Quarterly Report (10-q)

Date : 11/07/2019 @ 10:18PM
Source : Edgar (US Regulatory)
Stock : Audentes Therapeutics Inc (BOLD)
Quote : 59.97  0.0 (0.00%) @ 12:00AM
Audentes Therapeutics share price Chart

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                      .
Commission File Number: 001-37833
__________________________________
Audentes Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
__________________________________
Delaware
 
46-1606174
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
600 California Street, 17th Floor
San Francisco, California 94108
(Address of principal executive offices and zip code)
(415) 818-1001  
(Registrant’s telephone number, including area code)
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, par value $0.00001 per share
BOLD
The Nasdaq Global Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
 
Accelerated filer

Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  
Securities registered pursuant to Section 12(b) of the Act:
As of November 4, 2019, there were 45,783,265 shares of the Registrant’s Common Stock, $0.00001 par value per share, outstanding.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
2
 
3
 
4
 
6
 
7
18
26
26
 
 
27
27
65
65
65
65
65
66

1


PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
 
September 30, 2019
 
December 31, 2018
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
63,590

 
$
144,349

Short-term investments
287,874

 
269,958

Prepaid expenses and other current assets
4,919

 
5,465

Total current assets
356,383

 
419,772

Restricted cash - long-term
3,748

 
3,748

Property and equipment, net
38,165

 
32,099

Right-of-use assets
24,859

 

Goodwill
3,631

 
3,631

Intangible assets
8,000

 
8,000

Other assets
6,722

 
5,305

Total assets
$
441,508

 
$
472,555

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,905

 
$
8,123

Accrued liabilities
14,550

 
12,928

Operating lease liabilities
3,399

 

Contingent acquisition consideration payable

 
2,345

Deferred rent

 
456

Total current liabilities
27,854

 
23,852

Deferred rent - long-term

 
4,720

Asset retirement obligation - long-term
231

 
215

Operating lease liabilities - long-term
26,490

 

Contingent acquisition consideration payable - long-term
2,460

 

Deferred tax liability, net
1,014

 
1,014

Total liabilities
58,049

 
29,801

Stockholders' equity:
 
 
 
Preferred stock, $0.00001 par value, 10,000,000 shares authorized as of September 30, 2019 (unaudited) and December 31, 2018; 0 shares issued and outstanding as of September 30, 2019 (unaudited) and December 31, 2018, respectively

 

Common stock, $0.00001 par value, 300,000,000 shares authorized as of September 30, 2019 (unaudited) and December 31, 2018; 45,740,575 and 43,546,786 shares issued and outstanding as of September 30, 2019 (unaudited) and December 31, 2018, respectively

 

Additional paid-in capital
842,599

 
762,284

Accumulated deficit
(459,366
)
 
(319,470
)
Accumulated other comprehensive income (loss)
226

 
(60
)
Total stockholders' equity
383,459

 
442,754

Total liabilities and stockholders' equity
$
441,508

 
$
472,555

 
 
 
 
See accompanying notes to unaudited interim condensed consolidated financial statements.

2



AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except shares and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Operating expenses:
Unaudited
Research and development
$
37,636

 
$
29,918

 
$
114,772

 
$
76,157

General and administrative
10,189

 
7,817

 
31,960

 
20,617

Total operating expenses
47,825

 
37,735

 
146,732

 
96,774

Loss from operations
(47,825
)
 
(37,735
)
 
(146,732
)
 
(96,774
)
Interest income, net
2,112

 
1,509

 
6,937

 
3,662

Other expense, net
(28
)
 
(65
)
 
(101
)
 
(117
)
Net loss
(45,741
)
 
(36,291
)
 
(139,896
)
 
(93,229
)
Unrealized (losses) gains on investments, net

 
(4
)
 
286

 
33

Comprehensive loss
$
(45,741
)
 
$
(36,295
)
 
$
(139,610
)
 
$
(93,196
)
Net loss per share, basic and diluted
$
(1.00
)
 
$
(0.97
)
 
$
(3.14
)
 
$
(2.57
)
Weighted-average number of shares used in computing net loss per share, basic and diluted
45,543,354

 
37,359,877

 
44,538,676

 
36,302,803

 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim condensed consolidated financial statements.

3


AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except shares and per share amounts)
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
43,546,786

 
$

 
$
762,284

 
$
(319,470
)
 
$
(60
)
 
$
442,754

Issuance of common stock upon exercise of stock options
213,891

 

 
3,005

 

 

 
3,005

Stock-based compensation expense

 

 
5,500

 

 

 
5,500

Net loss

 

 

 
(49,391
)
 

 
(49,391
)
Unrealized gain on investments, net

 

 

 

 
127

 
127

Balance at March 31, 2019
43,760,677

 

 
770,789

 
(368,861
)
 
67

 
401,995

Issuance of common stock upon exercise of stock options
141,316

 

 
1,673

 

 

 
1,673

Issuance of common stock pursuant to ESPP purchases
38,328

 

 
767

 

 

 
767

Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes
24,439

 

 
(567
)
 

 

 
(567
)
Stock-based compensation expense

 

 
6,131

 

 

 
6,131

Issuance of common stock, net of $1,695 in issuance costs
1,419,351

 

 
54,308

 

 

 
54,308

Net loss

 

 

 
(44,764
)
 

 
(44,764
)
Unrealized gain on investments, net

 

 

 

 
159

 
159

Balance at June 30, 2019
45,384,111

 

 
833,101

 
(413,625
)
 
226

 
419,702

Issuance of common stock upon exercise of stock options
343,583

 

 
3,950

 

 

 
3,950

Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes
11,081

 

 
(229
)
 

 

 
(229
)
Stock-based compensation expense

 

 
5,712

 

 

 
5,712

Issuance of common stock, net of $2 in issuance costs
1,800

 

 
65

 

 

 
65

Net loss

 

 

 
(45,741
)
 

 
(45,741
)
Balance at September 30, 2019
45,740,575

 
$

 
$
842,599

 
$
(459,366
)
 
$
226

 
$
383,459

 
 
 
 
 
 
 
 
 
 
 
 

4


 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
29,901,368

 
$

 
$
347,327

 
$
(190,649
)
 
$
(80
)
 
$
156,598

Issuance of common stock upon exercise of stock options
183,692

 

 
807

 

 

 
807

Stock-based compensation expense

 

 
3,385

 

 

 
3,385

Issuance of common stock, net of $14,201 in issuance costs
6,612,500

 

 
217,237

 

 

 
217,237

Net loss

 

 

 
(25,571
)
 

 
(25,571
)
Unrealized loss on investments, net

 

 

 

 
(14
)
 
(14
)
Balance at March 31, 2018
36,697,560

 

 
568,756

 
(216,220
)
 
(94
)
 
352,442

Issuance of common stock upon exercise of stock options
141,828

 

 
1,139

 

 

 
1,139

Issuance of common stock upon exercise of warrants
5,800

 

 

 

 

 

Stock-based compensation expense

 

 
4,097

 

 

 
4,097

Issuance of common stock, net of $292 in issuance costs
400,024

 

 
14,602

 

 

 
14,602

Net loss

 

 

 
(31,367
)
 

 
(31,367
)
Unrealized gain on investments, net

 

 

 

 
51

 
51

Balance at June 30, 2018
37,245,212

 

 
588,594

 
(247,587
)
 
(43
)
 
340,964

Issuance of common stock upon exercise of stock options
207,917

 

 
1,253

 

 

 
1,253

Stock-based compensation expense

 

 
4,633

 

 

 
4,633

Net loss

 

 

 
(36,291
)
 

 
(36,291
)
Unrealized loss on investments, net

 

 

 

 
(4
)
 
(4
)
Balance at September 30, 2018
37,453,129

 
$

 
$
594,480

 
$
(283,878
)
 
$
(47
)
 
$
310,555

See accompanying notes to unaudited interim condensed consolidated financial statements.

5


AUDENTES THERAPEUTICS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
Unaudited
Net loss
$
(139,896
)
 
$
(93,229
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
5,732

 
3,948

Amortization of right-of-use assets
1,966

 

Stock-based compensation
17,343

 
12,115

Accretion of discount on marketable securities
(2,878
)
 
(856
)
Change in fair value of contingent acquisition consideration payable
115

 
(2,327
)
Other
21

 
83

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other current assets
591

 
(1,212
)
Other assets
(1,417
)
 
(3,260
)
Accounts payable
70

 
(724
)
Accrued liabilities
1,548

 
4,635

Deferred rent

 
1,332

Operating lease liabilities
(2,112
)
 

Net cash used in operating activities
(118,917
)
 
(79,495
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(10,017
)
 
(8,074
)
Proceeds from maturities of marketable securities
381,351

 
127,880

Purchases of marketable securities
(396,103
)
 
(209,952
)
Net cash used in investing activities
(24,769
)
 
(90,146
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options and ESPP purchases
9,350

 
3,199

Proceeds from issuance of common stock, net of issuance costs
54,373

 
231,724

Tax paid related to net share settlement of equity awards
(796
)
 

Net cash provided by financing activities
62,927

 
234,923

Net (decrease) increase in cash, cash equivalents and restricted cash
(80,759
)
 
65,282

Cash, cash equivalents and restricted cash at beginning of period
148,097

 
42,661

Cash, cash equivalents and restricted cash at end of period
$
67,338

 
$
107,943

 
 
 
 
Noncash investing and financing activities:
 
 
 
Change in accounts payable and accrued liabilities related to property and equipment purchases
$
1,786

 
$
2,200

Change in prepaid expenses and other current assets related to equity issuances and option exercises
$
45

 
$

Right-of-use assets obtained in exchange for lease obligations
$
5,155

 
$

See accompanying notes to unaudited interim condensed consolidated financial statements.

6


AUDENTES THERAPEUTICS, INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
1.
Organization and Basis of Presentation
Audentes Therapeutics, Inc., or the Company, was incorporated in the State of Delaware on November 13, 2012. The Company is an AAV-based genetic medicines company focused on developing and commercializing innovative products for patients living with serious rare neuromuscular diseases. The Company operates in one business segment, with its corporate headquarters located in San Francisco, California and its manufacturing and research operations located in South San Francisco, California.
The accompanying consolidated financial statements include the accounts of Audentes Therapeutics, Inc., and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 
Need for Additional Capital
The Company has incurred net losses from operations since inception and as of September 30, 2019, had an accumulated deficit of $459.4 million. The Company expects that its development activities will continue to generate operating losses over the next several years.
Common Stock Sales Agreement
In March 2018, the Company filed an automatic universal shelf registration statement. Pursuant to the registration statement, the Company entered into an “at-the-market” program and sales agreement, or ATM, with Cowen and Company, LLC., or Cowen, under which the Company may, from time to time, offer and sell common stock having an aggregate offering value of up to $150.0 million. Upon delivery of a placement notice and subject to the terms and conditions of the sales agreement, Cowen would use its commercially reasonable efforts to sell the shares from time to time, based upon the Company’s instructions. Sales of the Company’s common stock, if any, would be made at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Stock Market, or Nasdaq, or any other existing trading market for the common stock, at market prices or as otherwise agreed with Cowen. Under the sales agreement, Cowen would be entitled to a commission of up to 3.0% of the gross proceeds per share sold. The Company has no obligation to sell any shares under the sales agreement and may, at any time, suspend offers under the sales agreement or terminate the sales agreement by giving written notice as specified in the sales agreement.
During the nine months ended September 30, 2019, the Company sold 1,421,151 shares of common stock under the ATM for aggregate net proceeds of $54.4 million. As of September 30, 2019, there was approximately $78.6 million (excluding commissions) available for future sales pursuant to the ATM.
Liquidity
As of September 30, 2019, the Company had approximately $351.5 million of cash, cash equivalents and marketable securities, consisting of $63.6 million of cash and cash equivalents and $287.9 million of marketable securities. The Company believes that its balance of cash, cash equivalents and investments as of September 30, 2019 is sufficient to fund its current operational plan for at least the next twelve months from the issuance of these financial statements, though it may pursue additional capital through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. If financing is not available at adequate levels or on acceptable terms, the Company may need to reevaluate its operating plans. In addition, if the Company’s anticipated operating results are not achieved in future periods, planned expenditures may need to be reduced in order to extend the time period over which the then-available resources would be able to fund the Company’s operations.
2.
Summary of Significant Accounting Policies
The Company's significant accounting policies are detailed in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2019, as compared to the significant accounting policies disclosed in Note 2 - Significant Accounting Policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

7


Leases
The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. As the implicit rate in the Company's leases is unknown, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Company gives consideration to its credit risk, term of the lease, total lease payments and adjust for the impacts of collateral, as necessary, when calculating its incremental borrowing rates. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company's operating leases is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less.
Basis of Preparation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2018 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year.
The accompanying unaudited interim condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s audited financial statements filed in its Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of any expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to accrued liabilities, acquisition contingent consideration, income taxes, and stock-based compensation. Management bases its estimates on historical experience, and on various other market-specific relevant assumptions that management believes to be reasonable, under the circumstances. Actual results may differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and marketable securities. The Company invests in a variety of financial instruments and in accordance with its investment policy, limits the amount of credit exposure with any one issuer, industry or geographic area for investments other than instruments backed by the U.S. federal government.

8


Concentration of Manufacturing and Third-Party Services Risk
The Company is subject to certain risks with respect to sources of supply of manufactured materials and drug product for use in its preclinical studies and clinical trials. Due to the technical aspects of manufacturing drug product for gene therapies, there exist few alternative sources of manufacturing. The Company is reliant upon its own internal manufacturing capability and a small number of third-party vendors to produce drug product in sufficient quantities and quality to conduct its research and development activities.
Accounting Pronouncements Adopted in 2019
In August 2018, the Financial Accounting Standards Board, or FASB, issued ASU 2018-15, Intangibles - Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in ASC 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption was permitted and the Company early adopted the standard on January 1, 2019. Adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements. See Note 5 for further disclosure.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The measurement of equity-classified nonemployee awards is fixed at the grant date, and entities would measure the cost of awards subject to a performance condition using the outcome that is probable at the balance sheet date. The Company adopted this standard on January 1, 2019. As a result of adopting this standard, the Company no longer remeasures equity-classified nonemployee awards. The adoption of this new standard did not result in material impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. Under the new guidance, at the commencement date, lessees are required to recognize a lease liability with a corresponding right-of-use (ROU) asset. Effective January 1, 2019, the Company adopted Topic 842 using the modified retrospective approach provided by ASU 2018-11. Results for reporting periods beginning January 1, 2019 are presented under Topic 842, while prior period amounts were not adjusted and continue to be presented in accordance with the Company’s historical accounting under Topic 840, Leases. The Company elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. The Company also elected the short-term lease practical expedient, which allowed the Company to not recognize leases with a term of less than twelve months on its consolidated balance sheets. In addition, the Company elected the lease and non-lease components practical expedient, which allowed the Company to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components.
The impact of the adoption of Topic 842 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2019 was as follows:
 
December 31, 2018
 
Effect of Adoption
 
January 1, 2019
 
(in thousands)
Operating lease right-of-use assets
$

 
$
21,669

 
$
21,669

Liabilities:
 
 
 
 
 
Operating leases
$

 
$
2,541

 
$
2,541

Deferred rent
$
456

 
$
(456
)
 
$

Operating lease liabilities - long-term
$

 
$
24,304

 
$
24,304

Deferred rent and asset retirement obligation -
    long-term
$
4,935

 
$
(4,720
)
 
$
215



9


Adoption of the new standard resulted in recording operating lease right-of-use assets and operating lease liabilities of approximately $24.9 million and $29.9 million, respectively, on the Company’s condensed consolidated balance sheet as of September 30, 2019. However, the adoption of the new standard did not have an impact on the Company’s beginning accumulated deficit, statement of operations or cash flows. For additional information regarding the Company’s leases, see Note 9 in the notes to the condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which modifies, removes and adds certain disclosure requirements on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. It is the Company’s expectation that adoption of this pronouncement will not have a material impact to its condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. In addition, ASU 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures. It is the Company’s expectation that adoption of this pronouncement will not have a material impact to its consolidated financial statements and related disclosures.
3.
Investments
Investments consist of available-for-sale marketable securities as follows (in thousands):
 
September 30, 2019
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(Unaudited)
Money market funds
$
22,647

 
$

 
$

 
$
22,647

Commercial paper
92,750

 
7

 
(3
)
 
92,754

Corporate securities
111,201

 
178

 

 
111,379

U.S. treasury bills
10,760

 
2

 

 
10,762

U.S. government agency securities
61,367

 
35

 
(1
)
 
61,401

U.S. agency bonds
37,579

 
8

 

 
37,587

Total available-for-sale securities
$
336,304

 
$
230

 
$
(4
)
 
$
336,530

 
 
 
 
 
 
 
 
 
December 31, 2018
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
Money market funds
$
33,399

 
$

 
$

 
$
33,399

Commercial paper
144,578

 

 

 
144,578

Corporate securities
82,670

 
8

 
(39
)
 
82,639

U.S. treasury bills
60,573

 

 
(8
)
 
60,565

U.S. government agency securities
15,219

 

 

 
15,219

U.S. agency bonds
51,411

 

 
(22
)
 
51,389

U.S. agency discount securities
18,716

 

 

 
18,716

Total available-for-sale securities
$
406,566

 
$
8

 
$
(69
)
 
$
406,505

 
 
 
 
 
 
 
 


10


The following table summarizes the classification of the available-for-sale securities on the Company's condensed consolidated balance sheets (in thousands):
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Cash and cash equivalents
$
48,656

 
$
136,547

Short-term investments
287,874

 
269,958

Total
$
336,530

 
$
406,505

 
 
 
 

The Company does not intend to sell the investments that are in an unrealized loss position, and it is unlikely that it will be required to sell the investments before recovery of the investments' amortized cost basis, which may be maturity. The unrealized losses were the result of interest rate fluctuations affecting the value of the underlying instruments and the Company determined that the unrealized losses at September 30, 2019 were temporary in nature.
4.
Fair Value Measurements
Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued liabilities that approximate fair value due to their relatively short maturities.
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Assets Measured at Fair Value
Financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows (in thousands):
 
September 30, 2019
 
Fair Value Measurements Using
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Unaudited)
Money market funds
$
22,647

 
$
22,647

 
$

 
$

Commercial paper
92,754

 

 
92,754

 

Corporate securities
111,379

 

 
111,379

 

U.S. treasury bills
10,762

 

 
10,762

 

U.S. government agency securities
61,401

 

 
61,401

 

U.S. agency bonds
37,587

 

 
37,587

 

Total financial assets
$
336,530

 
$
22,647

 
$
313,883

 
$



11


 
December 31, 2018
 
Fair Value Measurements Using
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
Money market funds
$
33,399

 
$
33,399

 
$

 
$

Commercial paper
144,578

 

 
144,578

 

Corporate securities
82,639

 

 
82,639

 

U.S. treasury bills
60,565

 

 
60,565

 

U.S. government agency securities
15,219

 

 
15,219

 

U.S. agency bonds
51,389

 

 
51,389

 

U.S. agency discount securities
18,716

 

 
18,716

 

Total financial assets
$
406,505

 
$
33,399

 
$
373,106

 
$


The financial assets listed above do not include the Company’s operating cash of $14.9 million and $7.8 million as of September 30, 2019 and December 31, 2018, respectively.
Liabilities Measured at Fair Value
In August 2015, the Company acquired Cardiogen Sciences, Inc., or Cardiogen, a biotechnology company focused on the discovery and development of AAV gene therapy products for rare, inherited arrhythmogenic diseases. Pursuant to the terms of the acquisition, upon first dosing of a patient in a human clinical study involving AT307 for the treatment of CASQ2-CPVT, the Company is obligated to pay to former Cardiogen shareholders $4.2 million in common stock plus an additional $5.8 million in either cash or common stock, at the Company’s election, for aggregate contingent consideration of $10.0 million.  The Company recorded a contingent consideration payable that is estimated using a probability-based income approach utilizing an appropriate discount rate. Key assumptions used by management to estimate the fair value of contingent acquisition consideration payable include estimated probability of occurrence, the estimated timing of when the milestone may be attained and assumed discount period and discount rate, which are Level 3 inputs. Changes in the fair value of the contingent acquisition consideration payable, resulting from management’s revision of key assumptions, are recorded in research and development expense in the consolidated statement of operations and comprehensive loss. The probability-based income approach used by management to estimate the fair value of the contingent acquisition consideration is most sensitive to changes in the estimated probability of occurrence.
The following is a summary of the contingent acquisition consideration payable recorded in the accompanying consolidated balance sheets (in thousands):
 
Amount
 
(Unaudited)
Balance, December 31, 2018
$
2,345

Change in fair value of contingent acquisition consideration payable
115

Balance, September 30, 2019
$
2,460

 
 



12


5.
Balance Sheet Components
Property and Equipment, Net
Property and equipment, net, consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Furniture and office equipment
$
2,439

 
$
1,898

Computer equipment
1,391

 
1,019

Software
526

 
513

Leasehold improvements
23,453

 
19,607

Laboratory equipment
11,694

 
9,570

Manufacturing equipment
8,129

 
6,619

Construction in progress and deposits on equipment
6,640

 
3,320

Total property and equipment
54,272

 
42,546

Less accumulated depreciation and amortization
(16,107
)
 
(10,447
)
Property and equipment, net
$
38,165

 
$
32,099


Property and equipment depreciation and amortization expense for the three months ended September 30, 2019 and 2018 was $2.0 million and $1.5 million, respectively. Property and equipment depreciation and amortization for the nine months ended September 30, 2019 and 2018 was $5.7 million and $3.9 million, respectively.
Capitalized Implementation Costs of a Hosting Arrangement
The Company implemented a new enterprise resource planning, or ERP, system in July 2019. The ERP system is a cloud-based hosting arrangement that is a service contract. The Company early and prospectively adopted ASU 2018-15, Intangibles - Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract in the classification of costs incurred in connection with the implementation of this hosted ERP system. Based on the guidance, the Company expensed all costs (internal and external) that were incurred in the planning and post-implementation operation stages and capitalized approximately $2.5 million in costs related to the application development stage.  The capitalized costs are amortized on a straight-line basis over the non-cancelable contract term of five years.  As of September 30, 2019, approximately $0.5 million and $1.9 million of the capitalized costs were classified in current and noncurrent assets, respectively.  The Company began amortizing the capitalized implementation costs on July 1, 2019, which was the date the ERP system was placed in production and ready for its intended use. Amortization expense for the three and nine months ended September 30, 2019 was $0.1 million.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Accrued payroll and related expenses
$
8,310

 
$
8,581

Accrued research and development expenses
4,692

 
3,317

Accrued construction in progress
74

 
71

Accrued general and administrative expenses
1,474

 
959

Total accrued liabilities
$
14,550

 
$
12,928



13


6.
Commitments and Contingencies
In February 2019, the Company entered into an exclusive license agreement with Nationwide Children's Hospital related to the Company's AT702 program. Pursuant to the agreement, the Company paid an upfront fee of $7.0 million and will be obligated to make certain milestone and royalty payments upon the achievement of developmental, regulatory and net sales milestones.
As of September 30, 2019, the Company is subject to contingent payments upon the achievement of certain development, regulatory and commercial milestones, totaling up to approximately $270.9 million across all of its licensing agreements. Of this amount, $74.0 million relates to the Company’s Crigler-Najjar and CASQ2-CPVT programs, for which the Company previously announced plans to explore outlicensing opportunities to continue development activities.

7.
Stock Compensation
Stock-based Compensation Expense
Stock-based compensation expense by category was as follows for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Unaudited)
Research and development
$
3,048

 
$
2,611

 
$
9,465

 
$
6,930

General and administrative
2,664

 
2,022

 
7,878

 
5,185

Total stock-based compensation expense
$
5,712

 
$
4,633

 
$
17,343

 
$
12,115


Stock Options
The following table summarizes option activity for the nine months ended September 30, 2019:
 
Number of
Options
Outstanding
 
Weighted-
Average
Exercise Price
Per Option
 
 
 
 
Balance, December 31, 2018
4,894,201

 
$
18.79

Options granted
1,581,183

 
$
28.04

Options exercised
(698,790
)
 
$
12.35

Options forfeited
(664,866
)
 
$
24.29

Balance, September 30, 2019
5,111,728

 
$
21.82


The fair value of stock options granted to employees was estimated using a Black-Scholes option pricing model with the following assumptions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Expected term (in years)
6.0-6.1

 
6.1

 
5.5-6.1

 
5.5-6.1

Expected volatility
 62-63%

 
70
%
 
62-68%

 
70-76%

Risk-free interest rate
1.4-1.9%

 
2.8-3.0%

 
1.4-2.6%

 
2.3-3.0%

Expected dividend yield
%
 
%
 
%
 
%


14


Restricted Stock Units
In January 2019, the Company's compensation committee of the board of directors approved the commencement of granting restricted stock units, or RSUs, to our employees. RSUs are share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon the completion of a specific period of continued service. RSUs are generally subject to forfeiture if employment terminates prior to the release of vesting restrictions. RSUs granted are valued at the market price of the Company's common stock on the date of grant. The Company recognizes stock-based compensation expense for the fair value of RSUs on a straight-line basis over the requisite service period of these awards.
The following table summarizes activity of RSUs granted to employees with service-based vesting during the nine months ended September 30, 2019:
 
Number of
RSUs
Outstanding
 
Weighted-
Average
Grant Date
Fair Value
Per RSU
 
 
 
 
Balance, December 31, 2018

 
 
RSUs granted
571,530

 
$
28.59

RSUs vested
(58,156
)
 
$
24.89

RSUs forfeited
(62,468
)
 
$
24.94

Balance, September 30, 2019
450,906

 
$
29.57

2016 Employee Stock Purchase Plan
The Company's 2016 Employee Stock Purchase Plan, or the 2016 ESPP, was adopted on July 19, 2016 and commenced on May 1, 2018.  The Company initially reserved 210,000 shares of common stock for issuance under the 2016 ESPP. The number of shares reserved for issuance under the 2016 ESPP increases automatically on January 1 of each calendar year through January 1, 2028 by the number of shares equal to 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31.
Under the 2016 ESPP, employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. The 2016 ESPP generally provides for offering periods of six months in duration with purchase periods ending on either May 15 or November 15. Contributions under the 2016 ESPP are limited to a maximum of 15% of an employee’s eligible compensation and purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. The expense for the three and nine months ended September 30, 2019 was based on the fair value of rights granted upon the commencement of an offering and calculated using the following assumptions: for the three and nine months ended September 30, 2019 expected term in years was 0.5; volatility was 54.6% and 54.6-62.2%, respectively; the risk-free interest rate was 2.4% and 2.4-2.5%, respectively; and no dividend yield.
8.
Income Taxes
The Company did not record a federal or state income tax provision or benefit for the three and nine months ended September 30, 2019 and 2018 as it has incurred net losses since inception. In addition, the net deferred tax assets generated from net operating losses have been fully reserved as the Company believes it is not more likely than not that the benefit will be realized.
9.
Leases
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has various non-cancelable lease agreements for our office and manufacturing spaces with lease periods expiring between 2023 and 2027. The Company’s lease terms may include options to extend or terminate the leases. The lease term represents the period up to the early termination date unless it is reasonably certain that the Company will not exercise the early termination option. For certain leases, the Company has options to extend the lease term for additional periods ranging from five to eight years. These renewal options are not considered in the remaining lease term unless it is reasonably certain that the Company will exercise such options. Certain leases include rental payments that are adjusted periodically based on changes in consumer price and other indexes.

15


For the three and nine months ended September 30, 2019, the Company recorded operating lease costs of $1.5 million and $4.4 million, respectively. Under the terms of the lease agreements, the Company is also responsible for certain variable lease payments that are not included in the measurement of the lease liability. Variable lease costs for the three and nine months ended September 30, 2019 were $0.2 million and $0.7 million, respectively, primarily related to common area maintenance, taxes, utilities and insurance with the Company's operating leases. Cash paid for amounts included in the measurement of operating lease liabilities for the three and nine months ended September 30, 2019 were $1.6 million and $4.4 million, respectively.
As of September 30, 2019, maturities of lease liabilities for the following five fiscal years and thereafter were as follows (in thousands except lease term and discount rate):
 
Amount
Remainder of 2019
$
1,627

2020
6,692

2021
6,901

2022
7,130

2023
5,847

Thereafter
13,582

Total lease payments
41,779

Less:
 
Imputed interest
(11,714
)
Tenant improvement not yet received
(176
)
Present value of operating lease liabilities
$
29,889

Current operating lease liabilities
$
3,399

Operating lease liabilities - long-term
$
26,490

 
 
Weighted-average remaining lease term (in years)
6.1

Weighted-average discount rate
11.0
%

As the Company elected to apply the provisions of Topic 842 on a prospective basis, the following comparative period disclosure is being presented in accordance with Topic 840. The future minimum commitments under the Company's leases as of December 31, 2018, were as follows:
 
Amount
 
(in thousands)
2019
$
6,073

2020
6,692

2021
6,901

2022
7,130

2023
5,847

Thereafter
13,024

Total minimum lease payments
$
45,667




16


10.
Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period and excludes any potential dilutive effects of common stock equivalents. Diluted net loss per share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, convertible preferred stock, and unvested restricted common stock. As the Company had net losses for the three and nine months ended September 30, 2019 and 2018, all potential common shares were determined to be anti-dilutive and were therefore excluded from the calculation of diluted net loss per share.
The following table sets forth the computation of basic and diluted net loss per share of common stock during the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share data)
Net loss
$
(45,741
)
 
$
(36,291
)
 
$
(139,896
)
 
$
(93,229
)
Weighted-average number of shares used in computing
   net loss per share
45,543,354

 
37,359,877

 
44,538,676

 
36,302,803

Net loss per share, basic and diluted
$
(1.00
)
 
$
(0.97
)
 
$
(3.14
)
 
$
(2.57
)
 
 
 
 
 
 
 
 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive:
 
Nine Months Ended September 30,
 
2019
 
2018
Stock options to purchase common stock
5,111,728

 
5,029,052

Restricted stock units
450,906

 

 
5,562,634

 
5,029,052

 
 
 
 


17


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, timing and results of preclinical and clinical development activities, and potential regulatory approval and commercialization of product candidates. In some cases, forward looking-statements may be identified by terminology such as “believe,” “may,” “will,” “should”, “predict”, “goal”, “strategy”, “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “seek” and similar expressions and variations thereof. These words are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Investors should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
As used in this Quarterly Report on Form 10-Q, the terms “Audentes,” “the Company,” “we,” “us,” and “our” refer to Audentes Therapeutics, Inc. and, where appropriate, its consolidated subsidiaries, unless the context indicates otherwise.
Investors should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2018, included in our Annual Report on Form 10-K.
Business Overview
We are a leading AAV-based genetic medicines company focused on developing and commercializing innovative products for patients living with serious rare neuromuscular diseases. We are leveraging our adeno-associated viral, or AAV, gene therapy technology platform and proprietary manufacturing expertise to develop programs across three modalities: gene replacement, vectorized exon skipping and vectorized RNA knockdown.
We have built a compelling portfolio of product candidates, including AT132 for the treatment of X-Linked Myotubular Myopathy, or XLMTM; AT845 for Pompe disease; AT702, AT751 and AT753 for Duchenne muscular dystrophy, or DMD; and AT466 for myotonic dystrophy type 1, or DM1. We are completing enrollment in the pivotal expansion cohort of ASPIRO, a clinical trial of our most advanced product candidate, AT132, and plan to submit a biologics license application, or BLA, with the U.S. Food and Drug Administration, or FDA, for AT132 in mid-2020, and a marketing authorization application, or MAA, with the European Medicines Agency, or EMA, in the second half of 2020. In our Pompe disease program, we submitted our Investigational New Drug, or IND, application for AT845 to the FDA in September 2019. The FDA’s review of our submission is ongoing. In our DMD program, we are collaborating with Nationwide Children’s Hospital, or Nationwide Children’s, to develop AT702, a vectorized exon skipping product candidate designed to induce exon 2 skipping in DMD patients with duplications of exon 2 and mutations in exons 1-5 of the dystrophin gene. We plan to submit an IND for AT702 in the first quarter of 2020. Separate from the Nationwide Children’s collaboration, we are conducting preclinical work to advance AT751 and AT753, vectorized exon skipping product candidates to treat DMD patients with genotypes amenable to exon 51 and exon 53 skipping. In combination, we estimate that AT702, AT751 and AT753 may have the potential to address more than 25% of DMD patients, and we plan to leverage our vectorized exon skipping platform to develop additional product candidates with the potential to address up to 80% of DMD patients over time. We are also working with Nationwide Children’s to evaluate vectorized RNA knockdown and vectorized exon skipping to treat DM1. Preclinical vector screening studies are underway, and we expect to submit an IND for AT466 in 2020. We maintain full global rights to all of our product candidates.

18


We have developed a proprietary in-house current Good Manufacturing Practices, or cGMP, capability to produce our product candidates, providing us with a core strategic capability, and enabling more control over development timelines, costs and intellectual property. Our manufacturing facility is located in South San Francisco, California and supports our process and analytical development, fill-finish, quality control testing and manufacturing operations in accordance with cGMP requirements. We have designed and commissioned the facility to support the unique licensing requirements of both the FDA and EMA and we have initiated BLA readiness and validation activities for our XLMTM program. Operating at a 2x500-liter scale, we believe our current manufacturing capacity is sufficient to meet the anticipated global commercial demands of our XLMTM program, and the near-term development needs of our other product candidates. In addition to our vector manufacturing capabilities, we have invested in a state-of-the-art, internal plasmid manufacturing facility to support production of nonclinical and cGMP-grade plasmids for all of our development programs, including the potential commercialization of AT132. We plan to continue investment in our manufacturing capabilities to enable the cost-effective production of high-quality AAV vectors to support our clinical development and commercialization activities.
Recent Developments
AT132 for X-Linked Myotubular Myopathy
In October 2019, we presented new positive interim data from ASPIRO at the 24th International Annual Congress of the World Muscle Society. The newly reported data include safety and efficacy assessments as of the August 7, 2019 data cut-off date for 12 patients enrolled in the ASPIRO dose escalation cohorts. The data include 48 weeks or more of follow-up for seven patients enrolled in Cohort 1 (1x1014 vector genomes per kilogram (vg/kg); six treated and one untreated control) and 24-48 weeks of follow-up for five patients in Cohort 2 (3x1014 vg/kg; four treated and one untreated control). Key assessments include neuromuscular function as assessed by the achievement of motor milestones and improvement in CHOP INTEND score, and respiratory function as assessed by reduction in ventilator dependence and improvement in maximal inspiratory pressure. The newly reported data do not include new muscle biopsy data. Patients receiving AT132 have achieved significant and durable reductions in ventilator dependence, an endpoint considered to be closely correlated with morbidity and mortality in XLMTM patients. To date, the first seven patients treated (all six treated patients in Cohort 1 and the first patient treated in Cohort 2) have achieved ventilator independence. All treated patients were making progress against clinically meaningful developmental milestones with four patients walking with support or alone. AT132 was generally well-tolerated and showed a manageable safety profile across both dose groups. Since the last data update in May 2019, there has been one new serious adverse event, or SAE, in Cohort 2, an episode of joint swelling that resolved without treatment. Results to date indicate no clinically meaningful differences in the safety and tolerability profile of AT132 between the 1x1014 vg/kg and 3x1014 vg/kg dose cohorts.
Next steps in the AT132 development program include the completion of enrollment and follow-up of patients in the ASPIRO pivotal expansion cohort, designed to confirm the safety and efficacy profile of AT132 at a dose of 3x1014 vg/kg, and preparations for filing of a BLA for AT132 in the United States planned in mid-2020 and filing of a MAA in Europe planned for the second half of 2020.
AT845 for Pompe disease
In September 2019 we submitted our IND for AT845 to the FDA. The FDA’s review of our submission is ongoing, and in parallel we are progressing our clinical trial site start-up activities in anticipation of starting a Phase 1/2 clinical study in the first quarter of 2020.
License Agreements
We have built our portfolio of product candidates in part by engaging in license and collaboration agreements as well as strategic transactions with third parties. In July 2013, we entered into a license agreement with REGENXBIO Inc., or REGENXBIO, pursuant to which we obtained intellectual property rights related to AT132 and AT845. Under this arrangement, we are contractually committed to certain payments including (i) up to $8.8 million in combined development and regulatory milestone fees for each indication and each licensed product; (ii) up to $45.0 million in combined commercial milestone fees based on various annual aggregate net sales thresholds; and (iii) certain royalty payments.

19


Financial Overview
Since our inception, we have devoted substantially all of our resources to: identifying, acquiring, and developing our product candidate portfolio; organizing and staffing our company; raising capital; developing our manufacturing capabilities; and providing general and administrative support for these operations. We have never generated revenue and have incurred significant net losses since inception. We do not expect to receive any revenue from any product candidates that we develop until we obtain regulatory approval and commercialize our product candidates or enter into collaborative agreements with third parties. Our net losses were $128.8 million, $90.2 million and $59.7 million for the years ended December 31, 2018, 2017 and 2016, respectively, and $139.9 million for the nine months ended September 30, 2019. As of September 30, 2019, we had an accumulated deficit of $459.4 million. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
invest significantly to further develop and seek regulatory and marketing approvals for our existing and future product candidates;
continue to develop our proprietary in-house manufacturing facility and capabilities;
hire additional clinical, scientific, management and administrative personnel;
ultimately establish a sales, marketing and distribution infrastructure to commercialize any drugs for which we may obtain marketing approval;
maintain, expand and protect our intellectual property portfolio;
further expand our pipeline of potential product candidates;
acquire or in-license other assets and technologies; and
add additional operational, financial and management information systems and processes to support our ongoing development efforts, any future manufacturing or commercialization efforts and our administrative and compliance obligations as a public company.
We have funded our operations to date primarily from the issuance and sale of our convertible preferred stock, and through the issuance and sale of our common stock pursuant to public offerings. As of September 30, 2019, we had cash, cash equivalents and marketable securities of $351.5 million.
To fund our current operating plans, we will need additional capital, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts. There can be no assurance that we will ever be profitable or generate positive cash flow from operating activities.
Financial Operations Overview
Research and Development Expenses
Research and development direct program expenses consist primarily of external costs incurred for the development of our product candidates, which include:
expenses incurred under agreements with consultants, third-party service providers and investigative clinical trial sites that conduct research and development activities on our behalf;
laboratory and vendor expenses related to the execution of preclinical studies and clinical trials;
costs related to production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing processes; and
costs related to in-licensing of rights to develop and commercialize our product candidate portfolio.
Personnel, non-program and unallocated program expenses include costs associated with activities performed by our internal research and development organization and generally benefit multiple programs. These costs are not allocated by product candidate and consist primarily of:
personnel costs, which include salaries, bonuses, payroll taxes, benefits and stock-based compensation expense;
facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense;

20


lab supplies and equipment used for internal research and development activities;
unallocated manufacturing expenses; and
the change in fair value of contingent acquisition consideration payable.
We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks performed by others using information and data provided to us by our vendors, collaborators and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.
The largest component of our operating expenses has historically been our investment in research and development activities. We do not allocate personnel and other costs, such as salaries, bonuses, payroll taxes, benefits, stock-based compensation expense and certain internal program costs, to product candidates on a program-specific basis.
The following table summarizes our research and development expenses incurred during the respective periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
AT132 direct program costs
$
4,835

 
$
7,311

 
$
18,736

 
$
14,380

AT845 direct program costs
2,117

 
1,812

 
10,329

 
7,156

AT466 direct program costs
325

 

 
945

 

AT702 direct program costs
1,517

 

 
9,195

 

AT342 direct program costs
179

 
992

 
1,123

 
3,774

Personnel, non-program, and unallocated program costs(1)
28,663

 
19,803

 
74,444

 
50,847

Total research and development expenses
$
37,636

 
$
29,918

 
$
114,772

 
$
76,157

 
 
 
 
 
 
 
 
(1) Includes $23,000 and $0.6 million of costs related to our AT307 program during the three and nine months ended September 30, 2018, respectively. In the first quarter of 2019, we decided to seek a third-party to develop the AT307 program. The costs we incurred for the AT307 program during the three and nine months ended September 30, 2019 were immaterial.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and as we conduct additional clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, facilities costs, including rent and maintenance of facilities, depreciation and amortization expense and other expenses for outside professional services, including commercial, legal, human resources, audit and accounting services. Personnel costs consist of salaries, bonuses, payroll taxes, benefits and stock-based compensation expense. We expect our general and administrative expenses to increase in the future due to anticipated increases in headcount and professional services to prepare for the commercialization of AT132, further advance our pipeline and as a result of our operations as a public company, including expenses related to compliance with the rules and regulations of the SEC, Nasdaq, and other governing bodies in addition to insurance expenses, investor relations activities and other administration, accounting and professional services.
Interest Income, Net
Interest income consists of interest earned on our cash, cash equivalents and investments, and amortization of premiums or discounts from our marketable securities.

21


Other Expense, Net
Other expense, net primarily consists of gains and losses on disposals of property and equipment, investment management fees and foreign currency transaction gains and losses incurred during the period.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies related to business combinations and contingent consideration payable are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Our critical accounting policies and estimates are detailed in the Management’s Discussion and Analysis of Financial Condition and Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of adopting Topic 842, Leases, are discussed in Note 2, Summary of Significant Accounting Policies, to the Unaudited Interim Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements
Except as described in Note 2, Summary of Significant Accounting Policies, to the Unaudited Interim Condensed Consolidated Financial Statements, there have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2019, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2018, that are significant to us.
Results of Operations
Comparison of the Three Months Ended September 30, 2019 and 2018
 
Three Months Ended September 30,
 
2019
 
2018
 
Change
 
(in thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
37,636

 
$
29,918

 
$
7,718

General and administrative
10,189

 
7,817

 
2,372

Total operating expenses
47,825

 
37,735

 
10,090

Loss from operations
(47,825
)
 
(37,735
)
 
(10,090
)
Interest income, net
2,112

 
1,509

 
603

Other expense, net
(28
)
 
(65
)
 
37

Net loss
$
(45,741
)
 
$
(36,291
)
 
$
(9,450
)
 
 
 
 
 
 
Research and Development
Research and development expenses increased by $7.7 million, or 26%, to $37.6 million for the three months ended September 30, 2019. The increase was primarily the result of a $2.9 million increase for facilities and overhead related costs primarily due to increased headcount and investment in manufacturing, a $2.1 million increase in personnel costs, a $1.4 million increase in license and milestone payments related to our licensing agreements, a $0.8 million increase in consulting and professional services, a $0.7 million increase in manufacturing expense, a $0.4 million increase for non-cash stock-based compensation expense due to increased headcount that resulted in higher number of outstanding equity awards, and a $0.2 million increase in preclinical research, partially offset by a decrease of $0.8 million for clinical trial cost.

22


Our AT132 program expenses decreased by $2.5 million as compared to the same period in 2018 mainly due to fewer runs of study materials for the AT132 program as we provided production capacity to support other programs. Our AT845 program expenses increased by $0.3 million as we increased manufacturing of study materials and incurred additional consulting and initiation costs in preparation for planned clinical trials.  In connection with the in-licensing of AT702, we incurred $1.5 million in development expense during the three months ended September 30, 2019. Additionally, we initiated development activities for our AT466 program and incurred $0.3 million in related expense during the three months ended September 30, 2019.
General and Administrative
General and administrative expenses increased by $2.4 million, or 30%, to $10.2 million for the three months ended September 30, 2019. The increase was primarily the result of a $1.0 million increase in personnel due to an increased headcount, a $0.6 million increase in stock-based compensation expense due to increased headcount that resulted in higher number of outstanding equity awards, a $0.4 million increase in facilities and overhead related costs, and a $0.3 million increase in consulting expense and professional services.
Interest Income, Net
Interest income, net increased by $0.6 million, or 40%, to $2.1 million for the three months ended September 30, 2019, primary due to a higher cash balance as compared to the three months ended September 30, 2018 and our investment of funds received from our public equity offerings in fixed-income securities.
Comparison of the nine months ended September 30, 2019 and 2018
 
Nine Months Ended September 30,
 
2019
 
2018
 
Change
 
(in thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
114,772

 
$
76,157

 
$
38,615

General and administrative
31,960

 
20,617

 
11,343

Total operating expenses
146,732

 
96,774

 
49,958

Loss from operations
(146,732
)
 
(96,774
)
 
(49,958
)
Interest income, net
6,937

 
3,662

 
3,275

Other expense, net
(101
)
 
(117
)
 
16

Net loss
$
(139,896
)
 
$
(93,229
)
 
$
(46,667
)
 
 
 
 
 
 
Research and Development
Research and development expenses increased by $38.6 million, or 51%, to $114.8 million for the nine months ended September 30, 2019. The increase was primarily the result of a $9.8 million increase in manufacturing expense for clinical materials and supplies to support our clinical trials and research and development efforts, a $8.0 million increase in license and milestone payments, primarily due to the in-licensing of AT702, a $6.9 million increase in personnel costs, a $6.8 million increase for facilities and overhead related costs primarily due to increased headcount and investment in manufacturing, a $2.5 million increase for non-cash stock-based compensation expense due to increased headcount that resulted in higher number of outstanding equity awards, a $2.4 million increase in consulting and professional services, and a $0.4 million increase in clinical trials cost, partially offset by a decrease of $0.5 million for preclinical research. Additionally, during the nine months ended September 30, 2018, we revised our estimated probability and timing for triggering a milestone payment pursuant to the Cardiogen acquisition agreement that resulted in a $2.3 million decrease to the estimated fair value of the contingent liability and a related $2.3 million reduction of research and development expense.
Our AT132 and AT845 program expenses increased by $4.4 million and $3.2 million, respectively, as we conducted our ASPIRO clinical trial and increased manufacturing of clinical materials and incurred additional consulting and initiation costs in preparation for planned clinical trials.  In connection with the in-licensing of AT702, we incurred a one-time license fee of $7.0 million and $2.2 million in development expense during the nine months ended September 30, 2019. Additionally, we initiated development activities for our AT466 program and incurred $0.9 million in related expense during the nine months ended September 30, 2019.

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General and Administrative
General and administrative expenses increased by $11.3 million, or 55%, to $32.0 million for the nine months ended September 30, 2019. The increase was primarily the result of a $4.4 million increase in personnel due to an increased headcount, a $2.7 million increase in stock-based compensation expense due to increased headcount that resulted in higher number of outstanding equity awards, a $2.6 million increase for facilities and overhead related costs to support our continued growth, and a $1.6 million increase in consulting expense and professional services.
Interest Income, Net
Interest income, net increased by $3.3 million, or 89%, to $6.9 million for the nine months ended September 30, 2019, primary due to a higher cash balance as compared to the nine months ended September 30, 2018 and our investment of funds received from our public equity offerings in fixed-income securities.

Liquidity, Capital Resources and Plan of Operations
We are not profitable and have incurred losses and negative cash flows from operations each year since our inception. Our operations have been financed primarily by net proceeds from the sale and issuance of convertible preferred stock and common stock.
Common Stock Sales Agreement
In March 2018, we filed an automatic universal shelf registration statement. Pursuant to the registration statement, we entered into an “at-the-market” program and sales agreement, or ATM, with Cowen and Company, LLC., or Cowen, under which we may, from time to time, offer and sell common stock having an aggregate offering value of up to $150.0 million. Upon delivery of a placement notice and subject to the terms and conditions of the sales agreement, Cowen would use its commercially reasonable efforts to sell the shares from time to time, based upon our instructions. Sales of our common stock, if any, would be made at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on Nasdaq or any other existing trading market for the common stock, at market prices or as otherwise agreed with Cowen. Under the sales agreement, Cowen would be entitled to a commission of up to 3.0% of the gross proceeds per share sold. We have no obligation to sell any shares under the sales agreement and may, at any time, suspend offers under the sales agreement or terminate the sales agreement by giving written notice as specified in the sales agreement. During the nine months ended September 30, 2019, we sold 1,421,151 shares of common stock under the ATM for aggregate net proceeds of $54.4 million. As of September 30, 2019, there was approximately $78.6 million (excluding commissions) available for future sales pursuant to the ATM.
Our primary use of cash is to fund operating expenses, which consist of research and development expenditures and general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
We believe that our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash and capital expenditure requirements through at least the next 12 months from the issuance of the September 30, 2019 financial statements. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development and manufacturing activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.

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If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to financial covenants and covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, entering into licensing agreements or other collaboration arrangements with respect to our intellectual property or other assets or declaring dividends. If additional funding is required, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all. If we are unable to raise capital, we will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on our ability to execute our business plans.
The following table summarizes our cash flows for the periods indicated:
 
Nine Months Ended September 30,
 
2019
 
2018
 
(in thousands)
Cash used in operating activities
$
(118,917
)
 
$
(79,495
)
Cash used in investing activities
(24,769
)
 
(90,146
)
Cash provided by financing activities
62,927

 
234,923

Net (decrease) increase in cash, cash equivalents and restricted cash
$
(80,759
)
 
$
65,282

 
 
 
 
Cash Flows from Operating Activities
Cash used in operating activities for the nine months ended September 30, 2019 was $118.9 million. Our net loss was $139.9 million, which was partially offset by noncash charges of $22.3 million, consisting primarily of $17.3 million of stock-based compensation expense, $5.7 million of depreciation and amortization expense and $2.0 million of amortization of right-of-use assets, offset by $2.9 million primarily related to the accretion of discounts on marketable securities. The changes in net operating assets and liabilities were primarily the result of a decrease in prepaid expenses and current assets of $0.6 million, an increase of $1.4 million in other assets, an increase of $0.1 million in accounts payable and an increase of $1.5 million in accrued liabilities. These changes are primarily based on timing of invoicing by our vendors and payments from us to them. In addition, we recorded a decrease of $2.1 million related to our operating lease liabilities.
Cash used in operating activities for the nine months ended September 30, 2018 was $79.5 million. Our net loss was $93.2 million, which was partially offset by noncash charges of $13.0 million, consisting primarily of $12.1 million of stock-based compensation expense and $3.9 million of depreciation and amortization expense, offset by $0.9 million related to the accretion of discounts on marketable securities and a $2.3 million reduction in the fair value of the contingent acquisition consideration liability. The change in our net operating assets was primarily the result of an increase in prepaid expenses of $1.2 million, payment of a $3.2 million lease security deposit and a $0.7 million decrease in accounts payable offset by an increase of $4.6 million in accrued liabilities. These increases in prepaid expenses and accrued liabilities are based on timing of invoicing for services, primarily for research and development expenses.
Cash Flows from Investing Activities
Cash used in investing activities was $24.8 million for the nine months ended September 30, 2019, primarily due to purchases of investments of $396.1 million and purchases of property, equipment and leasehold improvements of $10.0 million, offset by the proceeds of $381.4 million from the maturities of investments.
Cash used in investing activities was $90.1 million for the nine months ended September 30, 2018, primarily due to purchases of marketable securities of $210.0 million and purchases of property and equipment and leasehold improvements of $8.1 million, partially offset by the sale or maturity of marketable securities of $127.9 million.
Cash Flows from Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2019 was related to proceeds of $9.4 million from the exercise of stock options and purchases under the 2016 ESPP and $54.4 million in net proceeds from the ATM, offset by $0.8 million in withholding taxes paid for the net share settlement of equity awards.
Cash provided by financing activities for the nine months ended September 30, 2018 was related to net proceeds from our follow-on offering of $217.1 million and from the ATM of $14.6 million, net of underwriting discounts, commissions and
offering costs, and proceeds from the exercise of stock options of $3.2 million

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Off-Balance Sheet Arrangements
At September 30, 2019, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Other Commitments
Lease Agreements
There were no significant changes to our lease agreements during the nine months ended September 30, 2019 as compared to our previous disclosure in our Annual Report on Form 10-K for the year ended December 31, 2018.
License and Collaboration Agreements
As of September 30, 2019, the Company is subject to contingent payments upon the achievement of certain development, regulatory and commercial milestones, totaling up to approximately $270.9 million across all of its licensing agreements. Of this amount, $74.0 million relates to the Company’s Crigler-Najjar and CASQ2-CPVT programs, for which the Company announced plans to explore outlicensing opportunities to continue development activities.
Other Contracts
We also enter into contracts in the normal course of business with various third parties for services related to preclinical research studies, clinical trials, testing, manufacturing and other services. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. We had cash, cash equivalents and investments of $351.5 million and $414.3 million as of September 30, 2019 and December 31, 2018, respectively, which consisted of bank deposits, money market funds and marketable fixed income securities. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant for us. We had no debt outstanding as of September 30, 2019 or December 31, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
During the third quarter of 2019, we implemented a new enterprise resource planning, or ERP, system. The new ERP system was designed and implemented, in part, to enhance the overall system of internal controls over financial reporting through further automation and integration of business processes. In connection with the ERP system implementation, we updated the processes that constitute our internal control over financial reporting, as necessary, to accommodate related changes to our accounting procedures and business processes.
Other than the ERP system implementation, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any pending material legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Investors should carefully consider the risks described below, as well as the other information in this report, including our unaudited interim condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. This list is not exhaustive and the order and presentation does not reflect management’s determination of priority or likelihood. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and investors may lose all or part of their investment.
Risks Related to Product Development and Regulatory Approval
We are early in our development efforts. If we are unable to develop, obtain regulatory approval for and commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.
We have invested substantially all of our efforts and financial resources in the identification and development of our AAV gene therapy technology platform and our portfolio of product candidates, which target a range of rare neuromuscular diseases, including X-Linked Myotubular Myopathy, or XLMTM, Pompe disease, Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1. Our ability to generate product revenue, which we do not expect will occur for several years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. We currently generate no revenue from sales of any product and we may never be able to develop or commercialize a marketable product.
Each of our programs and product candidates will require preclinical and clinical development, regulatory approval in multiple jurisdictions, obtaining preclinical, clinical and commercial manufacturing supply, capacity and expertise, building of a commercial organization, significant marketing efforts and substantial investment to achieve all of the foregoing before we generate any revenue from product sales. Our product candidates must be authorized for marketing by the U.S. Food and Drug Administration, or the FDA, or certain other foreign regulatory agencies, such as the EMA, before we may commercialize our product candidates.
The success of our product candidates depends on multiple factors, including:
successful completion of preclinical studies, including those compliant with Good Laboratory Practices, or GLP, toxicology studies, biodistribution studies and minimum effective dose studies in animals;
effective investigational new drug applications, or INDs, or Clinical Trial Authorizations, or CTAs, that allow commencement of our planned clinical trials or future clinical trials for our product candidates in relevant territories;
successful enrollment and completion of clinical trials compliant with current Good Clinical Practices, or GCPs;
positive results from our clinical programs that are supportive of safety and efficacy and provide an acceptable risk-benefit profile for our product candidates in the intended patient populations;
receipt of regulatory approvals from applicable regulatory authorities;
continued successful development of our internal manufacturing processes, including process development and scale-up activities to supply drug product for preclinical studies, clinical trials and commercial sale;
establishment of arrangements with third-party contract manufacturing organizations, or CMOs, for key materials used in our manufacturing processes and to establish backup sources for clinical and large-scale commercial supply;
establishment and maintenance of patent and trade secret protection and regulatory exclusivity for our product candidates;
enforcement and defense of intellectual property rights and claims;
commercial launch of our product candidates, if and when approved, whether alone or in collaboration with others;

27


acceptance of our product candidates, if and when approved, by patients and the medical community;
our effective competition against other therapies available in the market;
establishment and maintenance of adequate reimbursement from third-party payors for our products; and
maintenance of a continued acceptable safety profile of our product candidates following approval.
If we do not succeed in one or more of these factors in a timely manner, or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.
Success in early preclinical studies or clinical trials may not be indicative of results obtained in later preclinical studies and clinical trials and does not ensure regulatory approval of our product candidates.
Though viral vectors similar to ours have been evaluated by others in clinical trials, our product candidates only recently entered into human clinical trials, and we may experience unexpected or adverse results in the future. We will be required to demonstrate through adequate and well-controlled clinical trials that our product candidates are safe and effective, with a favorable risk-benefit profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Trial designs and results from previous trials are not necessarily predictive of our future clinical trial designs or results, and if we report interim safety and efficacy results from an ongoing clinical trial, we may not be able to confirm these results upon full analysis of the complete trial data. For example, in ASPIRO, an ongoing Phase 1/2 clinical trial of AT132 in XLMTM patients, we have reported encouraging interim data. However, the interim dataset from ASPIRO will differ from the final datasets upon which global regulatory decisions will be based. Potential reasons for these differences include, but are not limited to:
interim datasets may be comprised of a small number of patients, and the safety and efficacy results from longer term follow-up in patients dosed earlier in the study, or results from future patients, may not replicate those early results;
interim datasets may be comprised of patients evaluated at a specific dose level, whereas patients enrolled later in a study may receive higher doses with unknown implications for safety and efficacy;
not all patients may demonstrate improvement;
patients may discontinue their involvement in ASPIRO for a number of reasons, including disease progression or a lack of clinical benefit, and discontinuations will impact the amount of data we collect over time;
additional time and patient accrual provide new opportunities to capture new adverse events and further characterize the safety and efficacy of AT132; and
the precise composition of the final datasets is subject to ongoing regulatory feedback, which is likely to continue up until the time of submission of a BLA, or equivalent, and the advice may vary by regulatory authority.
In addition, the safety and efficacy results we observe with our product candidates in preclinical animal models may not be predictive of results from our clinical trials in humans, or may not translate to humans until higher doses are utilized, if at all.
Many companies in the biotechnology industry have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and there is a high failure rate for product candidates proceeding through clinical trials. Our product candidates may fail in late-stage clinical development if they do not show the desired safety and efficacy, even if they have successfully advanced through initial clinical trials. In addition, data obtained from preclinical studies and clinical trials are subject to varying interpretations. If agencies such as the FDA or EMA interpret data from our development programs differently than we do, the regulatory approval of our product candidates may be delayed, limited or prevented.
We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate for licensure. Even if our product candidates meet their safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process.

28


Regulatory authorities also may approve a product candidate for more limited indications than requested, or they may impose significant limitations in the form of narrow indications, warnings or a Risk Evaluation and Mitigation Strategy, or REMS. These regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates and materially and adversely affect our business, financial condition, results of operations and prospects.
If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our product candidates may be delayed and, as a result, our stock price may decline.
From time to time, we estimate the timing of the accomplishment of various scientific, clinical, regulatory, manufacturing and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of preclinical studies and clinical trials and the submission of regulatory filings. From time to time, we may publicly announce the expected timing of some of these milestones. All of these milestones are, and will be, based on a variety of assumptions. The actual timing of achieving these milestones can vary significantly compared to our estimates, in some cases for reasons beyond our control. We may experience numerous unforeseen events during, or as a result of, any clinical trials that we conduct that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
the FDA and other governmental health authorities, Institutional Review Boards, or IRBs, or ethics committees may not authorize or may delay authorizing us or our investigators to commence a clinical trial or conduct a clinical trial at all or at a prospective trial site, such as by requiring us to conduct additional preclinical studies and to submit additional data or imposing other requirements before permitting us to initiate or continue a clinical trial. For example, in early 2019 our collaborators at Nationwide Children’s Hospital, or Nationwide Children’s, submitted an IND for AT702 to treat DMD in patients with duplications of exon 2 and mutations in exons 1-5 of the dystrophin gene, and the FDA requested additional preclinical work prior to authorizing the initiation of clinical development;
we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective contract research organizations, or CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
clinical trials of our product candidates may produce negative or inconclusive results and we may decide, or regulators may require us, to conduct preclinical studies in addition to those we currently have planned or additional clinical trials or we may decide to abandon drug development programs. For example, in April 2019 we met with the FDA to discuss our plans for the ASPIRO pivotal expansion, subsequent to which they provided feedback focused on endpoint selection, study design and duration of post-treatment follow-up. As to endpoint selection, the FDA agreed that our proposed primary endpoint, change from baseline in hours of ventilation support over time through week 24, is clinically meaningful. With regard to study design, the pivotal expansion cohort includes eight patients, consisting of four age-matched pairs, within plus or minus 6 months of age, with one patient from each pair randomized to receive a single dose of AT132 at 3x1014 vg/kg, and the other to serve as a delayed treatment control. While the FDA recommended we conduct a double-blind, placebo-controlled study, our alternate design introduces multiple elements of control into the pivotal expansion cohort to increase the overall rigor and objectivity of the efficacy assessment, including one-to-one randomization to treatment or delayed-treatment control study arms to amplify power to assess treatment effect, age-matching to control for functional improvement that could be attributed to a subject’s age, and a ventilator weaning protocol that includes a blinded review of all respiratory functional data by an independent panel of pulmonologists to approve reductions in ventilator support. We believe that these study design elements will allow for the unbiased interpretation of data from the primary efficacy endpoint and will address key aspects of FDA feedback. As to duration of follow-up, the FDA recommended that in order to demonstrate the efficacy and durability of AT132, an evaluation period of at least one-year would be needed to assess the primary efficacy endpoint.  Based on data obtained in ASPIRO to date, we believe 24 weeks will be sufficient to meet the primary endpoint, and we are proceeding with our plans to conduct the primary efficacy endpoint analysis 24 weeks post-treatment, by which time the planned BLA filing will also include supportive data out to 24 months from Cohort 1 patients and between approximately twelve and 24 months from Cohort 2 patients. We believe that the ASPIRO pivotal cohort, supported by data from earlier ASPIRO cohorts, will be sufficient to demonstrate the safety, efficacy and durability of AT132, but there can be no assurance that the FDA will agree with the design of the ASPIRO pivotal cohort, or that the data generated from the ASPIRO pivotal cohort will be sufficient to receive regulatory approval for AT132 from the FDA or any other regulatory authority;
the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;

29


our third-party suppliers and contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators;
we may elect to, or regulators, IRBs or ethics committees may require that we or our investigators, suspend or terminate clinical trials for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to health risks;
the cost of planned clinical trials of our product candidates may be greater than we anticipate;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and
our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or IRBs or ethics committees to suspend or terminate the trials, or reports may arise from preclinical or clinical testing of other gene therapy studies that raise safety or efficacy concerns broadly about the field of gene therapy, or about our product candidates specifically. For example, we previously reported at our May and October 2019 ASPIRO updates that a series of adverse events have occurred in ASPIRO, several of which have been deemed to be serious and possibly or probably related to treatment with AT132. Additionally, in January 2018, an academic gene therapy researcher published results from non-GLP studies conducted in a small number of non-human primates and piglets, utilizing AAV vectors with different capsid serotypes and transgenes than those we use in our product candidates. These publications cited concerns about the potential risks of high systemic doses of AAV gene therapy products. We have not observed similar results in any of our non-clinical studies with our candidate vectors and continue to conduct preclinical studies and clinical trials across our portfolio of product candidates. If we observe unexpected safety signals in these studies or trials, we may decide, or regulatory authorities may require us, to delay or halt further development of our product candidates.
Our product candidates are based on a novel AAV gene therapy technology with which there is limited clinical experience to date, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.
Our product candidates are based on gene therapy technology and our future success depends on the successful development of this novel therapeutic approach. There can be no assurance that any development problems we or other gene therapy companies experience in the future related to gene therapy technology will not cause significant delays or unanticipated costs in the development of our product candidates, or that such development problems can be solved. In addition, the clinical trial requirements of the FDA, EMA and other regulatory agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or extensively studied therapeutic modalities. Further, as we are developing novel treatments for diseases in which there is limited clinical experience with new endpoints and methodologies, there is heightened risk that the FDA, EMA or comparable foreign regulatory bodies may not consider the clinical trial endpoints to provide clinically meaningful results, and the resulting clinical data and results may be more difficult to analyze. To date, only a limited number of gene therapy products have been approved in the United States and the European Union, or EU, which makes it difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in those or other jurisdictions. Further, approvals by one regulatory agency may not be indicative of what other regulatory agencies may require for approval.
Regulatory requirements governing gene therapy products have evolved and may continue to change in the future. For example, in July 2018, the FDA issued a number of draft and final guidance documents for the industry to describe the FDA’s current thinking with regard to the regulatory framework for gene therapy development, including guidance related to chemistry, manufacturing, and controls, or CMC, information and clinical trial design parameters to support product registration. These and other requirements and guidelines promulgated by the FDA and other regulatory review agencies, committees and advisory groups may lengthen the regulatory review process, require us to perform additional preclinical studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these treatment candidates or lead to significant post-approval limitations or restrictions.

30


The FDA, the National Institutes of Health, or NIH, the EMA and other regulatory agencies have demonstrated caution in their regulation of gene therapy treatments, and ethical and legal concerns about gene therapy and genetic testing may result in additional regulations or restrictions on the development and commercialization of our product candidates, which may be difficult to predict.
The FDA, NIH, other regulatory agencies at both the federal and state level in the United States, U.S. congressional committees, and the EMA and other foreign governments, have expressed interest in further regulating the biotechnology industry, including gene therapy and genetic testing. For example, the EMA advocates a risk-based approach to the development of a gene therapy product. Any such further regulation may delay or prevent commercialization of some or all of our product candidates. For example, in 1999, a patient died during a gene therapy clinical trial that utilized an adenovirus vector and it was later discovered that adenoviruses could generate an extreme immune system reaction that can be life-threatening. In January 2000, the FDA halted that trial and began investigating 69 other gene therapy trials underway in the United States, 13 of which required remedial action. In 2003, the FDA suspended 27 additional gene therapy trials involving several hundred patients after learning that some patients treated in a clinical trial in France had subsequently developed leukemia. While the new AAV vectors that we use across our portfolio of product candidates have been developed to reduce these side effects, gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop.
Regulatory requirements in the United States and abroad governing gene therapy products have changed frequently and may continue to change in the future. Our planned clinical trials may be subject to review by the NIH Office of Biotechnology Activities’ Recombinant DNA Advisory Committee, or RAC, even though no reviews have been required to date. As of April 2016, the new NIH Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules, including gene therapy, provide the opportunity for one or more oversight bodies (IRB or the Institutional Biosafety Committee, or IBC) to request a public RAC review based on their own review of the protocol and NIH requirements.  Regardless of the request for public review, NIH makes its own assessment as to whether the protocol would significantly benefit from a public RAC review. The NIH’s recommendations are shared with the FDA and the oversight bodies. The RAC can delay the initiation of a clinical trial, even if the FDA has reviewed the trial design and details and has not objected to its initiation or has notified the sponsor that the study may begin. Conversely, the FDA can put an IND on a clinical hold even if the RAC has provided a favorable review or has recommended against an in-depth, public review. If there is a public RAC review, the receipt of the final recommendation letter concludes the protocol registration process and then oversight body approval can be issued. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of any of our product candidates. Similarly, the EMA governs the development of gene therapies in the EU and may issue new guidelines concerning the development and marketing authorization for gene therapy products and require that we comply with these new guidelines.
These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory and advisory groups and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of such product candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of our product candidates can be costly and could negatively impact our ability to complete clinical trials and commercialize our current and future product candidates in a timely manner, if at all.

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Even if we complete the necessary clinical trials, we cannot predict when, or if, we will obtain regulatory approval to commercialize a product candidate and the approval may be for a narrower indication than we seek.
Prior to commercialization, our product candidates must be approved by the FDA pursuant to a BLA in the United States and by the EMA and similar regulatory authorities outside the United States. The process of obtaining marketing approvals, both in the United States and abroad, is expensive and takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We have not received approval to market any of our product candidates from regulatory authorities in any jurisdiction. We have no experience in submitting and supporting the applications necessary to gain marketing approvals, and, in the event regulatory authorities indicate that we may submit such applications, we may be unable to do so as quickly and efficiently as desired. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical studies or clinical trials. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate.
Approval of our product candidates may be delayed or refused for many reasons, including:
the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that our product candidates are safe and effective for any of their proposed indications;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
we may be unable to demonstrate that our product candidates’ clinical and other benefits outweigh their safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical programs or clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a BLA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere;
our manufacturing facilities, or those of third-party manufacturers with which we contract or procure certain services or raw materials, may not be adequate to support approval of our product candidates; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.
Even if our product candidates meet their safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process.
Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or REMS. These regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates and materially and adversely affect our business, financial condition, results of operations and prospects.

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Further, the regulatory authorities may require concurrent approval or the CE mark, indicating conformity with applicable European Community directives, of a companion diagnostic device. For the product candidates we currently are developing, we believe that diagnoses based on symptoms, in conjunction with existing genetic tests developed and administered by laboratories certified under the Clinical Laboratory Improvement Amendments, are sufficient to diagnose patients and will be permitted by the FDA. For future product candidates, however, it may be necessary to use FDA-cleared or FDA-approved diagnostic tests to diagnose patients or to assure the safe and effective use of product candidates in trial subjects. The FDA refers to such tests as in vitro companion diagnostic devices. In August 2014, the FDA issued a final guidance document describing the agency’s current thinking about the development and regulation of in vitro companion diagnostic devices. The final guidance articulates a policy position that, when an in vitro diagnostic device is essential to the safe and effective use of a therapeutic product, the FDA generally will require approval or clearance of the diagnostic device at the same time that the FDA approves the therapeutic product. At this point, it is unclear how the FDA will apply this policy to our current or future gene therapy product candidates. Should the FDA deem genetic tests used for diagnosing patients for our therapies to be in vitro companion diagnostics requiring FDA clearance or approval, we may face significant delays or obstacles in obtaining approval of a BLA for our product candidates. In the EU, the European Commission has proposed substantial revisions to the current regulations governing in vitro diagnostic medical devices. If adopted in their current form, these revisions may impose additional obligations on us that may impact the development and authorization of our product candidates in the EU.
We may never obtain FDA approval for any of our product candidates in the United States, and even if we do, we may never obtain approval for or commercialize any of our product candidates in any other jurisdiction, which would limit our ability to realize their full market potential.
In order to eventually market any of our product candidates in any particular foreign jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a jurisdiction-by-jurisdiction basis regarding safety and efficacy. Approval by the FDA in the United States, if obtained, does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time-consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. The foreign regulatory approval process involves all of the risks associated with FDA approval. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be unrealized.
Delays or disruptions in our manufacturing process development and operations may delay or disrupt our development and commercialization efforts.
We have invested in our own state-of-the-art cGMP manufacturing facility in South San Francisco, California, where we are developing and implementing novel production technologies to supply our preclinical studies and clinical trials. We believe that development of an internal manufacturing capability provides us with enhanced control of material supply for preclinical studies and clinical trials and commercial markets, enables the more rapid implementation of process changes and allows for better control over manufacturing-associated expenses and intellectual property. However, we have limited experience as a company in developing a manufacturing facility and there exist only a small number of CMOs with the experience necessary to manufacture our product candidates. We may have difficulty hiring experts to staff and operate our internal manufacturing facility or finding and maintaining relationships with external CMOs and, accordingly, our production capacity could be limited. Even if we are successful, our manufacturing capabilities could be affected by cost-overruns, unexpected delays, equipment failures, lack of capacity, delays in implementation of novel in-house technologies or scale-up activities, labor shortages, natural disasters, including earthquakes, power failures and numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy. The occurrence of any of these factors could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.

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Before we may initiate a clinical trial of our product candidates, we must demonstrate to the FDA that the CMC for our product candidates meets applicable requirements, and in the EU, a manufacturing authorization must be obtained from the appropriate EU regulatory authorities. In addition, we must pass a pre-approval inspection of our manufacturing facility by the FDA before any of our product candidates can obtain marketing approval. In order to obtain approval, we will need to ensure that all of our processes, methods and equipment are compliant with cGMPs and other regulations, and perform extensive audits of vendors, contract laboratories and suppliers. If we or any of our vendors, contract laboratories or suppliers is found to be out of compliance with cGMPs or other regulations, we may experience delays or disruptions in manufacturing while we work to remedy the noncompliance, or while we work to identify suitable replacement vendors. If we or our CMOs are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CMOs will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand. Any of these challenges could delay initiation of, or completion of, clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods and have an adverse effect on our business, financial condition, results of operations and growth prospects.
We may not be successful in our efforts to build a pipeline of additional product candidates.
Our business model is centered on applying our AAV gene therapy technology platform and expertise in rare neuromuscular diseases to develop and advance a broad portfolio of gene therapy product candidates across multiple modalities through development into commercialization. We may not be able to identify and develop new product candidates, and even if we are successful in continuing to build our pipeline, the potential product candidates that we identify may not receive regulatory approval. For example, during preclinical or clinical development, they may be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be drugs that will receive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize product candidates based upon our approach, we will not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price.
Our product candidates based on gene therapy technology may cause undesirable and unforeseen side effects or be perceived by the public as unsafe, which could delay or prevent their advancement into clinical trials or regulatory approval, limit the commercial potential or result in significant negative consequences.
There have been several significant adverse side effects in prior clinical trials of gene therapy product candidates, including reported cases of leukemia and death seen in other trials using other vectors. While the newer AAV vectors that we use have been developed to reduce these side effects, AAV gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop. There is also the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material.
Known side effects of treatment with gene therapy products include an immunologic reaction early after administration that could be detrimental to the patient’s health or substantially limit the effectiveness and durability of the treatment, including the development of a T-cell-mediated immunological response, most often seen affecting the liver.  In ASPIRO, our Phase 1/2 clinical trial of AT132, we have seen several adverse events, or AEs, that were deemed to be probably or possibly related to treatment, including elevations of liver enzymes, a signal that a T-cell mediated immune response has likely occurred.  At our May and October 2019 ASPIRO updates, we reported a series of adverse events that were deemed to be serious, or SAEs.  These included troponin I elevations, creatine kinase elevations, myocarditis, ST segment elevation, atrial tachycardia, hyperbilirubinemia, nausea, vomiting and fever.  To date, all of the reported adverse events in ASPIRO have resolved without treatment or been controlled by treatment.  However, if we are unable to clinically manage potential safety events in the future, we may decide or be required to halt or delay further clinical development of our product candidates.

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In addition to side effects caused by a product candidate, the administration process or related procedures also can cause adverse side effects. If any such adverse events occur, our clinical trials could be suspended or terminated. If we are unable to demonstrate that any adverse events were caused by the administration process or related procedures, the FDA, the European Commission, the EMA or other regulatory authorities could order us to cease further development of, or deny approval of, our product candidates for any or all targeted indications. Even if we can demonstrate that all future serious adverse events are not product-related, such occurrences could affect patient recruitment or the ability of enrolled patients to complete the trial. Moreover, if we elect, or are required, to not initiate, delay, suspend or terminate any future clinical trial of any of our product candidates, the commercial prospects of such product candidates may be harmed and our ability to generate product revenues from any of these product candidates may be delayed or eliminated. Any of these occurrences may harm our ability to develop other product candidates, and may harm our business, financial condition and prospects significantly.
Additionally, if any of our product candidates receives marketing approval, the FDA could require us to adopt a REMS to ensure that the benefits of the product outweigh its risks, which may include, among other things, a Medication Guide outlining the risks of the product for distribution to patients and a communication plan to health care practitioners. Furthermore, if we or others later identify undesirable side effects caused by any of our products, several potentially significant negative consequences could result, including:
regulatory authorities may suspend or withdraw approvals of such product;
regulatory authorities may require additional warnings on the labeling of such product;
we may be required to change the way such product is administered or conduct additional clinical trials;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these occurrences may harm our business, financial condition and prospects significantly.
The diseases we seek to treat have low prevalence and it may be difficult to identify patients with these diseases, which may lead to delays in enrollment for our trials or slower commercial revenue if approved.
Genetic diseases generally, and especially those that our product candidates are designed to address, have low rates of incidence and prevalence. For example, we estimate that the incidence of XLMTM is approximately one in 40,000 to one in 50,000 male births, the incidence of Pompe disease is approximately one in 40,000 births, the incidence of DM1 is approximately one in 8,000 births, and the incidence of DMD is approximately one in 3,500 to one in 5,000 male births. In addition, as we pursue increasingly precise forms of genetic medicines, the number of patients we can treat with a single product candidate may be less than the estimated patient population. For example, we estimate that AT702, our lead product candidate in DMD, may be able to treat up to approximately 6% of DMD patients that have genotypes amenable to exon 2 skipping or with mutations in exons 1-5 of the dystrophin gene. To address patients amenable to exon 51 and 53 skipping, we are developing separate product candidates, AT751 and AT753, respectively. In combination, these three product candidates may be able to treat up to approximately 25% of DMD patients, and we would need to develop additional product candidates to treat other mutations utilizing our vectorized exon skipping approach. In total, we estimate that up to 80% of DMD patients may have genotypes amenable to exon skipping approaches. In addition, some of our potential patients may have neutralizing antibodies to the AAV capsid serotypes we employ, which may limit our ability to treat them, or affect the therapeutic efficacy of our product candidates once administered. Working in rare genetic diseases poses unique challenges versus more conventional drug development for primary care markets, including the timely recruitment and enrollment of a sufficient number of eligible patients into clinical trials. Further, because newborn screening for certain of the diseases that our product candidates are designed to address is not widely adopted, and it can be difficult to diagnose these diseases in the absence of a genetic screen, we may have difficulty finding patients who are eligible to participate in our trials. Patient enrollment in clinical trials may be affected by other factors including:
the ability to identify and recruit patients that meet study eligibility and exclusion criteria;
the severity of the disease under investigation;
design of the study protocol;
the perceived risks, benefits and convenience of administration of the product candidate being studied;
our efforts to facilitate timely enrollment in clinical trials;
the patient referral practices of physicians; and
the proximity and availability of clinical trial sites to prospective patients.

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Our inability to enroll a sufficient number of patients for our planned clinical trials would result in significant delays and could require us to not initiate or abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.
Additionally, our projections of the number of patients living with the rare diseases our product candidates are designed to address, as well as the subset of those patients who have the potential to benefit from our product candidates, are based on estimates. The total addressable market opportunity for our product candidates will ultimately depend upon, among other things, the final labeling for each of our product candidates, if our product candidates are approved for sale in our target indications, acceptance by the medical community and patient access, drug pricing and reimbursement. The number of patients globally may turn out to be lower than expected, patients may not be otherwise amenable to treatment with our products, or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business. Our product candidates may potentially be dosed on a one-time basis, which means that patients who enroll in our clinical trials may not be eligible to receive our product candidates on a commercial basis if they are approved, leading to lower revenue potential.
A Regenerative Medicine Advanced Therapy, or RMAT, designation by the FDA, even if granted for any of our product candidates, may not lead to a faster development or regulatory review or approval process and it does not increase the likelihood that our product candidates will receive marketing approval.
Established under the 21st Century Cures Act, the RMAT designation is an expedited program for the advancement and approval of regenerative medicine products where preliminary clinical evidence indicates the potential to address unmet medical needs for life-threatening diseases or conditions. We have received RMAT designation for our AT132 program and plan to seek RMAT designation for our other product candidates if the preliminary clinical data support such designation. Similar to Breakthrough Therapy designation, the RMAT designation allows companies developing regenerative medicine therapies to work more closely and frequently with the FDA, and RMAT-designated products may be eligible for priority review and accelerated approval. In a November 2017 draft guidance document, the FDA stated that gene therapies, including genetically modified cells, that lead to a durable modification of cells or tissues, may meet the definition of a regenerative medicine therapy. For product candidates that have received a RMAT designation, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens.
RMAT designation is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for RMAT designation, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of RMAT designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under non-expedited FDA review procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as RMAT therapies, the FDA may later decide that the product no longer meets the conditions for qualification.
A Fast Track designation by the FDA, or a Priority Medicines, or PRIME, designation by the EMA, even if granted for any of our product candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our product candidates will receive marketing approval.
We have received Fast Track designation for AT132, and in the future, we may seek additional Fast Track designations for other product candidates. The Fast Track designation allows companies developing drugs that treat serious conditions and fill an unmet medical need to work more closely and frequently with the FDA and have their BLAs or New Drug Applications, or NDAs, be submitted to the FDA on a rolling basis. Fast Track-designated products may also be eligible for priority review and accelerated approval. If a drug or biologic, in our case, is intended for the treatment of a serious or life-threatening condition and the biologic demonstrates the potential to address unmet medical needs for this condition, the biologic sponsor may apply for FDA Fast Track designation. The FDA has broad discretion whether to grant this designation. Even if we believe a particular product candidate is eligible for this designation, there can be no assurance that the FDA would decide to grant it. Even if we do receive Fast Track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from our clinical development program. Many biologics that have received Fast Track designation have failed to obtain approval.

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We may also seek accelerated approval for products that have obtained Fast Track designation. Under the FDA’s accelerated approval program, the FDA may approve a biologic for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. For biologics granted accelerated approval, post-marketing confirmatory trials are required to describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. These confirmatory trials must be completed with due diligence and, in some cases, the FDA may require that the trial be designed and/or initiated prior to approval. Moreover, the FDA may withdraw approval of any product candidate or indication approved under the accelerated approval pathway if, for example:
the trial or trials required to verify the predicted clinical benefit of the product candidate fail to verify such benefit or do not demonstrate sufficient clinical benefit to justify the risks associated with the biologic;
other evidence demonstrates that the product candidate is not shown to be safe or effective under the conditions of use;
we fail to conduct any required post-approval trial of the product candidate with due diligence; or
we disseminate false or misleading promotional materials relating to the product candidate.
In addition to the FDA’s Fast Track and RMAT designations, other regulatory authorities may grant their own priority designations, including the Priority Medicines, or PRIME, designation granted by the EMA. We have received PRIME designation for AT132 and in the future, we may seek additional PRIME designations for other product candidates. PRIME designation allows companies that develop drugs that target an unmet medical need to receive early and proactive support from the EMA to optimize the generation of robust data on a drug’s benefits and risks and enable accelerated assessment of a drug’s marketing application. PRIME designation is subject to risks and uncertainties similar to those described above for Fast Track and RMAT designations, and our product candidates which have received PRIME designation may not experience a faster development process, review or approval compared to conventional EMA procedures.
We may be unable to maintain the benefits associated with Orphan Drug designation, including the potential for market exclusivity, for our product candidates, and may be unsuccessful in obtaining Orphan Drug designation or transfer of designations obtained by others for future product candidates.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs, or biologics in our case, intended to treat relatively small patient populations as orphan drugs. Under the U.S. Orphan Drug Act, the FDA may designate a biologic as an orphan drug if it is intended to treat a rare disease or condition, which is defined as a patient population of fewer than 200,000 individuals in the United States. In the United States, Orphan Drug designation entitles a company to financial incentives such as opportunities for grant funding towards clinical trial costs, tax credits for qualified clinical research costs, and prescription drug user fee waivers. Similarly, in the EU, the European Commission grants Orphan Drug designation after receiving the opinion of the EMA’s Committee for Orphan Medicinal Products on an Orphan Drug designation application. In the EU, Orphan Drug designation is intended to promote the development of biologics that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the EU and for which no satisfactory method of diagnosis, prevention or treatment has been authorized (or the product would be a significant benefit to those affected). In the EU, Orphan Drug designation entitles a company to financial incentives such as reduction of fees or fee waivers.
Generally, if a biologic with an Orphan Drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the biologic is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same biologic and indication for that time period, except in limited circumstances. If our competitors are able to obtain orphan drug exclusivity prior to us for products that constitute the same active moiety and treat the same indications as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time. The applicable period is seven years in the United States and ten years in the EU. The EU exclusivity period can be reduced to six years if a drug no longer meets the criteria for Orphan Drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified.
As part of our business strategy, we have sought and received Orphan Drug designation for AT132 in the United States and Europe. Both the FDA and the EMA have granted orphan drug designation to a prototype version of AT845, which we plan to update to reflect the final construct we intend to advance into clinical trials. However, Orphan Drug designation does not guarantee future orphan drug marketing exclusivity.

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Additionally, even if we obtain orphan drug exclusivity for our product candidates, that exclusivity may not provide effective protection from competition because drugs with different active moieties can be approved for the same condition. Even after an orphan drug is approved, the FDA can also subsequently approve a later application for the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer in a substantial portion of the target populations, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to manufacture sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Orphan Drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.
A Rare Pediatric Disease designation by the FDA does not guarantee that the NDA or BLA for the product will qualify for a priority review voucher upon approval, and it does not lead to a faster development or regulatory review process, or increase the likelihood that any of our product candidates will receive marketing approval.
Under the Rare Pediatric Disease Priority Review Voucher program, upon the approval of a qualifying BLA or NDA, for the treatment of a rare pediatric disease, the sponsor of such an application would be eligible for a rare pediatric disease priority review voucher that can be used to obtain priority review for a subsequent BLA or NDA. In July 2017, the FDA notified us that we obtained a Rare Pediatric Disease designation for AT132 for the treatment of XLMTM. If a product candidate is designated before October 1, 2020, as is the case with AT132, it is eligible to receive a voucher if it is approved before October 1, 2022. However, there is no guarantee that any of our product candidates will be approved by that date, or at all, and, therefore, we may not be in a position to obtain priority review vouchers prior to expiration of the program, unless Congress further reauthorizes the program. Additionally, designation of a drug for a rare pediatric disease does not guarantee that a BLA will meet the eligibility criteria for a rare pediatric disease priority review voucher at the time the application is approved. Finally, a Rare Pediatric Disease designation does not lead to faster development or regulatory review of the product, or increase the likelihood that it will receive marketing approval.
We rely on third parties to conduct our preclinical studies and clinical trials, and rely on them to perform other tasks for us. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
Although we have recruited a team that has experience with clinical trials, as a company we have limited experience in conducting clinical trials. Moreover, we do not have the ability to independently conduct preclinical studies and clinical trials, and we have relied upon, and plan to continue to rely upon medical institutions, clinical investigators, contract laboratories and other third parties, or our CROs, to conduct preclinical studies and clinical trials for our product candidates. We expect to rely heavily on these parties for execution of preclinical studies and clinical trials for our product candidates and control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards and our reliance on CROs will not relieve us of our regulatory responsibilities. For any violations of laws and regulations during the conduct of our preclinical studies and clinical trials, we could be subject to warning letters or enforcement action that may include civil penalties up to and including criminal prosecution.
We and our CROs will be required to comply with regulations, including GCPs for conducting, monitoring, recording and reporting the results of preclinical studies and clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial patients are adequately informed of the potential risks of participating in clinical trials and their rights are protected. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any drugs in clinical development. The FDA enforces GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. There can be no assurance that, upon inspection, the FDA will determine that any of our future clinical trials will comply with GCPs. In addition, our clinical trials must be conducted with product candidates produced in accordance with the requirements of cGMP regulations. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action.

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