# CRISPR Therapeutics AG (CRSP) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CRISPR Therapeutics AG's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1674416/000095017023003441/crsp-20221231.htm
Accession: 0000950170-23-003441
Filing date: 2023-02-21
Report date: 2022-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/CRSP/
All MD&A years: /company/CRSP/mda/
Previous year: /company/CRSP/mda/fy2021/ (FY 2021)
Next year: /company/CRSP/mda/fy2023/ (FY 2023)

Overview

We are a leading gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 is a revolutionary gene editing technology that allows for precise, directed changes to genomic DNA. The application of CRISPR/Cas9 for gene editing was co-invented by one of our scientific founders, Dr. Emmanuelle Charpentier. Dr. Charpentier and her collaborators published work elucidating how CRISPR/Cas9, a naturally occurring viral defense mechanism found in bacteria, can be adapted for use in gene editing. We are applying this technology to potentially treat a broad set of rare and common diseases. We believe that our scientific expertise, together with our gene editing approach, may enable an entirely new class of highly active and potentially curative therapies for patients, including those for whom current biopharmaceutical approaches have had limited success.

We have established a portfolio of therapeutic programs in a broad range of disease areas across four core franchises: hemoglobinopathies, immuno-oncology, regenerative medicine and in vivo approaches. Our most advanced programs target the genetically defined diseases transfusion-dependent beta thalassemia, or TDT, and severe sickle cell disease, or SCD, two hemoglobinopathies with high unmet medical need. We are also progressing several gene-edited allogeneic cell therapy programs,

including allogeneic chimeric antigen receptor T cell, or CAR T, candidates for the treatment of hematological and solid tumor cancers, and investigational, allogeneic, gene-edited, immune-evasive, stem cell-derived therapies for the treatment of type 1 diabetes,

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or T1D. In addition, we are advancing multiple programs leveraging in vivo editing approaches, initially for the treatment and prevention of cardiovascular disease.

Hemoglobinopathies

Our lead product candidate, exa-cel, is an investigational, autologous, ex vivo CRISPR gene-edited hematopoietic stem cell therapy that is being evaluated for the treatment of TDT and SCD. Exa-cel is being developed under a joint development and commercialization agreement between us and Vertex Pharmaceuticals Incorporated and certain of its subsidiaries, or Vertex. We and Vertex are investigating exa-cel in two ongoing Phase 1/2/3 open-label clinical trials that are designed to assess the safety and efficacy of a single dose of exa-cel in patients ages 12 to 35 with TDT (CLIMB-111) or SCD (CLIMB-121), respectively. Enrollment is complete for both CLIMB-111 and CLIMB-121. We and Vertex have also initiated two additional Phase 3 open-label clinical trials of exa-cel in pediatric patients with TDT (CLIMB-141) and SCD (CLIMB-151). Patients who received exa-cel in CLIMB-111, CLIMB-121, CLIMB-141 or CLIMB-151 will be asked to participate in a long-term, open-label follow-up trial, CLIMB-131, to evaluate the safety and efficacy of exa-cel. CLIMB-131 is designed to follow participants for up to 15 years after exa-cel infusion. In the second and fourth quarters of 2022, at the European Hematology Association Congress and American Society of Hematology Annual Meeting, respectively, we presented updated clinical data from CLIMB-111 and CLIMB-121 for 44 patients with TDT and 31 patients with SCD treated with exa-cel.

Exa-cel has been granted a number of regulatory designations from the U.S. Food and Drug Administration, or FDA, specifically RMAT, Fast Track, Orphan Drug, and Rare Pediatric Disease designations for the treatment of both TDT and SCD. Exa-cel has also been granted Orphan Drug Designation from the European Commission, as well as PRIME designation from the European Medicines Agency, or EMA, for the treatment of both TDT and SCD. In December 2022, we and Vertex completed regulatory submissions for exa-cel with the EMA and MHRA in the EU and the UK, respectively, and both the EMA and the MHRA have validated the MAA, respectively. In addition, we and Vertex initiated the rolling submission of our BLA in the United States in November 2022 and expect to complete the submission by the end of the first quarter of 2023.

Finally, building upon exa-cel, we have next-generation efforts in targeted conditioning and in vivo editing of hematopoietic stem cells, either of which could broaden the number of patients that can benefit from our therapies.

Immuno-Oncology

We believe CRISPR/Cas9 has the potential to create the next generation of CAR T cell therapies that may have a superior product profile compared to current autologous therapies and allow accessibility to broader patient populations. Drawing from the ex vivo gene editing capabilities gained through our lead programs, we are advancing several immuno-oncology cell therapy programs, including allogeneic CAR T programs targeting CD19 and CD70.

CD19 Franchise

CTX110, our lead immuno-oncology product candidate, is a healthy donor-derived gene-edited allogeneic CAR T investigational therapy targeting CD19. We are investigating CTX110 in our CARBON clinical trials, which are designed to assess the safety and efficacy of CTX110 in adult patients with relapsed or refractory CD19-positive B-cell malignancies who have received at least two prior lines of therapy. CTX110 has been granted RMAT designation by the FDA.

The Phase 1 CARBON clinical trial is being conducted in two parts – Part A and Part B. In Phase 1 Part A, patients were infused with a single dose of CTX110 across escalating dose levels following a standard lymphodepletion regimen, with an option to re-dose CTX110 based on clinical benefit. In Phase 1 Part B, patients received CTX110 at Dose Level (DL) 4 following standard lymphodepletion, as well as a consolidation dose of CTX110 at the same dose level between four and eight weeks after the initial dose for patients that demonstrated clinical benefit.

In the fourth quarter of 2022, we presented updated clinical data from Phase 1 Part A for 32 patients treated with CTX110, which showed the potential for CTX110 to achieve long-term durable complete remissions, or CRs, with a positively differentiated safety profile in heavily pre-treated patients, and described emerging data from Phase 1 Part B, which showed an encouraging efficacy profile with the potential to improve efficacy with the use of a consolidation dose. Based on this emerging data from our Phase 1 CARBON clinical trial and discussions with regulatory agencies, we have expanded CARBON to include a Phase 2, potentially registrational, single-arm, multi-center, open-label clinical trial that incorporates consolidation dosing. We have begun dosing patients in this pivotal arm.

In parallel with CTX110, we are advancing CTX112, a next-generation investigational, allogeneic CAR T product candidate targeting CD19. CTX112 incorporates additional edits designed to enhance CAR T potency and reducing CAR T exhaustion; and in the fourth quarter of 2022, the IND for CTX112 was cleared by the FDA.

CD70 Franchise

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CTX130 is a healthy donor-derived gene-edited allogeneic CAR T investigational therapy targeting CD70, an antigen expressed on various solid tumors and hematologic malignancies. CTX130 is being investigated in two ongoing independent Phase 1, single-arm, multi-center, open-label clinical trials, COBALT, that are designed to assess the safety and efficacy of several dose levels of CTX130 in adult patients. The COBALT-LYM trial is evaluating the safety and efficacy of CTX130 for the treatment of relapsed or refractory T or B cell malignancies. The COBALT-RCC trial is evaluating the safety and efficacy of CTX130 for the treatment of relapsed or refractory clear cell renal cell carcinoma. CTX130 has received Orphan Drug Designation from the FDA for the treatment of T cell lymphoma and RMAT designation for the treatment of Mycosis Fungoides and Sézary Syndrome (MF/SS), subtypes of Cutaneous T cell Lymphoma (CTCL). In the second quarter of 2022, at the European Hematology Association Congress, we released initial clinical data from the ongoing COBALT-LYM trial for 18 patients with T cell lymphoma treated with CTX130 who had reached at least 28 days of follow-up. Also, in the fourth quarter of 2022, at the Society of Immuno-therapy in Cancer Annual Meeting, we released initial clinical data from the COBALT-RCC trial for 14 patients.

In parallel with CTX130, we are advancing CTX131, a next-generation investigational allogeneic CAR T product candidate targeting CD70 for the potential treatment of both solid tumors and certain hematologic malignancies. CTX131 incorporates additional edits designed to enhance CAR T potency and reducing CAR T exhaustion; and in the first quarter of 2023, the IND for CTX131 was cleared by the FDA.

Additional candidates. Our CRISPR/Cas9 platform enables us to innovate continuously by incorporating incremental edits into next-generation products. In addition to CTX112 and CTX131, we are advancing several additional investigational CAR T product candidates. In addition, as we previously disclosed, following our June 2022 disclosure of high-level data from our Phase 1 clinical trial investigating CTX120, a healthy donor-derived gene-edited allogeneic CAR T investigational therapy targeting B-cell maturation antigen, or BCMA, for the treatment of relapsed or refractory multiple myeloma, we announced plans to pivot to a next-generation investigational allogeneic CAR T targeting BCMA, CTX121, which incorporates proprietary edits to enhance the potency of the CAR T cells and reducing CAR T exhaustion.

Regenerative Medicine

Regenerative medicine, or the use of stem cells to repair or replace tissue or organ function lost due to disease, damage or age, holds the potential to treat both rare and common diseases. Building upon our ex vivo gene editing expertise, we have expanded our efforts in this field with a focus on allogeneic stem cell-derived therapies gene edited using CRISPR/Cas9 to enable immune evasion, improve cell function, and direct cell fate. Our first major effort in this area is in diabetes, and we and ViaCyte, Inc., or ViaCyte, which was acquired by Vertex in the third quarter of 2022, are advancing a series of programs as part of a strategic collaboration for the discovery, development, and commercialization of gene-edited stem cell therapies for the treatment of diabetes.

We have a multi-staged product strategy that leverages our CRISPR/Cas9 platform to advance multiple product candidates incorporating incremental edits designed to increase benefit. Our initial product candidate, VCTX210, is an investigational, allogeneic, gene-edited, immune-evasive, stem cell-derived product candidate for the treatment of type 1 diabetes, or T1D, developed by applying our gene editing technology to ViaCyte’s proprietary stem cell capabilities. VCTX210 has gene edits designed to promote immune evasion and cell fitness. We and ViaCyte are investigating VCTX210 in an ongoing Phase 1 clinical trial that is designed to assess VCTX210’s safety, tolerability, and immune evasion in patients with T1D, and we are in the follow-up stage for this clinical trial. Our next generation product candidate, VCTX211, is an investigational, allogeneic, gene-edited, stem cell-derived product candidate for the treatment of T1D, which incorporates additional gene edits that aim to further enhance cell fitness. In the fourth quarter of 2022, the Clinical Trial Application for VCTX211 was cleared by Health Canada and the Phase 1/2 clinical trial is ongoing.

In Vivo

Our in vivo gene editing strategy focuses on gene disruption and whole gene correction – the two technologies required to address the vast majority of the most prevalent severe monogenic diseases. We have established a leading platform for in vivo gene disruption, starting in the liver. We plan to advance a broad portfolio of programs across both rare and common diseases with this platform, starting with CVD. Our lead investigational in vivo programs, CTX310 and CTX320, target angiopoietin-related protein 3 (ANGPTL3) and lipoprotein(a), respectively, two validated targets for CVD. Gene editing has the potential to shift the treatment paradigm for CVD by recapitulating the proven benefit of natural human genetic variants in a single-dose format. In addition, we continue to develop an expansive whole gene correction platform, starting with using LNPs, and adeno-associated viral vectors, or AAV, in the liver and advancing to AAV-free, HDR-independent methodologies.

CRISPR-X

While we have made significant progress with our current portfolio of programs, we recognize that we need to continue to innovate to unlock the full potential of CRISPR gene editing and bring the potential of transformative therapies to even more patients. In 2022, we launched a new early-stage research team known as CRISPR-X that focuses on innovative research to develop next-generation editing modalities. CRISPR-X focuses on technologies to enable whole gene correction and insertion without requiring HDR or viral delivery of DNA, such as all-RNA gene correction, non-viral delivery of DNA and novel gene insertion techniques.

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Partnerships

Given the numerous potential therapeutic applications for CRISPR/Cas9, we have partnered strategically to broaden the indications we can pursue and accelerate development of programs by accessing specific technologies and/or disease-area expertise. We maintain broad partnerships to develop gene editing-based therapeutics in specific disease areas.

Vertex. We established our initial collaboration agreement in 2015 with Vertex, which focused on TDT, SCD, cystic fibrosis and select additional indications. In December 2017, we entered into a joint development and commercialization agreement with Vertex pursuant to which, among other things, we are co-developing and preparing to co-commercialize exa-cel for TDT and SCD. In April 2021, we and Vertex amended and restated our existing joint development and commercialization agreement, pursuant to which, among other things, we will continue to develop and prepare to commercialize exa-cel for TDT and SCD in partnership with Vertex. We also entered into a strategic collaboration and license agreement with Vertex in June 2019 for the development and commercialization of products for the treatment of Duchenne muscular dystrophy and myotonic dystrophy type 1.

ViaCyte. We entered into a research and collaboration agreement in September 2018 with ViaCyte to pursue the discovery, development and commercialization of gene-edited allogeneic stem cell therapies for the treatment of diabetes, and in July 2021, we entered into a joint development and commercialization agreement with ViaCyte, or the ViaCyte JDCA. In connection with entering into the ViaCyte JDCA, our existing research collaboration agreement with ViaCyte expired in accordance with its terms. Under the ViaCyte JDCA, we and ViaCyte are jointly developing and will commercialize product candidates and shared products for use in the treatment of diabetes type 1, diabetes type 2 and insulin dependent/requiring diabetes, or the ViaCyte Collaboration Field, throughout the world. The ViaCyte JDCA includes, among other things, provisions relating to collaboration and program governance, clinical activities for the product candidates and shared products under the agreement and continuing research by the parties in the ViaCyte Collaboration Field. Unless otherwise mutually agreed, research costs incurred by a party will be solely borne by such party. The program expenses, as originally set forth in the research and collaboration agreement, as applicable, incurred through the date of first commercial sale of a shared product will be allocated 60% to us and 40% to ViaCyte. Following first commercial sale of a shared product, such program expenses will be shared equally between us and ViaCyte. Shared product revenues will be shared equally by us and ViaCyte. In the third quarter of 2022, Vertex announced it had acquired ViaCyte and the rights to the ViaCyte Collaboration Field.

Bayer. We entered into an option agreement in the fourth quarter of 2019 with Bayer pursuant to which Bayer has an option to co-develop and co-commercialize two products that we advance for the diagnosis, treatment, or prevention of certain autoimmune disorders, eye disorders, or hemophilia A disorders for a specified period of time, or, under certain circumstances, exclusively license such optioned products.

Other Partnerships. We have entered into a number of additional collaborations and license agreements to support and complement our hematopoietic stem cell, immuno-oncology, regenerative medicine and in vivo programs and platform, including agreements with: Nkarta, Inc. to co-develop and co-commercialize two donor-derived, gene-edited CAR-NK cell product candidates and a product candidate combining NK and T cells; Capsida Biotherapeutics, Inc. to develop in vivo gene editing therapies delivered with engineered AAV vectors for the treatment of amyotrophic lateral sclerosis and Friedreich’s ataxia; Moffitt Cancer Center and Roswell Park Comprehensive Cancer Center to advance autologous CAR T programs against new targets; MaxCyte, Inc. on ex vivo delivery for our hemoglobinopathy and immuno-oncology programs; CureVac AG on optimized mRNA constructs and manufacturing for certain in vivo programs; and KSQ Therapeutics, Inc. on intellectual property for our allogeneic immuno-oncology programs.

For additional information regarding the key terms of these arrangements, please see "Business—Strategic Partnerships and Collaborations".

Impacts of Coronavirus and Market Conditions on Our Business

We have been actively monitoring the coronavirus pandemic situation and its impact globally. We believe our financial results for the years ended December 31, 2022, 2021 and 2020 were not significantly impacted by the outbreak of the coronavirus. We believe our hybrid and remote working arrangements have had limited impact on our ability to maintain internal operations during the years ended December 31, 2022, 2021 and 2020. Further, disruption of global financial markets and a recession or market correction, including as a result of the coronavirus pandemic, the ongoing military conflict between Russia and Ukraine and the related sanctions imposed against Russia, and other global macroeconomic factors such as inflation, could reduce our ability to access capital, which could, in the future, negatively affect our business and the value of our common shares.

Financial Overview

Since our inception in October 2013, we have devoted substantially all of our resources to our research and development efforts, undertaking drug discovery and preclinical development activities, building and protecting our intellectual property estate, organizing and staffing our company, business planning, raising capital and providing general and administrative support for these operations. To date, we have primarily financed our operations through private placements of our preferred shares, common share issuances, convertible loans and collaboration agreements with strategic partners.

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While we were in a net income position in certain previous years due to upfronts associated with our collaborations with Vertex, we have a history of recurring losses and expect to continue to incur losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we continue our current research programs and development activities; seek to identify additional research programs and additional product candidates; conduct initial drug application supporting preclinical studies and initiate clinical trials for our product candidates; initiate preclinical testing and clinical trials for any other product candidates we identify and develop; maintain, defend, protect and expand our intellectual property estate; further develop our gene editing platform; hire additional research, clinical and scientific personnel; incur facilities costs associated with such personnel growth; develop manufacturing infrastructure and conduct related regulatory validation activities; and incur additional costs associated with operating as a public company.

Revenue Recognition

We have not generated any revenue to date from product sales and do not expect to do so in the near future. During the years ended December 31, 2022, 2021 and 2020, we recognized $0.4 million, $913.1 million and $0.5 million, respectively, of revenue related to our collaboration agreements with Vertex.

For the years ended December 31, 2022, 2021 and 2020, we generated $0.8 million, $1.9 million and $0.2 million, respectively, of grant revenue related to certain contracts with not-for-profit entities.

For additional information about our revenue recognition policy, see Note 2 and Note 8 of the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our product candidates, which include:

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employee-related expenses, including salaries, benefits and equity-based compensation expense;

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costs of services performed by third parties that conduct research and development and preclinical activities on our behalf;

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costs of purchasing lab supplies and non-capital equipment used in our preclinical activities and in manufacturing preclinical and clinical study materials;

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consultant fees;

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facility costs, including rent, depreciation and maintenance expenses; and

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fees and other payments related to acquiring and maintaining licenses under our third-party licensing agreements.

Our external research and development expenses support our various preclinical and clinical programs, and as such we do not break down external research and development expenses further. Our internal research and development expenses consist of payroll and benefits expenses, facilities expense, and other indirect research and development expenses incurred in support of overall research and development activities and as such are not allocated to a specific development stage or therapeutic area. Research and development costs are expensed as incurred. Nonrefundable advance payments for research and development goods or services to be received in the future are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. At this time, we cannot reasonably estimate or know the nature, timing or estimated costs of the efforts that will be necessary to complete the development of any product candidates we may identify and develop. This is due to the numerous risks and uncertainties associated with developing such product candidates, including the uncertainty of:

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successful completion of preclinical studies and IND-enabling studies;

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successful enrollment in, and completion of, clinical trials;

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receipt of marketing approvals from applicable regulatory authorities;

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establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

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obtaining and maintaining patent and trade secret protection and non-patent exclusivity;

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launching commercial sales of the product, if and when approved, whether alone or in collaboration with others;

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acceptance of the product, if and when approved, by patients, the medical community and third-party payors;

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effectively competing with other therapies and treatment options;

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a continued acceptable safety profile following approval;

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enforcing and defending intellectual property and proprietary rights and claims; and

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achieving desirable medicinal properties for the intended indications.

A change in the outcome of any of these variables with respect to the development of any product candidates or the subsequent commercialization of any product candidates we may successfully develop could significantly change the costs, timing and viability associated with the development of that product candidate.

Research and development activities are central to our business model. We expect our research and development costs to increase significantly for the foreseeable future as our current development programs progress, new programs are added and as we continue to prepare regulatory filings. These increases will likely include the costs related to the implementation and expansion of clinical trial sites and related patient enrollment, monitoring, program management and manufacturing expenses for current and future clinical trials.

General and Administrative Expenses

General and administrative expenses consist primarily of employee related expenses, including salaries, benefits and equity-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We expect to continue to incur general and administrative expenses consistent with research and development at companies of our size and stage of development, which may increase in the future to support continued research and development activities, and potential commercialization of our product candidates. In addition, we anticipate ongoing expenses related to the reimbursements of third-party patent related expenses in connection with certain of our in-licensed intellectual property.

Collaboration Expense, Net

Collaboration expense, net, consists of operating expenses related to exa-cel under our collaboration with Vertex. The A&R Vertex JDCA allows us to defer a portion of our share of costs under the arrangement if spending on the exa-cel program exceeds specified amounts. Any deferred amounts are only payable to Vertex as an offset against future profitability of the exa-cel program and the amounts payable are capped at a specified maximum amount per year.

Other Income

Other income consists primarily of interest income earned on investments.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Revenue

Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or ASC 606, applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases and collaboration arrangements. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps:

1) Identify the contract with the customer

A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance

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and (iii) we determine that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, we must apply judgment to determine whether promised goods and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.

3) Determine the transaction price

The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, such as research, development, regulatory and commercial milestones, we determine if it is probable that we will receive such amounts and there is no risk of a significant revenue reversal. When we cannot conclude that receipt of such amounts is probable, we constrain the related variable consideration resulting in its exclusion from transaction consideration. In determining the portion of the transaction consideration to be constrained, we consider the probability and uncertainty that the related research, developmental, regulatory and commercial milestones will be achieved given the nature of research and clinical development and the stage of the underlying programs. This assessment is performed at each reporting period. In making this evaluation, we consider both internal and external information available, including information from industry publications and other relevant factors. Changes to the constraint of variable consideration can have a material effect on the amount of revenue recognized in the period.

4) Allocate the transaction consideration to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction consideration is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction consideration to each performance obligation on a relative standalone selling price basis unless the transaction consideration is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices. In determining these estimated standalone selling prices, we make a number of significant judgements including, for licenses, management’s assumptions regarding probability weighted projected discounted cash flows for each of the collaboration development programs. The estimated standalone selling prices are sensitive to changes in assumptions, such as probabilities of scientific success, discount rate and certain assumptions that form the basis of forecasted cash flows. In developing these assumptions, management considers both internal and external information available, including information from other guideline companies within the same industry and other relevant factors. Changes to these assumptions can have a material effect on the allocation of the transaction consideration to performance obligations, as well as the amount and timing of revenue recognized.

5) Recognize revenue when or as we satisfy a performance obligation

We satisfy performance obligations over time or at a point in time, depending on the nature of the performance obligation. Revenue is recognized over time if the customer simultaneously receives and consumes the benefits provided by the entity’s performance, the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer.

Collaboration Arrangements

We record the elements of our collaboration agreements that represent joint operating activities in accordance with ASC 808, Collaborative Arrangements, or ASC 808. Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks and rewards that are dependent on the commercial success of the activities, are recorded as collaborative arrangements.

We evaluate the proper presentation of the commercial activities and the profit and loss sharing associated with the collaboration agreements. ASC 808 states that when payments between parties in a collaborative arrangement are not within the scope of other authoritative accounting literature, the income statement classification should be based on the nature of the arrangement, the nature of its business operations and the contractual terms of the arrangement. To the extent that these payments are not within the scope of other authoritative accounting literature, the income statement classification for the payments shall be based on an analogy to authoritative accounting literature or if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.

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Accrued research and development expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:

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CROs in connection with clinical studies;

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investigative sites in connection with clinical studies;

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vendors in connection with preclinical development activities; and

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vendors related to development, manufacturing and distribution of clinical trial materials.

We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period and adjust accordingly.

Equity-Based Compensation

Our share-based compensation programs grant awards that have included stock options, restricted stock units and restricted stock awards. Grants are awarded to employees and non-employees, including directors.

We account for our stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation, or ASC 718. ASC 718 requires all stock-based payments to employees and non-employee directors, including grants of employee stock options and restricted stock units and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. We use the Black-Scholes option pricing model to determine the fair value of options granted.

We account for forfeitures as they occur instead of estimating forfeitures at the time of grant and revising those estimates in subsequent periods if actual forfeitures differ from its estimates. Stock-based compensation expense recognized in the financial statements is based on awards for which performance or service conditions are expected to be satisfied.

Our stock-based awards are subject to service or performance-based vesting conditions. Compensation expense related to awards to employees, directors and non-employees with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Compensation expense related to awards to employees with performance-based vesting conditions is recognized based on the grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable.

We expense restricted stock unit awards to employees based on the fair value of the award on a straight-line basis over the associated service period of the award.

We estimate the fair value of our option awards to employees, directors and non-employees using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends. Due to the lack of complete company-specific historical and implied volatility data for the full expected term of the stock-based awards, we base our estimate of expected volatility on a representative group of publicly traded companies in addition to our own volatility data. For these analyses, we selected companies with comparable characteristics to our own, including enterprise value, risk profiles, position within the industry and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected term of our employee stock options using the “simplified” method, whereby, the expected term equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data. The risk-free interest rates for periods within the expected term of the option are based on the U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. We have never paid, and do not expect to pay, dividends in the foreseeable future.

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Recent Accounting Pronouncements

Refer to Note 2 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.

Results of Operations

The following is a discussion of the components of results of operations. This section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed on February 15, 2022.

Comparison of Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations for the years ended December 31, 2022 and 2021, together with the dollar change in those items:

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[[/GREPCENT_TABLE]]

Collaboration Revenue

Collaboration revenue was $0.4 million for the year ended December 31, 2022, compared to $913.1 million for the year ended December 31, 2021. Collaboration revenue for the year ended December 31, 2021 was primarily associated with the $900.0 million upfront payment from Vertex in connection with the A&R Vertex JDCA, as well as the achievement of a $12.5 million milestone under the 2019 Collaboration Agreement with Vertex, of which $12.0 million was recorded as revenue in 2021. Refer to Note 8 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a description of revenue recognized related to Vertex.

Grant Revenue

Grant revenue was $0.8 million and $1.9 million, respectively, for the years ended December 31, 2022 and 2021.

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Research and Development Expenses

Research and development expenses were $461.6 million for the year ended December 31, 2022, compared to $340.6 million for the year ended December 31, 2021. The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2021, together with the changes in those items in dollars (in thousands):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The increase of approximately $121.1 million was primarily attributable to the following:

•
$79.0 million of increased external research and development costs, primarily associated with production of drug product and increased clinical trial expense associated with our immuno-oncology programs;

•
$28.6 million of increased employee-related expenses primarily due to reallocation of resources from the exa-cel program, which are presented within “collaboration expense, net” in the consolidated statements of operations and comprehensive (loss) income, to our wholly-owned programs; and

•
$15.3 million of increased facility expenses due to the opening of our U.S. headquarters for research and development in Boston, MA.

General and Administrative Expenses

General and administrative expenses were $102.5 million for the year ended December 31, 2022, compared to $99.7 million for the year ended December 31, 2021. The increase of $2.8 million was primarily attributable to increased employee compensation, benefit and other headcount-related expenses.

Collaboration Expense, net

Collaboration expense, net, was $110.3 million for the year ended December 31, 2022, compared to $101.2 million for the year ended December 31, 2021. The increase of approximately $9.1 million was primarily attributable to increased manufacturing and other pre-commercial costs.

Under the A&R Vertex JDCA, we have an option to defer our portion of specified costs on the exa-cel program in excess of $110.3 million for the years ended December 31, 2022, 2023 and 2024. Vertex may only recover any such deferred amounts as an offset against future profitability of the exa-cel program, determined on an annual basis in accordance with the A&R Vertex JDCA. Any such deferred amounts are capped at a specified maximum amount per year.

For the year ended December 31, 2022, we exercised our option to defer $36.1 million of our share of costs incurred under the A&R Vertex JDCA. These deferred costs will be recognized by us when recoverability of such deferred amounts by Vertex is probable and the amount can be reasonably estimated. As of December 31, 2022, no such deferred amounts have been recognized.

Other Income, net

Other income, net, was $22.7 million for the year ended December 31, 2022, compared to $6.0 million for the year ended December 31, 2021. Other income, net, for the year ended December 31, 2022 consisted primarily of interest income earned on cash, cash equivalents and marketable securities during the year.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2022, we had cash, cash equivalents and marketable securities of approximately $1,868.4 million, of which $5.1 million was held outside of the United States.

With our cash on hand as of December 31, 2022, we expect cash, cash equivalents and marketable securities to be sufficient to fund our current operating plan through at least the next 24 months.

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We have predominantly incurred losses and cumulative negative cash flows from operations since our inception, and as of December 31, 2022, we had an accumulated deficit of $846.1 million. We anticipate that we will continue to incur losses for at least the next several years. We expect to continue to incur operating expenses consistent with research and development at companies of our size and stage of development, which may increase in the future to support continued research and development activities, and potential commercialization of our product candidates.

Since our initial public offering, we have primarily financed our operations through common share issuances and collaboration agreements with strategic partners. Recent sources of equity financing include:

Public Offerings

In July 2020, we sold 7.4 million common shares through an underwritten public offering (inclusive of shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares) at a public offering price of $70.00 per share for aggregate net proceeds of $489.7 million, which were net of equity issuance costs of $27.6 million. Additional equity issuance costs of $4.9 million for stamp taxes were accrued as of December 31, 2020 and paid in 2021.

At-the-Market Offerings

•
In August 2019, we entered into an Open Market Sale AgreementSM with Jefferies under which we are able to offer and sell, from time to time at our sole discretion through Jefferies, as our sales agent, our common shares, par value of CHF 0.03 per share, or the August 2019 Sales Agreement. In August 2019, in connection with the August 2019 Sales Agreement, we filed a prospectus supplement with the SEC to offer and sell, from time to time, common shares having aggregate gross proceeds of up to $200.0 million, or the 2019 ATM. In connection with our entry into the August 2019 Sales Agreement, our August 2018 Open Market Sale AgreementSM with Jefferies was mutually terminated by us and Jefferies. During the year ended December 31, 2020, we issued and sold an aggregate of 2.2 million common shares under the 2019 ATM at an average price of $89.47 per share for aggregate proceeds of $195.5 million, which were net of equity issuance costs of $4.5 million.

•
In December 2020, in connection with the August 2019 Sales Agreement, we filed a prospectus supplement with the SEC to offer and sell from time to time common shares having aggregate gross proceeds of up to $350.0 million, or the 2020 ATM. During the year ended December 31, 2020, we issued and sold an aggregate of 1.8 million common shares under the 2020 ATM at an average price of $169.57 per share for aggregate proceeds of $298.0 million, which were net of equity issuance costs of $4.5 million. Additional equity issuance costs for stamp taxes related to shares sold in 2020 related to the 2019 and 2020 ATM were $4.9 million, of which $4.0 million was accrued as of December 31, 2020 and paid in 2021.

•
In January 2021, we issued and sold under the 2020 ATM an aggregate of 0.3 million common shares at an average price of $162.46 per share with aggregate proceeds of $46.7 million, which were net of equity issuance costs of $0.7 million. An additional $0.5 million of stamp taxes on this amount was paid in 2021.

•
In January 2021, in connection with the August 2019 Sales Agreement, we filed a prospectus supplement with the SEC to offer and sell from time to time common shares having aggregate gross proceeds of up to $600.0 million. In July 2021, we filed a new prospectus supplement with the SEC, which replaced the previous prospectus supplement filed in January 2021, to offer and sell, from time to time, the common shares remaining under the original prospectus supplement having aggregate gross proceeds of up to $419.8 million, or, together with the January 2021 prospectus supplement, the 2021 ATM. As of December 31, 2022, we have issued and sold an aggregate of 1.1 million common shares under the 2021 ATM at an average price of $168.79 per share for aggregate proceeds of $178.8 million, which were net of equity issuance costs of $2.4 million.

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Sources of Liquidity

Cash Flows

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed on February 15, 2022.

The following table provides information regarding our cash flows for each of the periods below:

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[[/GREPCENT_TABLE]]

Operating Activities

Net cash used in operating activities was $495.7 million for the year ended December 31, 2022, compared to cash provided by operating activities of $539.0 million for the year ended December 31, 2021. The increase in cash used in operating activities was primarily driven by an increase in net loss of $1,027.8 million, from net income of $377.7 million for the year ended December 31, 2021 to net loss of $650.2 million for the year ended December 31, 2022, as well as a $7.0 million decrease in net changes of operating assets and liabilities.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was $258.7 million and consisted of purchases of marketable securities, net of maturities, of $221.5 million, as well as $37.2 million in purchases of property and equipment for use in research and development activities.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 was $38.6 million and consisted of net proceeds of $37.6 million from stock option exercises and ESPP contributions.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, research and development activities, manufacturing activities, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses, patent prosecution filing, defense and intellectual property maintenance costs, and general overhead costs, including costs associated with operating as a public company. We expect to continue to incur operating expenses consistent with research and development at companies of our size and stage of development, which may increase in the future to support continued research and development activities, and potential commercialization of our product candidates.

Because most of our programs are still in early stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development, manufacture and commercialization of any current or future product candidates, if approved, or whether, or when, we may achieve profitability. Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity financings, debt financings and payments received in connection with our collaboration agreements. We intend to consider opportunities to raise additional funds through the sale of equity or debt securities when market conditions are favorable to us to do so. However, the trading prices for our common shares and other biopharmaceutical companies have been highly volatile. As a result, we may face difficulties raising capital through sales of our common shares or such sales may be on unfavorable terms. In addition, a recession, depression or other sustained adverse market event, including resulting from the continued spread of the coronavirus, could materially and adversely affect our business and the value of our common shares. To the extent that we raise additional capital through the future sale of equity or debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing shareholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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Outlook

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditures for at least the next 24 months without giving effect to any additional proceeds we may receive under our collaboration with Vertex and any other capital raising transactions we may complete. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Given our need for additional financing to support the long-term clinical development of our programs, we intend to consider additional financing opportunities when market terms are favorable to us.

Our ability to generate revenue and achieve profitability depends significantly on our success in many areas, including: developing our delivery technologies and our gene editing technology platform; selecting appropriate product candidates to develop; completing research and preclinical and clinical development of selected product candidates; obtaining regulatory approvals and marketing authorizations for product candidates for which we complete clinical trials; developing a sustainable and scalable manufacturing process for product candidates; launching and commercializing product candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor; obtaining market acceptance of our product candidates, if approved; addressing any competing technological and market developments; negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter; maintaining good relationships with our collaborators and licensors; maintaining, defending, protecting and expanding our estate of intellectual property rights, including patents, trade secrets and know-how; and attracting, hiring and retaining qualified personnel.

Contractual and Other Obligations

Operating lease and sublease obligations

Our operating lease obligations primarily consist of lease payments on our office and laboratory facility in Boston, Massachusetts, as well as lease payments on our cell manufacturing facility in Framingham, Massachusetts, which are described in further detail in Note 7 of our consolidated financial statements included in this Annual Report on Form 10-K. Future contractual payments on operating lease and sublease obligations due within one year of December 31, 2022 are $29.3 million, and future contractual payments on operating lease and sublease obligations due greater than one year from December 31, 2022 are $310.9 million.

Other obligations

Under the Invention Management Agreement signed on December 15, 2016, we are obligated to share costs related to patent maintenance, defense and prosecution for the CRISPR/Cas9 gene editing intellectual property with California, Vienna and their licensees including Caribou, and Caribou’s licensee Intellia Therapeutics. Such costs are not quantifiable at this time.

Under the A&R Vertex JDCA, we are allowed to defer a portion of our share of costs under the arrangement if spending on the exa-cel program exceeds specified amounts. Any deferred amounts are only payable to Vertex as an offset against future profitability of the exa-cel program and the amounts payable are capped at a specified maximum amount per year. Deferred costs associated with the exa-cel program have not been accrued as of December 31, 2022 because a reasonable estimate of future payments against future profitability cannot be made.

In the normal course of business, we enter into agreements with contract research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes. These contracts are generally cancelable at any time by us upon less than 180 days’ prior written notice. Certain of these agreements require us to pay milestones to such third parties upon achievement of certain development, regulatory or commercial milestones as further described in Note 9 of our consolidated financial statements included in this Annual Report on Form 10-K. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones, which may not be achieved.

We also have obligations to make future payments to third parties that become due and payable on the achievement of certain milestones, including future payments to third parties with whom we have entered into research, development and commercialization agreements. We have not included these commitments on our balance sheet because the achievement and timing of these milestones is not fixed and determinable.

118