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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 
FORM 10-Q
 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
OR
 
o
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: 001-36819 

 
Spark Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
46-2654405
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
3737 Market Street
Suite 1300
Philadelphia, PA
 
19104
(Address of Principal Executive Offices)
 
(Zip Code)

(888) 772-7560
(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨



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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  x
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
ONCE
 
Nasdaq Global Select Market


As of May 2, 2019 there were 38,413,263 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.
 


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TABLE OF CONTENTS

 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 6.
 
 
SIGNATURES
 
 
 



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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement that we entered into with Roche Holdings, Inc., or Roche, and its wholly owned acquisition subsidiary on February 22, 2019, pursuant to which we expect to become a wholly owned subsidiary of Roche;
the failure to satisfy required closing conditions under the merger agreement, including, but not limited to, the tender of a minimum number of our outstanding shares of common stock in the related tender offer and the receipt of required regulatory approvals, or the failure to complete the merger in a timely manner;
risks related to disruption of management’s attention from our ongoing business operations due to the pendency of the transaction with Roche;
the effect of the announcement of the transaction with Roche on our operating results and business generally, including, but not limited to, our ability to retain and hire key personnel and maintain our relationships with customers, strategic partners, suppliers, regulatory authorities and others with whom we do business;
the impact of the pending transaction with Roche on our strategic plans and operations and our ability to respond effectively to competitive pressures, industry developments and future opportunities;
the outcome of any legal proceedings that may be instituted against us and others relating to the merger agreement with Roche;
our expectations regarding our commercial launch of LUXTURNA® (voretigene neparvovec-rzyl) and our plans to develop and commercialize our other product candidates;
our estimates regarding the potential market opportunity for LUXTURNA and our product candidates;
our ability to maintain our current, and enter into additional, agreements involving outcomes-based rebates and innovative contracting models with payers for LUXTURNA or any future products;
the timing, progress and results of clinical trials for SPK-7001SPK-9001, SPK-8011, SPK-8016 and our other product candidates, including statements regarding the timing of initiation and completion of clinical trials, dosing of subjects and the period during which the results of the trials will become available;
the initiation, timing, progress and results of future preclinical studies and clinical trials, and our research and development programs for our other product candidates;
our ability to achieve milestones and receive payments under our collaborations;
our commercialization, medical affairs, marketing and manufacturing capabilities and strategy;
the implementation of our business model, strategic plans for our business, product candidates and technology;
the scalability and commercial viability of our proprietary manufacturing processes;
our expectations about the rate and degree of market acceptance and clinical utility of LUXTURNA and our product candidates, in particular, and gene therapy in general;
our competitive position;
our intellectual property position;
developments and projections relating to our competitors and our industry;
our ability to maintain and establish collaborations or obtain additional funding;
our expectations related to the use of our capital resources;


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our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and
the impact of government laws and regulations.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make and do not assume the consummation of our proposed transaction with Roche unless specifically stated otherwise.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Spark Therapeutics, Inc.
Consolidated balance sheets (unaudited)
(in thousands, except share and per share data)

December 31,
2018

March 31,
2019
Assets



Current assets:



Cash and cash equivalents
$
95,247


$
76,317

Marketable securities
358,359

 
342,467

Trade and other receivables
47,385


20,468

Inventory
25,637

 
30,093

Prepaid expenses and other current assets
40,512


44,098

Total current assets
567,140

 
513,443

Restricted cash
53,000

 
53,000

Marketable securities
94,678

 
90,168

Property and equipment, net
95,998


62,711

Right of use asset

 
30,981

Goodwill
1,198

 
1,174

Other assets
2,338


4,031

Total assets
$
814,352

 
$
755,508

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable
$
19,492


$
15,128

Accrued expenses
34,790


34,853

Current portion of long-term debt
4,822

 
6,325

Current portion of deferred rent
1,365

 

Current portion of deferred revenue


22,120

Current portion of lease liability

 
6,009

Current other liabilities
1,885

 
2,002

Total current liabilities
62,354

 
86,437

Long-term debt
46,090

 
44,507

Long-term deferred rent
10,885



Long-term deferred revenue
160,000

 
132,719

Long-term lease liability

 
36,957

Other liabilities
38,510

 
3,860

Total liabilities
317,839

 
304,480

Stockholders’ equity:



Preferred stock, $0.001 par value. Authorized, 5,000,000 shares; no shares issued or outstanding



Common stock, $0.001 par value. Authorized, 150,000,000 shares; 37,764,213 shares issued and 37,686,301 shares outstanding as of December 31, 2018; 38,737,869 shares issued and 38,340,196 shares outstanding as of March 31, 2019
38


39

Additional paid-in capital
1,091,873


1,133,250

Accumulated other comprehensive loss
(1,050
)
 
(524
)
Treasury stock, at cost, 77,912 shares as of December 31, 2018 and 397,673 shares as of March 31, 2019
(4,661
)
 
(37,385
)
Accumulated deficit
(589,687
)

(644,352
)
Total stockholders’ equity
496,513

 
451,028

Total liabilities and stockholders’ equity
$
814,352

 
$
755,508

See accompanying notes to the unaudited consolidated financial statements.


2


Spark Therapeutics, Inc.
Consolidated statements of operations and comprehensive income (loss)
(unaudited)
(in thousands, except share and per share data)
 
Three months ended March 31,
 
2018
 
2019
Revenues:
 
 
 
Product sales, net
$
2,419

 
$
9,782

Contract revenue
13,257

 
10,989

Total revenues
15,676

 
20,771

Operating expenses:
 
 
 
Cost of product sales
121

 
745

Cost of contract revenue
869

 
2,750

Research and development
30,109

 
35,831

Selling, general and administrative
33,489

 
38,291

Total operating expenses
64,588

 
77,617

Loss from operations
(48,912
)
 
(56,846
)
Unrealized gain (loss) on equity investments
364

 
(211
)
Interest income, net
2,185

 
2,702

Loss before income taxes
(46,363
)
 
(54,355
)
Income tax expense
(10
)
 
(3
)
Net loss
$
(46,373
)
 
$
(54,358
)
Basic and diluted net loss per common share
$
(1.25
)
 
$
(1.43
)
Weighted average basic and diluted common shares outstanding
37,046,235

 
37,906,944

 
 
 
 
Net loss
$
(46,373
)
 
$
(54,358
)
Other comprehensive income (loss):
 
 
 
Unrealized (loss) gain on available-for-sale securities
(164
)
 
854

Unrealized loss on interest rate swap

 
(373
)
Foreign exchange translation adjustment
21

 
45

Total comprehensive loss
$
(46,516
)
 
$
(53,832
)

See accompanying notes to the unaudited consolidated financial statements.


3

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Spark Therapeutics, Inc.
Consolidated statement of stockholders’ equity (unaudited)
For the three months ended March 31, 2019
(in thousands, except share data)

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive loss
 
Common stock in treasury
 
Accumulated
deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
37,764,213

 
$
38

 
$
1,091,873

 
$
(1,050
)
 
77,912

 
$
(4,661
)
 
$
(589,687
)
 
$
496,513

Adjustment related to removal of built-to-suit asset and liability balances
 

 

 

 

 

 

 
(307
)
 
(307
)
Issuance of restricted stock
 
172,461

 

 

 

 

 

 

 

Purchase of common stock in treasury
 

 

 

 

 
58,425

 
(3,107
)
 

 
(3,107
)
Purchase of common stock under ESPP
 
15,829

 

 
563

 

 

 

 

 
563

Exercise of stock options
 
785,366

 
1

 
29,016

 

 
261,336

 
(29,617
)
 

 
(600
)
Unrealized gain on investments
 

 

 

 
854

 

 

 

 
854

Unrealized loss on interest rate swap
 

 

 

 
(373
)
 

 

 

 
(373
)
Unrealized gain on foreign currency translation
 

 

 

 
45

 

 

 

 
45

Stock-based compensation expense
 

 

 
11,798

 

 

 

 

 
11,798

Net loss
 

 

 

 

 

 

 
(54,358
)
 
(54,358
)
Balance, March 31, 2019
 
38,737,869

 
$
39

 
$
1,133,250

 
$
(524
)
 
397,673

 
$
(37,385
)
 
$
(644,352
)
 
$
451,028


See accompanying notes to the unaudited consolidated financial statements.


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Spark Therapeutics, Inc.
Consolidated statement of stockholders’ equity (unaudited)
For the three months ended March 31, 2018
(in thousands, except share data)

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive loss
 
Common stock in treasury
 
Accumulated
deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
37,131,626

 
$
37

 
$
1,026,590

 
$
(5,914
)
 
20,222

 
$
(1,226
)
 
$
(505,863
)
 
$
513,624

Reclassification of unrealized loss on equity investment to accumulated deficit
 

 

 

 
5,002

 

 

 
(5,002
)
 

Issuance of restricted stock
 
90,668

 

 

 

 

 

 

 

Purchase of common stock in treasury
 

 

 

 

 
32,918

 
(1,756
)
 

 
(1,756
)
Purchase of common stock under ESPP
 
13,463

 

 
762

 

 

 

 

 
762

Exercise of stock options
 
40,034

 

 
1,332

 

 

 

 

 
1,332

Unrealized loss on investments
 

 

 

 
(164
)
 

 

 

 
(164
)
Unrealized gain on foreign currency translation
 

 

 

 
21

 

 

 

 
21

Stock-based compensation expense
 

 

 
12,223

 

 

 

 

 
12,223

Net loss
 

 

 

 

 

 

 
(46,373
)
 
(46,373
)
Balance, March 31, 2018
 
37,275,791

 
$
37

 
$
1,040,907

 
$
(1,055
)
 
53,140

 
$
(2,982
)
 
$
(557,238
)
 
$
479,669


See accompanying notes to the unaudited consolidated financial statements.



5


Spark Therapeutics, Inc.
Consolidated statements of cash flows (unaudited)
(in thousands)
 
Three months ended March 31,
 
2018
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(46,373
)
 
$
(54,358
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Non-cash income
(75
)
 
(785
)
Depreciation and amortization expense
1,507

 
2,432

Loss on disposal of property and equipment
59

 

Stock-based compensation expense
12,223

 
11,798

Unrealized (gain) loss on equity investments
(364
)
 
211

Non-cash interest (income) expense
(597
)
 
95

Changes in operating assets and liabilities:
 
 
 
Inventory
(5,560
)
 
(4,457
)
Prepaid expenses and other assets
(1,527
)
 
(5,334
)
Trade and other receivables
(13,282
)
 
26,925

Accounts payable and accrued expenses
(8,382
)
 
(3,841
)
Deferred revenue
115,743

 
(5,161
)
Other liabilities
(371
)
 
376

Net cash provided by (used in) operating activities
53,001

 
(32,099
)
Cash flows from investing activities:
 
 
 
Payment for license agreement
(2,000
)
 

Purchases of marketable securities
(110,882
)
 
(75,343
)
Proceeds from maturities of marketable securities
94,673

 
96,016

Purchases of property and equipment
(4,141
)
 
(4,288
)
Net cash (used in) provided by investing activities
(22,350
)
 
16,385

Cash flows from financing activities:
 
 
 
Proceeds from exercise of options
1,332

 
11,607

Purchase of treasury stock
(1,756
)
 
(15,314
)
Proceeds from issuance of common stock under ESPP
762

 
563

Payments on long-term debt
(77
)
 
(80
)
Net cash provided by (used in) financing activities
261

 
(3,224
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
27

 
8

Net increase (decrease) in cash and cash equivalents and restricted cash
30,939

 
(18,930
)
Cash and cash equivalents and restricted cash, beginning of period
96,748

 
148,247

Cash and cash equivalents and restricted cash, end of period
$
127,687

 
$
129,317

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Property and equipment purchases included in accounts payable and accrued expenses
$
1,280

 
$
9,069

One Drexel Plaza lease cost included in other liabilities
$
363

 
$


See accompanying notes to the unaudited consolidated financial statements.


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Spark Therapeutics, Inc.
Notes to consolidated financial statements
(unaudited)

(1) The Company
Spark Therapeutics, Inc. was formed on March 13, 2013, in the state of Delaware as AAVenue Therapeutics, LLC and amended its Certificate of Formation in October 2013 to change its name to Spark Therapeutics LLC. In May 2014, it converted from a limited liability company (LLC) to a C corporation, Spark Therapeutics, Inc. (the Company). The Company is a gene therapy company, seeking to transform the lives of patients suffering from debilitating genetic diseases by developing potentially one-time, life-altering treatments. The Company operates in one segment and has its principal offices in Philadelphia, Pennsylvania.

On February 22, 2019, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Roche Holdings, Inc. (Roche) and 022019 Merger Subsidiary, Inc. (Merger Sub). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Merger Sub has commenced a cash tender offer (the Tender Offer) to acquire all of the issued and outstanding shares of the Company's common stock at a price per share of $114.50, net to the seller of such shares in cash, without interest, subject to any withholding of taxes required by applicable law. The completion of the Tender Offer is conditioned on at least a majority of the shares of the Company's outstanding common stock having been validly tendered into and not withdrawn from the offer, receipt of certain regulatory approvals, and other customary conditions. Following the completion of the Tender Offer, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Roche. The merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the merger. In the merger, each outstanding share of the Company's common stock (other than shares of common stock held by the Company as treasury stock, or owned by Roche or Merger Sub or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $114.50 per share in cash, without interest, subject to any withholding of taxes required by applicable law. The transaction is expected to close in the second quarter of 2019.
 
(2) Development-stage risks
The Company has incurred net losses since inception and expects to incur net losses for the foreseeable future. The Company had an accumulated deficit of $644.4 million as of March 31, 2019. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of LUXTURNA and its other product candidates in development. Additional financing may be needed by the Company to fund its operations and to commercially develop its other product candidates.
The Company’s future operations are highly dependent on a combination of factors, including: (i) the success of its research and development; (ii) regulatory approval of the Company’s proposed future products; (iii) the continued success of the commercialization of LUXTURNA; (iv) the timely and successful completion of additional financing; and (v) the development of competitive therapies by other biotechnology and pharmaceutical companies.

(3) Summary of significant accounting policies
(a) Basis of presentation
The accompanying unaudited interim consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of March 31, 2019, its results of operations for the three months ended March 31, 2018 and 2019, its stockholders' equity for the three months ended March 31, 2018 and 2019, and cash flows for the three months ended March 31, 2018 and 2019. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period. The interim consolidated financial statements presented herein do not contain the required disclosures under U.S. GAAP for annual consolidated financial statements.
The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.


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(b) Use of estimates
The preparation of consolidated 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

(c ) Trade and other receivables
Trade accounts receivable are recorded at gross value, and reserves for other sales-related allowances, such as discounts, rebates, services and insurance co-pay assistance, are included in accrued expenses on the Company's consolidated balance sheets.

(d ) Inventory
Inventory is stated at the lower of cost or net realizable value and consists of those costs realized following the U.S. Food and Drug Administration (FDA) approval of LUXTURNA. Cost is determined using the first-expired, first-out (FEFO) method. The Company reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand compared to forecasts of future sales. Based on management's assessment, no such inventory reserve is necessary as of December 31, 2018 or March 31, 2019.
Inventory consisted of the following (in thousands):
 
December 31,
2018
 
March 31,
2019
Raw materials
$
3,843

 
$
5,583

Work in process
19,843

 
22,881

Finished goods
1,951

 
1,629

 
$
25,637

 
$
30,093


(e) Fair value of financial instruments
Management believes that the carrying amounts of the Company’s financial instruments, including cash equivalents, trade and other receivables, accounts payable and accrued expenses, approximate fair value due to the short-term nature of those instruments. Management believes the carrying value of debt approximates fair value as the interest rates are reflective of the rate the Company could obtain on debt with similar terms and conditions.

(f) Net product sales
LUXTURNA is distributed in the United States through two distribution models: (1) the traditional buy-and-bill model where the treatment center purchases and pays for the product and then submits a claim to the payer; and (2) the Company's innovative contracting and distribution model, branded Spark PATH (Pioneering Access to Healthcare), which includes options for direct-to-payer contracting and outcomes-based rebates.
The Company’s net product sales represent total gross product sales in the United States less allowances for estimated prompt-payment discounts, service fees, rebates and insurance co-payment assistance. Allowances are established based on contractual terms and management’s reasonable estimates, as well as the expectation that 100% of the prompt-payment discounts will be earned. Product shipping and handling costs and distributor reporting fees are included in cost of product sales. The Company evaluated the variable consideration under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), as it relates to the outcomes-based method and determined that based on historical clinical data, no rebate reserves were required for the three months ended March 31, 2018 and 2019. All sales are recognized when control is transferred, which follows the Company’s verification of a scheduled LUXTURNA treatment.
The Company’s product return policy is to provide non-monetary credit or product replacement. As the product is sold in direct relation to a scheduled treatment, Company management estimates that there is minimal risk of product return, including the risk of product expiration.


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(g) Contract revenue
Under certain of the Company’s licensing, supply and collaboration agreements, it is entitled to receive payment upon the achievement of contingent milestone events or the performance of obligations. The Company recognizes revenue based on guidance in ASC 606.
ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue on the Company’s consolidated balance sheet. Amounts expected to be recognized as revenue in the next 12 months following the balance sheet date are classified as current liabilities.

(h) Net loss per common share
Basic and diluted net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. For all periods presented, unvested restricted shares and common stock options have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted average shares outstanding used to calculate both basic and diluted loss per share are the same.
The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of March 31, 2018 and 2019 as they would be anti-dilutive:
 
March 31,
 
2018
 
2019
Unvested restricted common shares
1,108,190

 
1,276,867

Stock options issued and outstanding
4,057,480

 
3,487,025


(i) Other comprehensive loss
The Company follows the provisions of ASC 220, Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income (loss) is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income (loss) includes gains and losses related to changes in the fair value of available-for-sale securities, changes in fair value of an interest rate swap and foreign currency translation.
The accumulated balances related to each component of other comprehensive income (loss) are summarized as follows (in thousands):
 
Net unrealized (loss) gain on available-for-sale securities
 
Unrealized loss on interest rate swap
 
Foreign currency translation adjustments
 
Accumulated other comprehensive loss
Balance as of December 31, 2018
$
(376
)
 
$
(641
)
 
$
(33
)
 
$
(1,050
)
Current period other comprehensive income (loss)
854

 
(373
)
 
45

 
526

Balance as of March 31, 2019
$
478

 
$
(1,014
)
 
$
12

 
$
(524
)




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(j) Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. Lessees are also required to record a right-of-use (ROU) asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. The Company adopted this standard on January 1, 2019, the effective date, using the effective date method using a modified retrospective transition approach and elected to apply the package of practical expediants. The adoption of the standard had a material impact on the consolidated balance sheet, which resulted in the derecognition of the Company’s built to suit asset of $34.8 million and corresponding liability of $34.5 million, and an adjustment to beginning accumulated deficit of $0.3 million in the first quarter of 2019. Upon adoption, the Company also recognized ROU assets and lease liabilities of $31.7 million and $43.9 million, respectively, as of January 1, 2019.

(4) Marketable securities
The following table summarizes the available-for-sale securities held at December 31, 2018 and March 31, 2019 (in thousands):
Description
 
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
December 31, 2018
 
 
 
 
 
 
 
 
     U.S. government agency
 
$
223,553

 
$
54

 
$
(123
)
 
$
223,484

     Corporate securities
 
$
239,940

 
$
34

 
$
(10,421
)
 
$
229,553

March 31, 2019
 
 
 
 
 
 
 
 
     U.S. government agency
 
$
236,863

 
$
278

 
$
(11
)
 
$
237,130

     Corporate securities
 
$
205,584

 
$
246

 
$
(10,325
)
 
$
195,505

No available-for-sale securities held as of March 31, 2019 had remaining maturities greater than two years.

(5) Fair value of financial instruments
The Company follows FASB accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements to maximize the use of “observable inputs.” The three-level hierarchy of inputs to measure fair value are as follows: 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity)
The Company has classified assets and liabilities measured at fair value on a recurring basis as follows (in thousands):


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Fair value measurements at reporting
date using
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
At December 31, 2018:
 
 
 
 
 
Assets:
 
 
 
 
 
Money market funds (included in cash and cash equivalents)
$
94,216

 

 

Certificates of deposit - restricted cash
$
53,000

 

 

Marketable securities - U.S. government agencies
$
223,484

 

 

Marketable securities - corporate securities
$
229,553

 

 

Liabilities:
 
 
 
 
 
Interest rate swap

 
$
641

 

At March 31, 2019:
 
 
 
 
 
Assets:
 
 
 
 
 
Money market funds (included in cash and cash equivalents)
$
70,809

 

 

Certificates of deposit - restricted cash
$
53,000

 

 

Marketable securities - U.S. government agencies
$
237,130

 

 

Marketable securities - corporate securities
$
195,505

 

 

Liabilities:
 
 
 
 
 
Interest rate swap

 
$
1,015

 


(a) Cash and cash equivalents
The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. Cash equivalents as of March 31, 2019 consisted of money market funds.

(b) Marketable securities
The Company classifies its marketable security investments as available-for-sale securities and the securities are stated at fair value. There were no material realized gains or losses recognized on the maturity of available-for-sale securities during the quarter ended March 31, 2019 and, as a result, the Company did not reclassify any amount out of accumulated other comprehensive loss for the same period. In addition, as part of the license and stock purchase agreements entered into with Selecta Biosciences, Inc. (Selecta) (note 12), the Company purchased restricted common shares of Selecta. The investment is classified as available-for-sale and is stated at fair value, and changes in fair value are recognized in the consolidated statements of operations and comprehensive income (loss).

(6) Accrued expenses
Accrued expenses consist of the following (in thousands):
 
December 31,
2018

March 31,
2019
Compensation and benefits
$
15,575

 
$
12,257

Consulting and professional fees
11,499

 
11,271

Commercial costs
2,405

 
3,336

Research and development
2,706

 
2,353

Other
2,605

 
5,636

 
$
34,790

 
$
34,853



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(7) Debt
The Company's debt consists of the following (in thousands):
 
December 31,
2018
 
March 31,
2019
Term loan outstanding
$
50,000

 
$
50,000

MELF loan outstanding
912

 
832

Less: current portion of long-term debt
(4,822
)
 
(6,325
)
Total long-term debt due after one year
$
46,090

 
$
44,507


In July 2018, the Company entered into a credit agreement with Wells Fargo Bank, National Association (Wells Fargo) as lender (the Credit Agreement), pursuant to which Wells Fargo extended a $50.0 million term loan to the Company, which bears interest at one-month LIBOR plus 0.65%, which rate is converted to a fixed rate per annum of 3.463% under the swap agreement discussed below. The term loan was fully drawn on the date of the Credit Agreement and matures on July 3, 2023 (Maturity Date). Through June 2019, the Company will only be obligated to make monthly interest payments with respect to the term loan. Thereafter, the term loan will amortize in equal monthly installments through the maturity date. For the three months ended March 31, 2019, the Company recorded interest expense of $0.4 million related to the Credit Agreement.

In order to manage the interest risk associated with the term loan, the Company entered into an interest rate swap with Wells Fargo on an initial notional amount of $50.0 million. Under this interest rate swap agreement, which expires on July 3, 2023, the Company receives a floating rate based on 1-month LIBOR plus 0.65% and pays a fixed rate of 3.463%. The Company designated this interest rate swap as a cash flow hedge of the forecasted interest payments related to the debt issuance. To maintain this rate, the Company entered into a cash collateral agreement with Wells Fargo that requires the Company to maintain a restricted cash balance equal to at least the principal balance of the term loan.

At March 31, 2019, the fair value of the derivative liability was $1.0 million, of which $0.2 million was recognized within other current liabilities and $0.8 million was recognized within other long-term liabilities. The effective portion of the swap is reported as a component of accumulated other comprehensive loss. There was no hedge ineffectiveness as of March 31, 2019. Changes in the fair value are reclassified from accumulated other comprehensive loss into operations in the same period that the hedged item affects earnings. During the three months ended March 31, 2019, the Company reclassified $38 thousand from accumulated other comprehensive loss into interest expense related to the effective portion of the swap. Over the next 12 months, $0.4 million of the effective portion of the interest rate swap is expected to be reclassified from accumulated other comprehensive loss into interest expense. If, at any time, the interest rate swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the statement of operations and comprehensive income (loss) for the applicable period.

In August 2016, the Company executed an agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other assets purchased (MELF loan) in the amount of $1.6 million. Borrowings under the MELF loan are secured by equipment, as defined in the loan agreement. Under the terms of the MELF loan, the Company has a five-year period of monthly payments of $29 thousand of principal and interest at an annual interest rate of 3.25%. For the three months ended March 31, 2018 and 2019, the Company recorded interest expense of $9 thousand and $7 thousand, respectively, related to the MELF loan.

(8) Stock incentive plans
The Company's 2015 Stock Incentive Plan (the 2015 Plan) provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors. In January 2019, the number of shares of common stock authorized for issuance under the 2015 Plan automatically increased, pursuant to the terms of the 2015 Plan, by 1,510,533 shares. As of March 31, 2019, 1,959,667 shares were available for future grants under the 2015 Plan.
In January 2019, the number of shares of common stock authorized for issuance under the 2015 Employee Stock Purchase Plan (the 2015 ESPP) automatically increased, pursuant to the terms of the 2015 ESPP, by 377,633 shares. The 2015 ESPP provides participating employees with the opportunity to purchase an aggregate of 1,481,992 shares of common stock. For the three months ended March 31, 2019, 15,829 shares were issued under the 2015 ESPP.
Stock-based compensation expense


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Stock-based compensation expense by award type was as follows (in thousands):
 
 
Three months ended March 31,
 
 
2018
 
2019
Stock options
 
$
8,025

 
$
6,459

Restricted stock
 
4,053

 
5,032

Employee stock purchase plan
 
145

 
307

 
 
$
12,223

 
$
11,798

Of the $11.8 million of stock-based compensation expense incurred during the first quarter of 2019, $4.5 million is classified as research and development expense and $7.3 million is classified as selling, general and administrative expense in the consolidated statements of operations and comprehensive income (loss). Of the $12.2 million of stock-based compensation expense incurred during the first quarter of 2018, $5.5 million is classified as research and development expense and $6.7 million is classified as selling, general and administrative expense in the consolidated statements of operations and comprehensive income (loss).
Stock options
The following table summarizes stock option activity:
 
Number
of options
 
Weighted-
average
exercise
price
Outstanding at December 31, 2018
3,487,376

 
$
42.40

Granted
847,500

 
$
43.62

Exercised
(785,366
)
 
$
36.95

Forfeited
(62,485
)
 
$
50.09

Outstanding at March 31, 2019
3,487,025

 
$
43.79

Vested at March 31, 2019
1,520,104

 
$
38.40

During the three months ended March 31, 2019, the Company withheld 153,605 shares to satisfy the exercise price of options exercised and 107,731 shares to satisfy minimum tax withholding obligations, which have been reflected as the acquisition of treasury shares.
Restricted stock
The following table summarizes restricted common stock activity:
 
Number
of shares
 
Weighted-
average
grant date
fair value
Nonvested shares at December 31, 2018
942,776

 
$
58.71

Shares granted
539,000

 
$
46.68

Shares vested
(173,711
)
 
$
54.29

Shares canceled
(31,198
)
 
$
55.86

Nonvested shares at March 31, 2019
1,276,867

 
$
54.30




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(9) Related-party transactions
As of December 31, 2018, and March 31, 2019, Children's Hospital of Philadelphia (CHOP) was considered a significant equity holder. In October 2013, the Company entered into technology and license agreements with CHOP for certain commercialization licenses to be provided to the Company in order to develop services, methods and marketable products for commercialization. The license agreement requires the Company to reimburse CHOP for the patent costs related to the underlying licensed rights incurred after the effective date. For the three months ended March 31, 2018 and 2019, the Company recorded $0.3 million and $0.2 million, respectively, of selling, general and administrative expense related to the reimbursement of such patent costs in the accompanying consolidated statements of operations and comprehensive income (loss).
In 2013, the Company entered into a number of services agreements with CHOP. The Master Research Services Agreement provides for certain research, development and manufacturing services to be provided to the Company by CHOP. A separate Services Agreement provides for clinical, technical and administrative services to be provided by CHOP to the Company. For the three months ended March 31, 2018 and 2019, the Company recorded $1.7 million and $0.2 million, respectively, as research and development expense.
As of December 31, 2018, $0.7 million and $0.5 million were recorded in accrued expenses and accounts payable, respectively, as amounts due to CHOP. As of March 31, 2019, $0.4 million and $1.2 million were recorded in accrued expenses and accounts payable, respectively, as amounts due to CHOP.

(10) Leases
The Company has operating leases for its corporate headquarters and research facilities in Philadelphia, Pennsylvania and leases for supplemental office facilities and certain equipment with original lease terms ranging from one to fifteen years, some of which include options to extend. These options to extend were not recognized as part of the Company's measurement of the ROU asset and operating lease liability. As of March 31, 2019, the weighted average remaining lease term of the Company’s operating leases was 11.43 years.
As of March 31, 2019, the Company has ROU assets of $31.0 million and current and noncurrent operating lease liabilities of $6.0 million and $37.0 million, respectively. These lease liabilities are based on the present value of the remaining minimum lease payments related to the Company’s operating leases as of March 31, 2019, discounted using the Company’s estimated incremental borrowing rate commensurate with the corresponding lease terms. As of March 31, 2019, the weighted average discount rate used to present value the Company’s operating lease liabilities was 5.45%.
Rent expense related to the Company’s operating leases was $1.1 million and $0.9 million for the three months ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019, the Company paid cash of $1.5 million related to its operating leases.
Future minimum rental payments under these leases as of March 31, 2019 are as follows (in thousands):
Year ending December 31,
 
 
2019
 
$
4,584

2020
 
5,815

2021
 
5,167

2022
 
5,121

2023
 
5,255

2024 and thereafter
 
32,437

Total
 
58,379

 
 
 
Less: imputed interest
 
(15,413
)
Current and long-term operating lease liability
 
$
42,966


The above table excludes $61.0 million of legally binding minimum lease payments for leases executed but not yet commenced as of March 31, 2019.



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Future minimum rental payments under our leases prior to adoption of ASC 842, Leases, as of December 31, 2018 were as follows (in thousands):
Year ending December 31,
 
 
2019
 
$
8,102

2020
 
11,044

2021
 
10,073

2022
 
10,156

2023
 
9,228

2024 and thereafter
 
78,079

Total
 
126,682


In 2017, the Company exited office space prior to the end of the lease term and recognized a contract termination liability. As of March 31, 2019, $3.0 million is recorded as long-term other liabilities and $1.8 million is recorded as current other liabilities on the accompanying consolidated balance sheet related to the termination expense.
The following table reconciles the termination cost discussed above (in thousands):
 
Balance as of December 31, 2018
 
Recognized during the three months ended March 31, 2019
 
Balance as of March 31, 2019
Contract termination liability
$5,270
 
$423
 
$4,847

(11) Commitments and contingencies
In August 2018, the Company entered into a Dedicated Manufacturing and Commercial Supply Agreement (the Brammer Agreement) with Brammer Bio MA, LLC (Brammer), pursuant to which Brammer has agreed to manufacture and supply certain products for the Company for clinical trial and commercial purposes. The term of the agreement continues until March 2026 and shall automatically renew for successive three (3) year terms unless the Company notifies Brammer of its intention not to renew no less than two (2) years prior to the expiration of the original term. During the term of the agreement, the Company will have access to a dedicated, specified portion of the manufacturing capacity in Brammer’s manufacturing facility located in Cambridge, Massachusetts, as well as non-dedicated capacity at Brammer’s facilities for manufacturing and other supply-related activities. Under the Brammer Agreement, the Company made an upfront payment of $4.0 million to Brammer upon execution of the agreement, which is included as a prepaid asset on the consolidated balance sheet and will be credited towards future capacity access amounts owed under the Brammer Agreement. The Company is obligated to pay yearly capacity access fees and is required to purchase a minimum dollar amount of manufactured batches per year.

(12) Collaboration and license agreements
(a) Novartis

In January 2018, the Company entered into a licensing and commercialization agreement (Novartis License Agreement) with Novartis Pharma AG (Novartis) to develop and commercialize voretigene neparvovec (also known as LUXTURNA) outside the United States. Under the terms of the Novartis License Agreement, the Company has granted Novartis an exclusive right and license, with the right to grant certain sublicenses, under the Company’s intellectual property reasonably necessary or useful for the development or commercialization of LUXTURNA for the treatment, prevention, cure or control of RPE65-mediated inherited retinal disease, or IRD, in humans outside the United States. Under the terms of the Novartis License Agreement, the Company received a non-refundable, one-time payment of $105.0 million in the first quarter of 2018, earned a $25.0 million milestone in the fourth quarter of 2018, and is eligible to receive up to an additional $40.0 million in milestone payments. The Company also is entitled to receive royalty payments at a percentage of net sales on a royalty-region by royalty-region basis, subject to reduction and extension in certain circumstances.
In conjunction with the Novartis License Agreement, the Company and Novartis also entered into a Supply Agreement, under which the Company has agreed to supply all of the commercial supply of voretigene neparvovec required by Novartis, subject to certain conditions. The Supply Agreement continues until the expiration or early termination of the Novartis License Agreement. In addition, either party may terminate the Supply Agreement upon the other party’s uncured material breach of the Supply Agreement, insolvency or bankruptcy. The Company evaluated whether or not the performance obligations granted under the License and Supply Agreements were distinct and concluded that they were not distinct as Novartis could not benefit from the Novartis License Agreement without the services under the Supply Agreement. As such, the performance obligations granted under the Novartis License Agreement and Supply Agreement are combined to constitute a single performance obligation and the Company accounts for them as a single contract.
During the fourth quarter of 2018, and in conjunction with the European Commission granting marketing authorization for LUXTURNA, the Company earned an additional $25.0 million milestone payment and recorded an additional $30.0 million of variable consideration that was no longer constrained which, along with the $105.0 million upfront payment, is included as deferred revenue on the accompanying consolidated balance sheet as of December 31, 2018. The Company allocated $160.0 million in license fees and milestone payments that were not constrained to the single performance obligation in the combined contracts. The Company will recognize the $160.0 million and variable amounts under the Supply Agreement over time using an outputs method based on vials supplied to Novartis. As of March 31, 2019, the remaining $10.0 million in milestone payments under the Novartis License Agreement remains constrained, due to additional regulatory approvals, and will not begin to be recognized until such amount becomes unconstrained.
As of March 31, 2019, the Company recognized $11.0 million of contract revenue related to the $160.0 million and other variable amounts under the Supply Agreement. As of March 31, 2019, there was $22.1 million of current deferred revenue and $132.7 million of long-term deferred revenue on the consolidated balance sheet related to the Novartis License Agreement.
In determining the transaction price, the Company analyzed the variable consideration and whether or not such variable consideration was constrained. The Company will reassess this variable consideration at each reporting period and adjust the transaction price, if necessary. The total vials that the Company expects to manufacture for Novartis over the life of the Supply Agreement will be a significant judgment that will be relied upon using the point in time method to recognize revenue.




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(b) Pfizer
In December 2014, the Company entered into a global collaboration agreement with Pfizer for the development and commercialization of SPK-FIX product candidates for the treatment of hemophilia B. Under the agreement, the Company granted Pfizer an exclusive worldwide license to any factor IX gene therapy that it develops, manufactures or commercializes prior to December 31, 2024. The Company is primarily responsible for conducting all research and development activities through completion of Phase 1/2 clinical trials of hemophilia B product candidates. Pfizer and the Company will share development costs incurred under an agreed product development plan for each product candidate with the Company’s share of development costs under the agreement limited to $10.6 million. Following the completion of Phase 1/2 clinical trials, Pfizer will be primarily responsible for development, manufacture, regulatory approval and commercialization, including all costs associated therewith. In connection with this agreement, the Company received a $20.0 million upfront payment for the license in December 2014. As there was no stand-alone value for the license, the Company recognized revenue through the estimated completion date of Phase 1/2 clinical trials. In November 2017, the Company amended its global collaboration agreement with Pfizer. Under the terms of this amendment, the Company received $15.0 million in payments upfront, and an additional $10.0 million upon completion of certain transition activities. The $25.0 million of consideration was recognized as revenue over the estimated performance period associated with the global collaboration agreement. 
The Company is eligible to receive up to an additional $230.0 million in aggregate milestone payments, $110.0 million of which relate to potential development, regulatory and commercial milestones for the first product candidate to achieve each milestone and $120.0 million of which relate to potential regulatory milestones for additional product candidates. In addition, the Company is entitled to receive royalties calculated as a low-teen percentage of net sales of licensed products. The royalties may be subject to certain reductions, including for a specified portion of royalty payments that Pfizer may become required to pay under any third-party license agreements, subject to a minimum royalty. Under the agreement, the Company remains solely responsible for the payment of license payments payable by the Company under specified license agreements.
The agreement will expire on a country-by-country basis upon the latest of: (i) the expiration of the last-to-expire valid claim, as defined in the agreement, in licensed patent rights covering a licensed product; (ii) the expiration of the last-to-expire regulatory exclusivity granted with respect to a licensed product; or (iii) 15 years after the first commercial sale of the last licensed product to be launched, in each case, in the applicable country. Pfizer may terminate the agreement on a licensed product-by-licensed product and country-by-country basis, or in its entirety, for any or no reason subject to notice requirements.
In February 2018, the Company entered into a supply agreement with Pfizer for production in 2018 of one batch of drug substance expected to be used for Phase 3 development. The Company received $7.0 million upfront and received $7.0 million upon delivery in July 2018. The $14.0 million of consideration was recognized as contract revenue as the batch of the drug substance was completed.
During the three months ended March 31, 2018, the Company recognized $13.3 million of contract revenue related to the Company's agreements with Pfizer. During the three months ended March 31, 2018, the Company recorded $0.8 million as a reduction to research and development expenses for the reimbursement of costs from Pfizer.
In July 2018, Pfizer announced the initiation of a Phase 3 program following the Company's transfer of responsibility for the hemophilia B gene therapy program to Pfizer.
(c) Selecta
In December 2016, the Company entered into a License and Option Agreement (Selecta License Agreement) with Selecta that provides the Company with exclusive worldwide rights to Selecta’s proprietary Synthetic Vaccine Particles (SVP™) platform technology for co-administration with gene therapy targets. Under the terms of the Selecta License Agreement, Selecta has granted the Company certain exclusive, worldwide, royalty-bearing licenses to Selecta’s intellectual property and know-how relating to its SVP technology to research, develop and commercialize gene therapies for factor VIII, an essential blood clotting protein relevant to the treatment of hemophilia A, which is the initial target under the license. In addition, for a specified period of time, the Company may exercise options to research, develop and commercialize gene therapies utilizing the SVP technology for up to four additional targets, subject to the Company’s payment of the applicable option exercise fee, in a range of $1.4 million to $2.0 million depending on the incidence of the applicable indication, to Selecta in each case.
Pursuant to a letter agreement (Letter Agreement), entered into between the Company and Selecta on June 6, 2017, Selecta agreed to reimburse the Company for all costs and expenses related to research and development for any licensed products for a specified amount of time, up to an agreed upon cap. Additionally, the Company has agreed to reimburse Selecta in respect of full-time equivalents and out-of-pocket costs incurred in performing certain tasks or assistance specifically requested by the Company. Selecta retains the responsibility to manufacture the Company’s preclinical, clinical and commercial requirements for the SVP technology, subject to the terms of the Selecta License Agreement.
In connection with the execution of the Selecta License Agreement, the Company paid Selecta an upfront payment of $10.0 million in December 2016. Additional payments in the aggregate of $5.0 million were paid in June 2017 and October 2017


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pursuant to the terms of the Selecta License Agreement and the Letter Agreement. On a target-by-target basis, the Company will be responsible to pay up to an aggregate of $430.0 million in milestone payments for each target, with up to $65.0 million being based on the Company’s achievement of specified development and regulatory milestones and up to $365.0 million for commercial milestones, as well as tiered royalties on global net sales at percentages ranging from mid-single to low-double digits. For a period of 3 years, the Company has the right to fund up to 50% of any development or regulatory milestone payable to Selecta by issuing to Selecta shares of the Company’s common stock having a fair market value equal to the percentage of such development or regulatory milestone, as applicable. The Selecta License Agreement will continue on a country-by-country and product-by-product basis until the expiration of the Company's royalty payment obligations with respect to such product in such country unless earlier terminated by the parties. The Selecta License Agreement may be terminated by the Company for convenience upon 90 days’ notice and the Company will not be required to make any payments. Either party may terminate the Selecta License Agreement on a target-by-target basis for material breach with respect to such target.
In connection with the Selecta License Agreement, the Company entered into a Stock Purchase Agreement (SPA) with Selecta pursuant to which the Company purchased 197,238 unregistered shares of Selecta’s common stock for $5.0 million in December 2016. An additional 324,362 unregistered shares of Selecta's common stock were purchased for $5.0 million in June 2017, and 205,254 unregistered shares of Selecta's common stock were purchased for $5.0 million in October 2017. These shares are classified as available-for-sale securities as of March 31, 2019.



17

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2018, included in our Annual Report on Form 10-K that was filed with the SEC on February 28, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.
Overview
We are a leader in the field of gene therapy, seeking to transform the lives of patients suffering from debilitating genetic diseases by developing potentially one-time, life-altering treatments. The goal of gene therapy is to overcome the effects of a malfunctioning, disease-causing gene. Gene therapies have the potential to provide long-lasting effects, dramatically and positively changing the lives of patients with conditions where no, or only palliative, therapies exist. We have built a pipeline of gene therapy product candidates that are directed to the retina, the liver and the central nervous system.
On February 22, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Roche Holdings, Inc., or Roche and 022019 Merger Subsidiary, Inc., or the Merger Sub. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, the Merger Sub has commenced a cash tender offer, or the Tender Offer, to acquire all of the issued and outstanding shares of our common stock at a price per share of $114.50, net to the seller of such shares in cash, without interest, subject to any withholding of taxes required by applicable law. The completion of the Tender Offer is conditioned on at least a majority of the shares of our outstanding common stock having been validly tendered into and not withdrawn from the offer, receipt of certain regulatory approvals, and other customary conditions. Following the completion of the Tender Offer, the Merger Sub will merge with and into our company, with our company surviving as a wholly owned subsidiary of Roche. The merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the merger. In the merger, each outstanding share of our common stock (other than shares of common stock held by us as treasury stock, or owned by Roche or the Merger Sub or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $114.50 per share in cash, without interest, subject to any withholding of taxes required by applicable law. The transaction is expected to close in the second quarter of 2019.
In December 2017, the U.S. Food and Drug Administration, or FDA, approved LUXTURNA® (voretigene neparvovec-rzyl) for the treatment of patients with viable retinal cells and confirmed biallelic RPE65 mutation-associated retinal dystrophy, a genetic blinding condition caused by mutations in the RPE65 gene. LUXTURNA is the first FDA-approved gene therapy for a genetic disease, the first and only pharmacological treatment for an inherited retinal disease, or IRD, and the first adeno-associated virus, or AAV, vector gene therapy approved in the United States. LUXTURNA is manufactured at our manufacturing facility located in Philadelphia, which is the first licensed manufacturing facility in the United States for a gene therapy treating an inherited disease. LUXTURNA has received orphan drug status. In January 2018, we entered into a licensing and commercialization agreement with Novartis Pharma AG, or Novartis, for the development and commercialization of voretigene neparvovec outside the United States. In November 2018, we received approval from the European Medicines Agency, or EMA, for the marketing authorization of LUXTURNA in all 28-member states of the European Union, or EU, as well as Iceland, Liechtenstein and Norway.
We are supporting the appropriate use of LUXTURNA in the United States through small, targeted commercial and medical affairs teams. LUXTURNA is administered by trained retinal surgeons at selected treatment centers in the United States that specialize in treating IRDs. In January 2018, we announced two novel payer programs to help ensure eligible patients in the United States have access to LUXTURNA: (i) an innovative contracting model that includes an option for direct-to-payer contracting; and (ii) an outcomes-based rebate arrangement with a short-term efficacy measure and a long-term durability measure.
We have three gene therapy product candidates, to which we retain global commercialization rights, in clinical development: (i) SPK-8011, our lead product candidate in the SPK-FVIII program for hemophilia A, (ii) SPK-8016, a product candidate intended ultimately for the hemophilia A inhibitor market, and (iii) SPK-7001, targeting choroideremia, or CHM. A fourth clinical-stage product candidate, SPK-9001, our lead product candidate in the SPK-FIX program for hemophilia B, recently was transitioned to Pfizer Inc., or Pfizer, pursuant to our license agreement. In July 2018, Pfizer announced the initiation of a Phase 3 program for SPK-9001, now referred to as PF-06838435 or fidanacogene elaparvovec.


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In our SPK-FVIII program for the treatment of hemophilia A, we initiated a dose-escalating Phase 1/2 clinical trial for our lead product candidate, SPK-8011, in 2017. As of a November 2, 2018, data cutoff date, we had enrolled 12 participants in the trial: two at a dose of 5 x 1011 vector genomes (vg)/kilogram (kg) of body weight, three at a dose of 1 x 1012 vg/kg and seven at a dose of 2 x 1012 vg/kg. Across all 12 participants at the three doses tested, we saw a 94% reduction in bleeding and a 95% reduction in infusions. In the 2 x 1012 vg/kg dose cohort, five of the seven participants had reduced their overall bleeds and infusions by 100% and 99%, respectively (calculated based on data after week four). We also saw evidence of stable, durable factor VIII activity levels in all participants that have been followed for greater than one year. We demonstrated a dose response, with higher doses, on average, leading to higher factor VIII levels. No participant developed factor VIII inhibitors, no thromboembolic events have been reported and transaminase elevations were infrequent and transient. One participant was electively admitted to the hospital to receive intravenous administration of methylprednisolone rather than having the infusions on an outpatient basis. The admission met the criteria for a serious adverse event, or SAE. We plan to incorporate a course of prophlactic steroids going forward in the development program.
We have scaled our mammalian cell-based suspension process to a 400 liter process and have achieved initial yields that are supportive of our future clinical and commercial requirements. Analytical and non-clinical testing demonstrated comparability of material manufactured with this suspension process to material manufactured with our adherent process. We have secured dedicated manufacturing capacity at Brammer Bio MA LLC, or Brammer Bio, in Cambridge, Massachusetts.
We recently initiated a Phase 3 clinical program for SPK-8011, beginning with a run-in study. In February 2018, FDA granted SPK-8011 breakthrough therapy designation. We retain global commercialization rights to the SPK-FVIII program.
We have additional product candidates in the SPK-FVIII program that are intended to target specific sub-populations of hemophilia A patients, the first of which will target the hemophilia A inhibitor market using a novel, internally developed product candidate, SPK-8016.  Our Investigational New Drug, or IND, for SPK-8016 has been cleared and, per agreement with FDA, we initiated dosing in this Phase 1/2 study in a cohort similar to the patient cohort in our on-going SPK-8011 Phase 1/2 study in order to establish safety before expanding into participants representing segments of the inhibitor market.
In December 2014, we entered into a global collaboration agreement with Pfizer for the development and commercialization of SPK-FIX product candidates for the treatment of hemophilia B. In July 2016, FDA granted breakthrough therapy designation to SPK-9001, the lead product candidate in our SPK-FIX program. In July 2018, we transitioned the program to Pfizer for Phase 3 development.
We are developing other liver-directed gene therapies, including SPK-3006, our lead product candidate for Pompe disease, an inherited lysosomal storage disorder caused by an enzyme deficiency that leads to accumulation of glycogen in cells, for which there are shortcomings in current enzyme replacement standard of care. In October 2018, we reported preclinical proof-of-concept data for SPK-3006.
SPK-7001 is our lead product candidate for the treatment of CHM, an IRD caused by mutations in the REP-1 gene. We have completed enrollment of ten participants in two dose cohorts of our Phase 1/2 trial for SPK-7001 and continue to follow subjects in the trial. In July 2017, we completed enrollment of five additional subjects in the trial who are at an earlier stage of disease. To date, SPK-7001 has been well tolerated and we have not observed any product candidate-related SAEs in this trial. We have observed two SAEs that were deemed to be procedure related. We have received orphan product designation for SPK-7001 for the treatment of CHM in both the United States and the EU.
We have several product candidates in various stages of preclinical development. We have preclinical programs targeting IRDs, including Stargaardt's disease. We are developing neurodegenerative disease product candidates that are intended to address TPP1 deficiency, which is a form of Batten disease, and Huntington's disease, among others. We have received orphan product designation in the United States for SPK-TPP1 for the treatment of CLN2 disease (neuronal ceroid lipofuscinosis (NCL)) caused by TPP1 deficiency.
We have incurred net losses since inception. We had an accumulated deficit of $644.4 million as of March 31, 2019. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from selling, general and administrative expenses associated with our operations. For the three months ended March 31, 2018 and 2019, we incurred $30.1 million and $35.8 million of research and development expenses, respectively, and $33.5 million and $38.3 million of selling, general and administrative expenses, respectively.
We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, hire additional personnel and commercialize any approved products, including LUXTURNA. Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even though we have generated revenues from the sale of commercial products, we may not become profitable. If we fail to become profitable, or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.


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Through March 31, 2019, we have received aggregate net proceeds from sales of our equity securities, after deducting underwriting discounts and commissions and other offering expenses payable by us, of $858.2 million.
In July 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, or Wells Fargo, as lender, or the Credit Agreement, pursuant to which Wells Fargo extended a $50.0 million term loan to us, which bears interest at one-month LIBOR plus 0.65%, which rate is converted to a fixed rate per annum of 3.463% under a swap agreement. The term loan was fully drawn on the date of the Credit Agreement and matures on July 3, 2023. Through June 2019, we will only be obligated to make monthly interest payments with respect to the term loan. Thereafter, the term loan will amortize in equal monthly installments through maturity. In connection with the Credit Agreement, we entered into a cash collateral and swap agreement with Wells Fargo on July 3, 2018.
Financial operations overview
Revenue
Product sales
LUXTURNA is distributed in the United States through two distribution models: (1) the traditional buy-and-bill model where the treatment center purchases and pays for the product and then submits a claim to the payer; and (2) our innovative contracting and distribution model, branded Spark PATH (Pioneering Access to Healthcare), that includes options for direct-to-payer contracting and outcomes-based rebates.
Our net product sales represent total gross product sales in the United States less allowances for estimated prompt-payment discounts, service fees, rebates and insurance co-payment assistance. Allowances are established based on contractual terms and management’s reasonable estimates, as well as the expectation that 100% of the prompt-payment discounts will be earned. Product shipping and handling costs and distributor reporting fees are included in cost of product sales. We evaluated the variable consideration under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), as it relates to the outcomes-based method and determined that based on historical clinical data, no additional reserves were required for the three months ended March 31, 2019. All sales are recognized when control is transferred, which follows our verification of a scheduled LUXTURNA treatment.
Our product return policy is to provide non-monetary credit or product replacement. As the product is sold in direct relation to a scheduled treatment, we estimate that there is minimal risk of product return, including the risk of product expiration.
During the three months ended March 31, 2019, we recognized $9.8 million in net product sales. Gross sales were $12.3 million, net of $2.5 million of product sales allowances. We expect that net product sales of LUXTURNA will fluctuate quarter over quarter, in particular as we continue to build and promote access. Net product sales for the three months ended March 31, 2019 may not be representative of our sales for any future period.
Contract revenue
In December 2014, we entered into a global collaboration agreement with Pfizer for the development and commercialization of product candidates in our SPK-FIX program for the treatment of hemophilia B. Under this collaboration, we maintained responsibility for the clinical development of SPK-FIX product candidates through the completion of Phase 1/2 trials, which completion occurred in July 2018. Thereafter, Pfizer has responsibility for further clinical development, regulatory approvals and commercialization. In connection with entering into this agreement, we received a $20.0 million upfront payment. In November 2017, we amended our global collaboration agreement with Pfizer. Under the terms of this amendment, we received $15.0 million in payments upfront, and an additional $10.0 million upon completion of certain transition activities. In February 2018, we entered into a supply agreement with Pfizer to begin production in 2018 for one batch of drug substance expected to be used for Phase 3 development. We received $7.0 million upfront and received $7.0 million upon delivery. In July 2018, Pfizer announced the initiation of a Phase 3 program following our transfer of responsibility for the hemophilia B gene therapy program to Pfizer.
In January 2018, we entered into a licensing and commercialization agreement with Novartis, or the Novartis License Agreement, to develop and commercialize voretigene neparvovec (also known as LUXTURNA) outside the United States. Under the terms of the Novartis License Agreement, we have granted Novartis an exclusive right and license, with the right to grant certain sublicenses, under our intellectual property reasonably necessary or useful for the development or commercialization of LUXTURNA for the treatment, prevention, cure or control of RPE65-mediated IRD in humans outside the United States. Under the terms of the Novartis License Agreement, we received a non-refundable, one-time payment of $105.0 million in the first quarter of 2018, and were eligible to receive up to an additional $65.0 million in milestone payments. We also are entitled to receive royalty payments at a percentage of net sales on a royalty-region by royalty-region basis, subject to reduction and extension in certain circumstances.


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In conjunction with the Novartis License Agreement, Novartis and we also entered into a Supply Agreement, under which we have agreed to supply all of the commercial supply of voretigene neparvovec required by Novartis, subject to certain conditions.
During the fourth quarter of 2018, and in conjunction with the European Commission granting marketing authorization for LUXTURNA, we earned an additional $25.0 million milestone payment and recorded an additional $30.0 million of variable consideration that was no longer constrained which, along with the $105.0 million upfront payment, is included as deferred revenue on our consolidated balance sheet as of December 31, 2018. As of March 31, 2019, we recognized $11.0 million of contract revenue related to the $160.0 million and other variable amounts under the Supply Agreement.

During the three months ended March 31, 2018, we recognized $13.3 million of contract revenue related to our Pfizer agreement.

Research and development expenses
Research and development expenses consist primarily of internal and external costs incurred for the development of our product candidates, which include:
employee-related expenses, including salaries, benefits, travel and other compensation expenses, including stock-based compensation;
expenses incurred under our agreements with contract research organizations, or CROs, and clinical sites that will conduct our preclinical studies and clinical trials and the cost of clinical consultants;
costs associated with regulatory filings;
costs of laboratory supplies and the acquiring, developing and manufacturing of preclinical and clinical study materials; and
costs of facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other operating costs for the portion of our facilities related to research and development.
Research and development costs are expensed as incurred. Expenses for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided by our vendors and our clinical sites.
We plan to increase our research and development expenses for the foreseeable future as we continue development of our product candidates. Our current and planned research and development activities include the following:
expanding our medical affairs group;
the Phase 1/2 clinical trials for SPK-7001, SPK-8011, SPK-8016 and SPK-3006;
the Phase 3 clinical trial for SPK-8011;
research and development for our preclinical programs; and
continued acquisition and manufacture of clinical trial materials in support of our clinical trials.
The successful development of our product candidates is highly uncertain and subject to numerous risks including, but not limited to: 
the scope, rate of progress and expense of our research and development activities;
clinical trial results;
the scope, terms and timing of regulatory approvals;
the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
the cost, timing and our ability to manufacture sufficient clinical and commercial supplies for any product candidates and products that we may develop; and
the risks disclosed in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q.
A change in the outcome of any of these variables could mean a significant change in the expenses and timing associated with the development of any product candidate.



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Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation and travel expenses, for our employees in operational, finance, legal, business development, commercial and human resource functions. Other selling, general and administrative expenses include facility-related costs, professional fees for directors, accounting and legal services, consultants and expenses associated with obtaining and maintaining patents.
We anticipate that our selling, general and administrative expenses will increase in the future as we increase our headcount to support our continued growth and the commercialization of our approved products. We also anticipate increases in expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance as a public company, director and officer insurance premiums and investor relations costs. With the approval of our first product, LUXTURNA, in December 2017, we have incurred, and anticipate incurring further, increases in payroll and related expenses as a result of our commercial operations, especially as they relate to sales and marketing.

Results of operations
Comparison of the three months ended March 31, 2018 and 2019
 
Three months ended March 31,
 
2018
 
2019
 
(in thousands)
Revenues:
 
 
 
Product sales, net
$
2,419

 
$
9,782

Contract revenue
13,257

 
10,989

Total revenues
15,676

 
20,771

Operating expenses:
 
 
 
Cost of product sales
121

 
745

Cost of contract revenue
869

 
2,750

Research and development
30,109

 
35,831

Selling, general and administrative
33,489

 
38,291

Total operating expenses
64,588

 
77,617

Loss from operations
(48,912
)
 
(56,846
)
Unrealized gain (loss) on equity investments
364

 
(211
)
Interest income, net
2,185

 
2,702

Loss before income taxes
(46,363
)
 
(54,355
)
Income tax expense
(10
)
 
(3
)
Net loss
$
(46,373
)
 
$
(54,358
)

Revenues
In the three months ended March 31, 2019, we recognized $20.8 million in total revenues, of which $9.8 million was net product sales of LUXTURNA and $11.0 million was contract revenue associated with our agreements with Novartis. In the three months ended March 31, 2018, we recognized $15.7 million in total revenues, of which $2.4 million was net product sales of LUXTURNA and $13.3 million was contract revenue associated with our agreements with Pfizer.

Cost of product sales
Cost of product sales in the three months ended March 31, 2018 and 2019, was $0.1 million and $0.7 million, respectively. Cost of product sales consists of manufacturing, shipping and other costs, as well as royalties. This increase in cost of product sales was due to an increase in the number of vials sold in the first quarter of 2019 as compared to the first quarter of 2018. A substantial portion of our current U.S. inventory sold during the quarter was completed prior to FDA approval and, therefore, was expensed previously as research and development.



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Cost of contract revenue
Cost of contract revenue in the three months ended March 31, 2018 and 2019, was $0.9 million and $2.8 million, respectively, and consists of manufacturing and other costs associated with our contract agreements.

Research and development expenses
Our research and development expenses for the three months ended March 31, 2019 were $35.8 million compared to $30.1 million for the three months ended March 31, 2018. The $5.7 million increase was due to increases of $2.6 million in internal research and development expenses and $3.1 million in external research and development expenses. The $2.6 million increase in internal research and development expenses primarily was due to increased headcount and salaries. The increase in external research and development primarily was due to a $3.9 million increase in expenses related to to our hemophilia A program and a $0.6 million increase in programs in preclinical development, offset by a decrease of $1.4 million in LUXTURNA costs and other clinical programs.
The following table summarizes our research and development expenses by product candidate or program for the three months ended March 31, 2018 and 2019:
 
Three months ended March 31,
 
2018
 
2019
 
(in thousands)
External research and development expenses:
 
 
 
LUXTURNA
$
1,513

 
$
416

SPK-CHM
286

 
211

SPK-FIX
233

 
12

SPK-FVIII
2,896

 
6,821

Programs in preclinical development
1,897

 
2,464

Total external research and development expenses
6,825

 
9,924

Total internal research and development expenses
23,284

 
25,907

Total research and development expenses
$
30,109

 
$
35,831

We do not allocate personnel-related costs, including stock-based compensation, costs associated with broad technology platform improvements or other indirect costs, to specific programs, as they are deployed across multiple projects under development and, as such, are separately classified as internal research and development expenses in the table above.

Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2019, were $38.3 million compared to $33.5 million for the three months ended March 31, 2018. Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, legal and patent costs, facility costs and other professional fees. The $4.8 million increase primarily was due to an increase of $1.3 million in salaries and related costs, including stock-based compensation, and a $4.0 million increase in legal and patent expenses, professional fees and other operating costs. These increases were partially offset by a reduction of $0.5 million in launch activities for LUXTURNA.



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Liquidity and capital resources
The following table sets forth the primary sources and uses of cash and cash equivalents for each period set forth below:
 
Three months ended March 31,
 
2018
 
2019
 
(in thousands)
Net cash provided by (used in):
 
 
 
Operating activities
$
53,001

 
$
(32,099
)
Investing activities
(22,350
)
 
16,385

Financing activities
261

 
(3,224
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
27

 
8

Net increase (decrease) in cash and cash equivalents and restricted cash
$
30,939

 
$
(18,930
)

Net cash (used in) provided by operating activities
The net cash used in operating activities was $32.1 million for the three months ended March 31, 2019, and consisted of a net loss of $54.4 million adjusted for non-cash items, including depreciation expense of $2.4 million, stock-based compensation expense of $11.8 million, non-cash income of $0.8 million, an unrealized loss on equity investments of $0.2 million and non-cash interest expense of $0.1 million. Net cash used in operating activities also included a net decrease in operating assets and liabilities of $8.5 million. The significant items in the change in operating assets include a decrease in other receivables of $26.9 million, primarily due to receipt of a $25.0 million milestone payment associated with our Novartis agreement, an increase of $5.3 million in prepaid expenses and other assets and an increase of $4.5 million of inventory as a result of increased commercialization efforts for LUXTURNA. The significant items in the change in operating liabilities include a decrease in accounts payable and accrued expenses of $3.8 million mainly due to large accruals at year-end related to bonus and other related salary accruals. The change in operating liabilities also includes a decrease of $5.2 million in deferred revenue related to revenue recognized from our Novartis licensing and commercialization agreement and an increase of $0.4 million in other liabilities.
The net cash provided by operating activities was $53.0 million for the three months ended March 31, 2018, and consisted of a net loss of $46.4 million adjusted for non-cash items, including depreciation expense of $1.5 million, stock-based compensation expense of $12.2 million, non-cash rent income of $0.1 million, a loss on disposal of equipment of $0.1 million, an unrealized gain on equity investments of $0.4 million and non-cash interest income of $0.6 million. Net cash used in operating activities also included a net decrease in operating assets and liabilities of $86.6 million. The significant items in the change in operating assets include an increase in other receivables of $13.3 million, primarily due to Pfizer receivables related to our global collaboration and supply agreements, an increase of $1.5 million in prepaid expenses and other assets and an increase of $5.6 million of inventory as a result of the commercialization of LUXTURNA. The significant items in the change in operating liabilities include a decrease in accounts payable and accrued expenses of $8.4 million mainly due to large accruals at year-end related to bonus and other related salary accruals. The change in operating liabilities also includes an increase in deferred revenue and other liabilities of $115.4 million primarily due to the receipt of $105.0 million from entering into a license and commercialization agreement with Novartis in January 2018.

Net cash provided by (used in) investing activities
Net cash provided by investing activities for the three months ended March 31, 2019 was $16.4 million, consisting of costs related to the net proceeds of marketable securities of $20.7 million, offset by the purchase of property and equipment of $4.3 million.
Net cash used in investing activities for the three months ended March 31, 2018 was $22.3 million, consisting of costs related to the net purchases of marketable securities of $16.2 million, the purchase of property and equipment of $4.1 million, and a product milestone payment of $2.0 million associated with the first product sale of LUXTURNA.

Net cash (used in) provided by financing activities
Net cash used in financing activities for the three months ended March 31, 2019 was $3.2 million, which consisted of $15.3 million for our repurchase of common stock for tax withholding obligations on restricted stock vestings and stock option


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exercises and $0.1 million in payments of long-term debt, offset by $11.6 million in proceeds from the exercise of stock options and $0.6 million in proceeds from the issuance of common stock under our employee stock purchase plan.
Net cash provided by financing activities for the three months ended March 31, 2018 was $0.3 million, which consisted of $1.3 million from the exercise of stock options and $0.8 million of proceeds from the issuance of common stock under our employee stock purchase plan, offset by $1.7 million for our repurchase of common stock for tax withholding obligations on restricted stock that vested during the quarter and $0.1 million in payments of long-term debt.

Funding requirements
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to commercialize LUXTURNA, continue research and development, continue and initiate clinical trials and seek regulatory approvals for our product candidates.
The expected use of our cash and cash equivalents and marketable securities of $509.0 million as of March 31, 2019 represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development programs, the status of, and results from, clinical trials, the potential need to conduct additional clinical trials to obtain approval of our product candidates for all intended indications, the timing and outcome of regulatory filings and actions, commercialization of approved products, as well as any technology acquisitions or additional collaborations into which we may enter with third parties for our product candidates and any unforeseen cash needs. As a result, our management retains broad discretion over the allocation of our existing cash and cash equivalents, and marketable securities.
Based on our planned use of our cash and cash equivalents and marketable securities, we estimate that such funds will be sufficient to enable us to continue to commercialize LUXTURNA, complete our Phase 1/2 trials for SPK-7001 and SPK-8011, initiate the Phase 3 run-in trial for SPK-8011, advance certain of our other pipeline product candidates and fund our operating expenses and capital expenditure requirements into 2021. The foregoing estimate does not contemplate the achievement of any additional milestones under our collaborations with Pfizer and Novartis. Moreover, we have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.

Off-balance sheet arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable Securities and Exchange Commission rules.

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

Critical accounting policies and significant judgments and estimates
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 U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe to be 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.
Since the filing of our Annual Report on Form 10-K, which was filed with the SEC on February 28, 2019, we have added or updated the following accounting policies because we determined them to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.


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Revenue Recognition
Under ASC 606, the performance obligations granted under the Novartis License Agreement and Supply Agreement are combined to constitute a single performance obligation and we account for them as a single contract (see Note 12). We allocated $160.0 million in license fees and milestone payments that were not constrained to the single performance obligation in the combined contracts. We will recognize the $160.0 million and variable amounts under the Supply Agreement over time using an outputs method based on vials supplied to Novartis. We will estimate the expected total vials to be supplied to Novartis over the life of the Supply Agreement. This estimate will be determined through a combination of current purchase projections received from Novartis, as well as future anticipated market demand from Novartis, for the remainder of the Supply Agreement. In the first quarter of 2019, we began to supply vials to Novartis and recorded contract revenue based on the estimated number of vials to be sold during the term of the contract. Each reporting period, we will reevaluate the total projected vials to be supplied to Novartis under the Supply Agreement.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in interest rates. As of March 31, 2019, we had cash and cash equivalents, restricted cash and marketable securities, including our investment in Selecta, of $562.0 million, primarily invested in U.S. government agency and corporate securities, certificates of deposit and money market accounts. We have policies requiring us to invest in the securities of high-quality issuers, limit our exposure to any individual issuer and ensure adequate liquidity. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points from levels at March 31, 2019, the net fair market value of our marketable securities would have resulted in a hypothetical decline of approximately $3.0 million.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting
With the adoption of ASU 2016-02, Leases, we have implemented additional internal controls around our leases. There have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the current quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On March 7, 2019, a putative securities class action complaint, Wang v. Spark Therapeutics, Inc. et al., No. 1:19-cv-00479, or the Wang Complaint, was filed in the United States District Court for the District of Delaware by purported company stockholder Elaine Wang against our company and our directors in connection with the merger. On March 11, 2019, a putative securities class action complaint, Kent v. Spark Therapeutics, Inc. et al., No. 1:19-cv-00485, or the Kent Complaint, was filed in the United States District Court for the District of Delaware by purported company stockholder Michael Kent against our company, our directors, the Merger Sub, and Roche in connection with the merger. On March 18, 2019, a putative securities class action complaint, Newman v. Spark Therapeutics, Inc. et al., No. 1:19-cv-00528, or the Newman Complaint, was filed in the United States District Court for the District of Delaware by purported company stockholder Arthur Newman against our company and our directors in connection with the merger. On March 20, 2019, a putative securities class action complaint, Gomez v. Spark Therapeutics, Inc. et al., No. 1:19-cv-02487, or the Gomez Complaint, was filed in the United States District Court for the Southern District of New York by purported company stockholder Zarrin Gomez against our company and our directors in connection with the merger.  The Wang Complaint, the Kent Complaint, the Newman Complaint and the Gomez Complaint allege that the Schedule 14D-9 filed on March 7, 2019 in connection with the merger omitted certain supposedly material information. The Wang Complaint, the Kent Complaint, the Newman Complaint and the Gomez Complaint assert claims against all the defendants for violation of Section 14(e) of the Exchange Act, and against our directors, and in the case of the Kent Complaint, Roche, and in the case of the Gomez Complaint, our company, for violation of Section 20(a) of the Exchange Act. The Wang Complaint, the Kent Complaint and the Gomez Complaint also assert claims against all defendants for violation of Section 14(d) of the Exchange Act. The Wang Complaint, the Kent Complaint, the Newman Complaint and the Gomez Complaint seek declaratory and injunctive relief, as well as damages and attorneys’ fees and costs. On April 18, 2019, a complaint, Grant v. Bennett, et al., Case No. 1:19-cv-02615, or the Grant Complaint, was filed in the United States District Court for the Northern District of Illinois against certain trustees at the University of Pennsylvania, our company and Roche, alleging intellectual property infringement and false claims by the trustees and seeks, among other relief, to enjoin the licensing of all adeno-associated virus patents by the University of Pennsylvania to our company and the consummation of the transactions contemplated by the Merger Agreement. We, and our board, believe that the Wang Complaint, the Kent Complaint, the Newman Complaint, the Gomez Complaint and the Grant Complaint are without merit and we, our board, the Merger Sub, and Roche intend to defend vigorously against such claims. Additional similar cases may also be filed in connection with the tender offer or the merger.

Item 1A. Risk Factors
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see the section entitled FORWARD-LOOKING STATEMENTS of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.
Risks related to the pending transaction with Roche

We may not complete the pending transaction with Roche within the time frame we anticipate, or at all, which could have an adverse effect on our business, financial results and/or operations.

On February 22, 2019, we entered into the Merger Agreement with Roche and the Merger Sub. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, the Merger Sub has commenced the Tender Offer to acquire all of the issued and outstanding shares of our common stock at a price per share of $114.50, net to the seller in cash, without interest, subject to any withholding of taxes required by applicable law. Following the completion of the Tender Offer, the Merger Sub will merge with and into our company, with our company surviving as a wholly owned subsidiary of Roche, and each outstanding share of our common stock (other than shares of common stock held by us as treasury stock, or owned by Roche or the Merger Sub or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $114.50 per share in cash, without interest, subject to any withholding of taxes required by applicable law.

The completion of the transaction will be conditioned on (1) at least a majority of the shares of our outstanding common stock having been validly tendered into and not withdrawn from the tender offer, (2) receipt of certain regulatory approvals,


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including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (3) the accuracy of certain representations and warranties that we made and compliance by us with certain covenants contained in the Merger Agreement, subject to qualifications, (4) there not having been a “Company Material Adverse Effect” (as defined in the Merger Agreement) with respect to us since the date of the Merger Agreement and (5) other customary conditions. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of our Board of Directors or a termination of the Merger Agreement by us to enter into an agreement for a “Superior Proposal,” as defined in the Merger Agreement. As a result, we cannot assure you that the transaction with Roche will be completed, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected time frame.

If the transaction is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the transaction will be completed. We could be required to pay Roche a termination fee of $144.0 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement. The failure to complete the transaction also may result in negative publicity and negatively affect our relationship with our stockholders, employees, collaborators, customers, regulators and other business partners. We may also be required to devote significant time and resources to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement.

The announcement and pendency of the transaction with Roche could adversely affect our business, financial results and/or operations.

Our efforts to complete the transaction could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the transaction will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the transaction is pending because employees may experience uncertainty about their roles following the transaction. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the transaction and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with collaborators, vendors, customers, regulators and other business partners. For example, vendors, collaborators and other counterparties may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to or termination of existing business relationships could adversely affect our results of operations and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the transaction could be exacerbated by any delays in completion of the transaction or termination of the Merger Agreement.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities, generally requiring us to conduct our business in the ordinary course, consistent with past practice, and subjecting us to a variety of specified limitations absent Roche’s prior consent. These limitations include, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, take certain actions relating to intellectual property, amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially and adversely affect our business, results of operations and financial condition.

In certain instances, the Merger Agreement requires us to pay a termination fee to Roche, which could require us to use available cash that would have otherwise been available for general corporate purposes.

Under the terms of the Merger Agreement, we may be required to pay Roche a termination fee of $144.0 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement. If the Merger Agreement is terminated under such circumstances, the termination fee we may be required to pay under the Merger Agreement may require us to use available cash that would have otherwise been available for general corporate purposes and other uses. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business operations and financial condition, which in turn would materially and adversely affect the price of our common stock.





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We have incurred, and will continue to incur, direct and indirect costs as a result of the pending transaction with Roche.

We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the pending transaction. We must pay substantially all of these costs and expenses whether or not the transaction is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses.
Risks related to our financial position
We have incurred net losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We have incurred net losses since inception. Our net losses were $46.4 million and $54.4 million for the three months ended March 31, 2018 and 2019, respectively. As of March 31, 2019, we had an accumulated deficit of $644.4 million. We have financed our operations primarily through private placements of our preferred stock, our IPO, which closed on February 4, 2015, and follow-on offerings which closed on December 28, 2015, June 20, 2016 and August 9, 2017. We received net proceeds from the IPO and follow-on offerings of $775.8 million, after deducting underwriting discounts and commissions and other offering expenses payable by us. We have devoted substantially all our efforts to research and development, including clinical and preclinical development of our product candidates, as well as to building our team and engaging in activities to prepare for commercial launch of LUXTURNA. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if, and as, we:
seek marketing approvals for any of our product candidates that successfully complete clinical trials;
continue to grow a marketing and distribution infrastructure to commercialize LUXTURNA in the United States, and any product candidates for which we may submit for and obtain marketing approval anywhere in the world;
continue our clinical development of our product candidates, including our Phase 1/2 clinical trials for SPK-7001, SPK-8011 and SPK-8016;
conduct IND-enabling studies for our preclinical programs;
initiate additional preclinical studies and clinical trials for our product candidates;
seek to identify additional product candidates;
build out additional laboratory and current good manufacturing practices, or cGMP, manufacturing capacity;
further develop our gene therapy platform;
further expand our medical affairs activities;
maintain, expand and protect our intellectual property portfolio; and
acquire or in-license product candidates and technologies.
LUXTURNA is our only product that has been approved for sale and, to date, it only has been approved for the treatment of patients with confirmed biallelic RPE65 mutation-associated retinal dystrophy who have viable retinal cells as determined by their treating physicians. Our ability to generate revenue will depend on the success of commercial sales of LUXTURNA. However, the successful commercialization of LUXTURNA in the United States is subject to many risks. LUXTURNA is our first commercial launch, and there is no guarantee that we will be able to do so successfully. There are numerous examples of unsuccessful launches where products fail to meet expectations of market potential, including those by pharmaceutical companies with more experience and resources than us. We do not anticipate our revenue from sales of LUXTURNA alone will be sufficient for us to become profitable.
To become and remain profitable, we must develop and commercialize additional product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause our stockholders to lose all or part of their investment.


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We have generated limited revenue from product sales and may never be profitable.
Our ability to generate revenue from product sales and achieve profitability depends on our ability, alone or with collaborative partners, to successfully develop and commercialize products.
While we began generating revenue from the sale of LUXTURNA in the first quarter of 2018, we do not expect to achieve profitability unless and until we complete the development of, and obtain the regulatory approvals necessary to commercialize, additional product candidates. Our ability to generate revenues from product sales and achieve profitability depends heavily on our, or our collaborators’, success in:
continuing commercialization of LUXTURNA;
identifying patients eligible for treatment with LUXTURNA for RPE65-mediated IRD;
maintaining regulatory and marketing approval for LUXTURNA in the United States and the EU;
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical trials;
completing research and preclinical and clinical development of our product candidates and identifying new gene therapy product candidates;
launching and commercializing product candidates for which we obtain regulatory and marketing approval by expanding our existing sales force, marketing and distribution infrastructure or, alternatively, collaborating with a commercialization partner;
qualifying for, and maintaining, adequate coverage and reimbursement by government and third-party payers on a timely basis for LUXTURNA and any product candidates for which we obtain marketing approval;
maintaining and enhancing a sustainable, scalable, reproducible and transferable manufacturing process;
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality, products and services to support clinical development of our product candidates and the market demand for LUXTURNA and any product candidates for which we obtain marketing approval;
addressing any competing technological and market developments;
implementing additional internal systems and infrastructure, as needed;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in such collaborations;
maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;
avoiding and defending against third-party interference or infringement claims; and
attracting, hiring and retaining qualified personnel.
We anticipate incurring significant costs associated with commercializing LUXTURNA in the United States and any other products for which we receive marketing approval. Even with the generation of revenues from sales of LUXTURNA and any other approved products, we may not become profitable and may need to obtain additional funding to continue operations.
Our limited operating history may make it difficult for stockholders to evaluate the success of our business to date and to assess our future viability.
We were founded in March 2013. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring technology, identifying potential product candidates and undertaking preclinical studies and clinical trials of our most advanced product candidates, undertaking the commercial launch of LUXTURNA and establishing collaborations. Although we have commenced the initial phases of the commercialization of LUXTURNA, we have no history of commercializing pharmaceutical products, are still in the process of launching LUXTURNA and, to date, have not generated substantial revenue from the sale of LUXTURNA. Consequently, any predictions stockholders make about our future success or viability may not be as accurate as they could be if we had a longer operating history. We are in the early stages of the process of transitioning from a company with a research focus to a company that is also capable of supporting commercial activities. We may not be successful in such a transition.
We may need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our product development and commercialization efforts or other operations.


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We expect our expenses to increase as we continue the research and development of, and seek marketing approval for, our product candidates. In addition, we expect to incur significant expenses related to product sales, medical affairs, diagnostics, marketing, manufacturing and distribution to support LUXTURNA and any other products for which we obtain marketing approval. Accordingly, we may need to obtain substantial additional funding for our continuing operations. If we are unable to raise capital on attractive terms, or at all, we could be forced to delay, reduce or eliminate certain of our research and development programs and/or commercialization efforts.
Our operations have consumed significant amounts of capital since inception. As of March 31, 2019, our cash and cash equivalents and marketable securities were $509.0 million. Our operating expenses were $77.6 million for the three months ended March 31, 2019. We expect to incur significant operating expenses for the foreseeable future. We estimate that our cash and cash equivalents and marketable securities as of March 31, 2019, will enable us to fund our operating expenses and capital expenditure requirements into 2021. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently anticipate.
Our future capital requirements will depend on many factors, including:
our execution of our commercial launch of LUXTURNA in the United States;
the cost and our ability to maintain the commercial infrastructure and manufacturing capabilities required, including product sales, medical affairs, diagnostics, marketing, manufacturing and distribution, to support LUXTURNA in the United States, and any other products for which we receive marketing approval;
qualifying for, and maintaining adequate coverage and reimbursement by, government and third-party payers on a timely basis for LUXTURNA and any other products for which we obtain marketing approval;
the costs of preparing and submitting marketing approvals for any of our product candidates that successfully complete clinical trials;
the costs and timing of manufacturing sufficient supplies of LUXTURNA to meet customer demand;
the scope, progress, results and costs of drug discovery, recruitment, laboratory testing, preclinical development and clinical trials for our product candidates;
the costs associated with the build out of additional laboratory and cGMP manufacturing capacity;
the costs, timing and outcome of regulatory review of our product candidates;
revenue received from commercial sales of LUXTURNA and any other products for which we may obtain marketing approval, including amounts reimbursed by government and third-party payers;
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
our current collaboration agreements remaining in effect and our achievement of milestones and/or royalty payments under those agreements;
our ability to establish and maintain additional collaborations on favorable terms, if at all; and
the extent to which we acquire or in-license product candidates and technologies.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete. We may never generate the necessary data or results required to obtain marketing approval and achieve product sales for any products other than LUXTURNA. In addition, LUXTURNA or any other products for which we obtain marketing approval may not achieve commercial success. Any product revenues from product candidates, and any commercial milestones or royalty payments under our collaboration agreements will be derived from, or based on, sales of products that may not be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. To the extent that additional capital is raised through the sale of equity or equity-linked securities, the issuance of those securities could result in substantial dilution for our current stockholders and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing stockholders may not agree with our financing plans or the terms of such financings. Adequate additional financing may not be available to us on acceptable terms, or at all.




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Risks related to LUXTURNA
The commercial success of LUXTURNA depends on the extent to which patients, physicians and payers accept and adopt LUXTURNA as a treatment for inherited retinal disease, or IRD, caused by biallelic mutations in the RPE65 gene.
The commercial success of LUXTURNA depends on the extent to which patients, physicians and payers accept and adopt LUXTURNA as a treatment for inherited retinal disease, or IRD, caused by biallelic mutations in the RPE65 gene, and we do not know whether our or others’ estimates in this regard will be accurate. While we conduct activities to raise awareness around genetic testing and inherited retinal diseases, there is significant uncertainty in the degree of market acceptance of LUXTURNA. In addition, physicians may not prescribe LUXTURNA, and patients may be unwilling to use LUXTURNA, if coverage is not provided or reimbursement is inadequate. Additionally, the use of LUXTURNA in a non-trial setting may result in unexpected, more serious or a greater incidence of adverse reactions that may negatively affect the commercial prospects of LUXTURNA. Furthermore, a significant negative development in any other gene therapy program or our failure to satisfy any post-marketing regulatory commitments and requirements to which we are or may become subject may adversely impact the commercial results and potential of LUXTURNA. We are conducting a post-marketing observational study of patients treated with LUXTURNA to further evaluate the long-term safety of LUXTURNA. If the results of this long-term study negatively change the benefit/risk profile of LUXTURNA, the commercial results of LUXTURNA and potentially any other product for which we receive marketing approval may be substantially diminished.
As part of our plan to market LUXTURNA in the United States through a limited number of centers that specialize in treating IRDs, we have trained vitreoretinal surgeons to perform the surgical procedure necessary to administer LUXTURNA via sub-retinal injection. This procedure requires significant skill and training. In addition, if we are unable to recruit or train, and thereafter retain, sufficient retinal surgeons to perform the procedure properly, the availability of LUXTURNA could be substantially diminished, which would adversely affect our business, financial condition, results of operations and prospects. Our efforts to educate the medical community and third-party payers on the benefits of LUXTURNA and our product candidates may require significant resources and may never be successful. Such efforts may require more resources than are typically required due to the complexity and uniqueness of LUXTURNA and our other potential products.
We received EMA approval for our marketing authorization application, or MAA, for LUXTURNA in November 2018. The Committee for Medicinal Products for Human Use, or CHMP, adopted a positive opinion on September 21, 2018, recommending approval of LUXTURNA. Even if a product candidate is approved, the European Commission may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of approval.
We have entered into a licensing and commercialization agreement with Novartis for the development and commercialization of voretigene neparvovec outside of the United States. The commercial success of voretigene neparvovec outside of the United States depends on Novartis' success at commercializing voretigene neparvovec outside of the United States. We have limited control over the amount and timing of resources that Novartis will dedicate to the commercialization of voretigene neparvovec.
If the RPE65-mediated IRD patient population is smaller than we estimate, our product revenues may be adversely affected and our business may suffer.
There are several factors that could contribute to making the actual number of patients who receive voretigene neparvovec less than the potentially addressable market. These include the lack of widespread availability of, and limited reimbursement for, new therapies in many underdeveloped markets. Further, the severity of the progression of a disease up to the time of treatment, especially in certain degenerative conditions such as IRDs caused by mutations in the RPE65 gene, likely will diminish the therapeutic benefit conferred by a gene therapy due to irreversible cell death. In addition, our patient identification efforts may not be successful due to operational challenges or erroneous prevalence and incidence assumptions. Lastly, certain patients’ immune systems might prohibit the successful delivery of certain gene therapy products to the target tissue, thereby limiting the treatment outcomes.
If we are unable to obtain adequate coverage of LUXTURNA from third-party payers, the adoption of LUXTURNA by physicians and patients may be limited, which could affect our ability to successfully commercialize LUXTURNA.
While we have reached agreement with certain third-party payers regarding our price for LUXTURNA, we still may receive substantial resistance to our pricing from other third-party payers and the public generally. To assist third-party payers and patients in obtaining and covering LUXTURNA, we have proposed novel payment and distribution programs to assist with the cost of LUXTURNA, including direct sales to payers and outcomes-based rebate arrangements. Even with these programs, there may be substantial resistance to the cost of LUXTURNA by third-party payers and the public generally. Additionally, to the extent reimbursement for LUXTURNA is subject to outcomes-based rebate arrangements, we may be liable for rebate payments in the future. Durability is a factor we use for our outcomes-based rebate arrangements and a negative change in our durability data could negatively impact our ability to successfully commercialize LUXTURNA. These novel payment


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programs may not be sufficient for third-party payers to grant coverage, and if we are unable to obtain adequate coverage of LUXTURNA, the adoption of LUXTURNA by physicians and patients may be limited. This in turn could affect our ability to successfully commercialize LUXTURNA and adversely impact our business, financial condition, results of operations and prospects.
Risks related to the development of our product candidates
Our gene therapy product candidates are based on a novel technology, which makes it difficult to predict the time and cost of development and of subsequently obtaining regulatory approval.
We have concentrated our research and development efforts on our gene therapy platform, and our future success depends on our successful development of viable gene therapy products. There can be no assurance that we will not experience problems or delays in developing new products and that such problems or delays will not cause unanticipated costs, or that any such development problems can be solved. Currently, LUXTURNA is the only gene therapy product that has been approved for a genetic disease in the United States and only two such products have been approved in the EU. Although we intend to leverage our experience with LUXTURNA in our preclinical and clinical development of product candidates, we may be unable to reduce development timelines and costs for our other gene therapy development programs. We also may experience unanticipated problems or delays in expanding our manufacturing capacity, which may prevent us from completing our clinical trials, meeting the obligations of our collaborations or successfully commercializing LUXTURNA and any other products for which we obtain marketing approval on a timely or profitable basis, if at all. We, a collaborator or another group may uncover a previously unknown risk associated with AAV, and this may prolong the period of observation required for obtaining regulatory approval or may necessitate additional clinical testing.
In addition, the clinical trial requirements of FDA, the European Commission, EMA, the competent authorities of the EU Member States and other regulatory authorities 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 such product candidates. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or more extensively studied product candidates. Only two gene therapy products for genetic diseases, uniQure N.V.’s Glybera and GlaxoSmithKline plc's Strimvelis, have received marketing authorization from the European Commission. The marketing authorization for Glybera subsequently expired following the decision of the marketing authorization holder not to apply for a related renewal. LUXTURNA is the only gene therapy product for a genetic disease to have received marketing approval from FDA. We do not yet know if or when it may be authorized by the European Commission. Even if we are successful in developing additional product candidates, it is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for these product candidates in either the United States or the EU, or how long it will take to commercialize any other products for which we receive marketing approval. In addition, the marketing authorization granted by the European Commission may not be indicative of what FDA may require for approval and vice versa.
Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. FDA has established the Office of Tissue and Advanced Therapies within the Center for Biologics Evaluation and Research, or CBER, to consolidate the review of gene therapy and related products, and has established the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER in its review. Gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from the National Institute of Health, or NIH, also potentially are subject to review by the Regulatory Affairs Certification, or RAC; however, NIH announced in 2014 that the RAC will only publicly review clinical trials if the trials cannot be evaluated by standard oversight bodies and pose unusual risks. Although FDA decides whether individual gene therapy protocols may proceed, the RAC public review process, if undertaken, can delay the initiation of a clinical trial, even if FDA has reviewed the trial design and approved its initiation. Conversely, FDA can put an IND on a clinical hold even if the RAC has provided a favorable review or an exemption from in-depth, public review. If we were to engage an NIH-funded institution, such as CHOP, to conduct a clinical trial, that institution’s institutional biosafety committee as well as its institutional review board, or IRB, would need to review the proposed clinical trial to assess the safety of the trial. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause FDA or other oversight bodies to change the requirements for approval of any of our product candidates. Similarly, the European Commission may issue new guidelines concerning the development and marketing authorization for gene therapy medicinal 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, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these 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 certain of our product candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delay or failure to obtain, or unexpected costs in obtaining, the


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regulatory approval necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue, and our business, financial condition, results of operations and prospects would be materially and adversely affected.
Because we are developing product candidates for the treatment of diseases in which there is little clinical experience and, in some cases, using new endpoints or methodologies, there is increased risk that certain regulatory authorities may not consider the endpoints of our clinical trials to provide clinically meaningful results.
Except for LUXTURNA, there are no pharmacologic therapies approved to treat IRDs caused by the biallelic RPE65 gene mutations in the United States or EU. In addition, there has been limited clinical trial experience for the development of pharmaceuticals to treat IRDs. Certain aspects of IRDs render efficacy endpoints historically used for vision clinical trials less applicable as clinical endpoints. As a result, the design and conduct of clinical trials for these disorders is subject to increased risk. In addition, the treatment of certain IRDs, such as CHM, may require assessment of clinical endpoints that reflect a stabilization, as opposed to an improvement, of functional vision. Assessing these endpoints may require longer periods of observation and may delay the completion of any trials we may undertake.
Success in preclinical studies or early clinical trials may not be indicative of results obtained in later trials.
Results from preclinical studies or previous clinical trials are not necessarily predictive of future clinical trial results, and interim results of a clinical trial are not necessarily indicative of final results. Our product candidates may fail to show the desired safety and efficacy in clinical development despite demonstrating positive results in preclinical studies or having successfully advanced through initial clinical trials or preliminary stages of clinical trials.
We have limited clinical safety and efficacy data for the use of SPK-7001 and SPK-8011 in humans. There can be no assurance that the results seen in preclinical studies for any of our product candidates ultimately will result in success in clinical trials or that results seen in Phase 1 or 2 trials will be replicated in Phase 3 trials. In addition, there can be no assurance that we will be able to achieve the same or similar success in our preclinical studies and clinical trials of our other product candidates.
There is a high failure rate for drugs and biologic products proceeding through clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical testing and earlier-stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may experience regulatory delays or rejections as a result of many factors, including changes in regulatory policy or requirements during the period of our product candidate development. Any such delays could materially and adversely affect our business, financial condition, results of operations and prospects.
We may find it difficult to enroll subjects in our clinical trials, which could delay or prevent us from proceeding with clinical trials of our product candidates.
Identifying and enrolling appropriate subjects to participate in clinical trials of our product candidates is critical to our success. The timing of the beginning and conclusion of clinical trials depends on our ability to recruit subjects to participate and complete clinical development programs. For example, hemophilia trials often take longer to enroll due to the availability of existing treatments. We have experienced slow enrollment in some of our prior hemophilia trials, and we may experience similar delays in any of our current or future clinical trials. Patients with the disease may be hesitant or unwilling to participate in our gene therapy studies for a variety of reasons: negative publicity from adverse events related to the biotechnology or gene therapy fields, competitive clinical trials for similar patient populations, clinical trials in products employing our vectors or our platform or for other reasons. These factors may delay the timeline for recruiting subjects, conducting studies and obtaining regulatory approval of our product candidates. These delays could result in increased costs, delays in advancing our product candidates, delays in testing the effectiveness of our product candidates or termination of the clinical trials altogether.
We may not be able to identify, recruit and enroll a sufficient number of subjects, or those with required or desired characteristics, to complete our clinical trials in a timely manner. Enrollment and trial completion is affected by factors including:
size of the patient population and process for identifying subjects;
design of the trial protocol;
eligibility and exclusion criteria;
perceived risks and benefits of the product candidate under study;
perceived risks and benefits of gene therapy-based approaches to treatment of diseases;
availability of competing therapies and clinical trials;
severity of the disease under investigation;
availability of genetic testing for potential subjects;


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proximity and availability of clinical trial sites for prospective subjects;
ability to obtain and maintain subject consent;
risk that enrolled subjects will drop out before completion of the trial;
patient referral practices of physicians; and
ability to monitor subjects adequately during and after treatment.
Our current product candidates are being developed to treat rare conditions. For any other product candidate that we successfully develop, we plan to seek initial marketing approvals in the United States and, subsequently, the EU. We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible subjects to participate in the clinical trials required by FDA or EMA or other regulatory authorities. Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including:
difficulty in establishing or managing relationships with contract research organizations, or CROs, and clinical investigators;
different standards for the conduct of clinical trials;
absence in some countries of established groups with sufficient regulatory expertise for review of gene therapy protocols;
our inability to locate qualified local consultants, physicians and partners; and
the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.
If we have difficulty enrolling a sufficient number of subjects to conduct our clinical trials as planned, we may need to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business, financial condition, results of operations and prospects.
We may encounter substantial delays in our clinical trials or we may fail to demonstrate safety or efficacy to the satisfaction of applicable regulatory authorities.
Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates. Clinical testing is expensive, time consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:
delays in reaching agreement or consensus with regulatory authorities on trial design;
delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
delays in opening clinical trial sites or obtaining required IRB or independent Ethics Committee approval at each clinical trial site;
delays in recruiting suitable subjects to participate in our clinical trials;
imposition of a clinical hold by regulatory authorities as a result of a serious adverse event, after an inspection of our clinical trial operations or trial sites or for any other reason;
failure by us, any CROs we engage or any other third parties to adhere to clinical trial requirements;
failure to perform in accordance with FDA Good Clinical Practice or applicable regulatory guidelines in the EU and other countries;
delays in the testing, validation, manufacturing and delivery of our product candidates to the clinical sites, including delays by third parties with whom we have contracted to perform certain of those functions;
delays in having subjects complete participation in a trial or return for post-treatment follow-up;
clinical trial sites or subjects dropping out of a trial;
selection of clinical endpoints that require prolonged periods of clinical observation or analysis of the resulting data;
occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
occurrence of serious adverse events in trials of the same class of agents conducted by other sponsors; or


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changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.
Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to generate revenues from product sales or to achieve regulatory and commercialization milestones or product royalties. In addition, if we make manufacturing or formulation changes to our product candidates, we may need to conduct additional studies to bridge our modified product candidates to earlier versions. Clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business, financial condition, results of operations and prospects.
Additionally, if the results of our clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with our product or product candidates, we may:
be delayed in obtaining marketing approval for our product candidates, if at all;
obtain approval for indications or patient populations that are not as broad as we intended or desired;
obtain approval with labeling that includes significant product use or distribution restrictions or safety warnings, including contraindications, warnings or precautions;
be subject to changes in the way the product is administered;
be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;
have regulatory authorities withdraw, or suspend, their approval of the product or impose restrictions on its distribution in the form of a modified Risk Evaluation and Mitigation Strategy, or REMS, or a similar risk mitigation strategy;
be sued for alleged injuries caused to patients taking our products; or
experience damage to our reputation.
Our product and product candidates and the process for administering our product and product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.
There have been several significant adverse side effects in gene therapy treatments in the past, including reported cases of leukemia and death seen in other trials using other vectors. While new recombinant vectors 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. There also is 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.
Possible adverse side effects that could occur with treatment with gene therapy products include an immunologic reaction early after administration which, while not necessarily adverse to the patient’s health, could substantially limit the effectiveness of the treatment. In previous clinical trials involving AAV vectors for gene therapy, some subjects experienced the development of a T-cell response, whereby after the vector is within the target cell, the cellular immune response system triggers the removal of transduced cells by activated T-cells. If our vectors demonstrate a similar effect, which we are unable to mitigate with immuno-suppressive regimens, we may decide or be required to halt or delay further clinical development of our product candidates and our commercial efforts could be materially and adversely affected.
In addition to any potential side effects caused by the product or product candidate, the administration process or related procedures also can cause adverse side effects. If any such adverse events occur, our marketing authorization or clinical trials could be suspended or terminated. For example, FDA placed our second open-label Phase 1 clinical trial for LUXTURNA, which we refer to as our 102 trial, on a clinical hold temporarily when we voluntarily halted enrollment and reported a serious adverse event arising from a steroid injection given following administration of LUXTURNA to manage post-operative inflammation related to the standard vitrectomy procedure subjects undergo prior to administration of LUXTURNA. We subsequently adjusted the protocol regarding the use of local steroids and FDA released the clinical hold, allowing the trial to proceed.
If in the future we are unable to demonstrate that such adverse events were caused by the administration process or related procedures, FDA, the European Commission, 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 delay, suspend or terminate any clinical trial of any of our product candidates, the commercial prospects of such product candidates may be harmed and our ability to generate


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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.
In addition, FDA could impose a REMS, and other non-US regulatory authorities could impose other specific obligations as a condition of approval to ensure that the benefits of our product candidates outweigh their risks, which could delay approval or commercial acceptance of our product candidates. A REMS may include, among other things, a communication plan to health care practitioners or patients, and elements to assure safe use, such as restricted distribution methods, patient registries, and other risk minimization tools. Similar risk management programs could be imposed by equivalent authorities in foreign jurisdictions, including by the European Commission. Furthermore, if we or others later identify undesirable side effects caused by our product candidate, several potentially significant negative consequences could result, including:
regulatory authorities may suspend or withdraw approvals of such product candidate;
regulatory authorities may require additional warnings or limitations of use in product labeling;
we may be required to change the way a product candidate is administered or conduct additional clinical trials;
we could be sued and held liable for harm caused by our products to patients; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of LUXTURNA and any other products for which we receive marketing approval and could significantly harm our business, financial condition, results of operations and prospects.
We may be unable to obtain additional orphan drug designations or obtain and maintain orphan drug exclusivity for any product. If a competitor obtains orphan drug exclusivity for its product and the regulatory authority subsequently determines that our product candidate is the same drug and treats the same indication(s) as the previously approved product, we may not be able to get our product approved until after the orphan drug exclusivity period has ended.
Regulatory authorities in some jurisdictions, including the United States and the EU, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as having a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the EU, EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the EU. Additionally, orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the EU would be sufficient to justify the necessary investment in developing the drug or biologic product. Similar “orphan drug” designations exist in some, but not all, jurisdictions outside the EU and the United States.
Upon approval, LUXTURNA was granted orphan drug exclusivity by FDA for the treatment of IRD caused by biallelic mutations to the RPE65 gene. Pursuant to such orphan drug exclusivity in the United States, FDA is precluded, subject to certain exceptions discussed below, from approving another marketing application for a product that constitutes the same drug treating the same indication for a seven-year period, which exclusivity period can be extended by six months under certain circumstances as discussed below. Orphan drug designation does not guarantee orphan drug exclusivity and a designated orphan drug will be denied market approval if it is blocked by the orphan exclusivity of a previously approved orphan product.
LUXTURNA has received an orphan drug designation from the European Commission for the treatment of both LCA and RP due to RPE65 mutations. SPK-9001 has received both breakthrough therapy and orphan drug designation by FDA. SPK-8011 has received breakthrough therapy designation by FDA. SPK-7001 has been granted orphan drug designation by FDA and the European Commission for the treatment of CHM. SPK-TPP1 has been granted orphan product designation by FDA for the treatment of CLN2 disease (neuronal ceroid lipofuscinosis (NCL)) caused by TPP1 deficiency.
If we request orphan drug designation for our other current or future product candidates, there can be no assurances that FDA or the European Commission will grant any of our product candidates such designation. Additionally, the designation of any of our product candidates as an orphan product does not guarantee that any regulatory agency will accelerate regulatory review of, or ultimately approve, that product candidate, nor does it limit the ability of any regulatory agency to grant orphan drug designation to product candidates of other companies that treat the same indications as our product candidates prior to our product candidates receiving exclusive marketing approval.
Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes FDA or the


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European Commission from approving another marketing application for a product that constitutes the same drug treating the same disease or condition for that marketing exclusivity period, except in limited circumstances. If another sponsor receives approval before we do (regardless of our orphan drug designation), we would be precluded from receiving marketing approval for our product if it is the same product approved for the same disease or condition for the applicable exclusivity period. The applicable period is seven years in the United States and 10 years in the EU. The exclusivity period in the United States can be extended by six months if the Biologics License Application, or BLA, sponsor submits pediatric data that fairly respond to a written request from FDA for such data. The exclusivity period in the EU can be reduced to six years if, at the end of the fifth year, it is established that the orphan designation criteria are no longer met, e.g., where a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be revoked if any regulatory agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.
Even if we maintain orphan drug exclusivity for LUXTURNA or obtain orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same disease or condition. In the United States, even after an orphan drug is approved, FDA may subsequently approve another drug for the same condition if FDA concludes that the latter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care or the exclusivity holder consents to the approval of another product or if the sponsor cannot supply a sufficient quantity of the product. It is unclear what criteria regulatory authorities will use for gene therapies to determine similarity under orphan drug designation. In the EU, marketing authorization may be granted to a similar medicinal product for the same orphan indication if the second applicant can establish in its application that its medicinal product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior, if the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application, or if the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of orphan medicinal product.
Breakthrough therapy designation by FDA may not lead to a faster development, regulatory review or approval process and it does not increase the likelihood that any of our product candidates will receive marketing approval in the United States.
We have received breakthrough therapy designation for SPK-9001 for the treatment of hemophilia B and SPK-8011 for the treatment of hemophilia A. We may, in the future, apply for breakthrough therapy designation for other product candidates in the United States. A breakthrough therapy product candidate is defined as a product candidate that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that such product candidate may demonstrate substantial improvement on one or more clinically significant endpoints over existing therapies. FDA will seek to ensure the sponsor of a breakthrough therapy product candidate receives: (i) intensive guidance on an efficient drug development program; (ii) intensive involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review; and (iii) a rolling review process whereby FDA may consider reviewing portions of a BLA before the sponsor submits the complete application. Product candidates designated as breakthrough therapies by FDA may be eligible for priority review if supported by clinical data.
Designation as a breakthrough therapy is within the discretion of FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, FDA may disagree. In any event, the receipt of a breakthrough therapy designation, or the redemption of a Rare Pediatric Disease Priority Review Voucher for a product candidate, may not result in a faster development process, review or approval compared to products considered for approval under conventional FDA procedures and, in any event, does not assure ultimate approval by FDA. In addition, even though SPK-9001 and SPK-8011 have been designated as breakthrough therapy product candidates, FDA may later decide that either or both no longer meet the conditions for designation and revoke it or decide that the application for the product will not receive priority review.
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.
We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate. 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 or conditions 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.


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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, contraindications or a REMS. These regulatory authorities may require warnings or precautions 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 or allow the promotional 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.
Further, the regulatory authorities may require concurrent approval, or CE marking, 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, or CLIA, are sufficient to diagnose patients and, with respect to LUXTURNA, have been permitted by FDA. For future product candidates, however, it may be necessary to use FDA-cleared or FDA-approved diagnostic tests or equivalent tests approved by foreign authorities or CE marked in the EU to diagnose patients or to assure the safe and effective use of product candidates in trial subjects. FDA refers to such tests as in vitro companion diagnostic devices. On July 31, 2014, FDA announced the publication of 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 safe and effective use of a therapeutic product depends on a diagnostic device, FDA generally will require approval or clearance of the diagnostic device when FDA approves the therapeutic product. The final guidance allows for two exceptions to the general rule of concurrent drug/device approval, namely, when the therapeutic product is intended to treat serious and life-threatening conditions for which no alternative exists, and when a serious safety issue arises for an approved therapeutic agent, and no FDA-cleared or FDA-approved companion diagnostic test is yet available. At this point, it is unclear how FDA will apply this policy to our current or future gene therapy product candidates. Should 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, Regulation (EU) 2017/746 of the European Parliament and of the Council of 5 April 2017 on in vitro diagnostic medical devices will apply from 2022 and repeal the current applicable provisions. Regulation (EU) 2017/746 will impose additional obligations on us that may impact the development and authorization of our product candidates in the EU.
Even if we obtain regulatory approval for a product candidate, our products will remain subject to regulatory oversight.
LUXTURNA, and any of our product candidates for which we obtain regulatory approval, will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information. Any regulatory approvals that we receive for our product candidates also may be subject to a REMS or the specific obligations imposed as a condition for marketing authorization by equivalent authorities in a foreign jurisdiction, particularly by the European Commission, limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the quality, safety and efficacy of the product. For example, in the United States, the holder of an approved BLA is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. FDA guidance advises that patients treated with some types of gene therapy undergo follow-up observations for potential adverse events for as long as 15 years, and each of our clinical trials includes a 15-year long-term follow-up phase. The holder of an approved BLA also must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with the Federal Food Drug and Cosmetic Act and implementing regulations and are subject to FDA oversight and post-marketing reporting obligations, in addition to other potentially applicable federal and state laws.
In the EU, the advertising and promotion of our products are subject to EU laws governing promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices. In addition, other legislation adopted by individual EU Member States may apply to the advertising and promotion of medicinal products. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with health care professionals. These laws require that promotional materials and advertising for medicinal products are consistent with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of the medicinal product. It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product. Promotion of a medicinal product that does not comport with the SmPC is considered to constitute off-label promotion, which is prohibited in the EU. The applicable laws at EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment.


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In addition, product manufacturers and their facilities may be subject to payment of application and program fees and are subject to continual review and periodic inspections by FDA and other regulatory authorities for compliance with current cGMP requirements and adherence to commitments made in the BLA or foreign marketing application. If we, or a regulatory authority, discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of that product, a regulatory authority may impose restrictions relative to that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.
If we fail to comply with applicable regulatory requirements for LUXTURNA or for any other product following approval, a regulatory authority may:
issue a warning letter asserting that we are in violation of the law;
seek an injunction or impose administrative, civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve a pending BLA or comparable foreign marketing application (or any supplements thereto) submitted by us or our strategic partners;
restrict the marketing or manufacturing of the product;
seize or detain the product or otherwise demand or require the withdrawal or recall of the product from the market;
refuse to permit the import or export of products;
request and publicize a voluntary recall of the product; or
refuse to allow us to enter into supply contracts, including government contracts.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and adversely affect our business, financial condition, results of operations and prospects.
In addition, FDA’s policies, and those of equivalent foreign regulatory agencies, may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would materially and adversely affect our business, financial condition, results of operations and prospects.
Both marketing authorization holders and manufacturers of medicinal products are subject to comprehensive regulatory oversight by EMA and the competent authorities of the individual EU Member States both before and after grant of the manufacturing and marketing authorizations. This includes control of compliance with cGMP rules, which govern quality control of the manufacturing process and require documentation policies and procedures. We and our third-party manufacturers would be required to ensure that our processes, methods, and equipment are compliant with cGMP. Failure by us or by any of our third-party partners, including suppliers, manufacturers, and distributors to comply with EU laws and the related national laws of individual EU Member States governing the conduct of clinical trials, manufacturing approval, marketing authorization of medicinal products, both before and after grant of marketing authorization, and marketing of such products following grant of authorization may result in administrative, civil, or criminal penalties. These penalties could include delays in or refusal to authorize the conduct of clinical trials or to grant marketing authorization, product withdrawals and recalls, product seizures, suspension, or variation of the marketing authorization, total or partial suspension of production, distribution, manufacturing, or clinical trials, operating restrictions, injunctions, suspension of licenses, fines, and criminal penalties.
In addition, EU legislation related to pharmacovigilance, or the assessment and monitoring of the safety of medicinal products, provides that EMA and the competent authorities of the EU Member States have the authority to require companies to conduct additional post-approval clinical efficacy and safety studies. The legislation also governs the obligations of marketing authorization holders with respect to additional monitoring, adverse event management and reporting. Under the pharmacovigilance legislation and its related regulations and guidelines, we may be required to conduct a burdensome collection of data regarding the risks and benefits of marketed products and may be required to engage in ongoing assessments of those risks and benefits, including the possible requirement to conduct additional clinical studies, which may be time-consuming and expensive and could impact our profitability. Non-compliance with such obligations can lead to the


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variation, suspension or withdrawal of marketing authorization or imposition of financial penalties or other enforcement measures.
We face significant competition in an environment of rapid technological change and the possibility that our competitors may achieve regulatory approval before us or develop therapies that are more advanced or effective than ours, which may adversely affect our financial condition and our ability to successfully market or commercialize our product and product candidates.
The biotechnology and pharmaceutical industries, including the gene therapy field, are characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. We face substantial competition from many different sources, including large and specialty pharmaceutical and biotechnology companies, academic research institutions, government agencies and public and private research institutions.
We are aware of companies focused on developing AAV gene therapies in various indications, including 4D Molecular Therapeutics, Abeona Therapeutics Inc., Actus Therapeutics, Inc., Adverum Biotechnologies, Inc., Amicus Therapeutics, Inc., Applied Genetic Technologies Corporation, Asklepios BioPharmaceutical, Inc., Audentes Therapeutics, Inc., Axovant Sciences, Inc., BioMarin Pharmaceutical Inc., GenSight Biologics SA, Homology Medicines, Inc., Horama SAS, Lysogene SAS, MeiraGTx Limited, Nightstar Therapeutics plc., PTC Therapeutics, Inc., REGENXBIO, Inc., Sangamo Therapeutics, Inc., Sarepta Therapeutics, Inc., Solid Biosciences Inc., Ultragenyx Pharmaceuticals, Inc., uniQure N.V. and Voyager Therapeutics, Inc., as well as several companies addressing other methods for delivering or modifying genes and regulating gene expression. Any advances in gene therapy technology made by a competitor may be used to develop therapies that could compete against LUXTURNA and any of our product candidates.

For LUXTURNA and clinical product candidates we are developing, the main competitors include:

LUXTURNA. While no other approved pharmacologic agents exist for patients with RPE65-mediated IRD, Second Sight Medical Products, Inc. has received approval from FDA and other foreign regulatory authorities for a retinal prosthesis medical device, which is being marketed to RP patients with limited or no light perception. Another retinal prosthesis medical device from Retina Implant AG has obtained a CE Certificate of Conformity from its notified body, and is similarly indicated for blinded patients. Novelion Therapeutics, Inc. (formerly QLT Inc.) completed a Phase 1b clinical trial of a vitamin A derivative to treat RP and LCA. In the gene therapy space, certain companies and several academic institutions have conducted or plan to conduct clinical trials involving RPE65-based product candidates, including MeiraGTx and Horama SAS. To date, none of these organizations has completed a trial involving injection of a subject’s second eye or has initiated a Phase 3 trial.
SPK-CHM. We are aware that Nightstar Therapeutics plc, or Nightstar, is developing an AAV-based gene therapy for the treatment of choroideremia. Nightstar has obtained orphan product designation in the United States and the European Union for this product candidate for the treatment of choroideremia and has announced that it has initiated a Phase 3 trial for choroideremia. We are also aware that 4D Molecular Therapeutics and F. Hoffmann-La Roche AG have pre-clinical programs in process.
SPK-FVIII. The standard of care for moderate to severe hemophilia A patients is intravenously administered factor VIII protein or its derivatives that are produced by several companies. There are other companies developing gene therapies to treat hemophilia A, including BioMarin Pharmaceutical Inc., Ultragenyx Pharmaceuticals, Inc., in collaboration with Bayer HealthCare, Shire PLC, uniQure N.V., Sangamo Therapeutics, Inc. in collaboration with Pfizer and Telethon Institute for Gene Therapy in collaboration with Sanofi.
Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and other resources, such as larger research and development, clinical, marketing and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of competitors. Our commercial opportunity could be reduced or eliminated if competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Competitors also may obtain FDA or other regulatory approval for their products more rapidly or earlier than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. Additionally, technologies developed by our competitors may render our product or product candidates uneconomical or obsolete, and we may not be successful in marketing our product or product candidates against competitors.
In addition, as a result of the expiration or successful challenge of our patent rights, we could face more litigation with respect to the validity and/or scope of patents relating to our competitors’ products. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and commercialize.


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Even if we obtain and maintain approval for product candidates from FDA, we may never obtain approval for our product candidates outside of the United States, which would limit our market opportunities and adversely affect our business.
Approval of a product candidate in the United States by FDA does not ensure approval of such product candidate by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by FDA. Sales of our product candidates outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries also must approve the manufacturing and marketing of the product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and more onerous than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our products, if approved, is also subject to approval. We intend to submit to the EMA for approval of our product candidates in the EU, but obtaining such approval from the European Commission following the opinion of EMA is a lengthy and expensive process. When an MAA is submitted to the EMA, a related scientific evaluation is conducted by EMA's CHMP and a scientific opinion is prepared concerning the suitability of the product for authorization. This scientific opinion is sent to the European Commission which, before arriving at a final decision on an MAA, must consult the Standing Committee on Medicinal Products for Human Use. The Standing Committee is composed of representatives of the EU Members States and chaired by a non-voting European Commission representative. The European Parliament also has a related "droit de regard". The European Parliament's role is to ensure that the European Commission has not exceeded its powers in deciding to grant or refuse to grant a marketing authorization. In accordance with the centralized procedure, the maximum timeframe for the evaluation of an MAA is 210 days. This excludes clock stops during which additional information or written or oral explanations are provided by the applicant in response to questions posed by the CHMP. The CHMP adopted a positive opinion on September 21, 2018, recommending approval of LUXTURNA.
Even if a product candidate is approved, FDA or the European Commission may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of approval.
Regulatory authorities in countries outside of the United States and the EU also have requirements for approval of product candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our product candidates in certain countries.
Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Also, regulatory approval for any of our product candidates may be withdrawn. If we fail to comply with regulatory requirements, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business, financial condition, results of operations and prospects will be adversely affected.
Risks related to the commercialization of LUXTURNA and our product candidates for which we obtain marketing approval
If we are unable to expand our market development capabilities or enter into agreements with third parties to market and sell any of our product candidates for which we obtain marketing approval, we may be unable to generate any product revenue.
To successfully commercialize any products that may result from our development programs, we need to continue to expand our market development capabilities, either on our own or with others. The development of our own market development effort is, and will continue to be, expensive and time-consuming and could delay any product launch. Moreover, we cannot be certain that we will be able to successfully develop this capability.
We have entered into a collaboration with Pfizer for the development and commercialization of SPK-FIX product candidates for the treatment of hemophilia B pursuant to which Pfizer would commercialize such product candidates, and we would be eligible to receive specified milestone payments and royalties, for any product developed under the agreement. We have entered into a license and commercialization agreement with Novartis for the development and commercialization of investigational voretigene neparvovec outside the United States, and we are eligible to receive specified milestone payments and royalties pursuant to that agreement. We may enter into collaborations regarding other of our product candidates with other entities to utilize their established marketing and distribution capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If any current or future collaborators do not commit sufficient resources to commercialize our products, or we are unable to develop the necessary capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. We compete with many companies that currently have extensive, experienced and well-funded medical affairs, marketing and sales operations to recruit, hire, train and retain marketing and sales personnel. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates. Without an


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internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.
If the market opportunities for our product candidates are smaller than we believe they are, our product revenues may be adversely affected and our business may suffer.
We focus our research and product development on treatments for severe genetic and orphan diseases. Our understanding of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. These estimates may prove to be incorrect and new studies may reduce the estimated incidence or prevalence of these diseases. The number of patients in the United States, the EU and elsewhere may turn out to be lower than expected, may not be otherwise amenable to treatment with our products or patients may become increasingly difficult to identify and access, all of which would adversely affect our business, financial condition, results of operations and prospects.
Further, there are several factors that could contribute to making the actual number of patients who receive other potential products less than the potentially addressable market. These include the lack of widespread availability of, and limited reimbursement for, new therapies in many underdeveloped markets. Further, the severity of the progression of a disease up to the time of treatment, especially in certain degenerative conditions, will likely diminish the therapeutic benefit conferred by a gene therapy due to irreversible cell death. Lastly, certain patients’ immune systems might prohibit the successful delivery of certain gene therapy products to the target tissue, thereby limiting the treatment outcomes.
Our business could be affected by government price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product and any of our product candidates that may be approved in the future, which would adversely affect our revenue and results of operations.
We expect that coverage and reimbursement of pharmaceutical drugs may be increasingly restricted both in the United States and internationally. The escalating cost of health care has led to increased pressure on the health care industry to reduce costs. In particular, increased public scrutiny has been placed on wholesale prices of drugs, and such prices continue to be subject to intense political and public debate in the United States and abroad. Government and private third-party payers have proposed health care reforms and cost reductions. A number of federal and state proposals to control the cost of health care, including the cost of drug treatments, have been made in the United States. Specifically, there have been several recent United States Congressional inquiries and proposed federal and state bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drugs. At least eight states have passed legislation related to drug price transparency and many others have pending legislation. In addition, there have been proposals to impose federal rebates on Medicare Part D drugs, which would require federally-mandated rebates on either all drugs dispensed to Medicare Part D beneficiaries or on only those drugs dispensed to certain groups of lower income beneficiaries. In some international markets, the government controls the pricing, which can affect the profitability of drugs. Current government regulations and possible future legislation regarding health care may affect coverage and reimbursement for medical treatment by third-party payers, which may render our product or any product candidates for which we obtain marketing approval not commercially viable or may adversely affect our anticipated future revenues and gross margins.
In 2018, President Trump released the Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs, or Blueprint. Certain proposals in the Blueprint seek to encourage innovation and expand outcome-based payments in Medicare and Medicaid and may cause significant operational and reimbursement changes for the pharmaceutical industry. We cannot predict whether the Blueprint may affect our ongoing discussions with the Centers for Medicare and Medicaid Services, or, CMS, to align on our proposal for an installment payment option and flexibility to offer greater outcomes-based rebates.
In late 2018, CMS issued an advance notice of proposed rulemaking, or ANPRM, describing a potential mandatory model to test Medicare reimbursement based on an "International Pricing Index", or IPI. CMS is considering issuing a proposed rule that would describe the model in more detail in spring 2019, with the goal of starting the model in spring 2020. If a model would proceed as described, we cannot predict the requisite infrastructure and reporting requirements, existing and new data sources required to establish an IPI and target price and the impact on price reporting and reporting mechanics.
We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, future price controls or other changes in pricing regulation or negative publicity related to the pricing of pharmaceutical drugs generally could restrict the amount that we are able to charge for our future products, which would adversely affect our anticipated revenue and results of operations.
The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for our products and any future products, if approved, could limit our ability to market those products and decrease our ability to generate product revenue.


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The cost of a single administration of gene therapy products can be substantial. We expect that coverage and reimbursement by government and commercial payers will be essential for most patients to be able to afford these treatments. Accordingly, sales of our product, and any product candidates for which we obtain marketing approval, will depend substantially, both domestically and abroad, on the extent to which the prices of such product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payers. Coverage and reimbursement by a third-party payer may depend upon several factors, including the third-party payer’s determination that use of a product is:
a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective; and
neither experimental nor investigational.
Obtaining coverage and reimbursement for a product from third-party payers is a time-consuming and costly process that could require us to provide to the payer supporting scientific, clinical and cost-effectiveness data. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement.
There is significant uncertainty related to third-party coverage and reimbursement of newly approved products, including potential one-time gene therapies. In the United States, third-party payers, including government payers such as the Medicare and Medicaid programs, play an important role in determining the extent to which new drugs and biologics will be covered and reimbursed. The Medicare and Medicaid programs increasingly are used as models for how private payers and government payers develop their coverage and reimbursement policies. LUXTURNA has been approved for coverage and reimbursement by CMS, the agency responsible for administering the Medicare program. We cannot be assured that Medicare or Medicaid will cover any other approved products or provide reimbursement at adequate levels to realize a sufficient return on our investment. Moreover, reimbursement agencies in the EU may be more conservative than CMS. For example, several cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement in certain EU Member States. It is difficult to predict what third-party payers will decide with respect to the coverage and reimbursement for our products for which we obtain marketing approval.
Outside the United States, international operations generally are subject to extensive government price controls and other market regulations, and increasing emphasis on cost-containment initiatives in the EU, Canada and other countries may put pricing pressure on us. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. It also can take a significant amount of time after approval of a product to secure pricing and reimbursement for such product in many counties outside the United States. In general, the prices of medicines under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for medical products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product and product candidates. Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable product revenues.
Moreover, increasing efforts by government and third-party payers in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for our product and product candidates. Payers increasingly are considering new metrics as the basis for reimbursement rates, such as average sale price, average manufacturer price, or AMP, and Actual Acquisition Cost. The existing data for reimbursement based on some of these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates, and CMS has begun making pharmacy National Average Drug Acquisition Cost and National Average Retail Price data publicly available on at least a monthly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement metrics on the willingness of payers to cover any products for which we obtain marketing approval. We expect to experience pricing pressures in connection with the sale of any products for which we obtain marketing approval due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become intense. As a result, increasingly high barriers are being erected to the entry of new products such as ours.
In the EU, each EU Member State may restrict the range of medicinal products for which its national health insurance system provides reimbursement and can control the prices of medicinal products for human use marketed in its territory. As a result, following receipt of marketing authorization in the EU, through any application route, an applicant is required to engage in pricing discussions and negotiations with the competent pricing authority in the individual EU Member States. Some EU


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Member States operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed upon. Other EU Member States approve a specific price for the medicinal product or may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. The downward pressure on healthcare costs in general, particularly prescription drugs, has become more intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, we may face competition for our product candidates from lower priced products in foreign countries that have placed price controls on pharmaceutical products.
A health technology assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in 24 EU Member States. An HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted. An HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcare system. Those elements of medicinal products are compared with other treatment options available on the market. The outcome of an HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual EU Member States. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product varies between EU Member States. In addition, pursuant to Directive 2011/24/EU on the application of patients’ rights in cross-border healthcare, a voluntary network of national authorities or bodies responsible for an HTA in the individual EU Member States was established. The purpose of the network is to facilitate and support the exchange of scientific information concerning HTAs. This may lead to harmonization of the criteria taken into account in the conduct of HTAs between EU Member States and in pricing and reimbursement decisions and may negatively affect price in at least some EU Member States. On January 31, 2018, the European Commission adopted a proposal for a regulation on health technologies assessment. This legislative proposal intends to boost cooperation amongst EU Member States for assessing health technology. If adopted in its current form, the regulation will permit EU Member States to use common HTA tools, methodologies and procedures across the EU, working together in four main areas: joint clinical assessments focusing on the most innovative health technologies with the most potential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities, identification of emerging health technologies to identify promising technologies early and continuing voluntary cooperation in other areas.
Ethical, legal and social issues related to genetic testing may reduce demand for LUXTURNA or any other gene therapy products for which we obtain marketing approval.
We anticipate that prior to receiving certain gene therapies, patients would be required to undergo genetic testing. Genetic testing has raised concerns regarding the appropriate utilization and the confidentiality of information provided by genetic testing. Genetic tests for assessing a person’s likelihood of developing a chronic disease have focused public attention on the need to protect the privacy of genetic information. For example, concerns have been expressed that insurance carriers and employers may use these tests to discriminate on the basis of genetic information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities restricting genetic testing or calling for limits on or regulating the use of genetic testing, particularly for diseases for which there is no known cure. Any of these scenarios could decrease demand for LUXTURNA or any other products for which we obtain marketing approval.
The commercial success of any of our product candidates, if approved, will depend upon its degree of market acceptance by physicians, patients, third-party payers and others in the medical community.
Even with the requisite approvals from FDA in the United States, European Commission in the EU and other regulatory authorities internationally, the commercial success of any products for which we obtain marketing approval will depend, in part, on the acceptance of physicians, patients and health care payers of gene therapy products in general, and our product candidates in particular, as medically necessary, effective, safe, and cost-effective. Any product that we commercialize may not gain acceptance by physicians, patients, health care providers/payers and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of gene therapy products of any products for which we obtain marketing approval, will depend on several factors, including:
the efficacy and safety of such product as demonstrated in clinical trials and subsequently in the market;
the potential and perceived advantages of such product over alternative treatments;
the cost of treatment relative to alternative treatments;
the clinical indications for which such product is approved by FDA or the European Commission;
patient awareness of, and willingness to seek, genotyping;
the willingness of physicians to prescribe new therapies;
the willingness of the target patient population to try new therapies;


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the prevalence and severity of any side effects;
product labeling requirements imposed by FDA, the European Commission or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling;
relative convenience and ease of administration;
the strength of marketing and distribution support;
the timing of market introduction of competitive products;
publicity concerning our products or competing products and treatments;
ethical, social and legal concerns about gene therapy that result in additional regulations restricting or prohibiting our products; and
sufficient third-party payer coverage and reimbursement.
Even if a potential product displays a favorable benefit/risk profile in clinical trials, market acceptance of the product will not be fully known until after it is launched.
Our gene therapy approach utilizes vectors derived from viruses, which may be perceived as unsafe or may result in unforeseen adverse events. Negative public opinion and increased regulatory scrutiny of gene therapy may damage public perception of the safety of our product and product candidates and adversely affect our ability to conduct our business or obtain regulatory approvals for our product candidates.
Gene therapy remains a novel technology, with no gene therapy product other than LUXTURNA approved for a genetic disease to date in the United States and only two gene therapy products for genetic diseases approved to date in the EU. Public perception may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. In particular, our success will depend upon physicians who specialize in the treatment of genetic diseases targeted by our product and product candidates, if approved, prescribing treatments that involve the use of our product and product candidates, if approved, in lieu of, or in addition to, existing treatments with which they are familiar and for which greater clinical data may be available. More restrictive government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop. For example, earlier gene therapy trials led to several well-publicized adverse events, including cases of leukemia and death seen in other trials using other vectors. Serious adverse events in our clinical trials, or other clinical trials involving gene therapy products or our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for LUXTURNA and any other products for which we obtain marketing approval.
If we obtain approval to commercialize any of our product candidates outside of the United States, in particular in the EU, a variety of risks associated with international operations could materially adversely affect our business.
We expect that we will be subject to additional risks in commercializing any of our product candidates outside the United States, including:
different regulatory requirements for approval of drugs and biologics in foreign countries;
reduced protection for intellectual property rights;
unexpected changes in tariffs, trade barriers and regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons, floods and fires.
Risks related to third parties


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We have in the past entered, and in the future may enter, into collaborations with third parties to develop or commercialize product candidates. If these collaborations are not successful, our business could be adversely affected.
We have entered into licensing and collaboration agreements with third parties, including our collaboration agreement with Pfizer for the development and commercialization of SPK-FIX product candidates and our licensing and commercialization agreement with Novartis for the development and commercialization of voretigene neparvovec outside of the United States. We may enter into additional collaborations in the future. We have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our and our collaborators’ abilities to successfully perform the functions assigned to each of us in these arrangements. In addition, our collaborators have the ability to abandon research or development projects and terminate applicable agreements. Moreover, an unsuccessful outcome in any clinical trial for which our collaborator is responsible could be harmful to the public perception and prospects of our gene therapy platform.
Our global collaboration agreement with Pfizer, into which we entered in December 2014, as amended in June 2016 and as further amended in November 2017, relates to the development and commercialization of product candidates for the treatment of hemophilia B. We entered into a supply agreement with Pfizer in February 2018 to supply Pfizer with one batch of SPK-9001 drug product. In July 2018, we transferred responsibility for our hemophilia B gene therapy program to Pfizer and Pfizer initiated its Phase 3 program. 
Our licensing and commercialization agreement with Novartis, into which we entered in January 2018, relates to the development and commercialization of voretigene neparvovec outside of the United States. Under this agreement, we granted Novartis an exclusive right and license for the development and commercialization of voretigene neparvovec in humans outside of the United States. We retain responsibility for maintaining marketing authorization for LUXTURNA granted by the European Commission, and Novartis is responsible for seeking regulatory approval for voretigene neparvovec outside of the United States and EU. If Novartis fails to devote sufficient financial and other resources to the future development and commercialization of voretigene neparvovec outside the United States, the development and commercialization of voretigene neparvovec outside of the United States could be delayed or could fail, which would result in a delay of receiving milestone payments or royalties with respect to voretigene neparvovec or in our not receiving milestone payments or royalties at all. Novartis has the right to terminate the license agreement at any time upon one year’s prior written notice to us. Novartis also may terminate the license agreement in the event there is an uncured material breach of our supply agreement by us, resulting in Novartis taking over manufacturing of voretigene neparvovec, or in the event we undergo a change of control. In addition, if Novartis takes over manufacturing of voretigene neparvovec because of our uncured material breach of the supply agreement, the royalties we receive under the license agreement will be reduced. If Novartis terminates our agreement at any time, because of an uncured material breach of the supply agreement or for any other reason, it would delay or prevent our further development and commercialization of voretigene neparvovec, may materially harm our business and could accelerate our need for additional capital.
We may enter into additional collaborations with third parties in the future. Our relationships with third parties, including Pfizer and Novartis, and any future collaborations we enter in the future, may pose several risks, including the following:
collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
collaborators may not perform their obligations as expected;
we may not achieve any milestones, or receive any milestone payments, under our collaborations, including milestones and/or payments that we expect to achieve or receive;
our collaborators may not achieve sales targets and we may not receive significant royalty payments based on sales by our collaborators;
the clinical trials conducted as part of these collaborations may not be successful;
collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;
collaborators may delay clinical trials, provide insufficient funding for clinical trials, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;


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we may not have access to, or may be restricted from disclosing, certain information regarding product candidates being developed or commercialized under a collaboration and, consequently, may have limited ability to inform our stockholders about the status of such product candidates;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
product candidates developed in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of any such product candidate;
disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development of any product candidates, may cause delays or termination of the research, development or commercialization of such product candidates, may lead to additional responsibilities for us with respect to such product candidates or may result in litigation or arbitration, any of which would be time-consuming and expensive;
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
disputes may arise with respect to the ownership of intellectual property developed pursuant to our collaborations;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and
collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to raise additional capital to pursue further development or commercialization of the applicable product candidates.
If our collaborations do not result in the successful development and commercialization of products, or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our development of product candidates could be delayed, and we may need additional resources to develop our product candidates. In addition, if one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and the perception of us in the business and financial communities could be adversely affected. Our collaborators are subject to similar risks with respect to product development, regulatory approval and commercialization and their business, results of operations and financial condition could be harmed should they experience any such risks, which could adversely affect our collaboration.
We may in the future decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of our product candidates. These relationships, or those like them, may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we could face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. Our ability to reach a definitive collaboration agreement will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of several factors. If we license rights to product candidates, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture.
We may not be successful in finding strategic collaborators for continuing development of certain of our product candidates or successfully commercializing or competing in the market for certain indications.
We may seek to develop strategic partnerships for developing certain of our product candidates or commercializing certain of our products and product candidates, due to capital costs required to develop the product candidates or manufacturing constraints. We may not be successful in our efforts to establish such a strategic partnership or other alternative arrangements for our products or product candidates because our research and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaborative effort or third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. In addition, we may be restricted under existing collaboration agreements from entering into future agreements with potential collaborators. For example, under our collaboration with Pfizer, we are subject to certain restrictions on our ability to directly or indirectly engage in certain activities relating to competing factor IX gene therapy products. We cannot be certain that, following a strategic transaction or license, we will achieve an economic benefit that justifies such transaction.


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If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms or at all, we may have to curtail the development of a product candidate, reduce or delay its development program, delay its potential commercialization, reduce the scope of any sales or marketing activities or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our product candidates and our business, financial condition, results of operations and prospects may be materially and adversely affected.
Risks related to manufacturing
Gene therapies are novel, complex and difficult to manufacture. We could experience production problems in our network of internal and external (CDMO) facilities that result in delays in our development or commercialization programs or otherwise adversely affect our business.
We completed construction of our own manufacturing facility in 2014, and we may encounter difficulties in operating this facility. The manufacturing process we use to produce LUXTURNA and our product candidates is complex, novel and has been validated for commercial use only with respect to LUXTURNA in the United States and in Europe. Several factors could cause production interruptions, including equipment malfunctions, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error or disruptions in the operations of our suppliers.
Our product and product candidates require processing steps that are more complex than those required for most chemical pharmaceuticals. Moreover, unlike chemical pharmaceuticals, the physical and chemical properties of a biologic such as ours generally cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product will perform in the intended manner. Accordingly, we employ multiple steps to control our manufacturing process to assure that the product or product candidate is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory. We may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, EU or other applicable standards or specifications with consistent and acceptable production yields and costs.
In addition, FDA, EMA and other foreign regulatory authorities may require us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, FDA, EMA or other foreign regulatory authorities may require that we not distribute a lot until the agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. We have experienced lot failures in the past and there is no assurance we will not experience such failures in the future. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects.
We also may encounter problems hiring and retaining the experienced specialist scientific, quality control and manufacturing personnel needed to operate our manufacturing process, which could result in delays in our production or difficulties in maintaining compliance with applicable regulatory requirements.
Any problems in our manufacturing process or facilities could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit our access to additional attractive development programs. Problems in our manufacturing process or CDMO facilities also could restrict our ability to meet market demand for LUXTURNA, or any product candidates for which we may receive marketing approval, and to meet our supply obligations to Novartis. Under our supply agreement with Novartis, we have agreed to provide all of the commercial supply of LUXTURNA required by Novartis, subject to certain conditions. If we are unable to produce enough product to meet the required demand, or if the product we produce does not satisfy the quality standards set forth in the supply agreement, Novartis may be able to manufacture LUXTURNA, terminate our license agreement and/or pay reduced royalties on LUXTURNA. While we have manufactured sufficient supplies for the commercial launch of LUXTURNA in the United States, we may not be able to manufacture sufficient supplies to continue commercial sales on a long-term basis.
Disruptions in our manufacturing process may delay or disrupt our commercialization efforts.
Our GMP manufacturing facility was approved by FDA for the commercial manufacture of LUXTURNA in December 2017 and by EMA in 2018. As an approved facility, we will need to continue to ensure that all of our processes, methods and equipment are compliant with cGMP and perform extensive audits of vendors, contract laboratories and suppliers. If any of our vendors, contract laboratories or suppliers is found to be out of compliance with cGMP, we may experience delays or disruptions in manufacturing while we work with these third parties to remedy the violation or while we work to identify suitable replacement vendors, contract laboratories or suppliers. The cGMP requirements govern quality control of the


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manufacturing process and documentation policies and procedures. In complying with cGMP, we will be obligated to expend time, money and effort in production, record keeping and quality control to assure that the product meets applicable specifications and other requirements. If we fail to comply with these requirements, we would be subject to possible regulatory action and may not be permitted to sell any products that we may develop.
We may rely on third parties to conduct aspects of our product manufacturing, and these third parties may not perform satisfactorily.
While we produce our commercial supply of LUXTURNA at our own facility, we may rely on third parties for the production of certain materials for our product candidates and, therefore, we can control only certain aspects of their activities. We have manufacturing agreements with third parties that provide for, among other things, production of product candidates for our current and future early stage clinical trials. Under certain circumstances, the other party is entitled to terminate its arrangement with us. If we need to enter into alternative arrangements, it could delay our product development activities. Our reliance on third parties for certain manufacturing activities will reduce our control over these activities but will not relieve us of our responsibility to ensure compliance with all required regulations. If a third party does not successfully carry out its contractual duties, meet expected deadlines or manufacture our product candidates in accordance with regulatory requirements, or if there are disagreements between us and any such third party, we will not be able to complete, or may be delayed in completing, the preclinical studies required to support future IND submissions and the clinical trials required for approval of our product candidates. In such instances, we may need to enter into an appropriate replacement third-party relationship, which may not be readily available or on acceptable terms, which would cause additional delay or increased expense prior to the approval of our product candidates and would thereby have a material adverse effect on our business, financial condition, results of operations and prospects.
Our reliance on these third parties entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:
reduced control for certain aspects of manufacturing activities;
termination or nonrenewal of manufacturing and service agreements with third parties in a manner or at a time that is costly or damaging to us; and
disruptions to the operations of our third-party manufacturers and service providers caused by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or service provider.
Any of these events could lead to clinical trial delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize future product candidates. Some of these events could be the basis for FDA action or action of equivalent competent authorities in foreign jurisdictions, including injunction, recall, seizure or total or partial suspension of product manufacture.
Failure to comply with ongoing regulatory requirements could cause us to suspend production or put in place costly or time-consuming remedial measures.
The regulatory authorities may, at any time following approval of a product for sale, audit the manufacturing facilities for such product. If any such inspection or audit identifies a failure to comply with applicable regulations, or if a violation of product specifications or applicable regulations occurs independent of such an inspection or audit, the relevant regulatory authority may require remedial measures that may be costly or time-consuming to implement and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a manufacturing facility. Any such remedial measures imposed upon us could materially harm our business, financial condition, results of operations and prospects.
If we fail to comply with applicable cGMP regulations, FDA and foreign regulatory authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new product candidate or suspension or revocation of a pre-existing approval. Such an occurrence may cause our business, financial condition, results of operations and prospects to be materially harmed.
Additionally, if supply from our facility is interrupted, there could be a significant disruption in commercial supply of LUXTURNA or any other product for which we obtain marketing approval, and in clinical supply for our product candidates. This also could affect our ability to meet our supply obligations under our agreement with Novartis. We currently do not have a backup manufacturer for commercial supply of LUXTURNA and have limited back-up manufacturing capacity for clinical trial supply for our product candidates. An alternative manufacturer would need to be qualified, through regulatory filings, which could result in further delay. The regulatory authorities also may require additional clinical trials if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and could result in a delay in our desired clinical and commercial timelines.


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Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.
Because we currently rely on third parties to manufacture certain of our product candidates and to perform quality testing, and because we collaborate with various organizations and academic institutions for the advancement of our gene therapy platform, we must, at times, share our proprietary technology and confidential information, including trade secrets, with them. We seek to protect our proprietary technology, in part, by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our proprietary technology and confidential information or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business, financial condition, results of operations and prospects.
Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of these agreements, independent development or publication of information including our trade secrets by third parties. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business, financial condition, results of operations and prospects.
Any contamination in our manufacturing process, shortages of raw materials or failure of any of our key suppliers to deliver necessary components could result in delays in our clinical development or marketing schedules and adversely affect our ability to meet our supply obligations to Novartis.
Given the nature of biologics manufacturing, there is a risk of contamination. Any contamination could materially adversely affect our ability to produce product candidates on schedule and could, therefore, harm our results of operations and cause reputational damage.
Some of the raw materials and other components required in our manufacturing process are derived from biologic sources. Such raw materials are difficult to procure and may be subject to contamination or recall. A material shortage, contamination, recall or restriction on the use of biologically derived substances in the manufacture of our product or product candidates could adversely impact or disrupt the commercial manufacturing or the production of clinical material, which could materially and adversely affect our development and commercialization timelines and our business, financial condition, results of operations and prospects and could adversely affect our ability to meet our supply obligations to Novartis.
Interruptions in the supply of product or inventory loss may adversely affect our operating results and financial condition.
LUXTURNA and our product candidates are manufactured using technically complex processes requiring specialized facilities, highly specific raw materials and other production constraints. The complexity of these processes, as well as strict government standards for the manufacture and storage of our products, subjects us to production risks. While product batches released for use in clinical trials or for commercialization undergo sample testing, some defects may only be identified following product release. In addition, process deviations or unanticipated effects of approved process changes may result in these intermediate products not complying with stability requirements or specifications. Our product and product candidates must be stored and transported at temperatures within a certain range. If these environmental conditions deviate, our product’s and product candidates’ remaining shelf-lives could be impaired or their efficacy and safety could be adversely affected, making them no longer suitable for use.
The occurrence, or suspected occurrence, of production and distribution difficulties can lead to lost inventories and, in some cases, product recalls, with consequential reputational damage and the risk of product liability. The investigation and remediation of any identified problems can cause production delays, substantial expense, lost sales and delays of new product launches. Any interruption in the supply of finished products or the loss thereof could hinder our ability to timely distribute our products and satisfy customer demand. Any unforeseen failure in the storage of the product or loss in supply could delay our clinical trials and, with respect to LUXTURNA or any of our product candidates that may be approved, result in a loss of our market share and negatively affect our business, financial condition, results of operations and prospects.
Risks related to our business operations
We may not be successful in our efforts to identify or discover additional product candidates and may fail to capitalize on programs or product candidates that may be a greater commercial opportunity or for which there is a greater likelihood of success.


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The success of our business depends upon our ability to identify, develop and commercialize product candidates based on our gene therapy platform. Research programs to identify new product candidates require substantial technical, financial and human resources. Although certain of our product candidates are currently in clinical or preclinical development, we may fail to identify other potential product candidates for clinical development for several reasons. For example, our research may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to have harmful side effects, may be commercially impracticable to manufacture or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.
Additionally, because we have limited resources, we may forego or delay pursuit of opportunities with certain programs or product candidates or for indications that later prove to have greater commercial potential. Our spending on current and future research and development programs may not yield any commercially viable products. If we do not accurately evaluate the commercial potential for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. Alternatively, we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.
If any of these events occur, we may be forced to abandon our development efforts with respect to a particular product candidate or fail to develop a potentially successful product candidate, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our future success depends on our ability to retain key employees and to attract, retain and motivate qualified personnel.
We are dependent on members of our executive team, the loss of whose services may adversely impact the achievement of our objectives. While we have entered into employment agreements with each of our executive officers, any of them could leave our employment at any time, as all of our employees are “at will” employees. We do not have “key person” insurance on any of our employees. The loss of the services of one or more of our current employees might impede the achievement of our research, development and commercialization objectives.
Recruiting and retaining other qualified employees for our business, including scientific and technical personnel is, and will continue to be, critical to our success. There currently is a shortage of skilled individuals with substantial gene therapy experience, which is likely to continue. As a result, competition for skilled personnel, including in gene therapy research and vector manufacturing, is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies and academic institutions for individuals with similar skill sets. In addition, failure to succeed in preclinical or clinical trials or applications for marketing approval may make it more challenging to recruit and retain qualified personnel. The inability to recruit, or loss of services of certain executives or key employees, may impede the progress of our research, development and commercialization objectives and have a material adverse effect on our business, financial condition, results of operations and prospects.
If we are unable to manage expected growth in the scale and complexity of our operations, our performance may suffer.
If we are successful in executing our business strategy, we will need to expand our managerial, operational, financial and other systems and resources in connection with the commercialization of LUXTURNA in the United States as well as to manage our operations, continue our research and development activities and, over the longer term, continue to build a commercial infrastructure to support commercialization of any other products for which we obtain marketing approval. Future growth would impose significant added responsibilities on members of management. It is likely that our management, finance, development personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and product candidates and the commercialization of LUXTURNA requires that we continue to develop more robust business processes and improve our systems and procedures in each of these areas and to attract and retain sufficient numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our research, development, commercialization and growth goals.


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Our employees, principal investigators, consultants, advisors and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants, advisors and commercial partners. Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in the EU and other jurisdictions, provide accurate information to FDA, the European Commission and other regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with FDA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.
Healthcare legislative and regulatory reform measures may have a material adverse effect on our business and results of operations.
Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, is a sweeping measure intended to, among other things, expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program.
Several provisions of the law may affect us and increase certain of our costs. See the risk factor entitled "Failure to comply with reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs could result in additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects" for more information regarding PPACA.
In addition, other legislative changes have been adopted since the PPACA was enacted. These changes include aggregate reductions in Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, following passage of the Bipartisan Budget Act of 2018, will remain in effect through 2027 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and, accordingly, our financial operations.
We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the reimbursement our customers may receive for our products. Further, there have been, and there may continue to be, judicial and Congressional challenges to certain aspects of the PPACA. For example, the U.S. Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the "individual mandate". Additional legislative and regulatory changes to the PPACA, its implementing regulations and guidance and its policies, remain possible in the 115th U.S. Congress and under the Trump Administration. However, it remains unclear how any new legislation or regulation might affect the prices we may obtain for LUXTURNA or any of our product candidates for which regulatory approval is obtained. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
In the United States, the research, manufacturing, distribution, sale, and promotion of drugs and biologic products are subject to regulation by various federal, state, and local authorities in addition to FDA, including CMS, other divisions of the


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United States Department of Health and Human Services, or HHS, (e.g., the Office of Inspector General), the United States Department of Justice offices of the United States Attorney, the Federal Trade Commission and state and local governments. Our operations are directly, or indirectly through our prescribers, customers and purchasers, subject to various federal and state fraud and abuse laws and regulations, including, without limitation, the federal Anti-Kickback Statute, the federal civil and criminal False Claims Act and Physician Payments Sunshine Act and regulations and equivalent provisions in other countries. These laws apply to, among other things, our proposed sales, marketing and educational programs. In addition, we may be subject to patient privacy laws by both the federal government and the states in which we conduct our business. The laws that affect our operations include, but are not limited to:
the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, in return for the purchase, recommendation, leasing or furnishing of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand, and prescribers, purchasers and formulary managers on the other. Liability may be established under the federal Anti-Kickback Statute without proving actual knowledge of the statute or specific intent to violate it. There are a number of statutory exemptions and regulatory safe harbors protecting some common activities from prosecution; however, those exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particular statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute, but the legality of the arrangement will be evaluated on a case-by-case basis based on the totality of the facts and circumstances. We seek to comply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs. Violations of the Anti-Kickback Statute are subject to significant civil, criminal, and administrative penalties, including damages, fines, imprisonment, and exclusion from government-funded healthcare programs like Medicare and Medicaid;
the federal civil False Claims Act, which prohibits any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds; or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the federal False Claims Act for allegedly submitting false or misleading pricing information to government health care programs and providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have faced enforcement actions for causing false claims to be submitted because of the company marketing a product for unapproved, and thus non-reimbursable, uses. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. The civil False Claims Act also permits an individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the statute and to share in any monetary recovery. False Claims Act liability is potentially significant because the statute provides for trebling of proved sustained damages and significant mandatory penalties per false claim. Because of the potential for large monetary exposure, healthcare and pharmaceutical companies often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages and per claim penalties that may awarded in litigation proceedings. Companies may be required, however, to enter into corporate integrity agreements with the government, which may impose substantial costs on companies to ensure compliance. Criminal prosecution is possible for making or presenting a false or fictitious or fraudulent claim to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among, other things, executing, or attempting to execute, a scheme to defraud any healthcare benefit program or knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or fraudulent statement