AVROBIO, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2019

OR

For the transition period from                  to                 

Commission File Number: 001-38537

AVROBIO, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (617) 914-8420

Securities registered pursuant to Section 12(b) of the Act:

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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  ☒

As of November 5, 2019, the registrant had 31,667,901 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

i

Forward-looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

ii

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

iii

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands, except share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY (DEFICIT) - CONTINUED

(unaudited)

(in thousands, except share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Nature of the Business

AVROBIO, Inc. (the “Company” or “AVROBIO”) is a clinical stage gene therapy company focused on developing potentially curative ex vivo lentiviral gene therapies to treat rare diseases following a single dose.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including but not limited to, risks associated with completing preclinical studies and clinical trials, receiving regulatory approvals for product candidates, development by competitors of new biopharmaceutical products, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales.

On June 20, 2018, the Company’s registration statement on Form S-1 relating to its initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (the “SEC”). The IPO closed on June 25, 2018 and the Company issued and sold 5,247,958 common shares at a public offering price of $19.00 per share for net proceeds of $90,103 after deducting underwriting discounts and commissions of $6,980 and other offering expenses of approximately $2,628. Simultaneously, on June 25, 2018, the Company issued and sold 787,193 additional common shares, pursuant to the full exercise of the underwriters’ option to purchase additional shares, for net proceeds of $13,910 after deducting underwriting discounts and commissions of $1,047. Thus, the aggregate net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering costs, were $104,013. Upon the closing of the IPO, all series Seed redeemable convertible preferred stock (the “Series Seed Preferred Stock”), series A redeemable convertible preferred stock (the “Series A Preferred Stock”) and series B redeemable convertible preferred stock (the “Series B Preferred Stock”), (the Series Seed Preferred Stock, the Series A Preferred Stock and the Series B Preferred Stock are collectively referred to as the “Preferred Stock”) then outstanding converted into an aggregate of 15,320,213 shares of common stock. In July 2019, the Company closed an underwritten public offering of 7,475,000 shares of its common stock at a public offering price of $18.50 per share, which included 975,000 shares of the Company’s common stock resulting from the full exercise of the underwriters’ option to purchase additional shares at the public offering price, less underwriting discounts and commissions (the “July 2019 Follow-on Offering”). The net proceeds to the Company from the July 2019 Follow-on Offering, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, were approximately $129,500.

Through September 30, 2019, the Company has funded its operations primarily with proceeds from the sale of the Preferred Stock and common stock through the Company’s IPO. The Company has incurred recurring losses since its inception, including net losses of $50,303 and $30,340 for the nine months ended September 30, 2019 and 2018, respectively. In addition, as of September 30, 2019, the Company had an accumulated deficit of $122,042. Although the Company has incurred recurring losses and expects to continue to incur losses for the foreseeable future, the Company expects that its existing cash, cash equivalents and marketable securities will be sufficient to fund current planned operations and capital expenditure requirements for at least the next twelve months from the date of issuance of the financial statements contained in this Form 10-Q. However, the future viability of the Company is dependent on its ability to raise additional capital to finance its operations. The Company’s inability to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. There can be no assurance that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or at all.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The unaudited condensed consolidated interim financial statements have been prepared on the same basis as the audited annual consolidated financial statements as of and for the year ended December 31, 2018, and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2019, and the results of its operations for the three and nine months ended September 30, 2019 and 2018, its statements of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and its statement of cash flows for the nine months ended September 30, 2019 and 2018.

6

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 25, 2019.

The accompanying Unaudited Condensed Consolidated Financial Statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the Unaudited Condensed Consolidated Financial Statements. As of September 30, 2019, there have been no changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except as it related to the adoption of new accounting standards during the first nine months of 2019 as discussed below.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual for research and development expenses, stock-based compensation expense, the valuation of equity and derivative instruments and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ materially from those estimates.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company may take advantage of these exemptions until the Company is no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, its consolidated financial statements may not be comparable to companies that comply with public company effective dates. The Company may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of an offering or such earlier time that it is no longer an “emerging growth company”.

Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the consolidated financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. See Note 13.

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808)—Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”). The amendments in ASU 2018-18 clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account. The amendments under ASU 2018-18 are effective for interim and annual fiscal periods beginning after December 15, 2019, with early adoption permitted. The amendments in ASU 2018-18 should be applied retrospectively to the date of initial application of ASC 606. The Company does not expect the adoption of ASU 2018-18 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement that is a service contract. The amendments under ASU 2018-15 are effective for interim and annual fiscal periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of ASU 2018-15 to have a material impact on its consolidated financial statements.

7

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

In August 2018, The FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for either the entire ASU or only the provisions that eliminate or modify requirements. The amendments with respect to changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively. All other amendments are to be applied retrospectively to all periods presented. The Company is currently evaluating the effects the adoption of ASU 2018-13 will have on its disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For public entities, the standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-15 during the quarter ended March 31, 2019. The adoption did not have a material impact on the condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. 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. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the previous leases standard, ASC 840, Leases. For public entities, not-for-profit entities and an employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC), the standard is effective for public entities for annual periods beginning after December 15, 2018 including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

3. Fair Value of Financial Assets and Liabilities

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such fair values as of September 30, 2019 and December 31, 2018:

There were no transfers within the hierarchy during the nine months ended September 30, 2019 or the year ended December 31, 2018.

8

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

Valuation of the Warrant to Purchase Preferred Stock

At June 30, 2018, the Company had outstanding a warrant to purchase shares of common stock that was issued to a lender in connection with a loan and security agreement entered into in 2017. The warrant was originally issued as a warrant to purchase shares of Series A Preferred Stock prior to the IPO.  The fair value of the warrant to purchase preferred stock was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

Prior to the IPO, the Company classified the warrant as a liability on its consolidated balance sheets as the warrant is a free-standing financial instrument that may require the Company to transfer assets upon exercise. The preferred stock warrant liability was initially recorded at fair value upon the date of issuance and was subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant to purchase preferred stock were recognized as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.

The Company utilized the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the warrant. The Company assessed these assumptions and estimates on a quarterly basis as additional information impacting the assumptions was obtained. Estimates and assumptions impacting the fair value measurement included the fair value per share of the underlying redeemable convertible preferred stock issuable upon exercise of the warrant, the remaining contractual term of the warrant, the risk-free interest rate, the expected dividend yield and the expected volatility of the price of the underlying redeemable convertible preferred stock. Upon the IPO, the warrant to purchase preferred stock was converted to a warrant to purchase common stock. The carrying amount of the warrant to purchase preferred stock as of the date of IPO was transferred to additional paid in capital.

The Company recognized a loss of $0 and $162 in the condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2019 and 2018, related to the change in fair value of the warrant. The Company did not recognize any gain or loss for the three months ended September 30, 2019 and 2018.

Valuation of Derivative

In January 2016, in connection with a license agreement entered into with University Health Network (“UHN”), and as part of the initial consideration for the license, the Company issued 1,161,665 shares of common stock to UHN pursuant to a stock purchase agreement (the “Stock Purchase Agreement”). The Stock Purchase Agreement contained a provision requiring the Company to make a cash payment to UHN of up to $2,000 if UHN’s fully diluted ownership was reduced within specified percentages as part of an IPO by the Company. The Company concluded the anti-dilution feature represented a derivative instrument and should be measured at fair value, with changes in fair value recognized as a gain or loss to other income (expense), net in the consolidated statements of operations and comprehensive loss. The initial fair value of the derivative was recorded as research and development expense in January 2016.

On June 21, 2018, in connection with the Company’s IPO, the Company remeasured the fair value of the derivative to $2,000 as the Company was required to pay the dilution payment as mentioned above, which the Company paid in July 2018. An increase in fair value of $0 and $1,629 was recorded in other expense in the accompanying condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2019 and 2018, respectively. The Company did not recognize any expense for the three months ended September 30, 2019 and 2018.

9

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

4. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

5. Property and Equipment, Net

Property and equipment, net consisted of the following:

Depreciation and amortization expense for the three months ended September 30, 2019 and 2018 was $215 and $130, respectively. Depreciation and amortization expense for the nine months ended September 30, 2019 and 2018 was $605 and $196, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

7. Redeemable Convertible Preferred Stock and Common Stock

Redeemable Convertible Preferred Stock

Prior to the IPO, the authorized capital stock of the Company included 63,491,857 shares of $0.0001 par value preferred stock, of which 3,333,333 shares have been designated as Series Seed Preferred Stock, 31,639,202 shares have been designated as Series A Preferred Stock and 28,519,322 shares have been designated as Series B Preferred Stock.

10

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

In January 2018, the Company issued and sold 28,519,322 shares of Series B Preferred Stock, at a price of $2.1389 per share, for total proceeds of $58,757, net of issuance costs of $2,243.

Upon closing of the IPO, all outstanding shares of Preferred Stock were converted into 15,320,213 shares of common stock. The holders of the Company’s Preferred Stock had certain voting, dividend, and redemption rights, as well as liquidation preferences and conversion privileges. All rights, preferences, and privileges associated with the preferred stock were terminated at the time of the Company’s IPO in conjunction with the conversion of all outstanding shares of Preferred Stock into shares of common stock.

Common Stock

As of September 30, 2019 and December 31, 2018, the authorized capital stock of the Company included 150,000,000 shares of common stock, $0.0001 par value and 10,000,000 shares of undesignated preferred stock. As of September 30, 2019 and December 31, 2018, no undesignated preferred stock was outstanding.

In accordance with the Fourth Amended and Restated Certificate of Incorporation, the holders of the common stock shall have the exclusive right to vote for the election of directors of the Company and on all other matters requiring stockholder action, each outstanding share entitling the holder thereof to one vote on each matter properly submitted to the stockholders of the Company for their vote; provided, however, that, except as otherwise required by law, holders of common stock, as such, shall not be entitled to vote on any amendment to any amendment to a certificate of designations of any series of undesignated preferred stock that alters or changes the powers, preferences, rights or other terms of one or more outstanding series of undesignated preferred stock if the holders of such affected series of undesignated preferred stock are entitled to vote, either separately or together with the holders of one or more other such series, on such amendment pursuant to a certificate of designations of any series of undesignated preferred stock.

Through September 30, 2019, no cash dividends have been declared or paid.

Common Stock Reserved for Future Issuance

At September 30, 2019 and December 31, 2018, the Company has reserved the following shares of common stock for future issuance:

8. Stock-Based Compensation

Stock Option Valuation

The assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and members of the Board were as follows, presented on a weighted-average basis:

11

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2019:

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the underlying stock options and the estimated fair value of the Company’s common stock for those stock options that had exercise prices lower than the estimated fair value of the Company’s common stock.

The weighted-average grant-date fair value of the Company’s stock options granted during the nine months ended September 30, 2019 and 2018 was $11.77 and $9.05, respectively.

Restricted Common Stock

The following table summarizes the Company’s restricted common stock activity for the nine months ended September 30, 2019:

The total fair value of restricted common stock vested during the nine months ended September 30, 2019 and 2018 was $44 and $39, respectively.

Stock-Based Compensation

Stock-based compensation expense was allocated as follows:

As of September 30, 2019, total unrecognized compensation cost related to the unvested stock-based awards was $22,065, which is expected to be recognized over a weighted-average period of 3.24 years.

12

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

9. License Agreements

Agreements with UHN

Fabry License Agreement—  

On January 27, 2016, the Company entered into an agreement with UHN, pursuant to which UHN granted the Company an option to enter into an exclusive license under the UHN intellectual property related to Fabry disease in accordance with the pre-negotiated licensing terms. On November 4, 2016, the Company exercised its option and entered into a license agreement with UHN, pursuant to which UHN granted the Company an exclusive worldwide license under certain intellectual property rights and a non-exclusive worldwide license under certain know-how, in each case subject to certain retained rights, to develop, commercialize and sell products for use in the treatment of Fabry disease. UHN also granted the Company an exclusive option, exercisable for a period of three years following the execution of the agreement, to obtain a license under certain improvements to the licensed intellectual property rights as well as an option to negotiate a license under certain other improvements. The Company elected not to exercise such option and the option has expired in accordance with its terms.

Under this agreement, the Company paid an option fee of CAD $20, an upfront license fee of CAD $75, plus the annual license maintenance fee for the first year. Thereafter, the Company is also required to pay UHN future annual license maintenance fees until the first sale of a licensed product in certain markets. The Company is also obligated to make future milestone payments in an aggregate amount of up to CAD $2,450 upon the achievement of specified milestones as well as royalties on a country-by-country basis of a low to mid-single-digit percentage of annual net sales of licensed products and a lower single-digit royalty percentage in certain circumstances. Additionally, the Company has agreed to pay a low double-digit royalty percentage of all sublicensing revenue.

The agreement requires the Company to meet certain performance milestones within specified timeframes. UHN may terminate the agreement if the Company fails to meet these performance milestones despite using commercially reasonable efforts and the Company is unable to reach agreement with UHN on revised timeframes. The Company’s royalty obligation expires on a licensed product-by-licensed product and country-by-country basis upon the latest to occur of the expiration or termination of the last valid claim under the licensed intellectual property rights in such country, the tenth anniversary of the first commercial sale of such licensed product in such country and the expiration of any applicable regulatory exclusivity in such country.

Unless terminated earlier, the agreement expires upon the expiration of the Company’s royalty obligation for all licensed products. UHN can terminate the agreement if the Company fails to make any payments within a specified period after receiving written notice of such failure, or in the event that the Company fails to obtain or maintain insurance. Either the Company or UHN may terminate the license agreement in the event of a material breach by the other party and failure to cure such breach within a certain period of time. The Company can voluntarily terminate the agreement with prior notice to UHN.

For the three months ended September 30, 2019 and 2018, the Company recorded research and development expense related to this agreement with UHN of $415 and $0, respectively, which consists of reimbursable funded study trial costs. For the nine months ended September 30, 2019 and 2018, the Company recorded research and development expense related to this agreement with UHN of $741 and $0, respectively, which consists of reimbursable funded study trial costs. No milestone or maintenance fees were incurred related to the Fabry license agreement in the nine months ended September 30, 2019 and 2018.

13

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

Interleukin 12 License Agreement—  

On January 27, 2016, the Company entered into an exclusive license agreement with UHN, pursuant to which UHN granted the Company a license to certain patent rights for the commercial development, manufacture, distribution and use of any products or processes resulting from development of those patent rights related to Interleukin 12. Upon execution of this agreement, the Company paid an upfront license fee of CAD $264. In addition, as part of the initial consideration for the license, the Company issued to UHN 1,161,665 shares of the Company’s common stock. The fair value of the shares issued to UHN of $480 and the upfront fee was expensed upon the execution of the agreement. In addition, the Company agreed to pay UHN up to $2,000 upon the closing of an IPO if certain criteria are met. This obligation was considered a derivative instrument and was initially recorded at fair value of $49. The Company is also required to pay UHN future annual license maintenance fees of CAD $50 on each anniversary of the effective date of the license agreement prior to expiration or termination and potential future milestone payments of up to CAD $19,275 upon the achievement of specified clinical and regulatory milestones. The Company also agreed to pay UHN royalties of a low single-digit percentage of net sales of licensed products sold by the Company. If the Company grants any sublicense rights under the license agreement, the Company has agreed to pay UHN a low double-digit royalty percentage of any sublicense income received by the Company.

The agreement requires the Company to meet certain diligence requirements based upon specified milestones. The agreement expires on the later of the date the last patent rights expire in the last country or ten years from the date of first sale. UHN can terminate the agreement if the Company fails to make any payments within a specified period after receiving written notice of such failure, or in the event that the Company fails to obtain or maintain insurance. The Company can voluntarily terminate the agreement with prior notice to UHN. Either the Company or UHN may terminate the license agreement in the event of a material breach by the other party and failure to cure such breach within a certain period of time.

For the nine months ended September 30, 2019 and 2018, the Company recorded research and development expense related to this agreement with UHN of $38 and $41, respectively, which consists of license maintenance fees. No license maintenance fees were recorded in the three months ended September 30, 2019 and 2018. No milestone fees were incurred related to the IL-12 license agreement in the nine months ended September 30, 2019 and 2018.

Agreement with BioMarin Pharmaceutical Inc. (“BioMarin”)

On August 31, 2017, the Company entered into a license agreement with BioMarin, pursuant to which BioMarin granted the Company an exclusive worldwide license under certain intellectual property rights owned or controlled by BioMarin to develop, commercialize and sell products for use in the treatment of Pompe disease. As consideration for this agreement, the Company paid an upfront license fee of $500 in cash and issued 233,765 shares of Series B Preferred Stock to BioMarin at the time of our Series B Preferred Stock financing in January 2018. Both the upfront cash payment of $500 and the value of the shares Series B Preferred Stock issued of $500 were recorded as research and development expense during the year ended December 31, 2017. The Company is also obligated to make future milestone payments of up to $13,000 upon the achievement of certain specified milestones and agreed to pay BioMarin royalties of a low single-digit percentage of net sales of licensed products sold by the Company or its affiliates covered by patent rights in a relevant country. No milestone fees related to the license were recorded for the nine months ended September 30, 2019 and 2018.

Unless terminated earlier, the agreement expires upon the expiration of the Company’s royalty obligation for all licensed products throughout the world. BioMarin and the Company can terminate the agreement in the event of a material breach by the other party and failure to cure such breach within a certain period of time. The Company may terminate the agreement at will upon written notice to BioMarin. BioMarin has the right to terminate the agreement upon the Company’s bankruptcy or insolvency, or in the event of any challenge or opposition to the licensed patent rights or related actions brought by the Company or its affiliates or sublicensees, or if the Company, its affiliates or sublicensees knowingly assist a third-party in challenging or otherwise opposing the licensed patent rights, except as required under a court order or subpoena.

14

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

Agreement with GenStem Therapeutics, Inc. (“GenStem”)

On October 2, 2017, the Company entered into a license agreement with GenStem, pursuant to which GenStem granted the Company an exclusive worldwide license, subject to certain retained rights, under certain intellectual property rights owned or controlled by GenStem to develop, commercialize and sell products for use in the treatment of cystinosis. Under this agreement, the Company paid an upfront license fee of $1,000 and is required to make payments upon completion of certain milestones up to an aggregate of $16,000. In November 2019, the Company made a payment of $2,000 in connection with the dosing of the first patient in the investigator-sponsored Phase 1/2 clinical trial of AVR-RD-04 in cystinosis in the United States.  The next anticipated payment under this Agreement is $2,000, which would become due following the dosing of the first patient in the first pivotal clinical trial of AVR-RD-04 in cystinosis in the United States. The Company also agreed to pay GenStem a tiered mid to high single-digit royalty percentage on annual net sales of licensed products as well as a low double-digit percentage of sublicense income received from certain third-party licensees. The Company’s royalty obligation expires on a licensed product-by-licensed product and country-by-country basis on the eleventh anniversary of the first commercial sale of such licensed product in such country or the expiration of the last valid claim under the licensed patent rights covering such licensed product in such country, whichever is later. Unless terminated earlier, the agreement expires upon the expiration of the Company’s royalty obligation for all licensed products throughout the world. GenStem and the Company can terminate the agreement in the event of a material breach by the other party and failure to cure such breach within a certain period of time. The Company may terminate the agreement at will upon the specified prior written notice to GenStem. No milestone fees related to the license were recorded for the nine months ended September 30, 2019 and 2018.

Agreement with Lund University Rights Holders

On November 17, 2016, the Company entered into a license agreement with affiliates of Lund University, along with certain other relevant rights holders that may be added from time to time, pursuant to which such rights holders granted to the Company an exclusive worldwide license, subject to certain retained rights, under certain intellectual property rights to develop, commercialize and sell products in any and all uses relevant to Gaucher disease. As consideration for the license, the Company is required to make payments in connection with the achievement of certain milestones up to an aggregate of $550. The agreement expires on the latest of (i) the twentieth anniversary of the end of a certain research project the Company is funding pursuant to an agreement with Lund University, (ii) the expiration of the term of any patent filed on the licensed rights that covers a licensed product, (iii) the expiration of any applicable marketing exclusivity right and (iv) such time that neither the Company nor any sublicensees, partners or contractors are commercializing a licensed product. Either the Company or the rights holders acting together may terminate the license agreement if the other such party commits a material breach and fails to cure such breach within a certain period of time, or if the other party enters into liquidation, becomes insolvent, or enters into composition or statutory reorganization proceedings. No milestone fees related to the license were recorded for the nine months ended September 30, 2019 and 2018.

10. Net Loss per Share Attributable to Common Stockholders 

For purposes of the diluted net loss per share calculation, stock options, unvested restricted stock, Preferred Stock and the warrant to purchase shares of Series A Preferred Stock are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same.

The following potentially dilutive common stock equivalents, presented based on amounts outstanding at each period end, were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods indicated:

15

AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

11. Commitments and Contingencies

Lease Agreement

On January 12, 2018, the Company entered into a lease agreement for office space located in Cambridge, Massachusetts. The lease agreement expires in January 2023, with a landlord who is an affiliate of the landlord of the Company’s prior lease facility. The annual lease payments are subject to a 3% increase each year. The Company recognizes rent expense on a straight-line basis over the lease period and has recorded deferred rent for rent expense incurred but not yet paid. The Company received a tenant incentive allowance of $842 in 2018. Such incentive allowance is being amortized as a reduction of rent expense on a straight-line basis over the lease period. In accordance with the lease agreement, the Company is required to maintain a security deposit of $209, which was recorded in other assets. In contemplation of this agreement, the Company terminated its prior lease agreement.

On August 31, 2018, the Company entered into a sub-lease agreement for lab space located in Cambridge, Massachusetts, United States, which expires in October 2020. The annual lease payments are subject to a 3% increase each year. In accordance with the lease agreement, the Company is required to maintain a security deposit of $283, which was recorded in other assets as of September 30, 2018.

Legal Proceedings

The Company, from time to time, may be party to litigation arising in the ordinary course of business. The Company was not subject to any material legal proceedings during the nine months ended September 30, 2019 and 2018 and to the best of its knowledge, no material legal proceedings are currently pending or threatened.

Other

The Company is also party to various agreements, principally relating to licensed technology, that require future payments relating to milestones not met at September 30, 2019 and December 31, 2018, or royalties on future sales. No milestone or royalty payments under these agreements are expected to be payable in the immediate future, except as disclosed in Note 9. See Note 9 for discussion of these arrangements.

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, the Company agrees to indemnify, hold harmless, and to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third-party with respect to the Company’s products. Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities. The Company’s maximum exposure under these arrangements is unknown at September 30, 2019. The Company does not anticipate recognizing any significant losses relating to these arrangements. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

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AVROBIO, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except share and per share data)

12. Related Party Transactions

UHN

In connection with the Company’s entry into a license agreement with UHN on January 27, 2016, the Company issued UHN 1,161,665 shares of its common stock. Upon the closing of the IPO, as UHN’s fully-diluted percentage ownership of the Company was reduced within a range of specified percentages, the Company was obligated to pay UHN an amount up to $2,000, which was paid in July 2018. See Note 3 for further discussion on the accounting treatment for this provision.

For the three months ended September 30, 2019 and 2018, the Company recognized $415 and $0, respectively, of research and development expense related to the license agreements with UHN (Note 9). For the nine months ended September 30, 2019 and 2018, the Company recognized $779 and $41, respectively, of research and development expense related to the license agreements with UHN (Note 9).

Others

For the three and nine months ended September 30, 2019, the Company recorded expenses of $369 and $1,090, respectively, related to a sublease to rent lab space, provided by an entity affiliated with a member of the Board. No such expense was recorded for the three and nine months ended September 30, 2018.

For the three nine months ended September 30, 2019 and 2018, the Company recognized $0 and $2, respectively, related to consulting services provided by an entity affiliated with an officer of the Company and a member of the Board. For the nine months ended September 30, 2019 and 2018, the Company recognized $0 and $42, respectively, related to consulting services provided by an entity affiliated with an officer of the Company and a member of the Board

13. Subsequent Events

In November 2019, the Company made a payment of $2,000 to GenStem in connection with the dosing of the first patient in the investigator-sponsored Phase 1/2 clinical trial of AVR-RD-04 in cystinosis in the United States (Note 9).  

17

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those set forth in our Annual Report on Form 10-K for the year ended December 31, 2018, as supplemented by our subsequent filings with the SEC.

Overview

We are a Phase 2 clinical stage gene therapy company focused on developing potentially curative ex vivo lentiviral-based gene therapies to treat rare diseases following a single dose treatment regimen. Our gene therapies employ hematopoietic stem cells that are harvested from the patient and then modified with lentiviral vectors to insert a functional copy of the gene that is defective in the target disease. We believe that our approach, which is designed to transform stem cells from patients into therapeutic products, has the potential to provide curative benefit for a range of diseases. Our initial focus is on a group of rare genetic diseases referred to as lysosomal storage diseases, which today are primarily managed with enzyme replacement therapies, or ERTs.

Our initial pipeline is comprised of four lentiviral-based gene therapy programs, including AVR-RD-01 for the treatment of Fabry disease, AVR-RD-02 for the treatment of Gaucher disease, AVR-RD-04 for the treatment of cystinosis, and AVR-RD-03 for the treatment of Pompe disease.  We are initially targeting rare diseases in which the current standard of care provides the mechanistic proof that the enzymes or proteins produced endogenously following treatment with our gene therapies can offer benefit to patients. Typically, in lysosomal storage diseases, a gene mutation results in the deficiency or malfunctioning of an enzyme or other protein. This results in the inability of lysosomes to properly process cellular byproducts. As a result, these byproducts accumulate to toxic levels in the body’s cells and, in turn, disrupt the function of multiple tissues and organs. Fabry disease, Gaucher disease and Pompe disease are primarily managed by bi-weekly, multi-hour infusions with ERTs that seek to exogenously replace the missing enzyme. However, given their characteristics_, most ERTs typically remain in the plasma only for a short period of time and thus, are not ideal because they are only dosed every two weeks. These existing therapies manage, rather than cure, the underlying diseases and, as a result, patients continue to have disease progression. Further, the frequent, periodic and life-long dosing schedule required for ERTs results in significant costs for the healthcare system and is burdensome for the patient.

We seek to develop promising gene therapy programs by applying our expertise in gene and cellular therapies and clinical and regulatory strategy and execution to efficiently bring these potentially curative therapies to patients. In our initial programs, we leverage years of extensive preclinical and early clinical research by leading international researchers, as well as our internal research efforts, to advance potential therapies. We plan to identify and develop future product candidates through our own internal research efforts as well as through collaborations with leading academics.

We continue our move towards implementing our commercial-scale plato^TM platform, which includes heightened vector efficiency, a closed, automated manufacturing system and utilization of a therapeutic drug monitoring, or TDM, conditioning regimen. These platform improvements have been designed with the intent of improving safety and enhancing the potency and long-term durability of our therapies. We are developing the plato platform to form the backbone of our commercial programs, with the intent of replacing our original academic platform with improved solutions for delivering our gene therapy candidates to patients in multiple disease indications. We believe improvements from our plato platform may lead to better patient outcomes with our gene therapy candidates.

Since our inception in 2015, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights, conducting discovery, research and development activities for our programs and planning for potential commercialization. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations with proceeds from the sales of preferred stock, our initial public offering, or IPO, and an underwritten public offering that closed in July 2019, or the July 2019 Follow-On Offering. Through September 30, 2019, we have received gross proceeds of $87.5 million from the sales of our preferred stock and net proceeds, after deducting underwriting discounts and commissions and other offering expenses payable by us, of $104.2 million and $129.5 million from the sales of common stock through our IPO and the July 2019 Follow-On Offering, respectively.

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On July 1, 2019, we filed a shelf registration statement on Form S-3 with the SEC, which covers the offering, issuance and sale by us of up to an aggregate of $200.0 million of our common stock, preferred stock, debt securities, warrants and/or units, which we refer to as the Shelf. We simultaneously entered into a Sales Agreement with Cowen and Company, LLC, as sales agent, to provide for the offering, issuance and sale by the Company of up to $50.0 million of our common stock from time to time in “at-the-market” offerings under the Shelf (the “ATM Facility”). The Shelf was declared effective by the SEC on July 10, 2019.  

In July 2019, we closed the July 2019 Follow-On Offering, resulting in net proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses payable by us, of approximately $129.5 million. As of September 30, 2019, we have not offered, issued or sold any shares of common stock under the ATM Facility.

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates and programs. Our net losses were $50.3 million and $30.3 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $122.0 million. We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval of our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations with proceeds from outside sources, with a majority of such proceeds to be derived from sales of equity, including the net proceeds from our IPO and the July 2019 Follow-On Offering, and potential proceeds if we offer and sell equity pursuant to the ATM Facility. We also plan to pursue additional funding from outside sources, including our expansion of, or our entry into, new borrowing arrangements; research and development incentive payments from the Australian government; and our entry into potential future collaboration agreements for one or more of our programs. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of September 30, 2019, we had cash and cash equivalents of $206.4 million. We believe that our existing cash and cash equivalents as of September 30, 2019, together with the net proceeds from the July 2019 Follow-On Offering, will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2021. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured.

Additional Recent Developments

AVR-RD-01 for Fabry disease

In July 2019, we announced clinical data from clinical trials of our investigational gene therapy AVR-RD-01 in Fabry disease. AVR-RD-01 is currently being studied in two ongoing clinical trials. A Phase 1 investigator-sponsored clinical trial of AVR-RD-01 is being conducted by the University Health Network, or UHN, and sponsored by Fabry Disease Clinical Research and Therapeutics, or FACTs, at three centers in Canada. A total of five patients with Fabry disease who have been previously treated with enzyme replacement therapy, or ERT, for at least six months have been enrolled and enrollment is complete. In addition, we are sponsoring a Phase 2 open-label, multinational clinical trial of AVR-RD-01, with expected enrollment of eight to 12 treatment-naïve males, 16 years and older, with classic Fabry disease, who have not been treated with ERT within 10 years prior to enrollment or chaperone therapy at any time. As of October 15, 2019, three patients in Australia have enrolled in this Phase 2 clinical trial, and we currently have the necessary regulatory clearances to expand enrollment to sites in Canada and the United States. We expect to open a U.S. site for our ongoing Phase 2 clinical trial of AVR-RD-01 in the fourth quarter of 2019.

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The primary efficacy endpoint of our Phase 2 clinical trial is the change from baseline in the average number of globotriaosylceramide, or Gb3, inclusions per peritubular capillary, or PTC, as measured in a patient kidney biopsy one year (48 weeks) after treatment with AVR-RD-01. In addition to safety, the Phase 2 and Phase 1 clinical trials are also examining additional secondary efficacy endpoints including biomarkers such as plasma lyso-globotriaosylsphingosine, or lyso-Gb3, alpha-galactosidase A, or AGA, enzyme levels measured in plasma and leukocytes, as well as certain parameters of organ function. In addition, vector copy number, or VCN, is being measured in these trials to assess the potential durability of the gene therapy. Safety and tolerability parameters also are being assessed in these trials.

The first patient in our Phase 2 clinical trial, who had not previously received ERT, exhibited a reduction from an average of 3.55 Gb3 inclusions per PTC at baseline to an average of 0.47 inclusions per PTC one year after administration of AVR-RD-01, representing an 87% reduction and a numerical decrease of 3.08. The following figure illustrates this decrease in average Gb3 inclusions per PTC for this patient.

Phase 2 Patient 1: 87% substrate reduction in kidney biopsy

Baseline: The last available, non-missing observation prior to AVR-RD-01 infusion

Note: With respect to Fabry disease clinical trials, Gb3 inclusions per PTC is interchangeable with GL-3 inclusions per KIC

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The following figures summarize the plasma lyso-Gb3 data observed in the first four patients from the ongoing Phase 1 clinical trial of AVR-RD-01:

Phase 1: Plasma lyso-Gb3 consistently reduced by 33-41% vs. baseline* ERT at 6+ months post-AVR-RD-01 treatment

*Baseline: The mean of the values reported prior to initiating mobilization

Percent reduction: As measured from baseline to last assessment

Plasma lyso-Gb3 data are also available for Patient 5 in the Phase 1 trial, up to three months post-treatment with AVR-RD-01. This patient’s baseline ERT (as defined above) was 15.84 nM, and his plasma lyso-Gb3 levels were 17.8 nM and 14.56 nM at 1 month and 3 months post-treatment with AVR-RD-01, respectively. Plasma lyso-Gb3 data are also available for Patient 2 in the Phase 2 trial, up to six months post-treatment with AVR-RD-01. This patient has an N215S genotype, which is associated with a late-onset cardiac variant phenotype and lower plasma lyso-Gb3 levels. His plasma lyso-Gb3 levels were 7.59 nM, 5.9 nM, 5.8 nM, 5.9 nM, and 6.71 nM at baseline, one month, two months, three months, and six months post-treatment with AVR-RD-01, respectively. This patient’s cardiac variant phenotype does not typically result in Gb3 accumulation in the kidney and skin, and accordingly we do not expect that data obtained from this patient will have a meaningful impact on certain efficacy endpoints in our Phase 2 clinical trial, including kidney and skin biopsies. Nonetheless, there may be other important insights derived from data collected from this patient in the Phase 2 clinical trial.

All six patients in our Phase 2 and Phase 1 clinical trials for whom data are reported at six months or longer post-treatment with AVR-RD-01 (out of a total of eight patients enrolled to date) have exhibited sustained AGA enzyme activity in both the plasma and leukocytes. The following figures summarize the plasma and leukocyte AGA enzyme activity reported from the ongoing clinical trials of AVR-RD-01 as of July 15, 2019.

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Phase 2 Patient 1: Sustained leukocyte and plasma enzyme activity at 1 year

Baseline: The last available, non-missing observation prior to AVR-RD-01 infusion

Phase 2 Patient 2: Sustained leukocyte and plasma enzyme activity at 6 months

Note: Patient 3 had plasma AGA activity of 0.740, leukocyte AGA activity of 9.94 as of 1 month

Baseline: The last available, non-missing observation prior to AVR-RD-01 infusion

Phase 1: Leukocyte and plasma enzyme activity levels trend consistently across all patients

Note: Enzyme measurements are taken at ERT troughs; Note: Dotted line illustrative only

Patient #5’s Day 12 data point was utilized since the one month data was not obtained

22

All six patients in our Phase 2 and Phase 1 clinical trials for whom data are reported at six months or longer following administration of AVR-RD-01 have exhibited consistent VCN trends, with VCN levels for the first Phase 1 patient stable at over two years post-treatment. The following figures summarize the VCN observations from the ongoing clinical trials of AVR-RD-01.

Patient 1 in Phase 2 Trial: VCN stable at 1 year

Note: 0.1 VCN is indicative of approx. 5-10% of all nucleated circulating blood cells having an average of 1-2 copies of the transgene

Patient 2 in Phase 2 Trial: VCN at 6 months

Note: Patient 3 had VCN of 0.12 as of 1 month

Note: 0.1 VCN is indicative of approx. 5-10% of all nucleated circulating blood cells having an average of 1-2 copies of the transgene

Phase 1 Trial: Consistent VCN trend across all patients

Note: 0.1 VCN is indicative of approx. 5-10% of all nucleated circulating blood cells having an average of 1-2 copies of the transgene

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Halting the progression of organ damage and improving outcomes of patients is a key mission of our Company and our investigational gene therapy programs. Assessment of kidney and cardiac function versus baseline is a secondary efficacy measure in our Phase 2 protocol. Such assessment is not, however, included in the Phase 1 protocol, and therefore such parameters are not discussed for Phase 1.

As shown below, interim data-to-date in the first patient in our Phase 2 trial indicates kidney and cardiac functions have been stable and in the normal range at one year following administration of AVR-RD-01 investigational gene therapy.

Phase 2 Patient 1: Kidney and cardiac function stable at one year

Source: https://www.kidney.org/atoz/content/gfr

Note: mGFR is measured Glomerular Filtration Rate, eGFR is estimated Glomerular Filtration Rate 

Source: Alfakih K et al, J Magn Reson Imaging, 2003

Note: EF is Ejection Fraction, LVMI is Left Ventricular Mass Index 

24

In the Phase 2 trial, the four SAEs that were reported through the safety data cut-off date of July 10, 2019 included one report of a Grade 2 pre-treatment seizure experienced after commencing stem cell mobilization but prior to undergoing the conditioning regimen and treatment with AVR-RD-01; one report of Grade 3 dehydration, nausea and vomiting following the conditioning regimen and treatment with AVR-RD-01; and two reports of febrile neutropenia (Grades 3 and 4, respectively) in separate patients following the conditioning regimen and treatment with AVR-RD-01 All four SAEs have subsequently resolved.

In the Phase 1 trial, the two SAEs that were reported through the safety data cut-off date of May 24, 2019 included one report of Grade 3 febrile neutropenia and one report of Grade 2 thrombophlebitis, each occurring following the conditioning regimen and treatment with AVR-RD-01. Both SAEs have subsequently resolved, with the thrombophlebitis SAE verbally reported to the Company as resolved following the safety data cut-off date.

Low anti-AGA antibody titers have been detected in two patients, one in each of the trials, and we believe neither is considered to be of clinical relevance.

Clinical measurements of data, such as AGA enzyme activity and VCN, can provide valuable insight into the potential effectiveness of ex vivo CD34+ hematopoietic stem cell gene therapy following administration in a patient. However, such measurements can vary greatly during the initial weeks following administration of the therapy. We believe that the first meaningful measurements of AGA enzyme activity and VCN only start to emerge after sufficient time has passed following administration of the gene-modified CD34+ hematopoietic stem cells to allow what we believe to be a meaningful interpretation of results. For example, data collected during the early weeks following administration of an ex vivo CD34+ hematopoietic stem cell gene therapy may be uninterpretable for reasons such as the manufactured drug product containing a random and indeterminable mixture of cells that may be dominated by late/mature progenitor cells, compared to early progenitor cells and long-term engrafting cells. In such circumstances, the large number of late/mature progenitor cells are over-represented in the collected data in the first few weeks following administration, but are subsequently permanently lost. For these reasons, we have presented in the figures above, and in the future intend to present, AGA enzyme activity data and VCN for patients only after which sufficient time has passed following administration of AVR-RD-01 to allow what we believe to be a meaningful interpretation of results.

Other Pipeline Programs

Our Company-sponsored Phase 1/2 clinical trial evaluating AVR-RD-02 in Gaucher disease, or GAU-201, has commenced active recruitment. The initial clinical site is in Canada and we intend to open additional clinical sites in Australia, the United States and other countries pending regulatory clearances. The first patient in this clinical trial is expected to be enrolled in the first quarter of 2020, with dosing expected in the second quarter of 2020. Additionally, in October 2019, the FDA granted our request for orphan-drug designation for AVR-RD-02 for the treatment of Gaucher disease.

The investigator-sponsored Phase 1/2 clinical trial evaluating AVR-RD-04 in cystinosis is being conducted by our collaborators at the University of California, San Diego, or UCSD. The first patient in this clinical trial was dosed in October 2019, and the site is continuing to actively recruit additional patients. In June 2019, the UCSD cystinosis study group announced that it had been awarded a grant from the California Institute of Regenerative Medicine, or CIRM, of approximately $12 million to directly fund this phase of the cystinosis clinical trial.

The Pompe disease program is advancing in early pre-clinical development. The IND-enabling pre-clinical program is anticipated to be initiated in 2019.

Plato Platform

Plato is our commercial-stage platform. It is an ex vivo gene therapy platform incorporating multiple recent upgrades including an optimized lentiviral vector, which we refer to as LV2, a closed, automated manufacturing system, and a refined approach to conditioning using busulfan with therapeutic drug monitoring. These three process changes, or upgrades, were recently cleared by applicable regulatory bodies in the United States, Canada and Australia for use in the Phase 2 clinical trial of AVR-RD-01 for Fabry disease and in Canada for the GAU-201 clinical trial of AVR-RD-02 for Gaucher disease. We intend to utilize the plato platform with these process changes for all future patients enrolling in our Phase 2 clinical trial of AVR-RD-01 for Fabry disease and our GAU-201 clinical trial for Gaucher disease.

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Components of Our Consolidated Results of Operations

Revenue

We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If development efforts for our product candidates are successful and result in regulatory approval or additional license agreements with third parties, we may generate revenue in the future from product sales.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses consist of costs incurred in connection with the development of our product candidates, including:

We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs, and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under license agreements. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to oversee the research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track their costs by program.

The Company has modified the presentation within the following tables to include expenses related to other preclinical development activities outside of its already presented programs in its direct research and development expenses, which were previously included as other unallocated research and development expenses. We have adjusted prior period amounts to reflect the changes in presentation made in the current period. The table below summarizes our research and development expenses incurred by program (in thousands):