Sanofi, we are jointly conducting research and development activities to advance vaccines targeting up to seven infectious disease pathogens. As part of the ongoing vaccine development program, comprehensive in vivo studies have been conducted across several infectious disease targets. Multiple development candidates have been evaluated against distinct pathogens, all of which were well tolerated across all species tested. Multiple antigens have been tested with all demonstrating robust neutralization titers. Two of the target pathogens under development are a novel strain of coronavirus named SARS-CoV-2, which causes COVID-19, and influenza. After evaluation of multiple COVID-19 vaccine candidates in vivo for immunogenicity and neutralizing antibody activity, MRT5500 was selected as the lead candidate for a vaccine against SARS-CoV-2. InOctober 2020 and inApril 2021 , preclinical data were reported demonstrating that MRT5500 induced potent neutralizing antibodies against SARS-CoV-2 in mice and non-human primates, or NHPs. Two doses of MRT5500 in NHPs induced neutralizing antibody levels significantly higher than those observed in a panel of samples from COVID-19 patients. Additionally, MRT5500 demonstrated protection against viral infection and disease progression in Syrian golden hamsters immunized with MRT5500 against a virus challenge. It was also demonstrated that MRT5500-immunized mice and NHPs exhibited a Th1-biased 22
-------------------------------------------------------------------------------- Table of Contents T-cell response against SARS-CoV-2. Vaccine-associated enhanced respiratory disease, or VAERD, has generally not been reported to be associated with a Th1-biased T-cell response and therefore these data suggest the potential for a reduced risk for VAERD. A Phase 1/2 clinical trial to evaluate MRT5500 began inMarch 2021 and interim data from this trial is expected in the third quarter of 2021. For information on risks related to our successful development of a vaccine against COVID-19, please see Part II, Item 1A - "Risk Factors - We and Sanofi may not be successful in our joint efforts to successfully develop in an expedited timeframe an mRNA vaccine against SARS-CoV-2," included elsewhere in this Quarterly Report on Form 10-Q. A Phase 1 clinical trial evaluating MRT5400 and MRT5401, our investigational mRNA vaccine candidates against seasonal influenza, was initiated inJune 2021 with interim data expected by the end of 2021. Preclinical studies are ongoing for targets against additional viral and bacterial pathogens. Our vision is to continue building a leading mRNA product company, leveraging our extensive experience with proprietary mRNA product development, delivery, manufacturing and process development. Our proprietary MRT platform has enabled us to focus on direct therapeutic approaches to treat specific genetic diseases with significant unmet medical need. We are primarily focused on applying our MRT platform to treat pulmonary diseases where the production of proteins can modify disease. We are also leveraging our platform's broad applicability to other diseases, including liver diseases, as well as to preventing disease in the case of infectious disease vaccines. To realize our vision, we plan to advance multiple programs to clinical stage, add new pipeline programs and continue to innovate on the mRNA platform. In order to achieve these goals, we plan to increase our research and development investments, add key in-house capabilities, deepen our platform and delivery expertise as well as expand our infrastructure and facility size. We also plan to appropriately invest in manufacturing and commercial capabilities to support continued growth and advancement and our ultimate goal of delivering mRNA medicines to treat or prevent life-threatening or debilitating illnesses. The successful development of our product candidates will require, among other things, that we develop sufficient mRNA manufacturing capabilities. To date, we have established 100-gram single-batch production with our clinical-stage mRNA therapeutics platform. Build-out of a dedicated manufacturing space through a contract manufacturing partner was completed during the third quarter of 2020 and has the potential to accommodate multiple 250-gram batches per month upon continued investments and third-party supplier arrangements. As it relates to development of a COVID-19 vaccine, depending on the final human COVID-19 vaccine dose and timing of scale-up activities, we estimate that we could have manufacturing capacity to produce 90-360 million doses annually. We plan to further expand our mRNA manufacturing capabilities to increase production capacity, and will need to work with raw material and other third-party suppliers to achieve this goal. Since our inception in 2011, we have devoted substantially all of our focus and financial resources to organizing and staffing our company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights and conducting discovery, research and development activities for our programs. We do not have any products approved for sale and have not generated any revenue from product sales. ThroughJune 30, 2021 , we have funded our operations primarily through sales of equity securities and upfront and milestone payments received under a collaboration and license agreement with Sanofi and we have received proceeds of approximately$1.1 billion from such transactions. We are a party to an Open Market Sale Agreement SM , or Sales Agreement, withJefferies LLC , or Jefferies, under which we may issue and sell shares of our common stock, from time to time, having an aggregate offering price of up to$100.0 million . During the year endedDecember 31, 2020 , we issued and sold 2,863,163 shares of our common stock pursuant to the Sales Agreement, resulting in gross proceeds of$37.9 million , before deducting commissions of$1.1 million and other offering expenses of$0.2 million . There were no shares issued or sold pursuant to the Sales Agreement during the six months endedJune 30, 2021 . In the future,$62.1 million of shares of common stock remain available to be sold pursuant to the Sales Agreement, which sales, if any, would be made under our universal shelf registration statement on Form S-3, or the 2020 Shelf. Since our inception, we have incurred significant operating losses. Our ability to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. As ofJune 30, 2021 , we had an accumulated deficit of$369.6 million . We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties or grants from organizations and foundations. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. 23 -------------------------------------------------------------------------------- Table of Contents 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 product sales, 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 or terminate our operations. As ofJune 30, 2021 , we had cash, cash equivalents and investments of$667.2 million . We believe that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure requirements into 2024. Sanofi Pasteur Collaboration and Licensing Agreement In 2018, we entered into a collaboration and license agreement with Sanofi, or the Original Sanofi Agreement, to develop mRNA vaccines for up to five infectious disease pathogens, or the Licensed Fields. OnMarch 26, 2020 , we and Sanofi amended the Original Sanofi Agreement, or the First Sanofi Amendment, to include vaccines against SARS-CoV-2 as an additional Licensed Field, increasing the number of infectious disease pathogens to up to six. OnJune 22, 2020 , we and Sanofi further amended the Original Sanofi Agreement to expand the scope of the collaboration and licenses granted to Sanofi, or the Second Sanofi Amendment, which closed onJuly 20, 2020 , the effective date. The Original Sanofi Agreement, as amended by the First Sanofi Amendment and the Second Sanofi Amendment, is referred to as the Amended Sanofi Agreement. Pursuant to the Amended Sanofi Agreement, we and Sanofi are jointly conducting research and development activities to advance mRNA vaccines targeting up to seven infectious disease pathogens. The term of the research collaboration expires inJune 2022 , with an option for Sanofi to extend for one additional year. If Sanofi elects to extend the collaboration, the collaboration may be further expanded to jointly conduct research and development activities to advance mRNA vaccines for up to an additional three infectious disease pathogens, bringing the total to up to ten pathogens. Under the terms of the Amended Sanofi Agreement, we have granted to Sanofi exclusive, worldwide licenses under applicable patents, patent applications, know-how and materials, including those arising under the collaboration, to develop, commercialize and manufacture mRNA vaccines to prevent, treat or cure diseases, disorders or conditions in humans caused by any infectious disease pathogen, with certain specified exceptions. Business Impact of the COVID-19 Pandemic Since early 2020, the outbreak of the novel strain of coronavirus named SARS-CoV-2 has spread across the globe and the COVID-19 pandemic has had wide-reaching impacts on the global economy and business operations. The COVID-19 pandemic has had, and we expect it may continue to have, an impact on our operations, the operations of our collaborators, the operations of third-party contractors and other entities, with which we interact, as well as on the patients who may enroll in our clinical trials. We actively continue to monitor COVID-19 trends and government guidance. The ultimate impacts of the COVID-19 pandemic are still unknown and uncertain. For additional information on risks posed by the COVID-19 pandemic, please see Part II, Item 1A - "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q. Components of Our Results of Operations Revenue from Product Sales To date, we have not generated any revenue from product sales, and we do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. 24 -------------------------------------------------------------------------------- Table of Contents Collaboration Revenue Since 2018, we have recognized revenue relating to the Amended Sanofi Agreement. Under revenue recognition guidance, we account for: (i) the license we conveyed to Sanofi with respect to the Licensed Fields, (ii) the licensed know-how to be conveyed to Sanofi with respect to the Licensed Fields, (iii) our obligations to perform research and development on the Licensed Fields, (iv) our obligation to transfer licensed materials to Sanofi, (v) our obligation to manufacture and supply certain non-clinical and clinical mRNA vaccines and materials containing mRNA until we transfer such manufacturing capabilities to Sanofi and (vi) the technology and process transfer as a single performance obligation. We recognize revenue using the cost-to-cost input method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost input method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. We recognize adjustments in revenue under the cumulative catch-up method. Under this method, the impact of this adjustment on revenue recorded to date is recognized in the period the adjustment is identified. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:
• employee-related expenses, including salaries, related benefits and
stock-based compensation expense for employees engaged in research and
development functions;
• expenses incurred in connection with the preclinical and clinical
development of our product candidates, including under agreements with
third parties, such as consultants and contract research organizations,
or CROs;
• the cost of manufacturing drug products for use in our preclinical
studies and clinical trials, including under agreements with third
parties, such as consultants and contract manufacturing organizations, or
CMOs;
• laboratory supplies;
• facilities, depreciation and other expenses, which include direct or
allocated expenses for rent and maintenance of facilities and insurance;
• costs to fulfill our obligations under our collaboration with Sanofi;
• costs related to compliance with regulatory requirements; and
• payments made under third-party licensing agreements.
We recognize external development costs based on an evaluation of the progress
to completion of specific tasks using information provided to us by our service
providers. Nonrefundable advance payments for goods or services to be received
in the future for use in research and development activities are recorded as
prepaid expenses. Such amounts are recognized as an expense when the services
have been performed or the goods have been delivered, or when it is no longer
expected that the goods will be delivered or the services rendered. Upfront
payments, milestone payments (other than those deemed contingent consideration
in a business combination) and annual maintenance fees under license agreements
are expensed in the period in which they are incurred.
Our direct research and development expenses are tracked on a
program-by-program
basis and consist primarily of external costs, such as fees paid to outside
consultants, CROs, CMOs and central laboratories in connection with our
preclinical development, process development, manufacturing and clinical
development activities. Our direct research and development expenses by program
also include costs of laboratory supplies incurred for each program as well as
fees incurred under license agreements. We do not allocate employee costs or
facility expenses, including depreciation or other indirect costs, to specific
programs because these costs are deployed across multiple programs and, as such,
are not separately classified. We use internal resources primarily to conduct
our research and discovery and to manage our preclinical development, process
development, manufacturing and clinical development activities.
25
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Table of Contents
Research and development activities are central to our business model. Product
candidates in later stages of clinical development generally have higher
development costs than those in earlier stages, primarily due to the increased
size and duration of later-stage clinical trials. As a result, we expect that
our research and development expenses will increase substantially over the next
several years as we conduct our clinical trials of MRT5005 for the treatment of
patients with CF; expand our manufacturing capabilities; conduct research and
development activities to advance mRNA vaccine candidates and develop an mRNA
vaccine platform under the Amended Sanofi Agreement; prepare regulatory filings
for our product candidates; continue to discover and develop additional product
candidates; and potentially advance product candidates from our discovery
program into later stages of clinical development. We expect to continue to
devote a substantial portion of our resources to our discovery program for the
foreseeable future.
The successful development and commercialization of our product candidates is
highly uncertain. At this time, we cannot reasonably estimate or know the
nature, timing and costs of the efforts that will be necessary to complete the
preclinical and clinical development of any of our product candidates. This
uncertainty is due to the numerous risks and uncertainties associated with
product development and commercialization, including the uncertainty of:
• the timing and progress of preclinical and clinical development
activities, including delays resulting from the
COVID-19
pandemic;
• the number and scope of preclinical and clinical programs we decide to
pursue;
• our ability to maintain our current research and development programs and
to establish new ones;
• establishing an appropriate safety profile with investigational new drug,
or IND,-enabling studies;
• successful patient enrollment in, and the initiation and completion of,
clinical trials;
• the successful completion of clinical trials with safety, tolerability
and efficacy profiles that are satisfactory to the FDA or any comparable
foreign regulatory authority;
• the receipt of regulatory approvals from applicable regulatory authorities;
• the timing, receipt and terms of any marketing approvals from applicable
regulatory authorities;
• the success of our collaboration with Sanofi;
• our ability to establish new licensing or collaboration arrangements;
• the performance of our future collaborators, if any;
• establishing commercial manufacturing capabilities or making arrangements
with third-party manufacturers;
• development and timely delivery of commercial-grade drug formulations
that can be used in our clinical trials and for commercial launch, if
approved;
• obtaining, maintaining, defending and enforcing patent claims and other
intellectual property rights;
• launching commercial sales of our product candidates, if approved,
whether alone or in collaboration with others; and
• maintaining a continued acceptable safety profile of the product
candidates following approval.
26-------------------------------------------------------------------------------- Table of Contents Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. If FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development of that product candidate. We may never obtain regulatory approval for any of our product candidates. Drug commercialization will take several years and millions of dollars in development costs. General and Administrative Expenses General and administrative expenses consist primarily of salaries, related benefits and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include facilities, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance, as well as professional fees for legal, patent, consulting, recruiting fees, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase over the next several years as we anticipate increased accounting, audit, legal, regulatory, compliance, director and officer insurance and investor and public relations costs associated with being a public company. Change in Fair Value of Contingent Consideration In connection with our acquisition of the messenger RNA therapeutic platform, or MRT Program, fromShire Human Genetic Therapies, Inc. , or Shire, a subsidiary of Takeda Pharmaceutical Company Ltd., we recognized contingent consideration liabilities for future potential milestone and earnout payment obligations. The contingent consideration was initially recorded at fair value on the acquisition date and is subsequently remeasured to fair value at each reporting date. Any changes in the fair value of the contingent consideration liabilities are recognized as operating income or expenses. Other Income, Net Other Income, Net Other income, net primarily consists of income recognized in connection with our investments in money market funds,U.S. treasuries andU.S. government agency bonds. Income Taxes We recognized an income tax benefit of$1.0 million and$0.7 million during the three and six months endedJune 30, 2021 , respectively, due to the current period income before income taxes and the application of the annual effective tax rate. The annual effective tax rate relates primarily to an expected income tax liability due to the acceleration of revenue recognition for tax purposes related to the Amended Sanofi Agreement. There was no income tax benefit recognized during the three and six months endedJune 30, 2020 . Net operating losses generated in 2018 and years thereafter can be carried forward indefinitely. As ofDecember 31, 2020 , we hadU.S. federal net operating loss carryforwards of$239.3 million , of which$116.1 million will, if not utilized, begin to expire in 2031. As ofDecember 31, 2020 , we hadU.S. state net operating loss carryforwards of$227.6 million , which will, if not utilized, begin to expire in 2031. As ofDecember 31, 2020 , we also hadU.S. federal and state research and development tax credit carryforwards of$7.0 million and$4.3 million , respectively, which will, if not utilized, begin to expire in 2032 and 2028, respectively, and orphan drug tax credit carryforwards of$17.4 million , which begin to expire in 2037. We also have state investment tax credit carryforwards of$0.8 million , which will, if not utilized, begin to expire in 2020. As ofDecember 31, 2020 , we recorded a full valuation allowance against our net deferred tax assets. 27 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the three months endedJune 30, 2021 and 2020: Three Months Ended June 30, 2021 2020 Change (in thousands) Collaboration revenue$ 72,649 $ 16,319 $ 56,330 Operating expenses: Research and development 40,477 29,002 11,475 General and administrative 11,921 8,601 3,320 Change in fair value of contingent consideration 4,242 15,347 (11,105 ) Total operating expenses 56,640 52,950 3,690 Income (loss) from operations 16,009 (36,631 ) 52,640 Other income, net 154 343 (189 ) Income (loss) before income taxes 16,163 (36,288 ) 52,451 Income tax benefit 981 - 981 Net income (loss)$ 17,144 $ (36,288 ) $ 53,432 Collaboration Revenue Collaboration revenue was$72.6 million and$16.3 million for the three months endedJune 30, 2021 and 2020, respectively, which was derived from the Sanofi collaboration. Revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. The transaction price increased in the three months endedJune 30, 2021 compared to the same period in 2020. Although total expenses in the vaccine program decreased in the three months endedJune 30, 2021 compared to the same period in 2020, revenue increased due to the increase in the transaction price. See "-Components of Our Results of Operations - Collaboration Revenue" above. Research and Development Expenses Three Months Ended June 30, 2021 2020 Change (in thousands) Direct external research and development expenses by program: Discovery program$ 8,234 $ 2,033 $ 6,201 Vaccine program 8,348 9,387 (1,039 ) MRT5005 program 3,314 3,350 (36 ) Unallocated research and development expenses: Personnel related (including stock-based compensation) 10,300 8,791 1,509 Other 10,281 5,441 4,840
Total research and development expenses
29,002
Research and development expenses were$40.5 million for the three months endedJune 30, 2021 , compared to$29.0 million for the three months endedJune 30, 2020 . The increase of$11.5 million was primarily due to continued development of our discovery program as well as increases in occupancy and personnel-related costs. Direct external expenses of our discovery program increased by$6.2 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to increased costs related to our ongoing exploratory research and discovery efforts to identify next-generation CF candidates and lead product candidates in additional pulmonary diseases. Direct external expenses of our vaccine program decreased by$1.0 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to decreased activities with the Sanofi collaboration. 28 -------------------------------------------------------------------------------- Table of Contents Unallocated research and development expenses increased by$6.3 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The increase of$1.5 million in personnel-related costs was primarily related to an increase in headcount in the three months endedJune 30, 2021 compared to the same period in 2020, partially offset by a decrease in stock-based compensation due to a stock option modification in the three months endedJune 30, 2020 . The increase of$4.8 million in other unallocated research and development expenses was due to an increase of$4.3 million in occupancy costs and an increase of$0.7 million in license fees due to payments owed to theMassachusetts Institute of Technology , orMIT , upon achievement of milestones under the Amended Sanofi Agreement, partially offset by a decrease of$0.6 million in amortization expense related to the definite-lived MRT intangible asset. General and Administrative Expenses General and administrative expenses were$11.9 million for the three months endedJune 30, 2021 , compared to$8.6 million for the three months endedJune 30, 2020 . The increase of$3.3 million was due to an increase of$1.7 million in personnel-related costs related to an increase in headcount in the three months endedJune 30, 2021 compared to the same period in 2020 as well as an increase in stock-based compensation, an increase of$1.1 million in professional fees primarily consisting of increases in recruiting fees and consulting costs and an increase of$0.2 million in insurance fees. Change in Fair Value of Contingent Consideration During the three months endedJune 30, 2021 and 2020, we recognized operating expenses of$4.2 million and$15.3 million , respectively, for changes in the fair value of the contingent consideration liabilities we recorded in connection with our acquisition of the MRT Program inDecember 2016 . The contingent consideration liabilities relate to future potential milestone and earnout payment obligations. The expense recognized during the three months endedJune 30, 2021 was attributed primarily to an increase in the fair value of the contingent consideration liability for future earnout payments that could become due. The increase in the fair value of contingent consideration was due to the time value of money due to the passage of time and a decrease in the discount rate during the three months endedJune 30, 2021 . Benefit from Income Taxes We recognized an income tax benefit of$1.0 million and$0 during the three months endedJune 30, 2021 and 2020, respectively, due to the current period income before income taxes and the application of the annual effective tax rate. The annual effective tax rate relates primarily to an expected income tax liability due to the acceleration of revenue recognition for tax purposes related to the Amended Sanofi Agreement. Comparison of the Six Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 Change (in thousands) Collaboration revenue$ 107,249 $ 20,974 $ 86,275 Operating expenses: Research and development 81,617 50,442 31,175 General and administrative 22,738 16,060 6,678
Change in fair value of contingent consideration (39,737 )
5,895 (45,632 ) Total operating expenses 64,618 72,397 (7,779 ) Income (loss) from operations 42,631 (51,423 ) 94,054 Other income, net 308 853 (545 ) Income (loss) before income taxes 42,939 (50,570 ) 93,509 Income tax benefit 727 - 727 Net income (loss)$ 43,666 $ (50,570 ) $ 94,236 Collaboration Revenue Collaboration revenue was$107.2 million and$21.0 million for the six months endedJune 30, 2021 and 2020, respectively, which was derived from the Sanofi collaboration. Revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. The transaction price increased in the six months endedJune 30, 2021 compared to the same period in 2020 resulting in an increase of revenue recognized. See "-Components of Our Results of Operations - Collaboration Revenue" above. 29 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Six Months Ended June 30, 2021 2020 Change (in thousands) Direct external research and development expenses by program: Discovery program$ 16,850 $ 5,807 $ 11,043 Vaccine program 15,917 11,976 3,941 MRT5005 program 9,528 9,444 84 Unallocated research and development expenses: Personnel related (including stock-based compensation) 19,058 14,777 4,281 Other 20,264 8,438 11,826 Total research and development expenses$ 81,617 $
50,442
Research and development expenses were$81.6 million for the six months endedJune 30, 2021 , compared to$50.4 million for the six months endedJune 30, 2020 . The increase of$31.2 million was primarily due to continued development of our discovery program and our vaccine program associated with the Sanofi collaboration as well as increases in occupancy and personnel-related costs. Direct external expenses of our discovery program increased by$11.0 million during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to increased costs related to our ongoing exploratory research and discovery efforts to identify next-generation CF candidates and identify lead product candidates in additional pulmonary diseases. Direct external expenses of our vaccine program increased by$3.9 million during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to increased activities with the Sanofi collaboration. Unallocated research and development expenses increased by$16.1 million during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase of$4.3 million in personnel-related costs was primarily related to an increase in headcount in the six months endedJune 30, 2021 compared to the same period in 2020, partially offset by a decrease in stock-based compensation due to a stock option modification in the six months endedJune 30, 2020 . The increase of$11.8 million in other unallocated research and development expenses was due to an increase of$8.6 million in occupancy costs, an increase of$1.7 million in license fees due to payments owed toMIT upon achievement of milestones under the Amended Sanofi Agreement and an increase of$1.0 million in amortization expense related to the definite-lived MRT intangible asset. General and Administrative Expenses General and administrative expenses were$22.7 million for the six months endedJune 30, 2021 , compared to$16.1 million for the six months endedJune 30, 2020 . The increase of$6.7 million was primarily due to an increase of$3.6 million in professional fees primarily consisting of increases in recruiting fees, consulting costs, accounting fees and legal fees primarily associated with filing patent applications and prosecuting our intellectual property portfolio. Additionally, personnel-related costs increased by$2.4 million primarily related to an increase in headcount in the six months endedJune 30, 2021 compared to the same period in 2020 as well as an increase in stock-based compensation and insurance fees increased by$0.3 million . Change in Fair Value of Contingent Consideration During the six months endedJune 30, 2021 and 2020, we recognized operating income of$39.7 million and operating expense of$5.9 million , respectively, for changes in the fair value of the contingent consideration liabilities we recorded in connection with our acquisition of the MRT Program inDecember 2016 . The contingent consideration liabilities relate to future potential milestone and earnout payment obligations. The income recognized during the six months endedJune 30, 2021 was attributed primarily to a decrease in the fair value of the contingent consideration liability for future earnout payments that could become due. The decrease in the fair value of contingent consideration was due to the previously announced results of the second interim data analysis from the Phase 1/2 clinical trial of MRT5005 and the resulting decrease in the fair value of contingent consideration during the three months endedMarch 31, 2021 . This decrease was partially offset by an increase in the fair value of contingent consideration due to the time value of money due to the passage of time and a decrease in the discount rate during the three months endedJune 30, 2021 . 30 -------------------------------------------------------------------------------- Table of Contents Benefit from Income Taxes We recognized an income tax benefit of$0.7 million and$0 during the six months endedJune 30, 2021 and 2020, respectively, due to the current period income before income taxes and the application of the annual effective tax rate. The annual effective tax rate relates primarily to an expected income tax liability due to the acceleration of revenue recognition for tax purposes related to the Amended Sanofi Agreement. Liquidity and Capital Resources Since our inception throughJune 30, 2021 , we have not generated any revenue from product sales, have generated collaboration revenue only from the Amended Sanofi Agreement and have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any of our product candidates, and we do not expect to generate revenue from sales of any product candidates for several years, if at all. See " -Funding Requirements" and Note 1 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a further discussion of our liquidity. ThroughJune 30, 2021 , we have funded our operations primarily through sales of equity securities and upfront and milestone payments received under the Amended Sanofi Agreement and we have received proceeds of approximately$1.1 billion from such transactions. We are party to the Sales Agreement, with Jefferies, under which we may issue and sell shares of our common stock, from time to time, having an aggregate offering price of up to$100.0 million . Sales of common stock through Jefferies may be made by any method that is deemed an "at the market" offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. Jefferies has agreed to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell shares of our common stock based upon our instructions. We are not obligated to make any sales of our common stock under the Sales Agreement. During the year endedDecember 31, 2020 , we issued and sold 2,863,163 shares of our common stock, resulting in gross proceeds of$37.9 million , before deducting commissions of$1.1 million and other offering expenses of$0.2 million . There were no shares issued or sold pursuant to the Sales Agreement during the six months endedJune 30, 2021 . In the future,$62.1 million of shares of common stock remain available to be sold pursuant to the Sales Agreement, which sales, if any, would be made under the 2020 Shelf. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Six Months EndedJune 30, 2021 2020 (in thousands)
Net cash provided by (used in) operating activities
$ (51,489 ) Net cash provided by (used in) investing activities (109,109 )
79,422
Net cash provided by financing activities 2,859
159,680
Net increase (decrease) in cash, cash equivalents and restricted cash$ (92,556 ) $ 187,613 Operating Activities During the six months endedJune 30, 2021 , operating activities provided$13.7 million of cash, resulting from our net income of$43.7 million , partially offset by net non-cash charges of$23.9 million and net cash used in changes in our operating assets and liabilities of$6.0 million . Net non-cash charges for the six months endedJune 30, 2021 primarily consisted of a$39.7 million decrease in the change in the fair value of contingent consideration, partially offset by a$9.3 million charge to stock-based compensation expense and a$6.5 million charge for depreciation and amortization expense. Net cash used in changes in our operating assets and liabilities consisted of a$8.5 million increase in prepaid expenses and other assets, a$6.2 million decrease in lease liability, a$3.2 million decrease in deferred revenue and a$2.4 million increase in long-term prepaid rent, partially offset by a$6.2 million decrease in right-of-use assets, a$3.9 million increase in accounts payable, a$2.6 million decrease in collaboration receivables and a$1.6 million increase in accrued expenses. During the six months endedJune 30, 2020 , operating activities used$51.5 million of cash, resulting from our net loss of$50.6 million and net cash used in changes in our operating assets and liabilities of$21.6 million , partially offset by net non-cash charges of$20.7 million . Net cash used in changes in our operating assets and liabilities consisted of a$10.5 million increase in collaboration receivables, a$7.4 million increase in long-term prepaid rent, a$6.4 million decrease in deferred revenue and a$2.8 million decrease in accounts payable, partially offset by a$4.0 million increase in accrued expenses and a$1.5 million increase in 31 -------------------------------------------------------------------------------- Table of Contents prepaid expenses and other assets. Net non-cash charges for the six months endedJune 30, 2020 primarily consisted of a$9.2 million charge to stock-based compensation expense, a$5.9 million increase in the change in the fair value of contingent consideration which was primarily due to the time value of money due to the passage of time and a$5.6 million charge for depreciation and amortization expense. Investing Activities During the six months endedJune 30, 2021 , net cash used in investing activities was$109.1 million , consisting of$185.7 million of purchases of investments and$3.4 million of purchases of property and equipment, partially offset by$80.0 million of sales and maturities of investments. During the six months endedJune 30, 2020 , net cash provided by investing activities was$79.4 million , consisting of$111.3 million of sales and maturities of investments, partially offset by$27.4 million of purchases of investments and$4.4 million of purchases of property and equipment. Financing Activities During the six months endedJune 30, 2021 , net cash provided by financing activities was$2.8 million , consisting primarily of proceeds from option exercises. During the six months endedJune 30, 2020 , net cash provided by financing activities was$159.7 million , consisting of net cash proceeds of$153.8 million from public offerings of our common stock and$5.8 million in proceeds from option exercises. Funding Requirements We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue ongoing and initiate new clinical trials of and seek marketing approval for our product candidates. In addition, we expect to incur additional costs associated with operating as a public company. Our expenses will also increase if, and as, we:
• continue the clinical development of MRT5005 for CF, MRT5500, the lead
vaccine candidate against
SARS-CoV-2,
and MRT5400 and MRT5401, the investigational mRNA vaccine candidates
against seasonal influenza;
• continue the advancement of mRNA therapeutics for next-generation CF and
PCD and continue the development of additional mRNA vaccine candidates
against infectious diseases;
• leverage our programs to advance our other product candidates, including
those for the treatment of diseases that affect the liver, into
preclinical and clinical development;
• seek regulatory approvals for any product candidates that successfully
complete clinical trials;
• seek to discover and develop additional product candidates;
• expand our manufacturing, operational, financial and management systems;
• increase personnel, including personnel to support our clinical
development, manufacturing and commercialization efforts and our
operations as a public company;
• maintain, expand and protect our intellectual property portfolio;
• acquire or
in-license
other product candidates and technologies;
• incur additional legal, accounting and other expenses in operating as a
public company; and
• establish a sales, marketing, medical affairs and distribution
infrastructure to commercialize any product candidates for which we may
not obtain marketing approval and intend to commercialize on our own or
jointly.
32-------------------------------------------------------------------------------- Table of Contents We believe that our existing cash, cash equivalents and investments of$667.2 million as ofJune 30, 2021 will enable us to fund our operating expenses and capital expenditure requirements into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We will need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions, many of which are outside of our control, and we may be unable to raise financing when needed, or on terms favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, reduce or eliminate 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, which could adversely affect our business prospects, and we may be unable to continue our operations. Because of numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Factors that may affect our planned future capital requirements and accelerate our need for additional working capital include the following: • the successful completion of our pending transaction withSanofi S.A. ;
• the scope, progress, results and costs of researching and developing our
product candidates, and conducting preclinical studies and clinical
trials;
• the success of our collaboration with Sanofi;
• the costs, timing and outcome of regulatory review of our product
candidates;
• the costs of future activities, including product sales, medical affairs,
marketing, manufacturing and distribution, for any of our product
candidates for which we receive marketing approval;
• the costs of manufacturing commercial-grade products and sufficient
inventory to support commercial launch;
• the ability to receive additional
non-dilutive
funding, including grants from organizations and foundations;
• the impacts of the
COVID-19
pandemic and our response to it;
• the revenue, if any, received from commercial sale of our products,
should any of our product candidates receive marketing approval;
• the cost and timing of hiring new employees to support our continued growth;
• the costs of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
• the ability to establish and maintain collaborations on favorable terms,
if at all;
• the extent to which we acquire or
in-license
other product candidates and technologies; and
• the timing, receipt and amount of sales of, or milestone payments related
to or royalties on, our current or future product candidates, if any.
A change in the outcome of any of these or other variables with respect to the
development of any of our product candidates could significantly change the
costs and timing associated with the development of that product candidate.
Further, our operating plans may change in the future, and we may need
additional funds to meet operational needs and capital requirements associated
with such operating plans.
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Until such time, if ever, as we can generate substantial product revenue, we
expect to finance our cash needs through a combination of public or private
equity offerings, debt financings, collaborations, strategic partnerships or
marketing, distribution or licensing arrangements with third parties and grants
from organizations and foundations. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the ownership
interests of our common stockholders may be materially diluted, and the terms of
such securities could include liquidation or other preferences that could
adversely affect the rights of our common stockholders. Debt financing and
preferred equity financing, if available, may involve agreements that include
restrictive covenants that limit our ability to take specified actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
In addition, debt financing would result in increased fixed payment obligations.
If we raise funds through collaborations, strategic partnerships or marketing,
distribution or licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies, future revenue streams, research
programs or product candidates or grant licenses on terms that may not be
favorable to us.
Cash Requirements from Contractual and Other Obligations
During the three months ended June 30, 2021 , there were no material changes to
our cash requirements from contractual and other obligations as of December 31,
2020 described under Management's Discussion and Analysis of Financial Condition
and Results of Operations in our 2020 Annual Report.
In April 2021 , we entered into a contract with The Richmond Group, Inc. for
$36.8 million for the
build-out
of the 200 West Street location in Waltham, Massachusetts . Under the lease
agreement for the 200 West Street location, our landlord will reimburse us
$26.3 million for tenant improvement allowances. We expect to spend between
$10.5 million and $12.5 million towards
build-out
costs, which represents the cost of the project that exceeds the tenant
improvement allowances, of which $2.3 million has been paid as of June 30, 2021 .
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States . The preparation
of our condensed consolidated financial statements and related disclosures
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities in our finance statements. We believe that several
accounting policies are important to understanding our historical and future
performance. We refer to these policies as critical because these specific areas
generally require us to make judgments and estimates about matters that are
uncertain at the time we make the estimate, and different estimates-which also
would have been reasonable-could have been used. On an ongoing basis, we
evaluate our estimates and judgments. We base our estimates on historical
experience, known trends and events and various other factors that we believe
are 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. Our actual results may differ from
these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies from
those described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our 2020 Annual Report.
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