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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-37368

 

ADAPTIMMUNE THERAPEUTICS PLC

(Exact name of Registrant as specified in its charter)

 

England and Wales

 

Not Applicable

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

60 Jubilee Avenue, Milton Park

Abingdon, Oxfordshire OX14 4RX

United Kingdom

(44) 1235 430000

(Address of principal executive offices)

 


 

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.   x Yes  o 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).  x Yes  o 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” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

 

 

Emerging growth company x

 

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 standard provided pursuant to Section 13(a) of the Exchange Act.  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes  x No

 

As of November 2, 2018 the number of outstanding ordinary shares par value £0.001 per share of the Registrant is 627,422,698.

 

 

 


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TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017

6

 

 

 

 

Unaudited Condensed Consolidated Statement of Change in Equity for the nine months ended September 30, 2018

7

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

8

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

78

 

 

 

Item 3.

Defaults Upon Senior Securities

78

 

 

 

Item 4.

Mine Safety Disclosures

78

 

 

 

Item 5.

Other Information

78

 

 

 

Item 6.

Exhibits

79

 

 

 

Signatures

 

80

 


Table of Contents

 

General information

 

In this Quarterly Report on Form 10-Q (“Quarterly Report”), “Adaptimmune,” the “Group,” the “Company,” “we,” “us” and “our” refer to Adaptimmune Therapeutics plc and its consolidated subsidiaries, except where the context otherwise requires.

 

Information Regarding Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this Quarterly Report are forward-looking statements.

 

These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. These forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we expect to operate in the future. Important factors that could cause those differences include, but are not limited to:

 

·      our ability to successfully advance and fund our MAGE-A10, MAGE-A4 and AFP SPEAR T-cells through clinical development and the timing within which we can recruit patients and treat patients in our clinical trials;

 

·      our ability to successfully and reproducibly manufacture SPEAR T-cells in order to meet patient demand;

 

·      our ability to further develop our commercial manufacturing process for our SPEAR T-cells, transfer such commercial process to third party contract manufacturers, if required, and for such third party contract manufacturers or ourselves to manufacture SPEAR T-cells to the quality and on the timescales we require;

 

·      the scope and timing of performance of our ongoing collaboration with GlaxoSmithKline (“GSK”) including nomination of further targets by GSK under the collaboration;

 

·      our ability to successfully advance our SPEAR T-cell technology platform to improve the safety and effectiveness of our existing SPEAR T-cell candidates and to submit Investigational New Drug Applications, or INDs, for new SPEAR T-cell candidates;

 

·      the rate and degree of market acceptance of T-cell therapy generally, and of SPEAR T-cells;

 

·      government regulation and approval, including, but not limited to, the expected regulatory approval timelines for SPEAR T-cells and the level of pricing and reimbursement for SPEAR T-cells, if approved for marketing;

 

·      the existence of any third party patents preventing further development of any SPEAR T-cells, including, any inability to obtain appropriate third party licenses, or enforcement of patents against us or our collaborators;

 

·      our ability to obtain granted patents covering any SPEAR T-cells and to enforce such patents against third parties;

 

·      volatility in equity markets in general and in the biopharmaceutical sector in particular;

 

·      fluctuations in the price of materials and bought-in components;

 

·      our relationships with suppliers, contract manufacturing organizations or CROs and other third-party providers including fluctuations in the price of materials and services, ability to obtain reagents particularly where such reagents are only available from a single source, and performance of third party providers;

 

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·      increased competition from other companies in the biotechnology and pharmaceutical industries including where such competition impacts ability to recruit patients in to clinical trials;

 

·      claims for personal injury or death arising from the use of SPEAR T-cell candidates;

 

·      our ability to attract and retain qualified personnel;

 

·      a change in our status as an emerging growth company under the Jumpstart Our Business Start-ups Act of 2012, or JOBS Act; and

 

·      additional factors that are not known to us at this time.

 

Additional factors that could cause actual results, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results to differ materially include, but are not limited to, those discussed under “Risk Factors” in Part II, Item 1A in this Quarterly Report and in our other filings with the Securities and Exchange Commission (the “SEC”). Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Quarterly Report not to occur. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only at the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this Quarterly Report might not occur, and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive of, but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

September 30,
2018

 

December 31,
2017

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

153,081

 

$

84,043

 

Marketable securities - available-for-sale debt securities

 

84,652

 

124,218

 

Accounts receivable, net of allowance for doubtful accounts of $- and $-

 

2,031

 

206

 

Other current assets and prepaid expenses (including current portion of clinical materials)

 

21,841

 

21,716

 

Total current assets

 

261,605

 

230,183

 

 

 

 

 

 

 

Restricted cash

 

4,163

 

4,253

 

Clinical materials

 

4,205

 

4,695

 

Property, plant and equipment, net

 

38,137

 

40,679

 

Intangibles, net

 

1,515

 

1,337

 

 

 

 

 

 

 

Total assets

 

309,625

 

281,147

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

3,907

 

8,378

 

Accrued expenses and other accrued liabilities

 

24,314

 

27,201

 

Deferred revenue

 

1,345

 

38,735

 

Total current liabilities

 

29,566

 

74,314

 

 

 

 

 

 

 

Other liabilities, non-current

 

3,904

 

3,849

 

 

 

 

 

 

 

Total liabilities

 

33,470

 

78,163

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock - Ordinary shares par value £0.001, 701,103,126 authorized and 627,222,076 issued and outstanding (2017: 701,103,126 authorized and 562,119,334 issued and outstanding)

 

939

 

854

 

Additional paid in capital

 

570,355

 

455,401

 

Accumulated other comprehensive loss

 

(12,813

)

(21,641

)

Accumulated deficit

 

(282,326

)

(231,630

)

Total stockholders’ equity

 

276,155

 

202,984

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

309,625

 

$

281,147

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Development revenue

 

$

1,678

 

$

27,185

 

$

18,912

 

$

33,563

 

License revenue

 

39,114

 

 

39,114

 

 

Total Revenue

 

40,792

 

27,185

 

58,026

 

33,563

 

Operating expenses

 

 

 

 

 

 

 

 

 

Research and development

 

(23,484

)

(24,034

)

(75,500

)

(62,240

)

General and administrative

 

(10,290

)

(8,111

)

(32,785

)

(22,284

)

Total operating expenses

 

(33,774

)

(32,145

)

(108,285

)

(84,524

)

Operating income (loss)

 

7,018

 

(4,960

)

(50,259

)

(50,961

)

Interest income

 

606

 

705

 

1,805

 

1,465

 

Other (expense) income, net

 

(2,249

)

3,602

 

(10,525

)

7,242

 

Income (loss) before income taxes

 

5,375

 

(653

)

(58,979

)

(42,254

)

Income taxes

 

(133

)

(225

)

(362

)

(621

)

Net income (loss) attributable to ordinary shareholders

 

$

5,242

 

$

(878

)

$

(59,341

)

$

(42,875

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per ordinary share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

 

$

(0.10

)

$

(0.08

)

Diluted

 

0.01

 

 

(0.10

)

(0.08

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

582,004,954

 

561,239,864

 

573,796,275

 

516,352,141

 

Diluted

 

621,764,201

 

561,239,864

 

573,796,275

 

516,352,141

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net income (loss)

 

$

5,242

 

$

(878

)

$

(59,341

)

$

(42,875

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $-, $-, $- and $-

 

1,521

 

(1,623

)

5,103

 

(2,932

)

Unrealized holding gains (losses) on available-for-sale debt securities, net of tax of $-, $-, $- and $-

 

85

 

(1,578

)

1,252

 

(2,874

)

Reclassification adjustment for losses on available-for-sale debt securities included in net loss, net of tax of $-, $-, $- and $-

 

 

 

2,473

 

 

Total comprehensive income (loss) for the period

 

$

6,848

 

$

(4,079

)

$

(50,513

)

$

(48,681

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

foreign

 

losses on

 

 

 

 

 

 

 

 

 

 

 

Additional

 

currency

 

available-for-

 

 

 

Total

 

 

 

Common

 

Common

 

paid in

 

translation

 

sale debt

 

Accumulated

 

stockholders’

 

 

 

stock

 

stock

 

capital

 

adjustments

 

securities

 

deficit

 

equity

 

Balance as of 1 January 2018 (under previous guidance)

 

562,119,334

 

$

854

 

$

455,401

 

$

(17,867

)

$

(3,774

)

$

(231,630

)

$

202,984

 

Cumulative effect of applying new accounting standards

 

 

 

 

 

 

 

 

 

 

 

8,645

 

8,645

 

Balance as of 1 January 2018 (adjusted)

 

 

 

854

 

455,401

 

(17,867

)

(3,774

)

(222,985

)

211,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(59,341

)

(59,341

)

Issuance of shares upon exercise of stock options

 

5,102,742

 

7

 

2,926

 

 

 

 

2,933

 

Issuance of shares upon completion of registered direct offering

 

60,000,000

 

78

 

99,575

 

 

 

 

 

 

 

99,653

 

Other comprehensive loss before reclassifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

5,103

 

 

 

5,103

 

Unrealized holding gains on available-for-sale debt securities, net of tax of $-

 

 

 

 

 

1,252

 

 

1,252

 

Reclassification from accumulated other comprehensive loss of losses on available-for-sale debt securities included in net loss, net of tax of $-

 

 

 

 

 

2,473

 

 

2,473

 

Share-based compensation expense

 

 

 

12,453

 

 

 

 

12,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2018

 

627,222,076

 

$

939

 

$

570,355

 

$

(12,764

)

$

(49

)

$

(282,326

)

$

276,155

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2018

 

2017

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(59,341

)

$

(42,875

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

5,248

 

3,418

 

Amortization

 

464

 

267

 

Share-based compensation expense

 

12,453

 

7,956

 

Realized loss on available-for-sale debt securities

 

2,473

 

 

Unrealized foreign exchange gain (losses)

 

4,921

 

(6,886

)

Other

 

262

 

606

 

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables and other operating assets

 

(4,140

)

4,180

 

Decrease (increase) in non-current operating assets

 

490

 

(484

)

(Decrease) increase in payables and deferred revenue

 

(35,533

)

859

 

Net cash used in operating activities

 

(72,703

)

(32,959

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition of property, plant and equipment

 

(3,823

)

(22,791

)

Acquisition of intangibles

 

(666

)

(288

)

Proceeds from disposal of property, plant and equipment

 

 

550

 

Maturity of short-term deposits

 

 

40,645

 

Investment in short-term deposits

 

 

(18,000

)

Maturity or redemption of marketable securities

 

114,988

 

7,032

 

Investment in marketable securities

 

(75,545

)

(93,218

)

Net cash provided by (used in) investing activities

 

34,954

 

(86,070

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs $347 and $4,774

 

99,653

 

103,167

 

Proceeds from exercise of stock options

 

2,933

 

401

 

Net cash provided by financing activities

 

102,586

 

103,568

 

 

 

 

 

 

 

Effect of currency exchange rate changes on cash, cash equivalents and restricted cash

 

4,111

 

2,223

 

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

 

68,948

 

(13,238

)

Cash, cash equivalents and restricted cash at start of period

 

88,296

 

162,796

 

Cash, cash equivalents and restricted cash at end of period

 

$

157,244

 

$

149,558

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ADAPTIMMUNE THERAPEUTICS PLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - General

 

Adaptimmune Therapeutics plc is registered in England and Wales. Its registered office is 60 Jubilee Avenue, Milton Park, Abingdon, Oxfordshire, OX14 4RX, United Kingdom.  Adaptimmune Therapeutics plc and its subsidiaries (collectively “Adaptimmune” or the “Company”) is a clinical-stage biopharmaceutical company focused on providing novel cell therapies to patients, particularly in solid tumors. The Company’s comprehensive and proprietary SPEAR (Specific Peptide Enhanced Affinity Receptor) T-cell platform enables it to identify cancer targets, find and genetically engineer T-cell receptors (“TCRs”), and produce therapeutic candidates for administration to patients. Using its affinity engineered TCRs, the Company aims to become a fully integrated cell therapy company and to have the first TCR T-cell approved.

 

The Company is subject to a number of risks similar to other biopharmaceutical companies in the early stage of clinical development including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical programs or clinical programs, the need to obtain marketing approval for its SPEAR T-cells, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s SPEAR T-cells, the need to develop a suitable commercial manufacturing process and protection of proprietary technology. If the Company does not successfully commercialize any of its SPEAR T-cells, it will be unable to generate product revenue or achieve profitability.  The Company had an accumulated deficit of $282.3 million as of September 30, 2018.

 

Note 2 - Summary of Significant Accounting Policies

 

(a)                       Basis of presentation

 

The condensed consolidated interim financial statements of Adaptimmune Therapeutics plc and its subsidiaries and other financial information included in this Quarterly Report are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars.  All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated on consolidation.

 

The unaudited condensed interim financial statements presented in this Quarterly Report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2018 (the “Annual Report”).  The balance sheet as of December 31, 2017 was derived from audited consolidated financial statements included in the Company’s Annual Report but does not include all disclosures required by U.S. GAAP. The Company’s significant accounting policies are described in Note 2 to those consolidated financial statements.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements.  However, these interim financial statements include all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period.  The interim results are not necessarily indicative of results to be expected for the full year.

 

On January 1, 2018, the Company adopted new guidance on revenue recognition, which has been codified within Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).  The comparative financial information for the three and nine months ended September 30, 2017 and as of December 31, 2017 has not been restated.

 

(b)                       Use of estimates in interim financial statements

 

The preparation of interim financial statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of share options, valuation allowances relating to deferred tax assets, revenue recognition, estimating clinical trial expenses and estimating reimbursements from R&D tax and expenditure credits. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.

 

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(c)                       Fair value measurements

 

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The hierarchy defines three levels of valuation inputs:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

 

Level 3 — Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

 

The carrying amounts of the Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments.  The fair value of marketable securities, which are measured at fair value on a recurring basis is detailed in Note 6, Fair value measurements.

 

(d)                      Revenue from contracts with customers

 

On January 1, 2018, the Company adopted new guidance on revenue recognition, which has been codified within ASC 606.  The accounting policy applicable from January 1, 2018 is described below and further details on the transition are available in Note 2(f).  The comparative financial information for the three and nine months ended September 30, 2017 and as of December 31, 2017 has not been restated and is prepared in accordance with the accounting policies that are described in Note 2 to the consolidated financial statements included in the Annual Report.

 

The Company has one contract with a customer, which is the GSK Collaboration and License Agreement.  The GSK Collaboration and License Agreement consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, the development of a second target, PRAME, and an exclusive license (the “NY-ESO License”) to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program.

 

In September 2017, GSK exercised its option to obtain the NY-ESO License and the first tranche ($26.6 million or £20 million) of the option exercise payment became payable to the Company. In connection with the option exercise, in September 2017, the GSK Agreement was amended to, among other things, include a detailed transition plan identifying the steps needed to complete transition of the Investigational New Drug Application (IND) process with the Food and Drug Administration (FDA) for the NY-ESO SPEAR T-cell program to GSK.  On July 23, 2018, the transition activities were substantially completed and the IND for the NY-ESO SPEAR T-cell program transferred to GSK.

 

The aggregate transaction price consists of an upfront payment of $42,123,000 received in June 2014, development milestones achieved of $66,404,000, an option exercise fee of $39,785,000. There was no variable consideration at September 30, 2018.

 

The Company determines the variable consideration to be included in the transaction price by estimating the most-likely amount that will be received and then applies a constraint to reduce the consideration to the amount which is probable of being received.   The determination of whether a milestone is probable includes consideration of the following factors:

 

·                  Whether achievement of a development milestone is highly susceptible to factors outside the entity’s influence, such as milestones involving the judgment or actions of third parties, including regulatory bodies or the customer;

 

·                  Whether the uncertainty about the achievement of the milestone is not expected to be resolved for a long period of time;

 

·                  Whether the Company can reasonably predict that a milestone will be achieved based on previous experience; and.

 

·                  The complexity and inherent uncertainty underlying the achievement of the milestone.

 

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The Company may also be entitled to development and regulatory milestones upon successful development of the NY-ESO SPEAR T-cells by GSK.  The amount of the milestones is dependent on the nature of the product that GSK further develops, the indication relevant to any product and the territory in relation to which the milestone is achieved.  These amounts have not been included within the transaction price as of September 30, 2018 because they are not considered probable. The Company may also receive commercial milestones based on the indication and the territory and mid-single to low double-digit royalties on worldwide net sales. These amounts have not been included within the transaction price as of September 30, 2018 because they are sales or usage based royalties promised in exchange for a license of intellectual property, which will be recognized when the subsequent sale or usage occurs.

 

The Company may be entitled to one small-dollar development milestone for the pre-clinical development of PRAME, which is not included in the transaction price because it is not considered probable.

 

The payments to the Company under the contract are typically due upon achievement of milestones and within standard payment terms (approximating to 45 days).  The contract does not include a significant financing component.

 

The upfront payment of $42,123,000 was allocated between the performance obligations using the Company’s best estimate of the relative selling price. In determining the best estimate, the Company considered internal pricing objectives it used in negotiating the contract, together with internal data regarding the cost and margin of providing services for each deliverable taking into account the different stage of development of each development program included in the contract. The variable consideration is allocated to the performance obligation to which it relates.

 

The amount of the transaction price allocated to the performance obligation is recognized as or when the Company satisfies the performance obligation.  The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs.  The Company considers that this depicts the progress of the project, where the significant inputs are internal project resource and third-party clinical and manufacturing costs.  The determination of the percentage of completion requires the Company to estimate the costs-to-complete the project.  The Company makes a detailed estimate of the costs-to-complete on an annual basis as part of the Company’s budgeting process, which is re-assessed every reporting period based on the latest project plan and discussions with project teams.  If a change in facts or circumstances occurs, the estimate is adjusted and the revenue is recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate is recognized as an adjustment to revenue in the period in which the change in estimate occurs.

 

The Company has determined that the performance obligation relating to the NY-ESO License is recognized at a point-in-time, upon commencement of the license, which occurred in September 2018.

 

The Company recognizes a contract asset, when the value of satisfied (or part satisfied) performance obligations is in excess of the payment due to the Company, and deferred revenue (contract liability) when the amount of unconditional consideration is in excess of the value of satisfied (or part satisfied) performance obligations.  Once a right to receive consideration is unconditional, that amount is presented as a receivable.

 

The timing and amount of milestone payments for the development and transition of the NY-ESO SPEAR T-cell program are intended to be commensurate with the cost and effort involved in achieving the milestones and therefore a contract asset would typically arise.  The Company received $26,610,000 of the option exercise fee in September 2017, which was included in deferred revenue at January 1, 2018 and this amount was recognized as revenue, along with a further option exercise fee of $13,175,000, in September 2018 upon commencement of the license.

 

Changes in deferred revenue typically arise due to:

 

·                  adjustments arising from a change in the estimate of the cost to complete the project, which results in a cumulative catch-up adjustment to revenue that affects the corresponding contract asset or deferred revenue;

 

·                  a change in the estimate of the transaction price due to changes in the assessment of whether variable consideration is constrained because it is not considered probable of being received;

 

·                  the recognition of revenue arising from deferred revenue; and

 

·                  the reclassification of amounts to receivables when a right to consideration to becomes unconditional.

 

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A change in the estimate of variable consideration constrained (for example, if a development milestone becomes probable of being received) could result in a significant change in the revenue recognized and deferred revenue.

 

(e)                        Share-based compensation

 

The Company has awarded share options to nonemployees for consultancy services.  Prior to January 1, 2018, these share options were measured at the fair value of the goods/services received or the fair value of the equity instrument issued, whichever was more reliably measured, and then remeasured at the then-current fair values at each reporting date until the share options have vested and recognized as an expense over the requisite service period.  The Company has adopted new guidance with effect from January 1, 2018, which requires that non-employee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. Further details on the transition are available in Note 2(f).

 

(f)                        New accounting pronouncements

 

Adopted in the period

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”) which requires a new approach to revenue recognition and, in March, April, May and December 2016, the FASB issued additional clarification related to this guidance. This guidance has been codified within ASC 606. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

 

Step 2: Identify the performance obligations in the contract.

 

Step 3: Determine the transaction price.

 

Step 4: Allocate the transaction price to the performance obligations in the contract.

 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company has adopted the guidance using the modified retrospective approach, with the cumulative effect of initially applying the guidance recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under previous guidance. The quantitative impact of the changes on the statement of operations for the three months ended September 30, 2018 are set out below (in thousands):

 

 

 

Under previous

 

 

 

 

 

 

 

revenue

 

 

 

 

 

 

 

guidance

 

Adjustment

 

As reported

 

 

 

 

 

 

 

 

 

Revenue

 

$

56,999

 

$

(16,207

)

$

40,792

 

Operating income

 

23,225

 

(16,207

)

7,018

 

Income before income taxes

 

21,582

 

(16,207

)

5,375

 

Net income attributable to ordinary shareholders

 

21,449

 

(16,207

)

5,242

 

Net income per ordinary share - Basic

 

0.04

 

 

 

0.01

 

Net income per ordinary share - Diluted

 

0.03

 

 

 

0.01

 

 

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The quantitative impacts of the changes on the statement of operations for the nine months ended September 30, 2018 are set out below (in thousands):

 

 

 

 

Under previous

 

 

 

 

 

 

 

revenue

 

 

 

 

 

 

 

guidance

 

Adjustment

 

As reported

 

 

 

 

 

 

 

 

 

Revenue

 

$

69,262

 

$

(11,236

)

$

58,026

 

Operating loss

 

(39,023

)

(11,236

)

(50,259

)

Loss before income taxes

 

(47,743

)

(11,236

)

(58,979

)

Net loss attributable to ordinary shareholders

 

(48,105

)

(11,236

)

(59,341

)

Net loss per ordinary share - Basic and diluted

 

(0.08

)

 

 

(0.10

)

 

The quantitative impacts of the changes on the balance sheet as of September 30, 2018 are set out below (in thousands):

 

 

 

Under previous

 

 

 

 

 

 

 

revenue

 

 

 

 

 

 

 

guidance

 

Adjustment

 

As reported

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

1,592

 

$

(247

)

$

1,345

 

Total current liabilities

 

29,813

 

(247

)

29,566

 

Total liabilities

 

33,717

 

(247

)

33,470

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

(15,651

)

2,838

 

(12,813

)

Accumulated deficit

 

(279,735

)

(2,591

)

(282,326

)

Total stockholders’ equity

 

275,908

 

247

 

276,155

 

 

The quantitative impacts of the changes on the statement of cash flows for the nine months ended September 30, 2018 are set out below (in thousands):

 

 

 

Under previous

 

 

 

 

 

 

 

revenue

 

 

 

 

 

 

 

guidance

 

Adjustment

 

As reported

 

 

 

 

 

 

 

 

 

Net loss

 

$

(48,105

)

$

(11,236

)

$

(59,341

)

Decrease in payables and deferred revenue

 

(46,769

)

11,236

 

(35,533

)

 

The cumulative effect of adopting the guidance on our financial statements at January 1, 2018 is a credit to opening accumulated losses and corresponding decrease in deferred revenue of $8,645,000.

 

The adoption of ASC 606 has had a material impact on the Company’s financial statements due to the following:

 

·                  Under the GSK Collaboration and License Agreement, the Company will receive non-substantive milestone payments in the future upon achievement of specified development milestones. Non-substantive milestones are currently included within the transaction price upon achievement of the milestone and recognized over the period during which the Company is delivering services to GSK.  ASC 606 requires an entity to estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.  This includes an estimate of variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.  This results in certain milestone payments being recognized earlier under ASC 606 than under existing guidance, if it is considered probable that the milestone will be achieved.

 

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·                  Upfront payments and non-refundable milestone payments were previously recognized in revenue using the proportional performance model ratably over the period that services are rendered, unless another attribution method more closely approximates the delivery of the goods or services to the customer. ASC 606 requires an entity to recognize revenue using a measure of progress that depicts the transfer of control of the goods or services to the customer.  The Company considers that an input measure, such as costs incurred, relative to the total expected inputs is the appropriate measure to depict the transfer of control of the services under the GSK Collaboration and License Agreement, which impacts the timing of its revenue from the GSK Collaboration and License Agreement.

 

The Company has applied the practical expedient for contracts that were modified before the adoption of ASU 2014-09, which permits entities to not retrospectively restate the contract for those contract modifications. Instead, the aggregate effect of all modifications that occurred before the adoption date has been reflected when:

 

a. Identifying the satisfied and unsatisfied performance obligations

 

b. Determining the transaction price

 

c. Allocating the transaction price to the satisfied and unsatisfied performance obligations.

 

ASC 606 requires an entity to provide financial statement users with sufficient information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To help achieve this objective, ASC 606 requires certain quantitative and qualitative disclosures included within Note 2(d) and Note 3, which are more extensive than the previously required revenue disclosures.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

The Company has adopted ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amended the guidance on the recognition and measurement of financial assets and financial liabilities.  The new guidance requires that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income.  The guidance also requires the use of an exit price when measuring the fair value of financial instruments for disclosure purposes, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset.  The guidance did not have a material impact on the Company’s consolidated financial statements.

 

Improvements to Nonemployee Share-Based Payment Accounting

 

The Company has adopted ASU 2018-07 — Compensation — Stock Compensation  — Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of existing guidance on employee share-based payment transactions to include nonemployee transactions.  Under the simplified guidance, nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The guidance has been adopted using a modified-retrospective approach, which requires that unsettled equity-classified awards for which a measurement date has not been established are measured at the adoption date fair value. The guidance did not have a material impact on the Company’s consolidated financial statements.

 

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To be adopted in future periods

 

Accounting for Leases

 

In February 2016, the FASB issued ASU 2016-02 - Leases.  The guidance requires that lessees recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term at the commencement date.  The guidance also makes targeted improvements to align lessor accounting with the lessee accounting model and guidance on revenue from contracts with customers.  The guidance is effective for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. Early application is permitted.  The guidance must be adopted on a modified retrospective transition approach for leases existing, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The FASB has issued ASU 2018-11 - Leases, which, in addition to the existing requirements to transition, permits an entity to transition to the new guidance by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods and the Company intends to adopt the guidance in this manner.  The Company’s assessment of the impact of the guidance on its consolidated financial statements is ongoing.  We anticipate that the adoption of the guidance will have a material impact on the Company’s consolidated balance sheet due to the recognition of a lease liability and corresponding right-of-use asset.  We have not finalized the assessment of the amount of the lease liability and right-of-use asset but we anticipate that it will result in the recording of lease assets of approximately $20 million and a corresponding lease liability of approximately $25 million.

 

Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued ASU 2016-13 — Financial Instruments — Credit losses, which replaces the incurred loss impairment methodology for financial instruments in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the fiscal year beginning January 1, 2020, including interim periods within that fiscal year.  Early application is permitted for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. The guidance must be adopted using a modified-retrospective approach and a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.

 

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

 

In August 2018, the FASB issued ASU 2018-15 — Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The guidance is effective for the fiscal year beginning January 1, 2020, including interim periods within that fiscal year.  Early application is permitted for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. The guidance may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.

 

Changes to the Disclosure Requirements for Fair Value Measurement

 

In August 2018, the FASB issued ASU 2018-13 — Fair Value Measurement (Topic 820) - Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.  The guidance is effective for the fiscal year beginning January 1, 2020, including interim periods within that fiscal year.  Early application is permitted. Certain amendments apply prospectively with the all other amendments applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.

 

(g)                      Related parties

 

In the three and nine months ended September 30, 2017, research and development expenses includes purchases of $67,000 and $781,000 from Immunocore Ltd (“Immunocore”).  As described in Note 2(w) to the consolidated financial statements included in the Annual Report, the Company no longer considered Immunocore to be a related party with effect from January 1, 2018.

 

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(h)                      Accumulated other comprehensive income (loss)

 

The following amounts were reclassified out of other comprehensive income during the three and nine months ended September 30, 2018 (in thousands):

 

 

 

Amount reclassified

 

 

 

 

 

Three months

 

Nine months

 

 

 

 

 

ended

 

ended

 

 

 

Component of Accumulated Other

 

September 30,

 

September 30,

 

Affected line item in the Statement of

 

Comprehensive Income

 

2018

 

2018

 

Operations

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on available-for-sale securities

 

 

 

 

 

 

 

Reclassification adjustment for losses on available-for-sale debt securities

 

$

 

$

2,473

 

Other income (expense), net

 

 

Note 3 — Revenue

 

Revenue from contracts with customers arises from one customer, which is GSK, in one geographic location, which is the United Kingdom.

 

Revenue comprises the following categories (in thousands):

 

 

 

Three months
ended
September 30,

 

Nine months
ended
September 30,

 

 

 

2018

 

2018

 

 

 

 

 

 

 

Development

 

$

1,678

 

$

18,912

 

Licenses

 

39,114

 

39,114

 

 

 

$

40,792

 

$

58,026

 

 

The deferred revenue balance as of January 1, 2018 and September 30, 2018 is as follows (in thousands):

 

 

 

September 30,
2018

 

January 1,
2018

 

Deferred revenue

 

$

1,345

 

$

30,090

 

 

Deferred revenue has decreased from $30,090,000 at January 1, 2018 to $1,345 at September 30, 2018 primarily due to the recognition of license revenue of $39,114,000 for the NY-ESO License which commenced in September 2018, of which $27,001,000 was included in the opening balance of deferred revenue.  A further $1,787,000 of the revenue recognized in the nine months ended September 30, 2018 was included in the opening balance of deferred revenue.

 

The impact of changes in variable consideration in the three and nine months ended September 30, 2018 was nil and a reduction in deferred revenue of $10,396,000, respectively, and the impact of changes in the percentage of completion in the three and nine months ended September 30, 2018 was to increase deferred revenue by $45,000 and $5,027,000, respectively.

 

The aggregate amount of the transaction price, excluding variable consideration which is constrained to reduce the consideration to the amount which is probable of being received, allocated to the performance obligations that are unsatisfied (or partially satisfied) as of September 30, 2018 was $1,345,000.  This amount comprises $88,000 of revenue allocated to partially satisfied performance obligations for the NY-ESO program and a further $1,257,000 of revenue allocated to the partially satisfied performance obligations for the PRAME program.

 

The NY-ESO program transferred to GSK on July 23, 2018 which resulted in the revenue allocated to the NY-ESO License being recognized in the third quarter of 2018.  The revenue allocated to the performance obligations for the NY-ESO program of $88,000 will be recognized over the remainder of 2018.

 

The revenue allocated to the PRAME program of $1,257,000 will be recognized over an estimated development period.  As of September 30, 2018, this is estimated to be six months.

 

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Note 4 — Other income (expense), net

 

Other income (expense), net consisted of the following (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Realized foreign exchange (losses) gains

 

$

(179

)

$

191

 

$

(2,869

)

$

703

 

Unrealized foreign exchange (losses) gains

 

(2,006

)

3,680

 

(4,921

)

6,887

 

Losses on redemption or maturity of available-for-sale debt securities

 

 

 

(2,473

)

 

Other

 

(64

)

(269

)

(262

)

(348

)

 

 

$

(2,249

)

$

3,602

 

$

(10,525

)

$

7,242

 

 

Note 5 — Loss per share

 

The numerator for the basic and diluted income (loss) per share is as follows (in thousands):

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net income (loss) attributable to ordinary shareholders

 

$

5,242

 

$

(878

)

$

(59,341

)

$

(42,875

)

Numerator for basic income (loss) per share

 

5,242

 

(878

)

(59,341

)

(42,875

)

Numerator for dilued income (loss) per share

 

5,242

 

(878

)

(59,341

)

(42,875

)

 

The denominator for the basic and diluted income (loss) per share is as follows:

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Denominator for basic income (loss) per share - Weighted average shares outstanding

 

582,004,954

 

561,239,864

 

573,796,275

 

516,352,141

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options

 

39,759,247

 

 

 

 

Denominator for diluted income (loss) per share

 

621,764,201

 

561,239,864

 

573,796,275

 

516,352,141

 

 

The dilutive effect of 2,791,651 and 75,087,783 stock options have been excluded from the diluted earnings (loss) per share calculation for the three months ended September 30, 2018 and 2017, respectively, because they would have an antidilutive effect on the earnings (loss) per share for the period.  The dilutive effect of  88,869,497 and 69,136,398 stock options have been excluded from the diluted loss per share calculation for the nine months ended September 30, 2018 and 2017, respectively, because they would have an antidilutive effect on the income (loss) per share for the period.

 

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Note 6 — Fair value measurements

 

Assets and liabilities measured at fair value on a recurring basis based on Level 1, Level 2, and Level 3 fair value measurement criteria as of September 30, 2018 are as follows (in thousands):

 

 

 

 

 

 

Fair value measurements using

 

 

 

September 30,
2018

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

82,668

 

$

82,668

 

$

 

$

 

Commercial paper

 

1,984

 

 

1,984

 

 

 

 

$

84,652

 

$

82,668

 

$

1,984

 

$

 

 

The Company estimates the fair value of available-for-sale debt securities with the aid of a third party valuation service, which uses actual trade and indicative prices sourced from third-party providers on a daily basis to estimate the fair value.  If observed market prices are not available (for example securities with short maturities and infrequent secondary market trades), the securities are priced using a valuation model maximizing observable inputs, including market interest rates.

 

Note 7 — Available-for-sale debt securities

 

As of September 30, 2018, the Company has the following investments in available-for-sale debt securities (in thousands):

 

 

 

 

 

 

 

 

Gross

 

Gross

 

Aggregate

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

estimated fair

 

 

 

Maturity

 

cost

 

gains

 

losses

 

value

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

3 months to 1 year

 

$

82,717

 

$

 

$

(49

)

$

82,668

 

Commercial paper

 

3 months to 1 year

 

1,984

 

 

 

 

1,984

 

 

 

 

 

$

84,701

 

$

 

$

(49

)

$

84,652

 

 

In the three and nine months ended September 30, 2018, realized losses recognized on the maturity of available-for-sale debt securities of nil and $2,473,000, respectively, primarily arising due to foreign exchange movements, were reclassified out of accumulated other comprehensive loss.

 

As of September 30, 2018 and December 31, 2017, the aggregate fair value of securities held by the Company in an unrealized loss position was $ 79,485,000 and $125,828,000, respectively, which consisted of 28 and 54 securities, respectively.  No securities have been in an unrealized loss position for more than one year. As of September 30, 2018, the securities in an unrealized loss position are not considered to be other than temporarily impaired because the impairments are not severe, have been for a short duration and are due to normal market fluctuations. Furthermore, the Company does not intend to sell the debt securities in an unrealized loss position and it is unlikely that the Company will be required to sell these securities before the recovery of the amortized cost.

 

Note 8 —Other current assets

 

Other current assets consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Corporate tax receivable

 

$

11,818

 

$

11,454

 

Prepayments

 

7,906

 

6,120

 

Clinical materials

 

1,190

 

3,760

 

Other current assets

 

927

 

382

 

 

 

$

21,841

 

$

21,716

 

 

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Note 9 — Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Accrued clinical and development expenditure

 

$

9,566

 

$

10,065

 

Accrued employee expenses

 

6,897

 

6,592

 

VAT

 

3,388

 

5,741

 

Other accrued expenditure

 

3,812

 

4,446

 

Other liabilities

 

651

 

357

 

 

 

$

24,314

 

$

27,201

 

 

The Company typically has a receivable for VAT.  As of December 31, 2017 and as of September 30, 2018, there was a VAT payable due to VAT arising on the milestone payments invoiced to GSK in 2017 and three months ended September 30,2018.

 

Note 10 — Share-based compensation

 

The following table shows the total share-based compensation expense included in the unaudited consolidated statements of operations (thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Research and development

 

$

2,053

 

$

871

 

$

6,338

 

$

2,229

 

General and administrative

 

1,989

 

1,201

 

6,115

 

2,528

 

 

 

$

4,042

 

$

2,072

 

$

12,453

 

$

4,757

 

 

There were 757,273 and 8,756,211 options over ordinary shares granted in the three months ended September 30, 2018 and 12,187,614 and 28,959,363 options over ordinary shares granted in the nine months ended September 30, 2018 and 2017, respectively, with a weighted average fair value of $1.09, $0.34, $0.82 and $0.34, respectively. Additionally, in the three and nine months ended September 30, 2018, 1,259,760 and 7,966,716 options were granted, which have a nominal exercise price (similar to a restricted stock unit (RSU)), with a weighted average fair value of $1.67 and $1.40, respectively.

 

The RSU-style options over ordinary shares in Adaptimmune Therapeutics plc were granted under the Adaptimmune Therapeutics plc Employee Share Option Scheme (adopted on January 14, 2016).  These options have an exercise price equal to the nominal value of an ordinary share, of £0.001, and generally vest over four years, with 25% on the first, and each subsequent, anniversary of the grant date.  The RSU-style options are not subject to performance conditions and the contractual term is ten years.

 

Note 11 — Shareholders’ equity

 

On September 7, 2018, the Company completed a registered direct offering of its American Depositary Shares (“ADSs”) following its entry into a definitive agreement with Matrix Capital Management Company, LP, New Enterprise Associates 16, L.P., New Enterprise Associates 14, L.P. and Syncona Portfolio Limited. The Company sold 10,000,000 ADSs (representing 60,000,000 ordinary shares) at a price of $10.00 per ADS.  The net proceeds were $99,653,000 after deducting offering expenses of $347,000.

 

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

 

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements” in this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

The following discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report and our consolidated financial statements and accompanying notes included within our Annual Report.

 

We are a clinical-stage biopharmaceutical company focused on novel cancer immunotherapy products based on our proprietary SPEAR T-cell platform. We have developed a comprehensive proprietary platform that enables us to identify cancer targets, find and genetically engineer TCRs, and produce TCR therapeutic candidates for administration to patients. We engineer TCRs to increase their affinity to cancer specific peptides in order to destroy cancer cells in patients.

 

Update on Clinical Pipeline Progress

 

Wholly owned SPEAR T-cells

 

We have Phase 1/2 clinical trials ongoing with our wholly owned MAGE-A10, MAGE-A4 and AFP SPEAR T-cells in a total of ten solid tumor types including non-small cell lung cancer (“NSCLC”), head and neck cancer, ovarian, urothelial, melanoma, hepatocellular, esophageal, gastric, synovial sarcoma and myxoid round cell lyposarcoma (“MRCLS”) cancers.

 

·                  MAGE-A10 SPEAR T-cell

 

Phase 1 clinical trials are ongoing with our MAGE-A10 SPEAR T-cell in NSCLC, urothelial, melanoma and head and neck cancers in the United States, Canada, the United Kingdom and Spain. These trials are first-in-human, open-label studies utilizing a modified 3+3 design in up to 28 patients with escalating target doses of 100 million (Cohort 1), 1 billion (Cohort 2), and 5 billion (Cohort 3 and Expansion Phase) transduced SPEAR T-cells to evaluate safety, including dose limiting toxicities (DLTs) followed by a possible expansion phase with doses of up to 10 billion SPEAR T-cells. Patients are currently being enrolled in Cohort 3 in the NSCLC trial and Cohort 3 and Expansion Phase in the triple tumor (urothelial, melanoma and head and neck cancers) trial.

 

Additional data on the safety and anti-tumor effects of the MAGE-A10 SPEAR T-cell in both clinical trials was presented at European Society for Medical Onvology (ESMO) in October 2018. As of September 4, 2018:

 

·                  11 patients were treated across both studies in Cohort 1 (both NSCLC and triple tumour studies) and Cohort 2 (all NSCLC patients).

·                  Treatment of patients at the Cohort 1 and Cohort 2 dose levels has shown no evidence of toxicity related to off-target binding or alloreactivity and most adverse events were consistent with those experienced by cancer patients undergoing chemotherapy or other immunotherapies.

·                  In the three patients treated in Cohort 2:

·                  One patient died of pneumonia (unrelated to T-cell therapy);

·                  One patient had stable disease (SD) at Week 4, but then progressed; and

·                  One patient had SD at Weeks 4 and 8, but progressed at Week 12.

·                  Transduced T-cells were detectable in peripheral blood in patients treated at the Cohort 1 and Cohort 2 dose levels.

 

·                  MAGE-A4 SPEAR T-cell

 

A Phase 1 clinical trial is ongoing in nine tumor indications namely urothelial, melanoma, head and neck, ovarian, NSCLC, esophageal and gastric cancers, synovial sarcoma and MRCLS. This trial is a first-in-human, open-label study utilizing a modified 3+3 design in up to 30 patients with escalating target doses of 100 million (Cohort 1), 1 billion (Cohort 2), and 5 billion (Cohort 3 and Expansion Phase) transduced SPEAR T-cells to evaluate safety, including dose limiting toxicities (DLTs) followed by a possible expansion phase with doses of up to 10 billion SPEAR T-cells. Patients are currently being enrolled in Cohort 3 and the Expansion Phase of the trial.

 

Additional data around the initial safety assessment of the MAGE-A4 SPEAR T-cell was presented at ESMO in October 2018. As of August 2, 2018:

 

·                  Three patients have been treated in Cohort 1 and three patients treated in Cohort 2;

 

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·                  Of the six patients treated, the best response was SD in four patients and progressive disease (PD) in two patients;

·                  The MAGE-A4 SPEAR T-cells showed no evidence of off-target toxicity or alloreactivity in the first two Cohorts; and

·                  Transduced T-cells were detectable in peripheral blood in patients treated at the Cohort 1 and Cohort 2 dose levels.

 

·                  AFP SPEAR T-cell

 

We are dosing in a Phase 1, open label, dose escalation study designed to evaluate the safety and anti-tumor activity of our alpha fetoprotein (“AFP”) therapeutic candidate in hepatocellular carcinoma (“HCC”). The trial is open in the United States, United Kingdom and Spain and is currently enrolling patients within the first dose cohort. The Phase 1 clinical trial will include a dose escalation to evaluate safety, including dose limiting toxicities (DLTs), followed by expansion of a tolerable dose to further explore safety and potential evidence of anti-tumor activity.

 

The NY-ESO SPEAR T-cell Program (now transitioned to GSK)

 

Transition of Program to GSK

 

The NY-ESO SPEAR T-cell program transitioned to GSK as of July 23, 2018. As a result of the transition, GSK has assumed full responsibility for future research, development, and potential commercialization of the NY-ESO SPEAR T-cell (referred to as GSK3377794  or GSK ‘794 by GSK).

 

Further clinical updates for MRCLS will be provided at SITC in November 2018 including in relation to the MRCLS study:

 

·                  10 patients were enrolled in the study and treated with the NY-ESO SPEAR T-cell;

·                  All evaluable patients achieved tumour reduction;

·                  Eight patients were evaluable in accordance with RECIST criteria. Of these two patients have been assessed by Investigators as having confirmed Partial Responses (PR) in accordance with RECIST criteria and six patients were assessed by Investigators as having confirmed SD in accordance with RECIST criteria. This compares to previously reported three confirmed partial responses as assessed by Investigators and one unconfirmed partial response, where two of the partial responses were confirmed before the minimum 28 days required by RECIST criteria. Two patients are non-evaluable according to RECIST criteria.

·                  The most frequent adverse events are consistent with those experienced by patients with cancer who are undergoing cytotoxic chemotherapy or other immunotherapies

 

Significant Events in the Three Months Ended September 30, 2018

 

On September 7, 2018, the Company completed a registered direct offering of  its American Depositary Shares (“ADSs”). The Company sold 10,000,000 ADSs (representing 60,000,000 ordinary shares) at a price of $10.00 per ADS.  The net proceeds were $99,653,000 after deducting offering expenses of $347,000.

 

Financial Operations Overview

 

On January 1, 2018, the Company adopted new accounting guidance on revenue recognition, which has been codified within Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).  The comparative financial information for the three and nine months ended September 30, 2017 and as of December 31, 2017 has not been restated and is prepared in accordance with the previous accounting guidance.

 

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Revenue

 

Revenue arises from the GSK Collaboration and License Agreement. The contract consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, the pre-clinical development of a second target, PRAME, and the NY-ESO License.

 

The aggregate transaction price consists of an upfront payment of $42.1 million in June 2014, development milestones achieved of $66.4 million, an option exercise fee of $39.8 million.

 

The transaction price is allocated to the performance obligation and recognized as or when the Company satisfies the performance obligation.  The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs.

 

The performance obligation relating to the NY-ESO License was recognized at a point-in-time, upon commencement of the license in September 2018.

 

Research and Development Expenses

 

Research and development expenses consist principally of the following:

 

·                  salaries for research and development staff and related expenses, including benefits;

 

·                  costs for production of preclinical compounds and drug substances by contract manufacturers;

 

·                  fees and other costs paid to contract research organizations in connection with additional preclinical testing and the performance of clinical trials;

 

·                  costs associated with the development of a process to manufacture and supply our lentiviral vector and SPEAR T-cells for use in clinical trials;

 

·                  costs to develop manufacturing capability at our U.S. facility for manufacture of SPEAR T-cells for use in clinical trials;

 

·                  costs relating to facilities, materials and equipment used in research and development;

 

·                  costs of acquired or in-licensed research and development which does not have alternative future use;

 

·                  amortization and depreciation of property, plant and equipment and intangible assets used to develop our SPEAR T-cells; and

 

·                  share-based compensation expenses;

 

offset by:

 

·                  reimbursements from government grants; and

 

·                  reimbursable tax and expenditure credits from the U.K. government.

 

Research and development expenditures are expensed as incurred.

 

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Research and development expenditure is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K. government.  As a company that carries out extensive research and development activities, we benefit from the U.K. research and development tax credit regime for small and medium sized companies (“SME R&D Tax Credit Scheme”), whereby our principal research subsidiary company, Adaptimmune Limited, is able to surrender the trading losses that arise from its research and development activities for a payable tax credit of up to approximately 33.4% of eligible research and development expenditures. Qualifying expenditures largely comprise employment costs for research staff, consumables and certain internal overhead costs incurred as part of research projects for which we do not receive income. Subcontracted research expenditures are eligible for a cash rebate of up to approximately 21.7%. A large proportion of costs in relation to our pipeline research, clinical trials management and manufacturing development activities, all of which are being carried out by Adaptimmune Limited, are eligible for inclusion within these tax credit cash rebate claims.

 

Expenditures incurred in conjunction with the GSK Collaboration and License Agreement are not qualifying expenditures under the SME R&D Tax Credit Scheme but certain of these expenditures can be reimbursed through the U.K. research and development expenditure credit scheme (the “RDEC Scheme”).  Under the RDEC Scheme tax relief is given at 12% of allowable R&D costs.

 

Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, which depends upon the timing of initiation of clinical trials and the rate of enrollment of patients in clinical trials.  The duration, costs, and timing of clinical trials and development of our SPEAR T-cells will depend on a variety of factors, including:

 

·                  the scope, rate of progress, and expense of our ongoing as well as any additional clinical trials and other research and development activities;

 

·                  uncertainties in clinical trial enrollment rates;

 

·                  future clinical trial results;

 

·                  significant and changing government regulation;

 

·                  the timing and receipt of any regulatory approvals; and

 

·                  supply and manufacture of lentiviral vector and SPEAR T-cells for clinical trials.

 

For further detail please see Part II — Item 1A Risk Factors — Risks Related to the Development of our SPEAR T-cells of our Quarterly Report

 

A change in the outcome of any of these variables may significantly change the costs and timing associated with the development of that SPEAR T cell. For example, if the FDA, or another regulatory authority, requires us to conduct clinical trials beyond those that we currently anticipate will be required for regulatory approval, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

 

General and Administrative Expenses

 

Our general and administrative expenses consist principally of:

 

·                  salaries for employees other than research and development staff, including benefits;

 

·                  business development expenses, including travel expenses;

 

·                  professional fees for auditors, lawyers and other consulting expenses;

 

·                  costs of facilities, communication, and office expenses;

 

·                  information technology expenses;

 

·                  amortization and depreciation of property, plant and equipment and intangible assets not related to research and development activities; and

 

·                  share-based compensation expenses.

 

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Other (Expense) Income, net

 

Other (expense) income, net comprises foreign exchange gains (losses). We are exposed to foreign exchange rate risk because we currently operate in the United Kingdom and United States. Our revenue from the GSK Collaboration and License Agreement is denominated in pounds sterling and is generated by our U.K.-based subsidiary, which has a pounds sterling functional currency. As a result, these sales are subject to translation into U.S. dollars when we consolidate our financial statements. Our expenses are generally denominated in the currency in which our operations are located, which are the United Kingdom and United States. However, our U.K.-based subsidiary incurs significant research and development costs in U.S. dollars and, to a lesser extent, Euros.  Our U.K. subsidiary with a pound sterling functional currency holds our investment in marketable securities, which are predominately denominated in U.S. dollars.  The entire change in the fair value of a foreign currency-denominated security, including the change due to foreign exchange, is included in other comprehensive income.

 

Our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. We seek to minimize this exposure by maintaining currency cash balances at levels appropriate to meet foreseeable expenses in U.S. dollars and pounds sterling. To date, we have not used hedging contracts to manage exchange rate exposure, although we may do so in the future.

 

Taxation

 

We are subject to corporate taxation in the United Kingdom and the United States.  We incur tax losses and tax credit carryforwards in the United Kingdom.  No deferred tax assets are recognized on our U.K. losses and tax credit carryforwards because there is currently no indication that we will make sufficient taxable profits to utilize these tax losses and tax credit carryforwards.

 

We benefit from reimbursable tax credits in the United Kingdom through the SME R&D Tax Credit Scheme as well as the RDEC Scheme which are presented as a deduction to research and development expenditure.

 

Our subsidiary in the United States has generated taxable profits due to a Service Agreement between our U.S. and U.K. operating subsidiaries and is subject to U.S. federal corporate income tax of 21% for the year ended December 31, 2018.  Due to its activity in the United States, and the sourcing of its revenue, the U.S. subsidiary is not currently subject to any state or local income taxes.  The Company also benefits from the U.S Research Tax Credit and Orphan Drug Credit.

 

In the future, if we generate taxable income in the United Kingdom, we may benefit from the United Kingdom’s “patent box” regime, which would allow certain profits attributable to revenues from patented products to be taxed at a rate of 10%. As we have many different patents covering our products, future upfront fees, milestone fees, product revenues, and royalties may be taxed at this favorably low tax rate.

 

U.K. Value Added Tax (“VAT”) is charged on all qualifying goods and services by VAT-registered businesses. An amount of 20% of the value of the goods or services is added to all relevant sales invoices and is payable to the U.K. tax authorities. Similarly, VAT paid on purchase invoices paid by Adaptimmune Limited and Adaptimmune Therapeutics plc is reclaimable from the U.K. tax authorities.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies considered to be critical to the judgments and estimates used in the preparation of our financial statements are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report.  There has been no change in the accounting policies considered to be critical accounting judgments and estimates other than the accounting judgments and estimates relating to revenue recognition, which have been changed from January 1, 2018 due to the adoption of ASC 606.

 

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Revenue Recognition

 

The Company has one contract with a customer, which is the GSK Collaboration and License Agreement.  The GSK Collaboration and License Agreement consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, the development of a second target, PRAME, and the NY-ESO License.

 

The aggregate transaction price consists of an upfront payment, development milestones achieved, an option exercise fee and an estimate of variable consideration. The Company determines the variable consideration to be included in the transaction price by estimating the most-likely amount that will be received and then applies a constraint to reduce the consideration to the amount which is probable of being received.  In estimating the amount of variable consideration to be included in the transaction price, the Company considers the latest project plan and other available information.  The determination of whether a milestone is probable includes consideration of the following factors:

 

·                  Whether achievement of a development milestone is highly susceptible to factors outside the entity’s influence, such as milestones involving the judgment or actions of third parties, including regulatory bodies or the customer;

 

·                  Whether the uncertainty about the achievement of the milestone is not expected to be resolved for a long period of time;

 

·                  Whether the Company can reasonably predict that a milestone will be achieved based on previous experience; and

 

·                  The complexity and inherent uncertainty underlying the achievement of the milestone.

 

The determination of whether future milestones are probable requires significant judgment and the impact of a change in the determination of whether a milestone is probable is recognized in the period the judgment is revised.  This can significantly impact the revenue recognized.  In the three and nine months ended September 30, 2018, revenue of nil and $10.4 million, respectively, was recognized due to development milestones becoming probable in the period.  As the development program progresses and the uncertainties underlying the milestones resolve, it is likely that further milestones will become probable.

 

The upfront payment of $42.1 million was allocated between the performance obligations using the Company’s best estimate of the relative selling price of each performance obligation. The best estimate of the selling price is determined after considering all reasonably available information, including internal pricing objectives used in negotiating the contract, together with internal data regarding the cost and margin of providing services for each deliverable taking into account the different stage of development of each development program. The variable consideration is allocated to the performance obligation to which it relates.

 

The amount of the transaction price allocated to the performance obligation is recognized as or when the Company satisfies the performance obligation.  The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs.  The determination of the percentage of completion requires the Company to estimate the costs-to-complete the project.  The Company makes a detailed estimate of the costs-to-complete on an annual basis as part of the Company’s budgeting process, which is re-assessed every reporting period based on the latest project plan and discussions with project teams, when a change in facts or circumstances occurs, the estimated is adjusted and the revenue is recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate is recognized as an adjustment to revenue in the period in which the change in estimate occurs.  In the three and nine months ended September 30, 2018, the estimate of the cost to complete for the performance obligation relating to the development and transition of the NY-ESO SPEAR T-cell program was revised, which resulted in a cumulative adjustment to reduce revenue of nil and $5.0 million for the three and nine months ended September 30, 2018.  Due to the inherent difficulties in determining the cost of completion for development programs, changes in the cost to complete are likely to continue to occur.

 

The performance obligation relating to the NY-ESO License was recognized at a point-in-time, upon commencement of the license in September 2018.

 

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Results of Operations

 

Comparison of Three Months Ended September 30, 2018 and 2017

 

The following table summarizes the results of our operations for the three months ended September 30, 2018 and 2017, together with the changes to those items (in thousands).

 

 

 

Three months ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

2017

 

Increase/decrease

 

Revenue

 

$

40,792

 

$

27,185

 

$

13,607

 

50

%

Research and development expenses

 

(23,484

)

(24,034

)

550

 

(2

)%

General and administrative expenses

 

(10,290

)

(8,111

)

(2,179

)

27

%

Total operating expenses

 

(33,774

)

(32,145

)

(1,629

)

5

%

Operating income (loss)

 

7,018

 

(4,960

)

11,978

 

(241

)%

Interest income

 

606

 

705

 

(99

)

(14

)%

Other (expense) income, net

 

(2,249

)

3,602

 

(5,851

)

(162

)%

Income before income taxes

 

5,375

 

(653

)

6,028

 

(923

)%

Income taxes

 

(133

)

(225

)

92

 

(41

)%

Income for the period

 

$

5,242

 

$

(878

)

$

6,120

 

(697

)%

 

Revenue

 

Revenue increased by $13.6 million to $40.8 million in the three months ended September 30, 2018 compared to $27.2 million for the three months ended September 30, 2017.  Revenue comprises the following (in thousands):

 

 

 

Three months ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

2017

 

Increase/decrease

 

Development revenue

 

$

1,678

 

$

27,185

 

$

(25,507

)

(94

)%

License revenue

 

39,114

 

 

39,114

 

NM

 

 

 

$

40,792

 

$

27,185

 

$

13,607

 

50

%

 

Revenue arises from the GSK Collaboration and License Agreement.  Development revenue relates to continued performance under the NY-ESO SPEAR T-cell transition program and the PRAME pre-clinical development program.  License revenue relates to NY-ESO License.

 

Revenue for the three months ended September 30, 2018 has been recognized under ASC 606 which is effective January 1, 2018.  Revenue in the comparative period of 2017 has been recognized under the previous guidance.  Development revenue in the three months ended September 30, 2018 under the previous guidance would be $17.9 million and license revenue would be $39.1 million.

 

Development revenue for the three months ended September 30, 2018 has decreased compared to the three months ended September 30, 2017.  The development revenue for the three months ended September 30, 2018 has decreased due to the NY-ESO program having transferred to GSK on July 23, 2018.  The development revenue for the three months ended September 30, 2017 benefited from cumulative revenue amortization of $17.5 million in September 2017 due to a reduction in the estimate of the period over which we would be delivering services to GSK in relation to the NY-ESO SPEAR T-cell development program.

 

License revenue was $39.1 million in the three months ended September 30, 2018 compared to nil in the three months ended September 30, 2017. License revenue is recognized upon commencement of the NY-ESO License which occurred in the third quarter of 2018.

 

Future revenues will fluctuate depending on the progress of the development program for PRAME, which is difficult to predict.  However, we anticipate that a further $1.3 million will be recognized over the next six months as the development of the second target, PRAME, progresses resulting in lower revenue in the year ended December 31, 2019 compared to the year ended December 31, 2018.

 

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Research and Development Expenses

 

Research and development expenses decreased by 2% to $23.5 million for the three months ended September 30, 2018 from $24.0 million for the three months ended September 30, 2017.  Our research and development expenses comprise the following (in thousands):

 

 

 

Three months ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

2017

 

Increase/decrease

 

Salaries, materials, equipment, depreciation of property, plant and equipment and other employee-related costs(1)

 

$

15,213

 

$

12,371

 

$

2,842

 

23

%

Subcontracted expenditure

 

10,016

 

12,292

 

(2,276

)

(19

)%

Share-based compensation expense

 

2,053

 

1,683

 

370

 

22

%

Payments for in-process research and development

 

 

685

 

(685

)

N/A

 

Reimbursements for research and development tax and expenditure credits

 

(3,798

)

(2,997

)

(801

)

27

%

 

 

$

23,484

 

$

24,034

 

$

(550

)

(2

)%

 


(1) These costs are not analyzed by project since employees may be engaged in multiple projects at a time.

 

The net decrease in our research and development expenses of $0.6 million for the three months ended September 30, 2018 compared to the same period in 2017 was primarily due to the following:

 

·                   a decrease of $2.3 million in subcontracted expenditures, including clinical trial expenses, contract research organization (CRO) costs and manufacturing expenses driven by decrease in manufacturing expenses and clinical trial costs due to the transfer of NY-ESO to GSK on July 23, 2018;

 

·                  a decrease in payments for in-process research and development of $0.7 million; and

 

·                  an increase in reimbursements for research and development tax and expenditure credits of $0.8 million.

 

offset by:

 

·                  an increase of $2.8 million in salaries, materials, equipment, depreciation of property, plant and equipment and other employee-related costs. The driver for these is the increase in the average number of employees engaged in research and development from 264 to 328; and

 

·                  an increase in share-based compensation expense of $0.4 million.

 

Our subcontracted costs for the three months ended September 30, 2018 were $10.0 million, compared to $12.3 million in the same period of 2017.  This includes $6.0 million of costs associated with manufacturing of SPEAR T-cells and $4.0 million of costs associated with clinical trials, including $0.7 million for the NY-ESO SPEAR T-cells.

 

Our research and development expenses are highly dependent on the phases and progression of our research projects and will fluctuate depending on the outcome of ongoing clinical trials.

 

General and Administrative Expenses

 

General and administrative expenses increased by 27% to $10.3 million for the three months ended September 30, 2018 from $8.1 million in the same period in 2017.

 

The net increase of $2.2 million was primarily due to an increase in personnel costs and share-based compensation expense, due to the addition of key management and other professionals, an increase in costs associated with developing our IT infrastructure, and an increase in other costs to support our growth.

 

We expect that our general and administrative expenses will continue to increase as we continue to expand our operations.

 

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Other Income (Expense), Net

 

Other income (expense), net was an expense of $2.2 million for the three months ended September 30, 2018 compared to an income of $3.6 million for the three months ended September 30, 2017.  Other income (expense), net primarily relates to unrealized foreign exchange gains and losses on cash, cash equivalents and intercompany loans held in U.S. dollars by our U.K. subsidiary.  Unrealized foreign exchange losses have increased primarily due to movements in foreign exchange rates and a decrease in our cash balances arising as a consequence of our investment of cash and cash equivalents into marketable securities. The unrealized foreign exchange gains (losses) arising on marketable securities are recognized within Other comprehensive income.

 

Income taxes

 

Income taxes decreased by 41% to $0.1 million for the three months ended September 30, 2018 from $0.2 million for the three months ended June 30, 2017.  Income taxes arise in the United States due to our U.S. subsidiary generating taxable profits.  We incur losses in the United Kingdom. Income taxes have decreased in the three months to September 30, 2018 due to the impact of US R&D tax credits and lower tax rates.

 

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Comparison of Nine months ended September 30, 2018 and 2017

 

The following table summarizes the results of our operations for the nine months ended September 30, 2018 and 2017, together with the changes to those items (in thousands).

 

 

 

Nine months ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

2017

 

Increase/decrease

 

Revenue

 

$

58,026

 

$

33,563

 

$

24,463

 

73

%

Research and development expenses

 

(75,500

)

(62,240

)

(13,260

)

21

%

General and administrative expenses

 

(32,785

)

(22,284

)

(10,501

)

47

%

Total operating expenses

 

(108,285

)

(84,524

)

(23,761

)

28

%

Operating loss

 

(50,259

)

(50,961

)

702

 

(1

)%

Interest income

 

1,805

 

1,465

 

340

 

23

%

Other (expense) income, net

 

(10,525

)

7,242

 

(17,767

)

(245

)%

Loss before income taxes

 

(58,979

)

(42,254

)

(16,725

)

40

%

Income taxes

 

(362

)

(621

)

259

 

(42

)%

Loss for the period

 

$

(59,341

)

$

(42,875

)

$

(16,466

)

38

%

 

Revenue

 

Revenue increased by $24.5 million to $58.0 million in the nine months ended September 30, 2018 compared to $33.6 million for the nine months ended September 30, 2017.  Revenue comprises the following (in thousands):

 

 

 

Nine months ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

2017

 

Increase/decrease

 

Development revenue

 

$

18,912

 

$

33,563

 

$

(14,651

)

(44

)%

License revenue

 

39,114

 

 

39,114

 

NM

 

 

 

$

58,026

 

$

33,563

 

$

24,463

 

73

%

 

Revenue arises from the GSK Collaboration and License Agreement.  Development revenue relates to continued performance under the NY-ESO SPEAR T-cell transition program and the PRAME pre-clinical development program.  License revenue relates to the NY-ESO License.

 

Revenue for the nine months ended September 30, 2018 has been recognized under ASC 606 which is effective January 1, 2018.  Revenue in the comparative period of 2017 has been recognized under the previous guidance.  Development revenue in the nine months ended September 30, 2018 under the previous guidance would be $30.2 million and license revenue would be $39.1 million.

 

Development revenue of $18.9 million in the nine months ended September 30, 2018 benefited from a change in the estimate of variable consideration of $10.3 million due to additional development milestones being considered probable, which was partially offset by $5.0 million arising due to a change in percentage of completion.

 

Development revenue of $33.6 million in the nine months ended September 30, 2017, benefited from $10.4 million of milestones being achieved in the nine months ended September 30, 2017 and an increase in cumulative revenue amortization of $17.5 million in September 2017 upon the exercise of the NY-ESO Option.  The cumulative revenue amortization arose due to the estimate of the period over which we would be delivering services to GSK in relation to the NY-ESO SPEAR T-cell development program being significantly reduced.

 

License revenue was $39.1 million in the nine months ended September 30, 2018 compared to nil in the nine months ended September 30, 2017. License revenue was recognized upon commencement of the NY-ESO License which occurred in the third quarter of 2018.

 

Future revenues will fluctuate depending on the progress of the development program for PRAME, which is difficult to predict.  However, we anticipate that a further $1.3 million will be recognized over the next six months as the development of the second

 

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target, PRAME, progresses resulting in lower revenue in the year ended December 31, 2019 compared to the year ended December 31, 2018.

 

Research and Development Expenses

 

Research and development expenses increased by 21% to $75.5 million for the nine months ended September 30, 2018 from $62.2 million for the nine months ended September 30, 2017.  Our research and development expenses comprise the following (in thousands):

 

 

 

Nine months ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

2017

 

Increase/decrease

 

Salaries, materials, equipment, depreciation of property, plant and equipment and other employee-related costs(1)

 

$

45,809

 

$

34,856

 

$

10,953

 

31

%

Subcontracted expenditure

 

35,035

 

29,587

 

5,448

 

18

%

Share-based compensation expense

 

6,338

 

3,913

 

2,425

 

62

%

Payments for in-process research and development

 

 

1,186

 

(1,186

)

(100

)%

Reimbursements for research and development tax and expenditure credits and government grants

 

(11,682

)

(7,302

)

(4,380

)

60

%

 

 

$

75,500

 

$

62,240

 

$

13,260

 

21

%

 


(1) These costs are not analyzed by project since employees may be engaged in multiple projects at a time.

 

The net increase in our research and development expenses of $13.3 million for the nine months ended September 30, 2018 compared to the same period in 2017 was primarily due to the following:

 

·                  an increase of $11.0 million in salaries, materials, equipment, depreciation of property, plant and equipment and other employee-related costs. The driver for these is the increase in the average number of employees engaged in research and development from 244 to 314;

 

·                  an increase of $5.4 million in subcontracted expenditures, including clinical trial expenses, contract research organization (CRO) costs and manufacturing expenses driven by increased recruitment in our clinical trials, initiation of clinical trials for MAGE-A4, MAGE-A10 and AFP, and an increase in process development relating to manufacturing; and

 

·                  an increase in share-based compensation expense of $2.4 million;

 

offset by:

 

·                  a decrease of $1.2 million in payments made to Universal Cells for in-process research and development; and

 

·                  an increase in reimbursements for research and development tax and expenditure credits of $4.4 million.

 

Our subcontracted costs for the nine months ended September 30, 2018 were $35.0 million, compared to $29.6 million in the same period of 2017.  This includes $20.8 million of costs associated with manufacturing for both the NY-ESO SPEAR T-cells and ur internal pipeline, including our MAGE-A10 and MAGE-A4 and AFP SPEAR T-cells and $14.2 million of costs associated with clinical trials, including $3.3 million for the NY-ESO SPEAR T-cells.

 

Our research and development expenses are highly dependent on the phases and progression of our research projects and will fluctuate depending on the outcome of ongoing clinical trials.

 

General and Administrative Expenses

 

General and administrative expenses increased by 47% to $32.8 million for the nine months ended September 30, 2018 from $22.3 million in the same period in 2017.

 

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The net increase of $10.5 million was primarily due to an increase in personnel costs and share-based compensation expense, due to the addition of key management and other professionals, an increase in costs associated with developing our IT infrastructure, and an increase in other costs to support our growth.

 

We expect that our general and administrative expenses will continue to increase as we continue to expand our operations.

 

Other Income (Expense), Net

 

Other income (expense), net was an expense of $10.5 million for the nine months ended September 30, 2018 compared to an income of $7.2 million for the nine months ended September 30, 2017.  Other income (expense), net primarily relates to unrealized foreign exchange gains and losses on cash, cash equivalents and intercompany loans held in U.S. dollars by our U.K. subsidiary.  Unrealized foreign exchange losses have increased primarily due to movements in foreign exchange rates and a decrease in our cash balances arising as a consequence of our investment of cash and cash equivalents into marketable securities. The unrealized foreign exchange gains (losses) arising on marketable securities are recognized within Other Comprehensive Income.

 

Income taxes

 

Income taxes decreased by 42% to $0.4 million for the nine months ended September 30, 2018 from $0.6 million for the nine months ended September 30, 2017 due to the impact of US R&D tax credits.  Income taxes arise in the United States and we incur losses in the United Kingdom.

 

Liquidity and Capital Resources

 

Sources of Funds

 

Since our inception, we have incurred significant net losses and negative cash flows from operations. We financed our operations primarily through sales of equity securities, cash receipts under our GSK Collaboration and License Agreement, government grants and research and development tax and expenditure credits. From inception through to September 30, 2018, we have raised:

 

·                  $513.5 million, net of issuance costs, through the issuance of shares, including $99.7 million raised through a registered direct offering in September 2018;

 

·                  $148.3 million upfront fees, milestones and exercise fees under our GSK Collaboration and License Agreement;

 

·                  $2.8 million of income in the form of government grants; and

 

·                  $24.2 million in the form of reimbursable U.K. research and development tax credits and receipts from the U.K. RDEC Scheme.

 

We use a non-GAAP measure, Total Liquidity, which is defined as the total of cash and cash equivalents and marketable securities, to evaluate the funds available to us in the near-term. A description of Total Liquidity and reconciliation to cash and cash equivalents, the most directly comparable U.S. GAAP measure, are provided below under “Non-GAAP measures”.

 

As of September 30, 2018, we had cash and cash equivalents of $153.1 million and Total Liquidity of $237.7 million. We believe that our Total Liquidity and income from GSK upon transition of the NY-ESO program will be sufficient to fund our operations, based upon our currently anticipated research and development activities and planned capital spending, through to late 2020.

 

Cash Flows

 

The following table summarizes the results of our cash flows for the nine months ended September 30, 2018 and 2017 (in thousands).

 

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Nine months ended

 

 

 

September 30,

 

 

 

2018

 

2017

 

Net cash used in operating activities

 

$

(72,703

)

$

(32,959

)

Net cash provided by (used in) investing activities

 

34,954

 

(86,070

)

Net cash provided by financing activities

 

102,586

 

103,568

 

Cash, cash equivalents and restricted cash

 

157,244

 

149,558

 

 

Operating Activities

 

Net cash used in operating activities increased by $39.7 million to $72.7 million for the nine months ended September 30, 2018 from $33.0 million for the nine months ended September 30, 2017. The increase in cash used in operations was primarily the result of the increase in research and development costs due to the ongoing advancement of our preclinical programs and clinical trials and an increase in general and administrative expenses due to the expansion of our operations.

 

Net cash used in operating activities of $72.7 million for the nine months ended September 30, 2018 comprised a net loss of $59.3 million and a decrease in operating assets and liabilities of $39.2 million, offset by noncash items of $25.8 million.  The decrease in operating assets and liabilities of $39.2 million in the nine months ended September 30, 2018 is primarily driven by movements in deferred revenue due to the recognition of the revenue for the NY-ESO License.  The noncash items consisted primarily of depreciation expense on plant and equipment of $5.2 million, share-based compensation expense of $12.5 million, a realized loss on sale of marketable securities of $2.5 million and unrealized foreign exchange losses of $4.9 million.

 

Investing Activities

 

Net cash provided by investing activities of $35.0 million for the nine months ended September 30, 2018 and net cash used in investing activities of $86.1 million for the nine months ended September 30, 2017, consisted of:

 

·                  purchases of property and equipment of $3.8 million and $22.8 million for the nine months ended September 30, 2018 and 2017, respectively;

 

·                  cash outflows from investment in marketable securities of $75.5 million and $93.2 million for the nine months ended September 30, 2018 and 2017, respectively, and cash inflows from maturity or redemption of marketable securities of $115.0 million and $7.0 million for the nine months ended September 30, 2018 and 2017, respectively; and

 

·                  investment in short-term cash deposits with maturities greater than three months but less than 12 months of $40.6 million and cash inflows from maturity of short-term deposits of $18.0 for the nine months ended September 30, 2017.

 

Financing Activities

 

Net cash from financing activities of $102.6 million in the nine months ended September 30, 2018, consisted of proceeds from a registered direct offering in September 2018 of $99.7 million and proceeds from share option exercises of $2.9 million, and net cash from financing activities for the nine months ended September 30, 2017 of $103.6 million consisted of proceeds from a follow-on public offering of ADSs of $61.4 million in March 2017 and proceeds of $41.8 million from a registered direct offering in April 2017 and proceeds from share option exercises of $0.4 million.

 

Non-GAAP Measures

 

Total Liquidity (a non-GAAP financial measure)

 

Total Liquidity (a non-GAAP financial measure) is the total of cash and cash equivalents and marketable securities. Each of these components appears in the consolidated balance sheet. The U.S. GAAP financial measure most directly comparable to Total Liquidity is cash and cash equivalents as reported in the consolidated financial statements, which reconciles to Total Liquidity as follows (in thousands):

 

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September 30,

 

December 31,

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

153,081

 

$

84,043

 

Marketable securities

 

84,652

 

124,218

 

Total Liquidity

 

$

237,733

 

$

208,261

 

 

We believe that the presentation of Total Liquidity provides useful information to investors because management reviews Total Liquidity as part of its management of overall liquidity, financial flexibility, capital structure and leverage.  The definition of Total Liquidity includes investments, which are highly-liquid and available to use in our current operations, such as marketable securities.

 

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 in the rules and regulations of the SEC.

 

Contractual Obligations

 

For a discussion of our contractual obligations, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Annual Report on Form 10-K. There have not been any material changes to our contractual obligations in the nine months ended September 30, 2018.

 

Safe Harbor

 

See the section titled “Information Regarding Forward-Looking Statements” at the beginning of this Quarterly Report.

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

For a discussion of our quantitative and qualitative disclosures about market risk, see “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2017 Annual Report on Form 10-K. There have been no material changes in the nine months ended September 30, 2018.

 

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, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of September 30, 2018. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2018, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

In January 2018, the Company adopted new guidance on revenue recognition, which has been codified within Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).  As a consequence of the new guidance, the Company implemented several new internal controls, including controls to monitor the probability of achievement of contingent milestone payments and the pattern of performance of the performance obligation in the quarter ended March 31, 2018.

 

No 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 quarter ended September 30, 2018 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.

 

As of September 30, 2018, we were not a party to any material legal proceedings.

 

Item 1A. Risk Factors.

 

Our business has significant risks. You should carefully consider the following risk factors as well as all other information contained in this Quarterly Report, including our condensed consolidated financial statements and the related notes, before making an investment decision regarding our securities. The risks and uncertainties described below are those significant risk factors currently known and specific to us that we believe are relevant to our business, results of operations and financial condition. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also impair our business, results of operations and financial condition.

 

Risks Related to Our Financial Condition and Capital Requirements

 

We are a clinical-stage biopharmaceutical company with no commercial products and prediction of future performance is very difficult.

 

We are a clinical-stage biopharmaceutical company focused on novel cancer immunotherapy products. We have no products or therapeutics approved for commercial sale and have not generated any revenue from product supplies or royalties. Our therapeutic candidates are based on engineered TCRs and are new and largely unproven. Our limited operating history, particularly in light of the rapidly evolving cancer immunotherapy field, may make it difficult to evaluate our current business and predict our future performance. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. Our inability to address these risks successfully would have a materially adverse effect on our business and prospects.

 

We have incurred net losses every year since our inception and expect to continue to incur net losses in the future.

 

We have generated losses since our inception in 2008, during which time we have devoted substantially all of our resources to research and development efforts relating to our SPEAR T-cells (including the NY-ESO SPEAR T-cell), including engaging in activities to manufacture and supply our SPEAR T-cells for clinical trials in compliance with current good manufacturing practice, or cGMP, conducting clinical trials of our SPEAR T-cells, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product supplies or royalties. Based on our current plans, we do not expect to generate product or royalty revenues unless and until we obtain marketing approval for, and commercialize, any of our SPEAR T-cells.

 

For the years ended December 31, 2017 and 2016 and six months ended December 31, 2015 and the year ended June 30, 2015, we incurred net losses of $70.1 million, $71.6 million, $23.0 million and $22.1 million, respectively. As of September 30, 2018, we had accumulated losses of $282.3 million. We expect to continue incurring significant losses as we continue with our research and development programs and to incur general and administrative costs associated with our operations. The extent of funding required to develop our product candidates is difficult to estimate given the novel nature of our SPEAR T-cells and their un-proven route to market. Our profitability is dependent upon the successful development, approval, and commercialization of our SPEAR T-cells, further development of the NY-ESO SPEAR T-cells by GSK (given the NY-ESO program has now been transitioned to GSK), achieving GSK milestones (for both the NY-ESO program, the PRAME program and any future SPEAR T-cell programs under the GSK Collaboration and License Agreement) and achieving a level of revenues adequate to support our cost structure. We may never achieve profitability, and unless and until we do, we will continue to need to raise additional cash.

 

We have never generated any revenue from sales of our SPEAR T-cells and our ability to generate revenue from sales of our SPEAR T-cells and become profitable depends significantly on our success in a number of factors.

 

We have no SPEAR T-cells approved for commercial sale, have not generated any revenue from sales of our SPEAR T-cells (including the NY-ESO SPEAR T-cell), and do not anticipate generating any revenue from sales of our SPEAR T-cells until some time after we receive regulatory approval, if at all, for the commercial sale of a SPEAR T-cell. We intend to fund future operations through milestone payments under our collaboration and license agreement with GSK and through additional equity financings or other third party collaborations. Our ability to generate revenue and achieve profitability depends on our success in many factors, including:

 

·                  completing preclinical development and advancing our SPEAR T-cells to clinic;

 

·                  delivering on the clinical development strategy for our SPEAR T-cells;

 

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·                  progressing our clinical trials within predicted timeframes and without any substantial delays, for example as may be caused by delays in patient recruitment, regulatory requirements to hold or suspend any clinical trials or delays in obtaining approvals required to conduct clinical trials;

 

·                  demonstrating a favorable benefit (efficacy parameters): risk (safety) for our SPEAR T-cells and the NY-ESO SPEAR T-cell that translate into a differentiated product of value for patients;

 

·                  obtaining data from clinical trials which are ongoing for SPEAR T-cells other than the NY-ESO SPEAR T-cell;

 

·                  obtaining regulatory approvals and marketing authorizations for our SPEAR T-cells and the NY-ESO SPEAR T-cell for which we or our collaborator complete clinical trials;

 

·                  progressing our clinical trials within predicted timeframes and without any substantial delays, for example as may be caused by delays in patient recruitment, regulatory requirements to hold or suspend any clinical trials or delays in obtaining approvals required to conduct clinical trials;

 

·                  developing sustainable and scalable manufacturing and supply processes for our SPEAR T-cells, including establishing and maintaining commercially viable supply relationships with third parties and establishing our own commercial manufacturing capabilities and infrastructure;

 

·                  developing a reliable and commercially viable/cost effective commercial manufacturing process to enable commercial supply of our SPEAR T-cells;

 

·                  launching and commercializing SPEAR T-cells for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;

 

·                  obtaining market acceptance, pricing and reimbursement of our SPEAR T-cells as viable treatment options;

 

·                  addressing any competing technological and market developments;

 

·                  identifying, assessing, acquiring and/or developing new SPEAR T-cells;

 

·                  maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and

 

·                  attracting, hiring and retaining qualified personnel.

 

Even if one or more of the SPEAR T-cells is approved for commercial sale whether by us or by a collaborator, we anticipate incurring significant costs associated with commercializing any approved SPEAR T-cell. Our expenses could increase beyond expectations if the FDA or any other regulatory agency requires changes to our manufacturing processes or assays, or for us to perform preclinical programs and clinical or other types of trials in addition to those that we currently anticipate. If we are successful in obtaining regulatory approvals to market one or more SPEAR T-cells, our revenue will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the SPEAR T-cell, the ability to get reimbursement at any price, and whether we own the commercial rights for that territory. If the number of our addressable disease patients is not as significant as we estimate, the indication approved by regulatory authorities is narrower than we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales or supplies of such SPEAR T-cells, even if approved. If we are not able to generate revenue from the sale of any approved SPEAR T-cells, we may never become profitable.

 

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If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our SPEAR T-cells.

 

Our operations have required substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the development of our SPEAR T-cells, including future clinical trials. If we receive approval for any of our SPEAR T-cells, we will require significant additional amounts in order to launch and commercialize these therapeutic candidates.

 

As of September 30, 2018, we had $153.1 million of cash and cash equivalents and $84.7 million of marketable securities. We expect to use these funds to advance and accelerate the clinical development of our MAGE-A10, MAGE-A4 and AFP SPEAR T-cells, to further develop and enhance our manufacturing capabilities and secure a commercially viable manufacturing platform for all of our SPEAR T-cells, to advance additional SPEAR T-cells into preclinical testing and progress such SPEAR T-cells through to clinical trials as quickly as possible and to fund working capital, including other general corporate purposes. We believe that such proceeds, our existing cash, and cash equivalents and marketable securities together with milestones payments to us under the GSK Collaboration and License Agreement will be sufficient to fund our operations for the foreseeable future, including for at least the next 12 months. However, changing circumstances beyond our control, including changes to the scope and timing of the programs under the GSK collaboration (for example, completion of post-transition NY-ESO program activities and nomination of any further targets under the collaboration), may cause us to increase our spending significantly faster than we currently anticipate. We may require additional capital for the further development and commercialization of our SPEAR T-cells and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate.

 

We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our SPEAR T-cells or other research and development initiatives. Our license and supply agreements may also be terminated if we are unable to meet the payment obligations under these agreements. We could be required to seek collaborators for our SPEAR T-cells at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to our SPEAR T-cells in markets where we otherwise would seek to pursue development or commercialization ourselves. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our American Depositary Shares, or ADSs, to decline.

 

Risks Related to the Development of Our SPEAR T-cells

 

Our business is highly dependent on the NY-ESO SPEAR T-cell and our existing SPEAR T-cell candidates including the MAGE-A10 SPEAR T-cell, MAGE-A4 SPEAR T-cell and AFP SPEAR T-cell, which will require significant additional clinical testing before we can seek regulatory approval and begin commercialization of any of our SPEAR T-cells.

 

There is no guarantee that any SPEAR T-cells will achieve regulatory approval or proceed to the next stage of clinical programs. The process for obtaining marketing approval for any candidate is very long and risky and there will be significant challenges for us to address in order to obtain marketing approval, if at all.

 

There is no guarantee that the results obtained in current clinical trials for the NY-ESO SPEAR T-cell will be sufficient for GSK to plan one or more pivotal clinical trials and obtain regulatory approval or marketing authorization. Negative results in the NY-ESO SPEAR T-cell clinical program or in other investigator-initiated clinical programs utilizing the NY-ESO therapeutic candidate may also impact our ability to obtain regulatory approval for other SPEAR T-cells, either at all or within anticipated timeframes because, although the SPEAR T-cell may target a different cancer peptide, the underlying technology platform, manufacturing process and development process is the same for all of our SPEAR T-cells. Accordingly, a failure or delay in any one program may affect the ability to obtain regulatory approval to continue or conduct clinical programs for other SPEAR T-cells.

 

We may not be able to submit INDs, or the foreign equivalent outside of the United States, to commence additional clinical trials for other SPEAR T-cells on the timeframes we expect, and even if we are able to, the FDA or comparable foreign regulatory authorities may not permit us to proceed with planned clinical trials.

 

Progression of new SPEAR T-cells into clinical trials is inherently risky and dependent on the results obtained in preclinical programs, the results of other clinical programs and results of third-party programs that utilize common components, such as production of the lentiviral vector lot used for production and administration of our SPEAR T-cell. If results are not available when expected or problems are identified during SPEAR T-cell development, we may experience significant delays in development of pipeline products and in existing clinical programs, which may impact our ability to receive regulatory approval. This may also impact our ability to achieve certain financial milestones and the expected timeframes to market any of our SPEAR T-cells. Failure to submit further IND or the foreign equivalent and commence additional clinical programs will significantly limit our opportunity to generate revenue.

 

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There is no guarantee that the FDA, or any other regulatory authority, will approve any IND (or equivalent application) for any of our future SPEAR T-cells, or for new indications for our SPEAR T-cells already in clinical trials, or that amendments to existing protocols will not be required. For example, the FDA issued a partial clinical hold for our proposed MRCLS trial with NY-ESO following review of the IND submitted for the trial. The FDA notification was not based on safety concerns. In our correspondence the FDA requested additional Chemistry Manufacturing and Controls, or CMC, and clinical information prior to the commencement of the proposed trial. An amendment to the ADP-0011-007 protocol for the trial was filed with the FDA which converted the trial into a pilot trial (rather than the previously proposed pivotal trial design with a futility phase) and this amended protocol was approved by the FDA resulting in a lift of the partial clinical hold. The start of the MRCLS trial was delayed as a result of the FDA issued partial clinical hold and there is no guarantee that any later MRCLS pivotal trial or further SPEAR T-cell trial will be approved by the FDA.

 

We are continuing to expand our clinical trial foot print in Europe.   This requires gaining the approval of country specific review bodies for GMO application and CTA.  As this is not a harmonized process, the requirements can vary considerably and delays can be incurred at a country level.

 

In the USA, some institutional review boards, or IRBs, have requested that the Sponsor obtain Investigational Device Exemptions (IDE) from the FDA for the validated clinical trial assay being used to select patients.  This has delayed the initiation of some sites and limited the ability to obtain high risk biopsies until an IDE has been granted.  We plan to proactively seek IDEs for our SPEAR T-cell assays where appropriate.

 

Our SPEAR T-cells being developed may have potentially fatal cross-reactivity to other peptides or protein sequences within the body.

 

One of our prior SPEAR T-cells, designed to target an HLA-1 restricted MAGE-A3 cancer-specific peptide, recognized another unrelated peptide from a protein called TITIN, expressed within normal cardiac and other muscle tissues in patients. As a result of this cross-reactivity to the TITIN protein in the heart, two patients died during our MAGE-A3 clinical program, the program was put on pause, then formally placed on hold by the FDA, after which we terminated the program. We subsequently developed a preclinical safety testing program that identifies potential cross-reactivity risks but there may be gaps or other problems detected in the testing program at a later date. Even with the use of this testing program, there can be no guarantee that the FDA will permit us to begin clinical trials of any additional SPEAR T-cells other than those for which INDs already exist or that other off-target cross-reactivity will not be identified or present in any patient group. Failure to develop an effective preclinical safety testing program will prevent or delay clinical trials of any SPEAR T-cell. Detection of any cross-reactivity will halt or delay any ongoing clinical trials for any SPEAR T-cell and prevent or delay regulatory approval. Given that the underlying technology platform, manufacturing process and development process is similar for all of our TCR therapies, issues pertaining to cross-reactivity for one SPEAR T-cell may impact our ability to obtain regulatory approval for other SPEAR T-cells undergoing development and clinical trials, which would significantly harm our business, prospects, financial condition and results of operations.

 

Cross-reactivity or allo-reactivity (binding to peptides presented on other HLA types) could also occur where the affinity-enhanced engineered TCR contained within any SPEAR T-cell binds to peptides presented by HLAs other than the HLA type for which the relevant TCR was developed. We have developed a preclinical screening process to identify allo-reactivity risk. Where any allo-reactivity risk is identified, patients with the allo-reactive alleles will be excluded from the trial. Any allo-reactivity or other cross-reactivity that impacts patient safety could materially impact our ability to advance our SPEAR T-cells into clinical trials or to proceed to market approval and commercialization. In addition, there is no guarantee that exclusion of patients with the identified allo-reactive allele will successfully eliminate the risk of allo-reactivity, and serious side effects for patients may still exist. Given that the underlying technology platform, manufacturing process and development process are similar for all of our SPEAR T-cells, issues pertaining to allo-reactivity for one SPEAR T-cell may impact our ability or our collaborator’s ability to obtain regulatory approval for other SPEAR T-cells undergoing development and clinical trials, which would significantly harm our business, prospects, financial condition and results of operations.

 

Our T-cell therapy, which is a type of cell therapy that uses gene therapy technology, represents a novel approach to cancer treatment that could result in heightened regulatory scrutiny, delays in clinical development, or delays in our or our collaborator’s ability or inability to achieve regulatory approval or commercialization of SPEAR T-cells.

 

Use of any SPEAR T-cells to treat a patient requires the use of gene therapy technology, which involves combining a patient’s T cells with our lentiviral delivery vector containing the gene for our affinity-enhanced engineered TCR. This is a novel treatment approach that carries inherent development risks. We are therefore constantly evaluating and adapting our SPEAR T-cells following the results obtained during development work and the clinical programs. Further development, characterization and evaluation may be required, depending on the results obtained, in particular where such results suggest any potential safety risk for

 

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patients. The need to develop further assays, or to modify in any way the protocols related to our SPEAR T-cells to improve safety or effectiveness, may delay the clinical program, regulatory approval or commercialization, if approved at all, of any SPEAR T-cell. Consequently, this may have a material impact on our ability to receive milestone payments and/or generate revenue from our SPEAR T-cells.

 

In addition, given the novelty of SPEAR T-cells, the end users and medical personnel require a substantial amount of education and training in their administration of SPEAR T-cells. Regulatory authorities have very limited experience with commercial engineered cell therapies and SPEAR T-cells for the treatment of cancer. As a result, regulators may be more risk adverse or require substantial dialogue and education as part of the normal regulatory approval process for each stage of development of any SPEAR T-cell. To date, only a limited number of gene therapy products have been approved in the United States and European Union. Consequently, it is difficult to predict and evaluate what additional regulatory hurdles may apply to the development of our SPEAR T-cells and whether additional investment, time or resources will be required to overcome any such hurdles.

 

Additionally, because our technology involves the genetic modification of patient cells ex-vivo using a viral vector, we are subject to many of the challenges and risks of gene therapy, including the following challenges:

 

·                  Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future.

 

·                  Random gene insertion associated with retrovirus-mediated genetically modified products, known as insertional oncogenesis, could lead to lymphoma, leukemia or other cancers, or other aberrantly functioning cells. Insertional oncogenesis was seen in early gene therapy studies conducted outside of the United States in 2003. In those studies, insertional oncogenesis resulted in patients developing leukemia following treatment with the relevant gene therapy, with one patient dying. As a result of the data from those studies, the FDA temporarily halted gene therapy trials in the United States. The previous trials involved modification of stem cells rather than T cells and utilized a murine gamma-retroviral vector rather than a lentiviral vector. We cannot guarantee that insertional oncogenesis resulting from administration of our SPEAR T-cells will not occur.

 

·                  Although our viral vectors are not able to replicate, there may be a risk with the use of retroviral or lentiviral vectors that they could undergo recombination and lead to new or reactivated pathogenic strains of virus or other infectious diseases.

 

·                  There is the potential for delayed adverse events following exposure to gene therapy products due to persistent biological activity of the genetic material or other components of products used to carry the genetic material. In part for this reason, the FDA recommends a 15-year follow-up observation period for all surviving patients who receive treatment using gene therapies in clinical trials. We may need to adopt such an observation period for our therapeutic candidates; however, the FDA does not require that the tracking be complete prior to its review of the Biologics License Application, or BLA.

 

·                  Clinical trials using genetically modified cells conducted at institutions that receive funding for recombinant DNA research from the NIH may be subject to review by the NIH Office of Biotechnology Activities’ Recombinant DNA Advisory Committee, or RAC. The RAC review process can delay or impede the initiation of a clinical trial.

 

If adverse events of the type described above were to occur, further advancement of our clinical trials could be halted or delayed, which would have a material adverse effect on our business and operations. In addition, heightened regulatory scrutiny of gene therapy product candidates may result in delays and increased costs in bringing a product candidate to market, if at all. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate revenue in the future.

 

In addition, results seen in third party clinical trials using other cell therapy products, for example CAR-T products, or in clinical trials conducted by our collaborators may impact on the further advancement of our clinical trials. Based on the data currently available to us in relation to our clinical trials there is no evidence that the type and severity of neurotox events observed with CD19-directed CAR-T cell treatments, in particular the fatal events observed in the NCT02535364 trial, occur with our SPEAR TCRs (including the NY-ESO SPEAR T-cell). However there is no guarantee that the FDA or other regulatory authorities will agree with that position and further education and discussion with regulatory authorities may be required.

 

Results seen in clinical trials using products that are used in our combination clinical trials, may impact on the further advancement of our clinical trials. For example, the FDA placed a clinical hold on three combination studies using KEYTRUDA (pembrolizumab), an anti-PD-1 therapy used to treat multiple myeloma. There is no guarantee that further reviews of safety data with KEYTRUDA or other anti-PD-1 therapies will not result in delays or holds to our clinical trials or the requirement to amend the protocol for such clinical trials.

 

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T-cell therapy is a novel approach to cancer treatment that creates significant increased risk in terms of side-effect profile, ability to satisfy regulatory requirements associated with clinical trials and the long- term viability of administered SPEAR T-cells.

 

Development of a pharmaceutical or biologic therapy or product has inherent risks based on differences in patient population and responses to therapy and treatment. The mechanism of action and impact on other systems and tissues within the human body following administration of SPEAR T-cell is not completely understood, which means that we cannot predict the long-term effects of treatment with SPEAR T-cells (whether by us or a collaborator). In addition it is not possible for any pre-clinical safety package to completely identify all potential safety risks.

 

We are aware that certain patients do not respond to our SPEAR T-cells and that other patients may relapse or cease to present the peptide being targeted by such SPEAR T-cells. The percentage of the patient population in which these events may occur is unknown, but the inability of patients to respond and the possibility of relapse may impact our or our collaborator’s ability to conduct clinical trials, to obtain regulatory approvals, if at all, and to successfully commercialize any SPEAR T-cell.

 

Clinical trials and the investigator-initiated clinical trials using SPEAR T-cell therapeutics are still in the early stages, and it is difficult to predict the results that will be obtained by us or our collaborator in ongoing clinical trials or the next phase or phases of any clinical program. It is also difficult to predict the way in which SPEAR T-cells will interact with third-party products used in combination clinical trials. For example, data seen in third party combination trials with KEYTRUDA has resulted in certain combination trials with KEYTRUDA being placed on clinical hold by the FDA. Any undesirable side effects seen in combination trials may affect our ability or our or our collaborator’s ability to continue with and obtain regulatory approval for any combination therapy, but may also impact our or our collaborator’s ability to continue with and obtain regulatory approval for SPEAR T-cell therapies alone.

 

There is a significant risk at each stage of any clinical program that serious adverse events or low efficacy, as well as less favorable benefit:risk profiles, will prevent any SPEAR T-cells from proceeding further or will result in those programs being suspended or placed on hold (whether voluntarily or as a result of a regulatory authority requirement). For example, there is a risk that the target (or similar) peptide to which any SPEAR T-cell is directed may be present in both patients’ cancer cells and other non-cancer cells and tissues. Should this be the case patients may suffer a range of side effects associated with the SPEAR T-cell binding to both the cancer cells and/or other cells and tissues and such side effects could cause patient death.  The extent of these side effects will depend on which cells and tissues are affected as well as the degree to which the target (or similar) peptide is expressed in these cells and tissues. Serious adverse events seen with other immunotherapy products, such as the severe neurotox events observed with CD19-directed CAR-T cell treatments, may also occur at any stage of the clinical program. Further, following infusion of any SPEAR T-cells, there may be a transient inflammatory reaction of the disease to the treatment.  Symptoms in any given subject would be dependent on the location and other characteristics of their tumor.  For example, subjects with lung tumors may experience dyspnea.  Cardiac toxicities may be observed in patients with pre-existing cardiac or pericardial masses.  These inflammatory reactions and related symptoms may be mild and self-limited, but can be severe and require medical intervention.

 

As of September 4, 2018, adverse events considered by investigators to be possibly related to either MAGE-A4 or MAGE-A10 SPEAR T-cells and presented at ESMO in October 2018 include cytokine release syndrome (“CRS”), pyrexia, peripheral oedema, sinus tachycardia/tachycardia, increase in alanine aminotransferase, increase in amylase, increase in aspartate amino transferase, chills, delirium, dysphagia, dysphonia, haemoptysis, hyperhidrosis, hypotension, lymphopenia, leukopenia, neutropenia, pleural effusion, decreased appetite, fatigue, nausea, febrile neutropenia, thrombocytopenia, alopecia, encephalopathy, diarrhea, headache, hypoxia and tumour pain.  As of September 4, 2018, serious adverse events seen in the MAGE-A4 and MAGE-A10 studies (whether considered related to the SPEAR T-cells or not) include CRS, dysponea, abdominal pain, cardiac arrest, progressive disease, haemoptysis, neutropenia, pneumonia, respiratory arrest, respiratory failure, sepsis, thrombocytopenia, pancytopenia, atrial fibrillation, hyponatraemia, muscular weakness, encephalopathy, syncope and pleural effusion.

 

Because administration of SPEAR T-cells is patient-specific, the process requires careful handling of patient-specific products and fail-safe tracking, namely the need to ensure that the tracking process is without error and that patient samples are tracked from patient removal, through manufacturing and re-administration to the same patient. Should the tracking process fail, whether at our own facility, a third party facility or at any point in the manufacturing and supply process, a patient could receive another patient’s T-cells resulting in a patient fatality. We will need to invest in systems, such as bar coding, to ensure fail safe tracking. There is always a risk of a failure in any such system. Inability to develop or adopt an acceptable fail-safe tracking methodology and handling regime may delay or prevent us from receiving regulatory approval and/or result in a patient fatality if a patient receives another patient’s T-cells. This risk may be increased where SPEAR T-cells are used in clinical programs that we do not control or sponsor and, should an error be made in the administration of our SPEAR T-cells in such clinical programs, this could affect the steps required in our own clinical programs and manufacturing process requiring the addition of further tracking mechanisms to ensure fail-safe tracking. The tracking systems required to ensure safe patient administration may also require

 

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increased administration to satisfy other regulatory requirements, for example data protection requirements in Europe. The need to ensure tracking systems are adequate and to comply with these additional regulatory requirements may result in delay to the start of trials or the need to obtain additional regulatory licenses or consents prior to starting such trials.

 

Validation of our SPEAR T-cells requires access to human samples but there is no guarantee that such samples can be obtained or, if they can be obtained, that the terms under which they are provided will be favorable to us.

 

Certain of the steps involved in validating and carrying out safety testing in relation to our SPEAR T-cells require access to samples (e.g., tissues samples or cell samples) from third parties. Such samples may be obtained from universities or research institutions and will often be provided, subject to satisfaction of certain terms and conditions. There can be no guarantee that we will be able to obtain samples in sufficient quantities to enable development of and use of the full preclinical safety testing program for all SPEAR T-cells undergoing development. In addition, the terms under which such samples are available may not be acceptable to us or may restrict our use of any generated results or require us to make payments to the third parties.

 

SPEAR T-cells and their application are not fully scientifically understood and are still undergoing validation and investigation.

 

Our SPEAR T-cells (including the NY-ESO SPEAR T-cell) and their potential associated risks are still under investigation. For example, there is a potential risk that, given that the TCR chains are produced separately and then assembled within patient T cells into full TCRs, the TCR chains from both transduced and naturally occurring T cells could be assembled into an unintended end TCR due to mis-pairing of TCR chains, which could create unknown recognition and cross-reactivity problems within patients. Although this phenomenon has not been reported in humans, it remains a theoretical risk for our SPEAR T-cells and is still being studied and investigated. This could delay regulatory approval, if any, for the relevant SPEAR T-cells. To the extent that any mis-pairing of TCR chains is identified, either in our or our competitors’ clinical trials, additional investment may be required in order to modify relevant SPEAR T-cells and to further assess and validate the risk of such mis-pairing to patients. There is also no guarantee that following modification of the relevant SPEAR T-cell, such modified SPEAR T-cell will remain suitable for patient treatment, that it will eliminate the risk of mis-pairing of TCR chains or that regulatory approval will be obtained at all or on a timely basis in relation to such modified SPEAR T-cells. The occurrence of such events would significantly harm our business, prospects, financial condition and results of operations.

 

We may not be able to identify and validate additional target peptides or isolate and develop affinity-enhanced TCRs that are suitable for validation and further development.

 

The success of our SPEAR T-cells depends on both the identification of target peptides presented on cancer cells, which can be bound by TCRs, and isolation and affinity enhancement of TCRs, which can be used to treat patients if regulatory approval is obtained. There is an inherent risk that the number of target peptides that can be identified and/or our ability to develop and isolate suitable TCRs for affinity enhancement could be significantly lower than projected or that no additional SPEAR T-cells suitable for further development can be identified. Any failure to identify and validate further target peptides will reduce the number of potential SPEAR T-cells that we can successfully develop, which in turn will reduce the commercial opportunities available to us and increase our reliance on our existing SPEAR T-cells.

 

In addition, there is no guarantee that our attempts to develop further SPEAR T-cells will result in candidates for which the safety and efficacy profiles enable progression to and through preclinical testing. Failure to identify further candidates for progression into preclinical testing and clinical programs will significantly impact our commercial returns, increase our reliance on the success of our existing SPEAR T-cell programs and may significantly harm our business, prospects, financial condition and results of operations. If resources become limited or if we fail to identify suitable target peptides, TCRs or affinity-enhanced TCRs, our ability to submit INDs for further SPEAR T-cells may be delayed or never realized, which would have a materially adverse effect on our business. We have multiple research projects ongoing both internally and with third parties, for example Universal Cells, Inc. and Bellicum, Inc. The outcomes of these research projects are uncertain and such research projects may or may not generate next generation SPEAR T-cells with profiles suitable for further development or progression into clinical trials.

 

We may encounter substantial delays in our clinical trials or may not be able to conduct our trials on the timelines we expect.

 

Conduct of clinical trials is dependent on finding clinical sites prepared to carry out the relevant clinical trials, screening of patients by the clinical sites, recruitment of patients both in terms of number and type of patients and general performance of the relevant clinical site. It is difficult to predict how quickly we or our collaborators will be able to recruit suitable patients, find suitable sites, begin clinical programs and administer our SPEAR T-cells. The patient population in which any required peptide antigen is presented may be lower than expected which will increase the timescales required to find and recruit patients into the applicable clinical trial. Screening of a large number of patients is required to identify HLA and tumor antigen positive patients for most of our clinical trials. For example, it has taken longer to recruit patients into our NSCLC trials with both the NY-ESO SPEAR T-cell and

 

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MAGE-A10 SPEAR T-cell due to the low percentage expression of peptide antigen seen in the patient populations at the relevant clinical trial sites. With the NY-ESO SPEAR T-cell, presentation of the antigen occurs predominantly in certain sub-types of NSCLC and additional clinical sites may need to be initiated in order to identify patients with those certain NSCLC sub-types. With MAGE-A10, presentation of the peptide antigen is seen in a lower number of patients than anticipated and with our AFP SPEAR T-cells recruitment of patients remains difficult due to the nature of the patient population targeted for the trial. This has delayed recruitment of patients into trials and has resulted in the Company incurring additional costs associated with the need to find and initiate additional clinical trial sites. It is also difficult to predict whether changes may be required to any clinical trial design as our clinical trials progress. For example, initial results from current Phase 1/2 clinical trials with the NY-ESO SPEAR T-cell have suggested that fludarabine is required as part of any patient pre-conditioning regimen. This has required amendment to protocol designs, which did not previously include fludarabine, to include fludarabine.

 

Our and our collaborator’s clinical trials will compete with other clinical trials that are in the same therapeutic areas as our SPEAR T-cells, which will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the number of qualified clinical investigators is limited, we will conduct some of our clinical trials at the same clinical trial sites where competing trials are ongoing, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites. Moreover, because our SPEAR T-cells represent a departure from more commonly used methods for cancer treatment, potential patients and their physicians may opt to use conventional therapies, such as chemotherapy and hematopoietic cell transplantation, rather than enrollment in any of our current or future clinical trials. This may also mean we cannot recruit patients at a suitable time in their disease progression. In addition, in relation to any indication, the standard of care for patients in that indication may change or further develop meaning that clinical sites are no longer prepared to continue with any clinical trial or require amendments to agreed protocols for clinical trials. For example, the standard of care in melanoma has changed since the start of our clinical trials in melanoma with the NY-ESO SPEAR T-cell and as a result the clinical trial has been halted due to anticipated unavailability of patients. Such circumstances can lead to the suspension of the relevant clinical trial at a site, inability to recruit further patients at that clinical site or a requirement to amend the protocol, all of which will delay or potentially halt progression of a SPEAR T-cell through clinical trials.

 

Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result, and have resulted in, increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our and our collaborator’s ability to advance the development of our SPEAR T-cells.

 

Comparability studies related to the manufacturing of any SPEAR T-cells may be required ahead of any pivotal trial start date or ahead of use in the European Union or alternatively in connection with any changes made to our manufacturing process. The requirement to carry out such comparability studies may delay the uptake of any changed process, start of any pivotal trial or use of the relevant SPEAR T-cells in Europe. If the results from the comparability studies are not acceptable, this may further delay the start of such trials or changed process and require re-evaluation of the process used to manufacture of such SPEAR T-cells. For example, comparability studies are ongoing in relation to changes made to the process for manufacture of the NY-ESO SPEAR T-cells. The results from these comparability studies may impact the start date for any registrational study or impact what data can be used for any marketing application for the NY-ESO SPEAR T-cells. Failure in such comparability studies may also impact other studies in which the modified process is already being used.

 

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We may not be able to develop or obtain approval for the analytical assays and companion diagnostics required for commercialization of our SPEAR T-cells.

 

Administration of our SPEAR T-cells requires the use of an immuno-chemistry or other screening assay in which patients are screened for the presence of the cancer peptide targeted by our SPEAR T-cells. This assay requires the identification of suitable antibodies which can be used to identify the presence of the relevant target cancer peptide.

 

If safe and effective use of a biologic product depends on an in vitro diagnostic, such as a test to detect patients with HLA type A2, then the FDA generally requires approval or clearance of the diagnostic, known as a companion diagnostic, concurrently with approval of the therapeutic product. To date, the FDA has generally required in vitro companion diagnostics that are intended for use in selection of patients who will respond to cancer treatment to obtain a pre-market approval, or PMA, which can take up to several years, for that diagnostic approval or clearance to occur simultaneously with approval of the biologic product.

 

We expect that, for all SPEAR T-cells, the FDA and similar regulatory authorities outside of the United States will require the development and regulatory approval of a companion diagnostic assay as a condition to approval. We also expect that the FDA may require PMA supplemental approvals for use of that same companion diagnostic as a condition of approval of additional SPEAR T-cells. We do not have experience or capabilities in developing or commercializing these companion diagnostics and plan to rely in large part on third parties to perform these functions.

 

If we or our collaborators, or any third parties that we engage to assist us, are unable to successfully develop companion diagnostic assays for use with any SPEAR T-cells, or are unable to obtain regulatory approval or experience delays in either development or obtaining regulatory approval, we may be unable to identify patients with the specific profile targeted