Editas Medicine, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated financial statements. Amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and operating progress
Editas is a research-stage genome-editing company focused on CRISPR-based medicines. It had no product sales; all programs remained in research or preclinical development. The company reported filing an IND application for its lead LCA10 program in October 2018, after quarter-end. Its stated “EM22” goals include at least three experimental medicines in early-stage clinical trials and two additional medicines in or ready for late-stage trials by the end of 2022.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Collaboration and other R&D revenue | $14.5 | $6.3 | $25.8 | $10.1 |
| Research and development expense | $17.4 | $20.4 | $71.5 | $56.7 |
| General and administrative expense | $13.3 | $12.6 | $41.8 | $36.8 |
| Total operating expenses | $30.8 | $33.0 | $113.3 | $93.6 |
| Operating loss | $(16.3) | $(26.7) | $(87.5) | $(83.5) |
| Net loss | $(15.2) | $(26.6) | $(84.9) | $(84.1) |
| Basic and diluted loss per share | $(0.32) | $(0.64) | $(1.81) | $(2.13) |
Q3 revenue rose primarily on Allergan revenue, partly offset by lower Juno revenue. For the nine-month period, higher Allergan and Beam revenue and a modest increase in Juno revenue drove the increase. The company reported no product revenue and no gross margin measure. Q3 operating expenses declined 7%; nine-month expenses increased 21%, reflecting greater research activity, personnel and stock compensation.
ASC 606 comparability: Adoption of the new revenue standard reduced reported Q3 2018 revenue by $4.5 million and increased the reported net loss by the same amount compared with amounts calculated without ASC 606. For the nine months, it reduced revenue and increased net loss by $3.1 million. The company recorded a $0.5 million increase in deferred revenue and accumulated deficit at adoption.
| Liquidity and balance sheet | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $111.7 | $146.6 |
| Marketable securities | $225.8 | $182.5 |
| Total current assets | $342.6 | $332.2 |
| Total assets | $387.6 | $373.3 |
| Total liabilities | $163.2 | $165.2 |
| Deferred revenue, current and non-current | $112.8 | $108.0 |
| Construction financing lease obligation, non-current | $32.7 | $33.4 |
Cash, cash equivalents and marketable securities totaled $337.5 million at quarter-end. The company had no notes payable outstanding; its remaining stated debt-like obligation was the construction financing lease. Working capital was $316.5 million. The accumulated deficit was $391.2 million.
For the first nine months, operating cash flow was $(47.0) million, investing cash flow $(44.5) million, and financing cash flow $56.6 million; cash, cash equivalents and restricted cash decreased $34.9 million. Financing included $48.5 million net proceeds from the January 2018 at-the-market offering and $8.4 million from option exercises. Investing outflows primarily reflected purchases of marketable securities, partly offset by maturities; these movements largely reflect investment portfolio management rather than operating expenditure alone.
Material changes, outlook and risks
- Collaborations: In May 2018, Juno’s collaboration expanded from three to four research areas; Editas received a $5.0 million amendment payment and two $2.5 million technical milestones. Juno research funding can total up to $22.0 million over the initial five-year program term, subject to the agreement.
- Allergan and LCA10: Allergan exercised its LCA10 option in July and paid $15.0 million. Editas elected to share U.S. profits and losses equally and co-develop the program; the parties had not yet entered a separate profit-sharing agreement as of September 30. Editas expects to fund 50% of U.S. program costs. The next potential disclosed Allergan milestone was $8.0 million; its achievement was uncertain.
- Beam: Editas licensed certain intellectual property to Beam and received preferred stock valued at approximately $3.6 million, in addition to nominal cash consideration. It recognized $4.0 million of Beam revenue in the first nine months.
- Runway and funding: Management expected cash, equivalents, marketable securities, interest income and anticipated Juno research support to fund operations and capital expenditures for at least 24 months from the filing date. The company nevertheless expects substantial additional capital will be required and warned that unavailable or unfavorable financing could force delays, reductions or termination of programs. It reported a $150 million ATM sales agreement entered in March 2018, with no shares sold under it as of the filing.
- Costs and contingencies: The company expects significant expenses and losses to continue and does not expect profitability in 2018 or the foreseeable future. Licensor patent prosecution and maintenance reimbursements were $11.0 million for the first nine months, with future commitments described as substantial but not determinable. A $12.5 million Broad research-funding obligation was recorded as R&D expense and settled with common shares in June. Further contingent research-funding and license success payments may arise under specified conditions.
- Intellectual property: The Federal Circuit affirmed the PTAB’s no-interference-in-fact decision in September 2018; the opposing parties had until December 9, 2018 to seek Supreme Court review. One in-licensed European patent had been revoked, with an appeal pending, and multiple other European patents faced opposition. A post-grant review petition challenged an in-licensed Cpf1 patent; the PTAB’s institution decision was expected by January 24, 2019. These proceedings could narrow or eliminate patent rights important to the platform.
- Development risks: The filing emphasizes the early stage of the pipeline, uncertain safety and efficacy of genome editing, off-target editing risk, regulatory uncertainty, difficulty enrolling rare-disease trials, manufacturing dependence on third parties, competition and reliance on collaborators. The company also disclosed that the Broad Street patent proceedings drive significant and potentially ongoing expense.
Management stated that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2018. No material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether the LCA10 IND filed in October was accepted and what clinical-start timing, trial design and funding obligations followed.
- How the ASC 606 revenue timing, especially Juno license material rights and Allergan performance obligations, affects reported revenue and deferred revenue in later periods.
- Actual cash burn and runway versus management’s 24-month estimate, including the costs of the U.S. LCA10 profit-sharing arrangement and patent reimbursements.
- Progress and outcomes in the challenged U.S. and European patent proceedings, and any effect on licensed technology or collaboration rights.
- Whether collaborators exercise further options, achieve milestones or continue funding, and whether Editas uses the $150 million ATM facility or raises other capital.