Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 001-36281
______________________________
DICERNA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
______________________________
Delaware
 
20-5993609
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
87 Cambridgepark Drive
Cambridge, MA
 
 02140
(Address of principal executive offices)

 
(Zip code)

(617) 621-8097
(Registrant’s telephone number, including area code)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 Par Value
DRNA
The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days)    Yes  x   No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
Accelerated filer
x
Non-accelerated filer
 
Smaller reporting company
x
 
 
 
Emerging growth company
x


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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐    No  x
As of August 5, 2019, there were 68,360,051 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
 


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DICERNA PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing,” “goal,” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
how long we expect to maintain liquidity to fund our planned level of operations and our ability to obtain additional funds for our operations;
the initiation, timing, progress, and results of our research and development programs, preclinical studies, any clinical trials, and Investigational New Drug application, Clinical Trial Application, New Drug Application, and other regulatory submissions;
our ability to identify and develop product candidates for treatment of additional disease indications;
our or a collaborator’s ability to obtain and maintain regulatory approval of any of our product candidates;
the rate and degree of market acceptance of any approved product candidates;
the commercialization of any approved product candidates;
our ability to establish and maintain additional collaborations and retain commercial rights for our product candidates in the collaborations;
the implementation of our business model and strategic plans for our business, technologies, and product candidates;
our estimates of our expenses, ongoing losses, future revenue, and capital requirements;
our ability to obtain and maintain intellectual property protection for our technologies and product candidates and our ability to operate our business without infringing the intellectual property rights of others;
our reliance on third parties to conduct our preclinical studies or any clinical trials;
our reliance on third-party suppliers and manufacturers to supply the materials and components for, manufacture, and research and develop our preclinical and clinical trial drug supplies;
our ability to attract and retain qualified key management and technical personnel;
our dependence on our existing collaborators, Eli Lilly and Company, Alexion Pharmaceuticals, Inc., and Boehringer Ingelheim International GmbH, for developing, obtaining regulatory approval for, and commercializing product candidates in the collaborations;
our receipt and timing of any potential milestone payments or royalties under our existing research collaboration and license agreements or any future arrangements with our existing collaboration partners or any other collaborators;
our financial performance; and
developments relating to our competitors or our industry.
These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part II, Item 1A – “Risk Factors” below and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
This Quarterly Report on Form 10-Q also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates, and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market, and other

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data from reports, research surveys, studies, and similar data prepared by third parties, industry, medical and general publications, government data, and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.
Except where the context otherwise requires, in this Quarterly Report on Form 10-Q, “we,” “us,” “our,” “Dicerna,” and the “Company” refer to Dicerna Pharmaceuticals, Inc. and, where appropriate, its consolidated subsidiaries.
Trademarks
This Quarterly Report on Form 10-Q includes trademarks, service marks, and trade names owned by us or other companies. All trademarks, service marks, and trade names included in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.


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PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
DICERNA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
 
 
JUNE 30,
2019
 
DECEMBER 31,
2018
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
100,321

 
$
54,239

Held-to-maturity investments
 
244,969

 
248,387

Contract receivables
 

 
100,000

Prepaid expenses and other current assets
 
4,958

 
2,888

Total current assets
 
350,248

 
405,514

NONCURRENT ASSETS:
 
 
 
 
Property and equipment, net
 
4,915

 
2,718

Right-of-use asset
 
2,627

 

Restricted cash equivalents
 
3,544

 
744

Other noncurrent assets
 
62

 
65

Total noncurrent assets
 
11,148

 
3,527

TOTAL ASSETS
 
$
361,396

 
$
409,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
5,636

 
$
5,013

Accrued expenses and other current liabilities
 
10,515

 
9,649

Lease liability, current
 
1,648

 

Litigation settlement payable
 

 
10,500

Deferred revenue, current
 
78,073

 
68,893

Total current liabilities
 
95,872

 
94,055

NONCURRENT LIABILITIES:
 
 
 
 
Lease liability, noncurrent
 
1,035

 

Deferred revenue, noncurrent
 
104,324

 
114,293

Total noncurrent liabilities
 
105,359

 
114,293

TOTAL LIABILITIES
 
201,231

 
208,348

COMMITMENTS AND CONTINGENCIES (NOTE 8)
 


 


STOCKHOLDERS’ EQUITY:
 
 
 
 
Preferred stock, $0.0001 par value – 5,000,000 shares authorized; no shares issued or outstanding at June 30, 2019 or December 31, 2018
 

 

Common stock, $0.0001 par value – 150,000,000 shares authorized; 68,360,051 and 68,210,742 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
 
7

 
7

Additional paid-in capital
 
615,014

 
605,495

Accumulated deficit
 
(454,856
)
 
(404,809
)
Total stockholders’ equity
 
160,165

 
200,693

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
361,396

 
$
409,041

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

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DICERNA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
 
 
THREE MONTHS ENDED
JUNE 30,
 
SIX MONTHS ENDED
JUNE 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue from collaborative arrangements
 
$
5,682

 
$
1,545

 
$
8,789

 
$
3,090

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
22,832

 
10,339

 
44,435

 
20,232

General and administrative
 
8,831

 
4,760

 
18,507

 
9,095

Litigation expense
 

 
22,244

 

 
25,428

Total operating expenses
 
31,663

 
37,343

 
62,942

 
54,755

Loss from operations
 
(25,981
)
 
(35,798
)
 
(54,153
)
 
(51,665
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
2,136

 
330

 
4,154

 
619

Interest expense
 

 
(176
)
 

 
(176
)
Total other income, net
 
2,136

 
154

 
4,154

 
443

Net loss
 
$
(23,845
)
 
$
(35,644
)
 
$
(49,999
)
 
$
(51,222
)
Net loss per share – basic and diluted
 
$
(0.35
)
 
$
(0.68
)
 
$
(0.73
)
 
$
(0.98
)
Weighted average common shares outstanding – basic and diluted
 
68,323,850

 
52,555,751

 
68,292,212

 
52,141,849

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


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DICERNA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share data)
 
 
SIX MONTHS ENDED
JUNE 30, 2019
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED
DEFICIT
 
TOTAL
STOCKHOLDERS’
EQUITY
 
 
SHARES
 
AMOUNT
 
 
 
BALANCE – January 1, 2019
 
68,210,742

 
$
7

 
$
605,495

 
$
(404,809
)
 
$
200,693

Exercises of common stock options and sales of common stock under Employee Stock Purchase Plan
 
78,164

 

 
353

 

 
353

Stock-based compensation expense (inclusive of the impact of adoption of ASU 2018-07)
 

 

 
4,784

 
43

 
4,827

Cumulative effect adjustment related to the adoption of ASC 842
 

 

 

 
(91
)
 
(91
)
Net loss
 

 

 

 
(26,154
)
 
(26,154
)
BALANCE – March 31, 2019
 
68,288,906

 
7

 
610,632

 
(431,011
)
 
179,628

Exercises of common stock options and sales of common stock under Employee Stock Purchase Plan
 
71,145

 

 
489

 

 
489

Stock-based compensation expense
 

 

 
3,893

 

 
3,893

Net loss
 

 

 

 
(23,845
)
 
(23,845
)
BALANCE – June 30, 2019
 
68,360,051

 
$
7

 
$
615,014

 
$
(454,856
)
 
$
160,165


 
 
SIX MONTHS ENDED
JUNE 30, 2018
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED
DEFICIT
 
TOTAL
STOCKHOLDERS’
EQUITY
 
 
SHARES
 
AMOUNT
 
 
 
BALANCE – January 1, 2018
 
51,644,841

 
$
5

 
$
417,037

 
$
(315,956
)
 
$
101,086

Exercises of common stock options and sales of common stock under Employee Stock Purchase Plan
 
130,362

 

 
667

 

 
667

Vesting of restricted common stock
 
10,000

 

 

 

 

Settlement of restricted stock for tax withholding
 
(3,774
)
 

 
(35
)
 

 
(35
)
Stock-based compensation expense
 

 

 
1,747

 

 
1,747

Net loss
 

 

 

 
(15,579
)
 
(15,579
)
BALANCE – March 31, 2018
 
51,781,429

 
5

 
419,416

 
(331,535
)
 
87,886

Issuance of common stock to Alnylam Pharmaceuticals, Inc.
 
983,208

 

 
10,315

 

 
10,315

Exercise of warrants to purchase common stock
 
45,710

 

 
49

 

 
49

Exercises of common stock options
 
57,424

 

 
191

 

 
191

Stock-based compensation expense
 

 

 
1,778

 

 
1,778

Net loss
 

 

 

 
(35,644
)
 
(35,644
)
BALANCE – June 30, 2018
 
52,867,771

 
$
5

 
$
431,749

 
$
(367,179
)
 
$
64,575

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

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DICERNA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
SIX MONTHS ENDED
JUNE 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(49,999
)
 
$
(51,222
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Non-cash litigation expense

 
10,315

Stock-based compensation expense
8,720

 
3,525

Depreciation and amortization expense
539

 
393

Amortization of premium on investments
(2,297
)
 
(195
)
Lease expense
916

 

Changes in operating assets and liabilities:
 
 
 
Litigation settlement payable
(10,500
)
 
8,904

Deferred revenue
(789
)
 
(3,090
)
Prepaid expenses and other assets
(2,067
)
 
(313
)
Accounts payable
1,795

 
(1,163
)
Contract receivables
100,000

 

Accrued expenses and other liabilities
866

 
573

Lease liability
(952
)
 

Net cash provided by (used in) operating activities
46,232

 
(32,273
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Maturities of held-to-maturity investments
228,000

 
35,000

Purchases of held-to-maturity investments
(222,286
)
 
(29,790
)
Purchases of property and equipment
(3,856
)
 
(173
)
Net cash provided by investing activities
1,858

 
5,037

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments of common stock offering costs
(50
)
 

Proceeds from exercises of common stock warrants, stock options, and issuances under Employee Stock Purchase Plan
842

 
908

Settlement of restricted stock for tax withholding

 
(35
)
Net cash provided by financing activities
792

 
873

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH EQUIVALENTS
48,882

 
(26,363
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH EQUIVALENTS – Beginning of period
54,983

 
69,533

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH EQUIVALENTS – End of period
$
103,865

 
$
43,170

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
NONCASH OPERATING ACTIVITIES
 
 
 
Right-of-use assets acquired through operating leases
$
667

 
$

NONCASH INVESTING ACTIVITIES
 
 
 
Property and equipment purchases included in accounts payable and accrued expenses
$
527

 
$
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The following table provides a reconciliation of cash, cash equivalents, and restricted cash equivalents reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:
 
SIX MONTHS ENDED
JUNE 30,
 
2019
 
2018
Cash and cash equivalents
$
100,321

 
$
42,426

Restricted cash equivalents
3,544

 
744

Total cash, cash equivalents, and restricted cash equivalents shown in the condensed consolidated statements of cash flows
$
103,865

 
$
43,170

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

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DICERNA PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(amounts in thousands, except share and per share data and where otherwise noted)
1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business
DicernaTM Pharmaceuticals, Inc. (“Dicerna” or the “Company”), a Delaware corporation founded in 2006 and headquartered in Cambridge, Massachusetts, is a biopharmaceutical company using ribonucleic acid (“RNA”) interference (“RNAi”) to develop medicines that silence genes that cause disease. The Company’s proprietary GalXCTM technology is being applied to develop potent, selective, and safe RNAi therapies to treat diseases involving the liver, including rare diseases, chronic liver diseases, cardiovascular diseases, and viral infectious diseases. Dicerna aims to treat disease by addressing the underlying causes of illness with capabilities that extend beyond the liver to address a broad range of diseases, focusing on target genes where connections between gene and disease are well understood and documented. Dicerna intends to discover, develop, and commercialize novel therapeutics either on its own or in collaboration with pharmaceutical partners. Dicerna has strategic collaborations with Eli Lilly and Company (“Lilly”), Alexion Pharmaceuticals, Inc. (together with its affiliates, “Alexion”), and Boehringer Ingelheim International GmbH (“BI”).
Basis of presentation
These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission for interim financial information, and include the accounts of Dicerna Pharmaceuticals, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP to constitute a complete set of financial statements. These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position at June 30, 2019 and its results of operations, changes in stockholders’ equity, and cash flows for the interim periods ended June 30, 2019 and 2018. These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, for any other interim period, or for any other future year.
Significant judgments and estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the Company’s condensed consolidated financial statements, as well as the revenues and expenses incurred during the reporting periods. On an ongoing basis, the Company evaluates judgments and estimates, including those related to revenue recognition, stock-based compensation, and accrued expenses. The Company bases its estimates on historical experience and on various other factors that the Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results could differ materially from those estimates.
Summary of significant accounting policies
There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10‑K, except as a result of adopting the Financial Accounting Standards Board (“FASB”)’s Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as discussed below:
Leases
The Company determines if an arrangement is a lease at inception. Leases with a term greater than one year are presented on the balance sheet as right-of-use (“ROU”) assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize leases with terms of one year or less on its balance sheet. At the commencement date, operating lease liabilities and their corresponding ROU assets are recorded based on the present value of future lease payments over the expected lease term. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. Operating lease cost is recognized over the expected term on a straight-line basis.

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Recent accounting pronouncement
Adopted in 2019
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as amended by multiple standards updates, in order to increase transparency and comparability among organizations by requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The most significant change arising from the new standard is the recognition of ROU assets and lease liabilities for leases classified as operating leases. Under the standard, disclosures are required to enable financial statement users to assess the amount, timing, and uncertainty of cash flows arising from the leases. Companies are also required to recognize and measure leases existing at, or entered into after, the adoption date using a modified retrospective approach, with certain practical expedients available. Comparative periods prior to adoption have not been retrospectively adjusted.
The Company adopted the standard effective January 1, 2019 and elected the package of three practical expedients that permitted an entity to (a) not reassess whether expired or existing contracts contain leases, (b) not reassess lease classification for existing or expired leases, and (c) not consider whether previously capitalized initial direct costs would be appropriate under the new standard. In addition, the Company has elected to combine lease and non-lease components as a single component and not to recognize leases on the balance sheet with an initial term of one year or less.
Upon adoption, the Company recorded ROU assets of $2.7 million and lease liabilities of $2.8 million. The standard did not have a material impact on the statement of operations or statement of cash flows.
2.    NET LOSS PER SHARE
The Company computes basic net loss per common share by dividing net loss by the weighted average number of common shares outstanding. In periods of net income, the Company’s accounting policy includes allocating a proportional share of net income to participating securities, as determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the “two-class method”). Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods when the Company incurs a net loss, the Company does not allocate a loss to participating securities because they have no contractual obligation to share in the losses of the Company. The Company computes diluted net loss per common share after giving consideration to the dilutive effect of stock options, warrants, and nonvested restricted stock that are outstanding during the period, except where such non-participating securities would be anti‑dilutive. The outstanding securities presented below were excluded from the calculation of net loss per share because such securities would have been anti-dilutive due to the Company’s net loss per share during the three and six months ended on the dates presented.
 
JUNE 30,
2019
 
JUNE 30,
2018
Options to purchase common stock
11,973,016

 
7,556,554

Warrants to purchase common stock
2,198

 
2,198

Total
11,975,214

 
7,558,752

3.    HELD-TO-MATURITY INVESTMENTS
The Company invests its excess cash balances in short-term and long-term fixed-income investments. The Company determines the appropriate classification of investments at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.
The Company’s investment policy mandates that, at the time of purchase, the maturity of each investment within its portfolio shall not exceed 24 months. In addition, the weighted average maturity of the investment portfolio must not exceed 12 months.

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The following tables provide information relating to the Company’s held-to-maturity investments:
 
 
JUNE 30, 2019
DESCRIPTION
 
AMORTIZED
COST
 
GROSS 
UNREALIZED
HOLDING

GAINS
 
GROSS
UNREALIZED
HOLDING

LOSSES
 
FAIR
VALUE
U.S. Treasury securities maturing in one year or less
 
$
244,969

 
$
245

 
$

 
$
245,214

 
 
DECEMBER 31, 2018
DESCRIPTION
 
AMORTIZED
COST
 
GROSS 
UNREALIZED
HOLDING

GAINS
 
GROSS
UNREALIZED
HOLDING

LOSSES
 
FAIR
VALUE
U.S. Treasury securities maturing in one year or less
 
$
248,387

 
$

 
$
(43
)
 
$
248,344

4.    FAIR VALUE MEASUREMENTS
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value are performed in a manner to maximize the use of observable inputs and minimize the use of unobservable inputs. As a basis for considering such assumptions, the accounting literature establishes a three-tier value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1 – observable inputs, such as quoted prices in active markets;
Level 2 – inputs other than the quoted prices in active markets that are observable either directly or indirectly; and
Level 3 – unobservable inputs for which there is little or no market data, which requires the Company to develop its own assumptions.
A summary of the Company’s assets that are measured or disclosed at fair value on a recurring basis is presented below:
 
 
JUNE 30, 2019
DESCRIPTION
 
TOTAL FAIR VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
101,447

 
$
101,447

 
$

 
$

Held-to-maturity investments
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
245,214

 

 
245,214

 

Restricted cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
3,544

 
3,544

 

 

Total
 
$
350,205

 
$
104,991

 
$
245,214

 
$

 
 
DECEMBER 31, 2018
DESCRIPTION
 
TOTAL FAIR VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
44,886

 
$
44,886

 
$

 
$

Held-to-maturity investments
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
248,344

 

 
248,344

 

Restricted cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
744

 
744

 

 

Total
 
$
293,974

 
$
45,630

 
$
248,344

 
$

The Company’s cash equivalents and restricted cash equivalents, which are in money market funds, are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets as of June 30, 2019 and December 31, 2018.

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The Company’s held-to-maturity investments bore interest at the prevailing market rates for instruments with similar characteristics and therefore approximated fair value. These financial instruments were classified within Level 2 of the fair value hierarchy because the inputs to the fair value measurements were valued using observable inputs as of June 30, 2019 and December 31, 2018.
As of June 30, 2019 and December 31, 2018, the Company’s contract receivables, accounts payable, and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments.
The litigation settlement payable at December 31, 2018 represents the remaining cash obligation payable to Alnylam Pharmaceuticals, Inc. (“Alnylam”) (see Note 8) under the terms of the Settlement & Release Agreement executed between the parties on April 28, 2018 (“Settlement Agreement”). The litigation settlement payable was recorded as the present value of the future cash payments to be made by the Company under the terms of the Settlement Agreement. As the present value of the litigation settlement payable was determined using market rates based on the nature of the obligation and the Company’s creditworthiness, the carrying value approximates the fair value.
5.    COLLABORATIVE LICENSE AGREEMENTS
Lilly collaboration and share purchase agreements
On October 25, 2018, the Company entered into a Collaboration and License Agreement (the “Lilly Collaboration Agreement”) with Lilly for the discovery, development, and commercialization of potential new medicines in the areas of cardiometabolic disease, neurodegeneration, and pain. Under the terms of the Lilly Collaboration Agreement, the Company and Lilly will seek to use the Company’s proprietary GalXC RNAi technology platform to progress new drug targets toward clinical development and commercialization. In addition, the Company and Lilly will collaborate to extend the GalXC RNAi platform technology to non-liver (i.e., non-hepatocyte) tissues, including neural tissues.
The Lilly Collaboration Agreement provides that the Company will work exclusively with Lilly in the neurodegeneration and pain fields, with the exception of mutually agreed upon orphan indications. Additionally, the Company will work exclusively with Lilly on select targets in the cardiometabolic field. Under the Lilly Collaboration Agreement, the Company will provide Lilly with exclusive and non-exclusive licenses to support the companies’ activities and to enable Lilly to commercialize products derived from or containing compounds developed pursuant to such agreement. The Lilly Collaboration Agreement provides for three initially named hepatocyte targets, and the Company and Lilly have agreed to develop an initial research program with the goal of researching and developing multiple lead candidates directed to each of these initial targets. The Lilly Collaboration Agreement contemplates in excess of 10 targets.
Under the terms of the Lilly Collaboration Agreement, Lilly agreed to pay the Company a non-refundable, non-creditable upfront payment of $100.0 million. The Company is also eligible to receive up to $350.0 million, per target, in development and commercialization milestones, in addition to a $5.0 million payment, which will become due for each of the non-hepatocyte targets when a product candidate achieves proof of principle in an animal model. In addition, the Company is eligible to earn mid-single to low-double digit royalties on product sales on a country-by-country and product-by-product basis until the later of expiration of patent rights in a country, the expiration of data or regulatory exclusivity in such country, or 10 years after the first product sale in such country, subject to certain royalty step-down provisions set forth in the agreement. Simultaneously with the entry into the Lilly Collaboration Agreement, the Company and Lilly entered into a Share Purchase Agreement (the “Lilly Share Issuance Agreement”), pursuant to which Lilly purchased 5,414,185 shares of the Company’s common stock at $18.47 per share, for an aggregate purchase price of $100.0 million. Management concluded that the Lilly Share Issuance Agreement is to be combined with the Lilly Collaboration Agreement (together, the “Combined Agreements”) for accounting purposes. Of the total $200.0 million upfront compensation, the Company applied equity accounting guidance to measure the $51.3 million recorded in equity upon the issuance of the shares, and $148.7 million was identified as the transaction price allocated to the revenue arrangement.
The Company concluded that Lilly is a customer in this arrangement, and as such, the element of the arrangement unrelated to the issuance of the shares falls within the scope of the revenue recognition guidance. The Company identified contract promises under the Combined Agreements for licenses of intellectual property and know-how rights, associated research and development services for targets and for a new platform, and participation on a joint steering committee. The Company determined that the contract promises were not separately identifiable and were not distinct or distinct within the context of the contract due to the specialized nature of the services to be provided by Dicerna, specifically with respect to the Company’s therapeutic expertise related to RNAi and the Company’s GalXC conjugates, and the interdependent relationship between the contract promises. As such, the Company concluded that there is a single identified combined performance obligation.
The Company used the most likely amount method to estimate variable consideration and estimated that the most likely amount for each potential development milestone payment under this agreement, which is considered variable consideration, was zero, as the achievement of those milestones is uncertain and highly susceptible to factors outside of the Company’s control. Accordingly, all such

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milestones were excluded from the transaction price. Management will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur and adjust the transaction price as necessary. Sales-based royalties, including milestone payments based on the level of sales, were also excluded from the transaction price, as the license is deemed to be the predominant item to which the royalties relate. The Company will recognize such revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Revenue associated with the performance obligation will be recognized as services are provided using a cost-to-cost measure of progress method. The transfer of control occurs over time and, in management’s judgment, this input method is the best measure of progress towards satisfying the performance obligation and reflects a faithful depiction of the transfer of goods and services.
The Company recognized $2.6 million and $3.1 million of revenue under the Lilly Collaboration Agreement during the three and six months ended June 30, 2019, respectively. The amount of the Company’s partially unsatisfied performance obligation, recorded as a contract liability presented in deferred revenue at June 30, 2019, is $145.6 million, of which $62.1 million is included in the current portion of deferred revenue. As of June 30, 2019, the Company expected to recognize this amount over the remaining research term of the agreement, which is expected to extend through the first quarter of 2022, with the majority being recognized through the fourth quarter of 2021.
Alexion collaboration and equity agreements
On October 22, 2018, the Company and Alexion entered into a Collaborative Research and License Agreement (the “Alexion Collaboration Agreement”). The Alexion Collaboration Agreement is for the joint discovery and development of RNAi therapies for complement-mediated diseases. Under the terms of the Alexion Collaboration Agreement, the Company and Alexion will collaborate on the discovery and development of subcutaneously delivered GalXC candidates, currently in preclinical development, for the treatment of complement-mediated diseases with potential global commercialization by Alexion. The Company will lead the joint discovery and research efforts through the preclinical stage, and Alexion will lead development efforts beginning with Phase 1 studies. The Company will be responsible for manufacturing of the GalXC candidates through the completion of Phase 1, and the related costs will be paid by Alexion. Alexion will be solely responsible for the manufacturing of any product candidate subsequent to the completion of Phase 1. The Alexion Collaboration Agreement provides Alexion with exclusive worldwide licenses as well as development and commercial rights for two of the Company’s preclinical, subcutaneously delivered GalXC RNAi candidates and an exclusive option for the discovery and development of GalXC RNAi candidates against two additional complement pathway targets.
Under the terms of the Alexion Collaboration Agreement, Alexion agreed to pay the Company a non-refundable, non-reimbursable, and non-creditable upfront payment of $22.0 million. The Alexion Collaboration Agreement also provides for potential additional payments to the Company of up to $600.0 million from proceeds from target option exercises and development and sales milestones, as defined in the agreement, which is comprised of: (i) option exercise fees of up to $20.0 million, representing $10.0 million for each of the targets selected; (ii) development milestones of up to $105.0 million for each product; and (iii) aggregate sales milestones of up to $160.0 million. Under the agreement, Alexion also agreed to pay to the Company mid-single to low-double digit royalties on potential product sales on a country-by-country, product-by-product basis until the later of the expiration of patent rights in a country, the expiration of market or regulatory exclusivity in such country, or 10 years after the first product sale in such country, subject to certain royalty step-down provisions set forth in the agreement.
Simultaneously with the entry into the Alexion Collaboration Agreement, the Company and Alexion Pharmaceuticals entered into a Share Purchase Agreement (the “Alexion Share Issuance Agreement”), pursuant to which Alexion Pharmaceuticals purchased 835,834 shares of the Company’s common stock at $17.95 per share at issuance, for an aggregate stated purchase price of $15.0 million. Management concluded that the Alexion Share Issuance Agreement is to be combined with the Alexion Collaboration Agreement (together, the “Alexion Agreements”) for accounting purposes. With respect to the $15.0 million of cash received upon issuance of the shares, the Company applied equity accounting guidance to measure the $9.1 million recorded in equity upon the issuance of the shares, and the remaining $5.9 million was included as a component of the transaction price attributable to the revenue arrangement.
Alexion selected two targets upon entry into the Alexion Collaboration Agreement, which, as noted above, provides Alexion with the option to select up to two additional targets, in exchange for an option fee payment of $10.0 million for each selected target.
The Company concluded that Alexion is a customer in this arrangement, and as such, the element of the arrangement unrelated to the issuance of the shares falls within the scope of the revenue recognition guidance. The Company identified the following promises under the arrangement: (i) the granting of licenses of intellectual property and know-how rights; (ii) the option to select additional targets; (iii) the option to perform validation testing on additional targets; (iv) associated research and development services for the initial and, as applicable, additional targets; and (v) the Company’s participation in the joint steering committee. The Company concluded that the research and development services were not capable of being distinct from the research and development license, and were not distinct within the context of the contract, and should therefore be combined into a single performance obligation for

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each program. The Company considered the level of Alexion’s therapeutic expertise specifically related to RNAi, as well as Alexion’s know-how of the Company’s GalXC conjugates, and concluded that Alexion cannot currently benefit from the granted license on its own or together with other resources that are readily available to Alexion, including relationships with oligonucleotide vendors who synthesize GalXC conjugates under contract with the Company. As a result, the combination of the license of intellectual property together with the provision of research and development services together represent the highest level of goods and services that can be deemed distinct.
Additionally, the Company determined that the options to select additional targets and to perform validation testing on additional targets were not priced at a discount and, as such, do not provide Alexion with material rights. Based on management’s assessments, the Company identified a single performance obligation, namely, the combined license and research and development services, for each of the two initially nominated targets.
At the outset of the Alexion Collaboration Agreement, the transaction price was determined to be $37.4 million, which is comprised of the $22.0 million upfront payment, the $5.9 million identified upon issuance of the shares, as described above, and $9.5 million in aggregate contingent milestone payments that were either received or probable of achievement and under the Company’s control.
The Company used the most likely amount method to estimate variable consideration and estimated that the most likely amount for each potential development milestone payment beyond the three initial research program milestones under this agreement was zero, as the achievement of those milestones is uncertain and highly susceptible to factors outside of the Company’s control. Accordingly, such milestones were excluded from the transaction price. Management will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur and adjust the transaction price as necessary. Sales-based royalties, including milestone payments based on the level of sales, were also excluded from the transaction price, as the license is deemed to be the predominant item to which the royalties relate. The Company will recognize such revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Revenue associated with the performance obligations is being recognized as services are provided using an input method based on a cost-to-cost measure of progress method. The transfer of control occurs over time and, in management’s judgment, this input method is the best measure of progress towards satisfying the performance obligation and reflects a faithful depiction of the transfer of goods and services.
During the three and six months ended June 30, 2019, the Company recognized $1.1 million and $1.5 million as revenue under the Alexion Agreements, respectively. The aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligations and recorded as deferred revenue at June 30, 2019 is $32.8 million, of which $12.5 million is included in the current portion of deferred revenue. As of June 30, 2019, the Company expects to recognize this amount over the remaining research program term, which is estimated to extend through the fourth quarter of 2023, with the majority being recognized through the fourth quarter of 2021.
BI Agreement and related amendments
On October 27, 2017, the Company entered into a collaborative research and license agreement with BI (the “BI Agreement”), pursuant to which the Company and BI jointly research and develop product candidates for the treatment of chronic liver disease using the GalXC platform, Dicerna’s proprietary RNAi-based technology. The BI Agreement is for the development of product candidates against one target gene with an option for BI to add the development of product candidates that target a second gene (the “Second Target”). Pursuant to the BI Agreement, Dicerna granted BI a worldwide license in connection with the research and development of such product candidates and transferred certain intellectual property rights of the selected product candidates to BI for clinical development and commercialization. Dicerna also may provide assistance to BI in order to help BI further develop selected product candidates. Under the terms of the BI Agreement, BI agreed to pay Dicerna a non-refundable upfront payment of $10.0 million for the first target, less a refundable withholding tax in Germany of $1.6 million. BI also agreed to reimburse Dicerna certain third-party expenses of $0.3 million. The German withholding tax was withheld by BI and remitted to the German tax authorities in accordance with local tax law. The Company received reimbursement of this tax in July 2018.
The Company is eligible to receive up to $191.0 million in potential development and commercial milestones related to the initial target. Dicerna is also eligible to receive royalty payments on potential global net sales, subject to certain adjustments, tiered from high single digits up to low double-digits. BI’s Second Target option provided for an option fee payment of $5.0 million and success-based development and commercialization milestones and royalty payments to Dicerna.
Milestone payments that are contingent upon the Company’s performance under the BI Agreement include potential developmental milestones totaling $99.0 million. The Company has excluded these amounts from allocable consideration at the outset of the

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arrangement, as described below. All potential net sales milestones, totaling $95.0 million, will be accounted for in the same manner as royalties and recorded as revenue at the later of the achievement of the milestone or the satisfaction of the performance obligation.
The Company concluded that BI is a customer in this arrangement, and as such, the arrangement falls within the scope of the revenue recognition guidance. The Company identified the following performance obligations under the contract: the license of intellectual property and conducting agreed-upon research program services. The Company concluded that the license and research and development services are not capable of being distinct and are not distinct within the context of the contract; therefore, the Company considers these to be one performance obligation. The Company concluded the option underlying the transfer of future licenses and potential associated research for any not-yet-known target gene is not a performance obligation of the contract at inception because the option fee reflects the standalone selling price of the option, and therefore, the option is not considered to be a material right. The Company considered the level of BI’s therapeutic expertise specifically related to RNAi, as well as BI’s know-how with regard to the Company’s GalXC conjugates, and concluded that BI cannot currently benefit from the granted license on its own or together with other resources that are readily available to BI, including relationships with oligonucleotide vendors who synthesize GalXC conjugates under contract with the Company. As a result, the combination of the license of intellectual property together with the provision of research and development support services together represent the highest level of goods and services that can be deemed distinct.
Based on management’s evaluation, the $10.0 million non-refundable upfront fee and the $0.3 million agreed-upon reimbursable third-party expenses constituted the amount of the consideration to be included in the transaction price and was allocated to the performance obligation identified. None of the development milestones have been included in the transaction price during the period, since none of such milestone amounts are within the control of the Company and are not considered probable to occur until confirmed by BI, at BI’s sole discretion. Any consideration related to commercial sales-based milestones (including royalties) will be recognized when the related sales occur, since these amounts have been determined to relate predominantly to the license granted to BI and therefore are recognized at the later of when the performance obligation is satisfied or when the related sales occur. The Company re-evaluates the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur and adjusts the transaction price as necessary.
The $10.3 million transaction price for the first target is being recognized through July 2019, which represents the Company’s best estimate of the period during which it will be obligated to provide research support services to BI. Related revenue is recognized on a straight-line basis, which is, in management’s judgment, an appropriate measure of progress toward satisfying the performance obligation. The Company recognized $1.3 million and $2.7 million associated with the first target under the BI Agreement during the three and six months ended June 30, 2019, respectively. The aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligations and recorded as deferred revenue at June 30, 2019 is $0.5 million, all of which is included in the current portion of deferred revenue.
BI contract amendment
In October 2018, BI exercised its Second Target option, which entitled the Company to a non-refundable payment of $5.0 million upon the agreement of a research work plan and budget for the Second Target. The terms of the Second Target option exercise and related rights and obligations associated with the Second Target were agreed between the Company and BI in an Additional Target Agreement (the “ATA”), which was entered into on December 31, 2018.
Under the terms of the ATA, BI will be responsible for future clinical development and commercialization of candidate products for the Second Target. Additionally, during the term of the research program, BI will reimburse the Company for certain expenses. The Company is eligible to receive up to $170.0 million in potential development and commercial milestones related to the Second Target. The Company is also eligible to receive tiered royalty payments on potential global net sales, subject to certain adjustments, in the mid-single digits. Except as otherwise set forth in the ATA, development of the Second Target is subject to the terms of the original BI Agreement.
The exercise of the Second Target option on December 31, 2018 through the ATA created a new contract for accounting purposes, and management determined that the $5.0 million exercise price was representative of the standalone selling price. Consistent with the reasons described related to the initial target, management concluded that the non-refundable Second Target option exercise fee (akin to an upfront payment) constituted the amount of the consideration to be included in the transaction price and has been allocated to the single performance obligation. The basis for the conclusions regarding the treatment of development and sales-based milestones associated with the Second Target are consistent with those associated with the initial combined performance obligation under the BI Agreement. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

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The $5.0 million transaction price began being recognized as revenue in January 2019 and will be recognized over the Company’s best estimate of the period during which it will be obligated to provide research support services to BI, currently estimated to end in August 2020.
Consistent with the first target, revenue is recognized on a straight-line basis, which is in management’s judgment an appropriate measure of progress toward satisfying the performance obligation, largely in absence of evidence that obligations are fulfilled in a specific pattern. The Company recognized $0.7 million and $1.5 million associated with the Second Target under the BI Agreement during the three and six months ended June 30, 2019, respectively. The aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligation and recorded as deferred revenue at June 30, 2019 is $3.5 million, $3.0 million of which is included in the current portion of deferred revenue.
In addition to establishing the terms of the Second Target option exercise, the ATA also amends the BI Agreement to provide BI with the option to add, over a three-year period, the development of product candidates targeting a further additional target gene (the “Third Target Option”).
Per the ATA, if BI elects, in its sole discretion, to exercise the Third Target Option, the parties would agree to a research work plan and budget for the additional gene and negotiate development and commercialization milestones and royalty payments to the Company, and BI would make an option fee payment to the Company of $5.0 million. This option exercise fee is consistent with the Second Target option exercise fee, which management concluded was representative of the standalone selling price. If BI chooses to exercise the Third Target Option, the Company will be responsible for the discovery and initial profiling of the product candidates, including primary preclinical studies, synthesis, and delivery. BI will be responsible for evaluating and selecting the product candidates for further development. If BI selects one or more product candidates, it will be responsible for further preclinical development, clinical development, manufacturing, and commercialization of those products. If the Third Target Option is exercised, such exercise would result in a new contract for accounting purposes, as the licensing rights and research and development services underlying the Third Target Option are distinct from those associated with the initial and Second Target.
The following table presents changes in the Company’s aggregate deferred revenue balances for each reporting period:
 
SIX MONTHS ENDED
JUNE 30, 2019
 
BALANCE AT BEGINNING OF PERIOD
 
ADDITIONS
 
DEDUCTIONS
 
BALANCE AT END OF PERIOD
Deferred revenue, current and noncurrent
$
183,186

 
$
8,000

 
$
(8,789
)
 
$
182,397

 
YEAR ENDED
DECEMBER 31, 2018
 
BALANCE AT BEGINNING OF PERIOD
 
ADDITIONS
 
DEDUCTIONS
 
BALANCE AT END OF PERIOD
Deferred revenue, current and noncurrent
$
9,270

 
$
180,092

 
$
(6,176
)
 
$
183,186

6.    STOCK-BASED COMPENSATION

On May 7, 2019, the Company approved a further amendment and restatement (the “Amendment and Restatement”) to its 2014 amended and restated performance incentive plan (the “Amended and Restated 2014 Performance Incentive Plan”). The Amendment and Restatement updated the plan to reflect recent amendments to Section 162(m) of the Internal Revenue Code made by the Tax Cuts and Jobs Act.
During the three and six months ended June 30, 2019, the Company granted stock options to purchase 891,500 and 4,456,000 shares of common stock with aggregate grant date fair values of $8.5 million and $37.3 million, respectively, compared to stock options to purchase 442,000 and 1,761,350 shares of common stock granted with aggregate grant date fair values of $3.8 million and $12.3 million for the three and six months ended June 30, 2018, respectively.

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The assumptions used to estimate the grant date fair value using the Black-Scholes option pricing model were as follows:
 
THREE MONTHS ENDED
JUNE 30,
 
2019
 
2018
Common stock price
$12.12 - $15.44
 
$9.14 - $14.41
Expected option term (in years)
5.28 - 6.05
 
5.50 - 6.25
Expected volatility
79.12% - 80.80%
 
76.82% - 78.33%
Risk-free interest rate
1.75% - 2.35%
 
2.65% - 2.84%
Expected dividend yield
—%
 
—%
 
SIX MONTHS ENDED
JUNE 30,
 
2019
 
2018
Common stock price
$10.31 - $15.44
 
$9.14 - $14.41
Expected option term (in years)
5.28 - 6.07
 
5.50 - 6.25
Expected volatility
78.79% - 80.80%
 
75.89% - 78.33%
Risk-free interest rate
1.75% - 2.62%
 
2.32% - 2.84%
Expected dividend yield
—%
 
—%
The Company has classified stock-based compensation in its condensed consolidated statements of operations as follows:
 
THREE MONTHS ENDED
JUNE 30,
 
2019
 
2018
Research and development expenses
$
1,901

 
$
750

General and administrative expenses
1,992

 
1,028

Total
$
3,893

 
$
1,778

 
SIX MONTHS ENDED
JUNE 30,
 
2019
 
2018
Research and development expenses
$
3,759

 
$
1,557

General and administrative expenses
4,961

 
1,968

Total
$
8,720

 
$
3,525

7.
LEASES
On July 11, 2014, the Company executed a noncancelable operating lease for office and laboratory space in Cambridge, Massachusetts. The lease agreement, the term of which commenced on December 1, 2014, obligates the Company to make minimum payments totaling $9.6 million over a six-year lease term ending November 30, 2020. The Company has the option to extend the lease term for one additional five-year period. Rent expense is recorded on a straight-line basis.
As part of the Company’s lease agreement, the Company established a letter of credit, secured by a restricted money market account, the balance of which is presented as restricted cash equivalents at June 30, 2019 and December 31, 2018.
The Company currently has two leases for the use of office and laboratory space in addition to the lease described below. The lease for the Company’s current headquarters in Cambridge, Massachusetts has a six-year term with a five-year renewal option. The other lease, for a much smaller office in Cambridge, Massachusetts, has a 30-month term without a renewal option.
The lease term for both of the Company’s Cambridge, Massachusetts leases includes the noncancelable period of the lease, plus any additional periods covered by either (a) a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or (b) an option to extend (or not to terminate) the lease controlled by the lessor.

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Future lease payments for noncancelable operating leases as of June 30, 2019 is as follows:
 
 
OPERATING
LEASES
(1)
Remaining 2019
 
$
830

2020
 
1,901

2021
 
193

Total undiscounted operating lease payments
 
2,924

Less: imputed interest expense
 
(241
)
Total operating lease liabilities
 
$
2,683

__________________________
(1) Excluded from the table above are the lease payments associated with the lease of office and laboratory space in Lexington, Massachusetts for the Company’s future headquarters. The Company has excluded its lease payments due to the commencement date not having occurred and a lease liability not yet having been recognized on its condensed consolidated balance sheet.
Payments due under each lease agreement include fixed and variable payments. Variable payments relate to the Company’s share of the lessor’s operating costs associated with the underlying asset and are recognized when the event on which those payments are assessed occurs. Neither of Dicerna’s leases contain residual value guarantees.
The interest rate implicit in lease agreements is typically not readily determinable, and as such, the Company utilizes the incremental borrowing rate to calculate lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
In addition, on January 2, 2019, Dicerna executed a lease for laboratory and office space in Lexington, Massachusetts that had not commenced as of June 30, 2019. As a result, the Company has not yet recognized an ROU asset or lease liability on the condensed consolidated balance sheet for the lease. The term of the lease is seven years with approximately $30.1 million in fixed payments and variable payments. Dicerna has the option to extend the lease term at a prevailing market rate as of the extension date, which is seven years after the lease commencement date. The Company currently expects the lease to commence in the fourth quarter of 2019.
The components of lease cost for the three and six months ended June 30, 2019 are as follows:
 
 
 THREE MONTHS ENDED
JUNE 30, 2019
 
SIX MONTHS ENDED
JUNE 30, 2019
Operating lease cost
 
$
471

 
$
916

Variable lease cost
 
278

 
586

Total lease cost
 
$
749

 
$
1,502

Amounts reported in the condensed consolidated balance sheet for leases where the Company is the lessee as of June 30, 2019 were as follows:
 
 
JUNE 30, 2019
Operating leases
 
 
Operating lease ROU assets
 
$
2,627

Operating lease liabilities
 
$
2,683

 
 
 
Weighted average remaining lease term
 
 
Operating leases
 
1.56 years

 
 
 
Weighted average discount rate
 
 
Operating leases
 
10.00
%

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Other information related to leases for the six months ended June 30, 2019 is as follows:
 
 
SIX MONTHS ENDED
JUNE 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
952

 
 
 
Right-of-use assets obtained in exchange for lease liabilities
 
 
Operating leases
 
$
3,414

8.    COMMITMENTS AND CONTINGENCIES
Alnylam Settlement
On June 10, 2015, Alnylam filed a complaint against the Company in the Superior Court of Middlesex County, Massachusetts alleging misappropriation of confidential, proprietary, and trade secret information, as well as other related claims, in connection with the Company’s hiring of a number of former employees of Merck & Co., Inc. (“Merck”) and its discussions with Merck regarding the acquisition of its subsidiary, Sirna Therapeutics, Inc., which was subsequently acquired by Alnylam.
On April 18, 2018, the Company and Alnylam entered into the Settlement Agreement, resolving all ongoing litigation between the Company and Alnylam. Pursuant to the terms of the Settlement Agreement, the Company agreed to make the following payments to Alnylam: (i) a $2.0 million upfront payment in cash, which the Company made in May 2018; (ii) an additional $13.0 million in cash to be paid as 10.0% of any upfront or first year cash consideration that the Company receives pursuant to future collaborations related to Ga1NAc-conjugated RNAi research and development (excluding any amounts received or to be received by the Company from its existing collaboration with BI), provided that the $13.0 million must be paid by no later than April 28, 2022; and (iii) issuance of shares of the Company’s common stock pursuant to the Alnylam Share Issuance Agreement.
At December 31, 2018, the outstanding balance of the litigation settlement payable was $10.5 million. The Company paid the remaining outstanding balance of litigation settlement payable in full on January 22, 2019.
Legal proceedings
From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss. There were no contingent liabilities recorded as of June 30, 2019.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section as well as factors described in Part II, Item 1A – “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.

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Overview
DicernaTM Pharmaceuticals, Inc. (“we”, “us,” “our,” “the Company,” or “Dicerna”) is a biopharmaceutical company using ribonucleic acid (“RNA”) interference (“RNAi”) to develop medicines that silence genes that cause disease. The Company’s proprietary GalXCTM technology is being applied to develop potent, selective, and safe RNAi therapies to treat diseases involving the liver, including rare diseases, chronic liver diseases, cardiovascular diseases, and viral infectious diseases. Dicerna aims to treat disease by addressing the underlying causes of illness with capabilities that extend beyond the liver to address a broad range of diseases, focusing on target genes where connections between gene and disease are well understood and documented. Dicerna intends to discover, develop, and commercialize novel therapeutics either on its own or in collaboration with pharmaceutical partners. Dicerna has strategic collaborations with Eli Lilly and Company (“Lilly”), Alexion Pharmaceuticals, Inc. (together with its affiliates, “Alexion”), and Boehringer Ingelheim International GmbH (“BI”).
All of our GalXC drug discovery and development efforts are based on the therapeutic modality of RNAi, a highly potent and specific mechanism for silencing the activity of a targeted gene. In this naturally occurring biological process, double-stranded RNA molecules induce the enzymatic destruction of the messenger ribonucleic acid (“mRNA”) of a target gene that contains sequences that are complementary to one strand of the therapeutic double-stranded RNA molecule. Our approach is to design proprietary double-stranded RNA molecules that have the potential to engage the enzyme Dicer and initiate an RNAi process to silence a specific target gene. Our GalXC RNAi platform utilizes a proprietary structure of double-stranded RNA molecules configured for subcutaneous delivery to the liver. Due to the enzymatic nature of RNAi, a single GalXC molecule incorporated into the RNAi machinery can destroy hundreds or thousands of mRNAs from the targeted gene.
The GalXC RNAi platform supports Dicerna’s long-term strategy to retain a full or substantial ownership stake, subject to the evaluation of potential licensing opportunities as they may arise, and to invest internally in diseases with focused patient populations, such as certain rare diseases. We see such diseases as representing opportunities that carry a relatively higher probability of success, with genetically and molecularly defined disease markers, high unmet medical need, a limited number of centers of excellence to facilitate reaching these patients, and the potential for more rapid clinical development programs. For more complex diseases with multiple gene dysfunctions and larger patient populations, we are pursuing collaborations that can provide the enhanced scale, resources, and commercial infrastructure required to maximize these prospects.
We currently view our operations and manage our business as one segment, which encompasses the discovery, research, and development of treatments based on our RNAi technology platform.
Development Programs
In choosing which development programs to internally advance, we apply the scientific, clinical, and commercial criteria that we believe allow us to best leverage our GalXC RNAi platform and maximize value. We are focusing our efforts on three priority therapeutic programs for which we currently have a Clinical Trial Application (“CTA”) filed, an Investigational New Drug (“IND”) application filed, or are in enabling studies in preparation to submit additional regulatory applications that will be necessary to initiate clinical trials. We are also evaluating a series of potential programs in the clinical candidate selection stage, or for which a provisional clinical candidate has been selected that may be elevated into IND/CTA-enabling studies in the future, either on our own or in collaboration with larger pharmaceutical companies.
Our three priority programs are: DCR-PHXC for the treatment of primary hyperoxaluria (“PH”), DCR-HBVS for the treatment of chronic hepatitis B virus (“HBV”) infection, and DCR-A1AT for the treatment of alpha-1 antitrypsin (“A1AT”) deficiency-associated liver disease. Our potential programs include additional rare disease programs, a program for the treatment of hypercholesterolemia, and multiple programs in various therapeutic areas involving liver function.

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The table below sets forth the state of development of our various GalXC RNAi platform product candidates as of August 8, 2019.
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Status of Dicerna Programs
Our current GalXC RNAi platform development programs are as follows:
Primary Hyperoxaluria. We are developing DCR-PHXC for the treatment of all types of PH. PH is a family of severe, rare, genetic liver disorders characterized by overproduction of oxalate, a natural chemical in the body that is normally eliminated as waste through the kidneys. In patients with PH, the kidneys are unable to eliminate the large amount of oxalate that is produced. The accumulation of oxalate can result in severe damage to the kidneys and other organs.
In May 2018, we received notice from the United States (“U.S.”) Food and Drug Administration (“FDA”) granting Orphan Drug Designation to DCR-PHXC for the treatment of PH. In August 2018, the European Medicines Agency’s Committee for Orphan Medicinal Products designated DCR-PHXC as an orphan medicinal product for the treatment of PH in the European Union (“EU”). We received approval to proceed with the Phase 2 (“PHYOX2”) and Phase 3 (“PHYOX3”) studies in 2019 in a subset of the countries in which we intend to open trial sites. In one of the countries in which we already have approval, we initiated dosing of participants rolling over from the PHYOX™1 single-dose study into the recently approved PHYOX3 study, a long-term, multi-dose, open label, roll-over extension study. Additionally, we plan to enroll patients in our registration trial, PHYOX2, in the fourth quarter of 2019. In discussions with the FDA, we reached agreement with the FDA on the primary endpoint for the PHYOX2 pivotal clinical trial, and alignment with the FDA regarding the path to full approval for the treatment of patients with PH type 1 (“PH1”), as conveyed during a recent FDA Type A meeting. In July 2019, we received Breakthrough Therapy Designation from the FDA for the development of DCR-PHXC for the treatment of PH1. We plan to continue our dialogue with the FDA regarding endpoints for studies involving patients with PH type 2 (“PH2”) and PH type 3 as part of the PHYOX clinical development program for DCR-PHXC and potentially an expansion of the Breakthrough Therapy Designation.

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Our Phase 1 clinical trial of DCR-PHXC called PHYOX1 has completed dosing. PHYOX1 is a Phase 1 single ascending-dose study of DCR-PHXC in healthy volunteers (“HVs”) and study participants with PH1 and PH2. The primary objective of the study is to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of single-ascending doses of DCR-PHXC. Secondary endpoints include the change in 24-hour urinary oxalate excretion from baseline, defined as the mean of two 24-hour collections during screening. The trial is divided into two groups:
Group A is a placebo-controlled, single-blind study and includes 25 HVs at a single site in the United Kingdom with five cohorts dosed at 0.3, 1.5, 3.0, 6.0 or 12.0-mg/kg of DCR-PHXC or placebo (3:2 randomization).
Group B is an open-label study and includes 18 participants, 15 with PH1 and three with PH2, and includes three cohorts of participants dosed at 1.5, 3.0, and 6.0-mg/kg of DCR-PHXC, and a fourth cohort with flexible dosing. Group B participants are enrolled among five sites in the European Union and one site in the United States.
Group A dosing was completed in March 2018 and dosing in Group B was completed in January 2019. We first reported interim results from the PHYOX1 trial on September 5, 2018 and subsequently presented updated results (as of October 1, 2018) at Kidney Week in San Diego on October 25, 2018, at the German Society of Pediatric Nephrology 50th Annual Meeting in Cologne, Germany on March 28, 2019, and at the Oxalosis and Hyperoxaluria Foundation International Hyperoxaluria Workshop in Boston, Massachusetts on June 20, 2019.
As of May 2019, investigators reported that DCR-PHXC was generally well-tolerated, based on data from 18 participants (15 adults and three adolescents [participants 12-17 years old]) with PH1 (n=15) and PH2 (n=3) and 25 adult HVs. To date, four serious adverse events (“SAEs”) have occurred in three participants in Group B, none was deemed related to the study drug, and all four SAEs have resolved. A total of nine participants dosed with DCR-PHXC experienced mild or moderate injection site reactions, all of which resolved without intervention within 96 hours. The investigators observed no clinically meaningful safety signals, including from liver function tests.
With respect to efficacy data in PHYOX1, as of May 2019, a single 3.0-mg/kg dose of DCR-PHXC was associated with a mean maximal reduction of 24-hour urinary oxalate of 71% (range: 62% to 80%) in participants with PH1. The 3.0-mg/kg dose brought urinary oxalate levels into the normal range (defined as 24-hour excretion <0.46 mmol) at one or more post-dose time points in four of six participants with PH1, and to near-normalization (defined as 24-hour excretion <0.6 and ≥0.46 mmol) in one participant with PH1 receiving this dose. Among the four participants with PH1 dosed at 6.0-mg/kg, the mean maximal reduction in urinary oxalate was 66% (range: 35% to 100%); one participant in this cohort reached normalization at one or more post-dose time points; two others achieved near-normalization. Additionally, the investigators reported a mean maximal reduction in urinary oxalate of 48% (range: 28% to 59%) among participants with PH1 receiving a single 1.5-mg/kg dose, which was associated with normalization or near-normalization in three of five participants.
The PHYOX1 investigators also reported that the three participants with PH2 (one of whom received a single 1.5-mg/kg dose of DCR-PHXC; the other two received a 3.0-mg/kg dose) achieved a mean maximal reduction of 24-hour urinary oxalate of 42% (range: 22% to 66%) with one participant reaching normalization. All three participants with PH2 have reached Day 57 post-dosing and one is still in follow-up.
Chronic Hepatitis B Virus infection. We have declared a GalXC RNAi platform-based product candidate for the treatment of chronic HBV infection, DCR-HBVS, and have initiated a Phase 1 clinical trial, which is known as DCR-HBVS-101. HBV is the world’s most common serious liver infection, with more than 292 million patients chronically infected, according to an estimate by the World Health Organization. Chronic HBV infection, a condition characterized by the presence of the HBV surface antigen (“HBsAg”) for six months or more, claims approximately 780,000 lives annually; an estimated 650,000 of these deaths are caused by cirrhosis and liver cancer as a result of chronic hepatitis B, and 130,000 of these deaths result from complications associated with acute disease.
Current therapies for HBV rarely lead to a long-term immunological cure as measured by the clearance of HBsAg and sustained HBV deoxyribonucleic acid (“DNA”) suppression in patient plasma or blood. DCR-HBVS is comprised of a single GalXC molecule that targets HBV mRNAs within the HBsAg gene sequence region. Preclinical studies with a standard mouse model of HBV infection showed DCR-HBVS was associated with greater than 99% reduction in circulating HBsAg, suggesting a level of HBsAg suppression, both in magnitude and duration of suppression, that may be greater than that achieved from targeting within the X gene sequence region.

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We received CTA and ethics committee approvals for a Phase 1 clinical trial in HVs and patients with chronic HBV infection in New Zealand in December 2018 and in Australia, Hong Kong, South Korea, and Thailand in 2019. The Phase 1 study was initiated in December 2018 and the first participants were dosed in January 2019. We anticipate human proof of concept data to be available in the fourth quarter of 2019.
The DCR-HBVS-101 clinical trial is a Phase 1, randomized, placebo-controlled study designed to evaluate the safety and tolerability of DCR-HBVS in HVs and in patients with non-cirrhotic chronic HBV infection. Secondary objectives are to characterize the pharmacokinetic profile of DCR-HBVS and to evaluate preliminary pharmacodynamics and antiviral efficacy on plasma levels of HBsAg and HBV DNA in blood. The DCR-HBVS-101 clinical trial is divided into three phases or groups:
In Group A, 30 HVs are to receive a single ascending-dose of DCR-HBVS (0.1, 1.5, 3.0, 6.0, or 12.0-mg/kg) or placebo, with a four-week follow-up period. Group B is a single-dose arm in which eight participants with HBV who are naïve to nucleoside analog therapy will receive a 3.0-mg/kg dose of DCR-HBVS or placebo; these participants will be followed for at least 12 weeks. We expect to initiate Group B dosing in the third quarter of 2019, in parallel with Group C at the 3.0-mg/kg dose level. Group C is a multiple ascending dose arm in which DCR-HBVS (1.5, 3.0, or 6.0-mg/kg) or placebo will be administered to 18 participants with HBV who are already being treated with nucleoside analogs, with a treatment and follow-up period of 16 weeks or more. The first patient dosed was from this group, at a dose of 1.5-mg/kg, in May 2019.
Study participants in Groups B and C, in whom HBsAg will have dropped by more than 1 log10 IU/mL below baseline at their last scheduled study visit, will continue to be followed until their HBsAg level is less than 1 log10 IU/mL below the baseline value.
Alpha-1 antitrypsin deficiency-associated liver disease. We have declared a GalXC RNAi platform-based product candidate for the treatment of A1AT deficiency-associated liver disease and submitted a CTA to the Swedish Medical Products Agency in June 2019 to conduct a first-in-human Phase 1/2 study of DCR-A1AT, an investigational therapy from our GalXC™ technology platform.
A1AT deficiency is an inherited disorder that can lead to liver disease in children and adults and lung disease in adults. The disorder is caused by mutations in a gene called SERPINA1. This gene, when functioning normally, provides instructions for making the A1AT protein, which protects the body from an enzyme called neutrophil elastase. This enzyme is released from white blood cells to fight infection, but it can attack normal tissues if not tightly controlled by A1AT. Mutations in the SERPINA1 gene can result in a deficiency (shortage) of A1AT or an abnormal form of the protein that cannot control neutrophil elastase. Accumulation of abnormal A1AT in the liver can lead to liver disease. Uncontrolled neutrophil elastase can also destroy alveoli (small air sacs in the lungs) and cause lung disease.
Approximately 7% of children with A1AT deficiency develop cirrhosis, and more than 15% of those require liver transplantation. About 10% of adults with A1AT deficiency develop cirrhosis due to formation of scar tissue in the liver, and over 15% of those require liver transplant. Individuals affected by A1AT deficiency are also at risk of developing hepatocellular carcinoma, a type of liver cancer. Liver transplant is currently the only effective treatment for A1AT deficiency-associated liver disease.
A1AT deficiency occurs all over the world, though its prevalence varies by population. The disorder affects roughly one in 1,500 to 3,500 individuals with European ancestry but is uncommon in people of Asian descent. Many individuals with A1AT deficiency are thought to be undiagnosed, particularly those who also have chronic obstructive pulmonary disease. Some people with A1AT deficiency are misdiagnosed as having asthma.
Additional pipeline programs. We have developed a robust portfolio of additional targets and diseases that we plan to pursue either on our own or through collaborations. We have applied our GalXC technology to multiple gene targets across our disease focus areas of rare diseases, chronic liver diseases, and cardiovascular diseases.
Pursuant to our strategy, we are seeking collaborations with larger and/or more experienced pharmaceutical companies to advance our programs in the areas of chronic liver diseases and cardiovascular diseases, as well as select rare diseases that do not fit our criteria for a priority development program. The chronic liver and cardiovascular disease areas represent large and diverse patient populations, requiring complex clinical development and commercialization paths that we believe can be more effectively pursued in collaboration with larger pharmaceutical companies. Certain rare diseases require complex clinical development and commercialization paths

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aligned with existing treatment paradigms that we believe can be more effectively pursued in collaboration with companies possessing certain rare disease expertise.
For our additional rare disease opportunities, we are continuing to assess their potential for clinical success and market opportunity while optimizing our GalXC molecules. For our additional pipeline programs, we may utilize more advanced versions of our GalXC technology that further improve pharmaceutical properties of the GalXC molecules, including enhancing the duration of action and potency. We have further optimized our GalXC technology platform, enabling the development of next generation GalXC molecules. Improvements to our GalXC compound include modification of the tetraloop end of the molecule, which can be applied to any target gene, resulting in a substantially longer duration of action and higher potency of target gene silencing in animal models across multiple targets. Modification of the tetraloop only impacts the sense strand and does not impact the antisense strand. These modifications are unique to our GalXC molecules and, we believe, provide a competitive advantage for the Company.
Partner Development Programs
Lilly Collaboration
On October 25, 2018, we entered into a Collaboration and License Agreement with Lilly (the “Lilly Collaboration Agreement”). The Lilly Collaboration Agreement is for the discovery, development, and commercialization of potential new medicines in the areas of cardiometabolic disease, neurodegeneration, and pain. Under the terms of the Lilly Collaboration Agreement, we and Lilly will seek to use our proprietary GalXC RNAi technology platform to progress new drug targets toward clinical development and commercialization. In addition, we will collaborate with Lilly to extend the GalXC RNAi platform technology to non-liver (i.e., non-hepatocyte) tissues, including neural tissues.
The Lilly Collaboration Agreement provides that we will work exclusively with Lilly in the neurodegeneration and pain fields with the exception of mutually agreed upon orphan indications. Additionally, we will work exclusively with Lilly on select targets in the cardiometabolic field. Under the Lilly Collaboration Agreement, we will provide Lilly with exclusive and non-exclusive licenses to support the companies’ activities and to enable Lilly to commercialize products derived from or containing compounds developed pursuant to such agreement. The Lilly Collaboration Agreement contemplates in excess of 10 targets.
Under the terms of the Lilly Collaboration Agreement, Lilly paid us a non-refundable, non-creditable upfront payment of $100.0 million and made a concurrent stated $100.0 million equity investment in us at a premium pursuant to a share issuance agreement between the parties (the “Lilly Share Issuance Agreement”). Under the Lilly Collaboration Agreement, we are also eligible to potentially receive up to approximately $350.0 million per target in development and commercialization milestones, in addition to a $5.0 million payment due for each of the non-hepatocyte targets when a product achieves proof of principle in an animal model. In addition, the Lilly Collaboration Agreement also provides that Lilly will pay us mid-single to low-double digit royalties on product sales on a country-by-country and product-by-product basis until the later of expiration of patent rights in a country, the expiration of data or regulatory exclusivity in such country, or 10 years after the first product sale in such country, subject to certain royalty step-down provisions set forth in the agreement. During the three and six months ended June 30, 2019, $2.6 million and $3.1 million of revenue was recognized associated with the Lilly Collaboration Agreement, respectively.
Alexion Collaboration
On October 22, 2018, we entered into a Collaborative Research and License Agreement (the “Alexion Collaboration Agreement”) with Alexion for the joint discovery and development of RNAi therapies for complement-mediated diseases. Under the terms of the Alexion Collaboration Agreement, we will collaborate with Alexion on the discovery and development of subcutaneously delivered GalXC candidates, currently in preclinical development, for the treatment of complement-mediated diseases with potential global commercialization by Alexion. We will lead the joint discovery and research efforts through the preclinical stage, and Alexion will lead development efforts beginning with Phase 1 studies. We will be responsible for manufacturing of the GalXC candidates through the completion of Phase 1, the costs of which will be paid by Alexion. Alexion will be solely responsible for the manufacturing of any product candidate subsequent to the completion of Phase 1.
The Alexion Collaboration Agreement also provides Alexion with exclusive worldwide licenses as well as development and commercial rights for two of our preclinical, subcutaneously delivered GalXC RNAi candidates and an exclusive option for the discovery and development of GalXC RNAi candidates against two additional complement pathway targets.
Under the terms of the Alexion Collaboration Agreement, Alexion paid us a non-refundable, non-reimbursable, and non-creditable upfront payment of $22.0 million, with Alexion Pharmaceuticals making a concurrent stated $15.0 million equity investment at a premium in Dicerna pursuant to a share issuance agreement between us and Alexion Pharmaceuticals (the “Alexion

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Share Issuance Agreement”). The Alexion Collaboration Agreement also provides for potential additional payments to Dicerna of up to $600.0 million from proceeds from target option exercises and development and sales milestones, as defined in the agreement, which is comprised of option exercise fees of up to $20.0 million, representing $10.0 million for each of the candidates selected; development milestones of up to $105.0 million for each product; and aggregate sales milestones of up to $160.0 million. Under the agreement, Alexion will also pay us mid-single to low-double digit royalties on potential product sales on a country-by-country, product-by-product basis until the later of the expiration of patent rights in a country, the expiration of market or regulatory exclusivity in such country, or 10 years after the first product sale in such country, subject to certain royalty step-down provisions set forth in the agreement. During the three and six months ended June 30, 2019, we recognized $1.1 million and $1.5 million in revenue associated with the Alexion Collaboration Agreement, respectively.
BI Collaboration
On October 27, 2017, we entered into a Collaborative Research and License Agreement with BI (the “BI Agreement”), pursuant to which we and BI agreed to jointly research and develop product candidates for the treatment of chronic liver diseases, with an initial focus on nonalcoholic steatohepatitis (“NASH”) using our GalXC platform. NASH is caused by the buildup of fat in the liver, potentially leading to liver fibrosis and cirrhosis. NASH has an especially high prevalence among obese and diabetic patients and is an area of high unmet medical need.
The BI Agreement is for the development of product candidates against one target gene with an option for BI to add the development of product candidates that target a second gene (the “Second Target”). We are working exclusively with BI to develop the product candidates against the undisclosed target gene. We are responsible for the discovery and initial profiling of the product candidates, including primary preclinical studies, synthesis, and delivery. BI is responsible for evaluating and selecting the product candidates for further development. If BI selects one or more product candidates, it will be responsible for further preclinical development, clinical development, manufacturing, and commercialization of those products. Also pursuant to the BI Agreement, we granted BI a worldwide license in connection with the research and development of the product candidates and have transferred to BI certain intellectual property rights of the product candidates selected by BI for clinical development and commercialization. We also may provide assistance to BI in order to help BI further develop selected product candidates.
Under the terms of the BI Agreement, BI agreed to pay us a non-refundable upfront payment of $10.0 million for the first target. During the term of the research program, BI will reimburse Dicerna the cost of materials and third-party expenses that have been included in the preclinical studies up to an agreed-upon limit. We are eligible to receive up to $191.0 million in potential development and commercial milestones related to the initial target. We are also eligible to receive royalty payments on potential global net sales, subject to certain adjustments, tiered from high single digits up to low double-digits. BI’s Second Target option provided for an option fee payment of $5.0 million and success-based development and commercialization milestones and royalty payments to Dicerna.
In October 2018, BI exercised its Second Target option, which entitles the Company to a non-refundable payment of $5.0 million upon the agreement of a research work plan and budget for the Second Target. The terms of the Second Target option exercise and related rights and obligations associated with the Second Target were agreed between the Company and BI in an Additional Target Agreement (the “ATA”), which was entered into on December 31, 2018. In addition to establishing the terms of the Second Target option exercise, the ATA also amends the BI Agreement to provide BI with the option to add, over a three-year period, the development of product candidates targeting a further additional target gene (the “Third Target” option).
Under the terms of the ATA, in accordance with the terms of the BI Agreement, BI agreed to pay us a non-refundable upfront payment of $5.0 million to exercise its initial option for development related to the Second Target. Under the terms of the ATA, during the term of the research program, BI will reimburse us for certain expenses. We are eligible to receive up to $170.0 million in potential development and commercial milestones related to the Second Target. We are also eligible to receive tiered royalty payments on potential global net sales, subject to certain adjustments, in the mid-single digits. Other than as set forth in the ATA, development of the Second Target will be subject to the terms of the BI Agreement. Per the ATA, if BI elects, in its sole discretion, to exercise the Third Target option, the parties would agree to a research work plan and budget for the additional gene and negotiate development and commercialization milestones and royalty payments to Dicerna, and BI would make an option fee payment to us of $5.0 million. During the three and six months ended June 30, 2019, $2.0 million and $4.2 million of revenue was recognized associated with the BI Agreement, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as

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well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate these estimates and judgments. Actual results may differ from these estimates and could have a material impact on our condensed consolidated financial statements.
The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our financial statements presented in this report are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K filed with the SEC on March 13, 2019. There have been no significant changes to our critical accounting policies as disclosed in our most recently filed Annual Report on Form 10-K during the six months ended June 30, 2019.
Recent Accounting Pronouncement
A summary of significant recent accounting pronouncements that we have adopted or expect to adopt is included in Note 1 – Description of Business and Basis of Presentation to our condensed consolidated financial statements (see Part I, Item 1 – “Financial Statements” of this Quarterly Report on Form 10-Q). Additional information regarding relevant accounting pronouncements is provided below.
Adopted in 2019
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as amended by multiple standards updates, in order to increase transparency and comparability among organizations by requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The most significant change arising from the new standard is the recognition of right-of-use (“ROU”) assets and lease liabilities for leases classified as operating leases. Under the standard, disclosures are required to enable financial statement users to assess the amount, timing, and uncertainty of cash flows arising from the leases. Companies are also required to recognize and measure leases existing at, or entered into after, the adoption date using a modified retrospective approach, with certain practical expedients available. Comparative periods prior to adoption have not been retrospectively adjusted.
We adopted the standard effective January 1, 2019 and elected the package of three practical expedients that permitted an entity not to (a) reassess whether expired or existing contracts contain leases, (b) reassess lease classification for existing or expired leases, and (c) consider whether previously capitalized initial direct costs would be appropriate under the new standard.
Upon adoption, we recorded ROU assets of $2.7 million and lease liabilities of $2.8 million. The standard did not have a material impact on the statement of operations or statement of cash flows.
Recent Developments
Lexington lease
On January 2, 2019, we entered into a non-cancelable real property lease agreement with Hayden Office Trust under a Declaration of Trust dated August 24, 1977, as the same may have been amended, for 80,872 square feet of laboratory and office space in Lexington, Massachusetts (the “Lexington Lease”). We intend to move our corporate headquarters and research facility to this location upon occupancy and expect the move to occur in the fourth quarter of 2019.
The original term (the “Original Term”) of the Lexington Lease is seven years, commencing on the earlier of (a) the date on which the premises are ready for occupancy under the terms of the lease, or (b) the date on which we commence occupancy of any portion of the premises for the permitted uses under the lease. We have options to extend the term of the lease for two additional successive periods of five years each (the “Extension Periods”).
Annual fixed rent is approximately $3.9 million for the first 12-month period during the Original Term, increasing on an annual basis until reaching approximately $4.7 million for the seventh 12-month period during the Original Term. The Lexington Lease provides for an aggregate fixed rent of approximately $30.1 million during the seven-year Original Term. We will agree upon annual fixed rent during the Extension Periods with the landlord following our provision of notice of intention to exercise an extension option. If we cannot reach an agreement on annual fixed rent during an Extension Period with the landlord, we will have the right to seek, subject to the terms of the Lexington Lease, a broker determination of the prevailing market rent, and the annual fixed rent during such Extension Period will be the prevailing market rent determined by the broker.
In addition to the annual fixed rent, we will be responsible for certain customary operating expenses and real estate taxes specified in the agreement. The Lexington Lease also contains customary default provisions allowing the landlord to terminate the lease or seek damages if we fail to cure certain breaches of our obligations under the lease within specified periods of time. In

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addition, we will be obligated to indemnify the landlord for certain losses incurred in connection with our use or occupancy of the premises.
Cambridge sublease
On January 4, 2019, we entered into a non-cancelable real property sublease agreement with PPF OFF 150 Cambridge Park Drive, LLC (the “Landlord”) and International Business Machines Corporation (the “Sublandlord”), for approximately 9,653 square feet of office space in Cambridge, Massachusetts (“Cambridge Sublease”). The term of the sublease commenced on January 11, 2019, the date that the Landlord provided written consent to the Cambridge Sublease, and extends through the sublease expiration date of July 30, 2021. The Cambridge Sublease provides for an aggregate fixed rent of approximately $0.8 million during the term of the sublease.
Executive Summary
Our results of operations and liquidity and capital resources for and as of the three and six months ended June 30, 2019 reflect the following:
On January 1, 2019, we implemented the new lease accounting standard issued by the Financial Accounting Standards Board, Leases (Topic 842). Upon adoption, we recorded a right-of-use asset of $2.7 million which is recorded in noncurrent assets in the condensed consolidated balance sheet, a short-term lease liability of $1.4 million, and a long-term lease liability of $1.4 million. As of June 30, 2019, the right-of-use asset was $2.6 million, and the short-term and long-term lease liabilities were $1.6 million and $1.0 million, respectively.
On January 2, 2019, we entered into a seven-year non-cancelable real property lease agreement for 80,872 square feet of laboratory and office space in Lexington, Massachusetts. We intend to move our corporate headquarters and research facility to this location in the fourth quarter of 2019.
On January 4, 2019, we entered into a non-cancelable real property sublease agreement for 9,653 square feet of office space in Cambridge, Massachusetts. The term of the sublease commenced on January 11, 2019 and extends through the sublease expiration date of July 30, 2021.
In January 2019, we received a $100.0 million upfront payment from Lilly associated with a collaboration agreement executed in October 2018 to which we were a party. The collaboration agreement with Lilly is for the discovery, development, and commercialization of potential new medicines in the areas of cardiometabolic disease, neurodegeneration, and pain.
In February 2019, we received a non-refundable payment of $5.0 million upon the agreement of a research work plan and budget pursuant to BI’s exercise of its Second Target option in October 2018.
Revenue from collaborative arrangements during the three months ended June 30, 2019 reflects $2.6 million, $1.1 million, and $2.0 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $1.5 million solely related to the BI collaboration during the three months ended June 30, 2018.
Revenue from collaborative arrangements during the six months ended June 30, 2019 reflects $3.1 million, $1.5 million, and $4.2 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $3.1 million solely related to the BI collaboration during the six months ended June 30, 2018.
Financial Operations Overview
Revenue from collaborative arrangements
Our revenue from collaboration arrangements to date has been generated primarily through research funding, license fees, option exercise fees, and preclinical development payments under our research collaboration arrangements with Lilly, Alexion, and BI. We have not generated any commercial product revenue, nor do we expect to generate any product revenue for the foreseeable future.
In the future, we may generate revenue from a combination of research and development payments, license fees and other upfront payments, milestone payments, product sales, and royalties in connection with our current or future collaborations with partners. We expect that any revenue we generate will fluctuate in future periods as a result of the timing of our or our collaborators’ achievement of preclinical, clinical, regulatory, and commercialization milestones, to the extent achieved, the timing and amount of any payments to us relating to such milestones, and the extent to which any of our product candidates are approved and successfully commercialized by us or a collaborator. If we, our current collaboration partners, or any future collaborator fails to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue from collaboration arrangements, and our results of operations and financial position, would be materially and adversely affected.

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Research and development expenses
Research and development expenses consist of costs associated with our research activities, including discovery and development of our GalXC molecules and drug delivery technologies, clinical and preclinical development activities, and research activities under our research collaboration and license agreements. Our research and development expenses include:
direct research and development expenses incurred under arrangements with third parties, such as contract research organizations, contract manufacturing organizations, and consultants;
platform-related lab expenses, including lab supplies, license fees, and consultants;
employee-related expenses, including salaries, benefits, and stock-based compensation expense; and
facilities, depreciation, and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies.
We expense research and development costs as they are incurred. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received. A significant portion of our research and development costs are not tracked by project as they benefit multiple projects or our technology platform.
The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We or any of our current or future collaborators may never succeed in obtaining marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability, and commercial viability. All of our research and development programs are at an early stage, and successful development of future product candidates from these programs is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We anticipate we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to our ability to maintain or enter into collaborations with respect to each product candidate, the scientific and clinical success of each product candidate, as well as ongoing assessments as to the commercial potential of product candidates. We will need to raise additional capital and may seek additional collaborations in the future in order to advance our various product candidates. Additional private or public financings may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development, commercial, and support functions. Other general and administrative expenses include travel expenses, professional fees for legal (excluding litigation expenses), audit, tax, and other professional services, and allocated facility-related costs not otherwise included in research and development expenses.
Litigation expense
Litigation expense consists of legal fees and expenses solely related to the litigation with Alnylam Pharmaceuticals, Inc. (“Alnylam”).
Interest income
Interest income consists of interest income earned on our cash and cash equivalents, held-to-maturity investments, and restricted cash equivalents.
Interest expense
Interest expense of $0.2 million during the three and six months ended June 30, 2018 represents interest expense incurred on a long-term payable with Alnylam, which was paid in the first quarter of 2019.

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Results of Operations
Comparison of the Three and Six Months Ended June 30, 2019 and 2018
The following table summarizes the results of our operations for the periods indicated (amounts in thousands, except percentages):
 
THREE MONTHS ENDED
JUNE 30,
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Revenue from collaborative arrangements
$
5,682

 
$
1,545

 
$
4,137

 
267.8
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
22,832

 
10,339

 
12,493

 
120.8
 %
General and administrative
8,831

 
4,760

 
4,071

 
85.5
 %
Litigation expense

 
22,244

 
(22,244
)
 
(100.0
)%
Total operating expenses
31,663

 
37,343

 
(5,680
)
 
(15.2
)%
Loss from operations
(25,981
)
 
(35,798
)
 
9,817

 
(27.4
)%
Other income (expense):
 
 
 
 
 
 
 
Interest income
2,136

 
330

 
1,806

 
*

Interest expense

 
(176
)
 
176

 
(100.0
)%
Total other income, net
2,136

 
154

 
1,982

 
*

Net loss
$
(23,845
)
 
$
(35,644
)
 
$
11,799

 
(33.1
)%
 
 
SIX MONTHS ENDED
JUNE 30,
 
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Revenue from collaborative arrangements
 
$
8,789

 
$
3,090

 
$
5,699

 
184.4
 %
Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
44,435

 
20,232

 
24,203

 
119.6
 %
General and administrative
 
18,507

 
9,095

 
9,412

 
103.5
 %
Litigation expense
 

 
25,428

 
(25,428
)
 
(100.0
)%
Total operating expenses
 
62,942

 
54,755

 
8,187

 
15.0
 %
Loss from operations
 
(54,153
)
 
(51,665
)
 
(2,488
)
 
4.8
 %
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
4,154

 
619

 
3,535

 
*

Interest expense
 

 
(176
)
 
176

 
(100.0
)%
Total other income, net
 
4,154

 
443

 
3,711

 
*

Net loss
 
$
(49,999
)
 
$
(51,222
)
 
$
1,223

 
(2.4
)%
* Percentage change not meaningful
Revenue from collaborative arrangements
Revenue from collaborative arrangements during the three months ended June 30, 2019 reflects $2.6 million, $1.1 million, and $2.0 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $1.5 million solely related to the BI collaboration during the three months ended June 30, 2018.
Revenue from collaborative arrangements during the six months ended June 30, 2019 reflects $3.1 million, $1.5 million, and $4.2 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $3.1 million solely related to the BI collaboration during the six months ended June 30, 2018.
We do not expect to generate any product revenue for the foreseeable future.

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Research and development expenses
The following table summarizes our research and development expenses incurred during the periods indicated (amounts in thousands):
 
THREE MONTHS ENDED
JUNE 30,
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Direct research and development expenses
$
12,138

 
$
5,066

 
$
7,072

 
139.6
%
Platform-related expenses
2,761

 
1,425

 
1,336

 
93.8
%
Employee-related expenses
7,037

 
3,053

 
3,984

 
130.5
%
Facilities, depreciation, and other expenses
896

 
795

 
101

 
12.7
%
Total
$
22,832

 
$
10,339

 
$
12,493

 
120.8
%
 
SIX MONTHS ENDED
JUNE 30,
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Direct research and development expenses
$
23,512

 
$
9,831

 
$
13,681

 
139.2
%
Platform-related expenses
5,463

 
2,538

 
2,925

 
115.2
%
Employee-related expenses
13,602

 
6,255

 
7,347

 
117.5
%
Facilities, depreciation, and other expenses
1,858

 
1,608

 
250

 
15.5
%
Total
$
44,435

 
$
20,232

 
$
24,203

 
119.6
%
Research and development expenses increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to direct research and development expenses and employee-related expenses. The $7.1 million increase in direct research and development expenses in the three months ended June 30, 2019 included a $3.3 million increase in manufacturing costs to support our clinical studies and a $3.2 million increase in clinical study costs, reflecting increased activities associated with our DCR-PHXC and DCR-HBVS programs. These costs were partially offset by a $0.6 million decrease in preclinical study costs. Research and development expenses was also impacted by a $4.0 million increase in employee-related expenses, including stock-based compensation and benefits.
Research and development expenses increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to direct research and development expenses and employee-related expenses. The $13.7 million increase in direct research and development expenses in the six months ended June 30, 2019 included an $8.0 million increase in manufacturing costs to support our clinical studies and a $5.9 million increase in clinical study costs, reflecting increased activities associated with our DCR-PHXC and DCR-HBVS programs. These costs were partially offset by a $1.9 million decrease in preclinical study costs. Research and development expenses was also impacted by a $7.3 million increase in employee-related expenses, such as compensation and benefits. The increase in employee-related expenses in both the three and six months ended June 30, 2019, is a result of a 140% increase in research and development headcount necessary to support our growth.
We expect our overall research and development expenses to continue to increase for the foreseeable future, primarily as we complete clinical manufacturing activities, advance preclinical toxicology studies, continue clinical activities associated with our lead product candidates, and increase activities under the Lilly and Alexion agreements.
General and administrative expenses
General and administrative expenses increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in the three months ended June 30, 2019 is primarily related to a $2.4 million increase in employee-related expenses, due to increased stock-based compensation and headcount growth, and a $0.6 million increase in general and business development consulting costs.
General and administrative expenses increased for the six months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in the six months ended June 30, 2019 is primarily related to a $5.5 million increase in employee-related expenses, due to increased stock-based compensation and headcount growth, and a $1.7 million increase in general and business development consulting costs. Our use of consultants in both the three and six months ended June 30, 2019 increased largely due to support for business development initiatives, as well as accounting support for the implementation of new accounting standards and preparation for our planned compliance with Sarbanes-Oxley Section 404(b) in 2019.

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Litigation expenses
The three and six months ended June 30, 2018 included $22.2 million and $25.4 million of litigation fees, which were comprised solely of expenses associated with the litigation with Alnylam that was settled in the second quarter of 2018.
Interest income
Interest income represents interest earned from our cash and cash equivalents, held-to-maturity investments, and restricted cash equivalents. The increases for the three and six months ended June 30, 2019 were largely due to higher balances in money market funds and U.S. Treasury securities as a result of cash received from our follow-on public offering in September 2018 and the collaboration agreements executed with Lilly and Alexion in October 2018.
Interest expense
Interest expense of $0.2 million during the three and six months ended June 30, 2018 represents interest expense incurred on the balance of the litigation settlement payable.
Liquidity and Capital Resources
We have historically funded our operations primarily through the public offering and private placement of our securities and consideration received from our collaborative agreements with Lilly, Alexion, and BI. As of June 30, 2019, we had cash and cash equivalents and held-to-maturity investments of $345.3 million compared to $302.6 million as of December 31, 2018. The balance of cash, cash equivalents, and held-to-maturity investments as of June 30, 2019 includes the receipt of an additional $105.0 million in proceeds from the Lilly and BI collaborations, which were partially offset by the $10.5 million final settlement payment to Alnylam.
In October 2018, we entered into collaboration agreements with both Alexion and Lilly. The amount of cash generated from upfront payments and equity investments in both collaborations provides us with sufficient resources to continue our planned operations and clinical activities beyond the year ended December 31, 2020.
Cash flows
The following table shows a summary of our condensed consolidated cash flows for the periods indicated (amounts in thousands):
 
SIX MONTHS ENDED
JUNE 30,
 
2019
 
2018
Net cash provided by (used in) operating activities
$
46,232

 
$
(32,273
)
Net cash provided by investing activities
$
1,858

 
$
5,037

Net cash provided by financing activities
$
792

 
$
873

Operating activities
Net cash provided by (used in) operating activities increased $78.5 million in the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to a $100.0 million decrease in contract receivables as a result of the upfront cash payment received from Lilly in January 2019 in connection with our collaboration agreement. This increase in cash was offset by the $19.4 million litigation settlement payable and $10.3 million non-cash litigation expense in the six months ended June 30, 2018, as there were no such expenses in the six months ended June 30, 2019.
Investing activities
Net cash provided by investing activities decreased $3.2 million in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease in net cash provided by investing activities primarily relates to a $3.7 million increase in purchases of property and equipment. In addition, there was a $193.0 million increase of proceeds from the maturities of held-to-maturity investments that was largely offset by a $192.5 million increase in purchases of held-to-maturity investments for the six months ended June 30, 2019.

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Financing activities
Net cash provided by financing activities remained relatively flat, decreasing $0.1 million, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Funding requirements
We expect that our primary uses of capital will continue to be third-party clinical research and development services and manufacturing costs, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses, and general overhead costs. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of capital outlays and operating expenditures associated with our anticipated development activities. However, based on our current operating plan, we believe that our available cash, cash equivalents, and held-to-maturity investments will be sufficient to fund the execution of our current clinical and operating plans for at least the 12-month period following August 8, 2019. We based this estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors. Our future capital requirements are difficult to forecast and will depend on many factors, including:
the potential receipt of any milestone payments under the Lilly Collaboration Agreement, the Alexion Collaboration Agreement, or the BI Agreement;
the terms and timing of any other collaboration, licensing, and other arrangements that we may establish;
the initiation, progress, timing, and completion of preclinical studies and clinical trials for our potential product candidates;
the number and characteristics of product candidates that we pursue;
the outcome, timing, and cost of regulatory approvals;
delays that may be caused by changing regulatory requirements;
the cost and timing of hiring new employees to support our continued growth;
the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;
the costs of filing and prosecuting intellectual property rights and enforcing and defending any intellectual property-related claims;
the costs of responding to and defending ourselves against complaints and potential litigation;
the costs and timing of procuring clinical and commercial supplies for our product candidates;
the extent to which we acquire or in-license other product candidates and technologies; and
the extent to which we acquire or invest in other businesses, product candidates, or technologies.
Until such time, if ever, that we generate product revenue, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, and research collaboration and license agreements. We may be unable to raise capital or enter into such other arrangements when needed or on favorable terms, or at all. Our failure to raise capital or enter into such other arrangements in a reasonable timeframe would have a negative impact on our financial condition, and we may have to delay, reduce, or terminate our research and development programs, preclinical or clinical trials, limit strategic opportunities, or undergo reductions in our workforce or other corporate restructuring activities.
Please see the risk factors set forth in Part II, Item 1A – “Risk Factors” in this Quarterly Report on Form 10-Q for additional risks associated with our substantial capital requirements.

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Contractual Obligations and Commitments
The following is a summary of our significant contractual obligations as of June 30, 2019 (amounts in thousands):
 
Payments Due By Period
 
Total
 
Less Than 1
Year
 
More Than
1 Year and
Less Than 3
Years
 
More Than
3 Years and
Less Than 5
Years
 
More Than 5
Years
Operating lease obligations*
$
2,924

 
$
1,852

 
$
1,072

 
$

 
$

______________________________________
*
Represents future minimum lease payments under our existing non-cancelable operating leases for our offices and laboratory space in Cambridge, Massachusetts, for which the end of the lease terms are November 30, 2020 and July 30, 2021. Excluded from the table above are fixed lease payments of $30.1 million associated with our lease of office and laboratory space in Lexington, Massachusetts for our future headquarters. Such lease payments were excluded as the commencement date has not yet occurred and a lease liability has not yet been recognized on our condensed consolidated balance sheet.
We also have obligations to make future payments to licensors that become due and payable on the achievement of certain development, regulatory, and commercial milestones. We have not included any such potential obligations on our condensed consolidated balance sheet or in the table above since the achievement and timing of these milestones were not probable or estimable as of June 30, 2019.
Off-Balance Sheet Arrangements
As of June 30, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objectives of our investment activities are to ensure liquidity and to preserve principal, while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Some of the securities that we invest in may have market risk related to changes in interest rates. As of June 30, 2019, we had cash, cash equivalents, and held-to-maturity investments of $345.3 million. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash and cash equivalents and held-to-maturity investments and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents or held-to-maturity investments. To minimize the risk in the future, we intend to maintain our portfolio of cash, cash equivalents, and held-to-maturity investments in a variety of securities, including commercial paper, money market funds, and government securities.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file under the Exchange Act with the SEC is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of, this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
We continuously seek to improve the efficiency and effectiveness of our internal controls. This results in refinements to processes throughout the Company. There was no change in our internal control over financial reporting during the quarter ended

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June 30, 2019, which was identified in connection with management’s evaluation required by Exchange Act Rules 13a-15(f) and 15d-15(f), that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one person, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II: OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time we may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. We are not currently a party to or aware of any proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or results of operations. Any future litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results, and financial condition. We maintain liability insurance; however, if any costs or expenses associated with this or any other litigation exceed our insurance coverage, we may be forced to bear some or all of these costs or expenses directly, which could be substantial.
ITEM 1A.
RISK FACTORS
We are providing the following cautionary discussion of risk factors, uncertainties, and assumptions that we believe are relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results and our forward-looking statements. We note these factors for investors as permitted by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this section to be a complete discussion of all potential risks or uncertainties that may substantially impact our business. Moreover, we operate in a competitive and rapidly changing environment. New factors emerge from time to time, and it is not possible to predict the impact of all of these factors on our business, financial condition, or results of operations.
Risks Related to Our Business
We will need to raise substantial additional funds to advance development of our product candidates and we cannot guarantee that we will have sufficient funds available in the future to develop and commercialize our current or future product candidates. Raising additional funds may cause dilution to our stockholders, restrict our operations, or require us to relinquish control over our technologies or product candidates.
We will need to raise substantial additional funds to expand our development, regulatory, manufacturing, marketing, and sales capabilities, whether internally or through other organizations. We have used substantial funds to develop our product candidates and delivery technologies and will require significant funds to conduct further research and development and preclinical testing and clinical trials of our product candidates, to seek regulatory approvals for our product candidates, and to manufacture and market products, if any are approved for commercial sale. As of June 30, 2019, we had $345.3 million in cash, cash equivalents, and held-to-maturity investments. Based on our current operating plan and liquidity, we believe that our available cash, cash equivalents, and held-to-maturity investments will be sufficient to fund the execution of our current clinical and operating plan beyond 2020. However, to the extent our clinical and operating plan changes, we will need to raise substantial additional funds. Further, our future capital requirements and the period for which our existing resources are able to support our operations may vary significantly from what we expect. Our monthly spending levels vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with successful development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. To execute our business plan, we will need, among other things:
to obtain the human and financial resources necessary to develop, test, obtain regulatory approval for, manufacture, and market our product candidates;
to build and maintain a strong intellectual property portfolio and avoid infringing intellectual property of third parties;
to establish and maintain successful licenses, collaborations, and alliances;
to satisfy the requirements of clinical trial protocols, including patient enrollment;
to establish and demonstrate the clinical efficacy and safety of our product candidates;
to manage our spending as costs and expenses increase due to preclinical studies and clinical trials, regulatory approvals, manufacturing scale-up, and commercialization;
to obtain additional capital to support and expand our operations;
to satisfy the requirements for quality and safety in developing and commercializing our products; and
to market our products to achieve acceptance and use by the medical community.
If we are unable to obtain funding on a timely basis or on acceptable terms, we may have to delay, reduce, or terminate our research and development programs and preclinical studies or clinical trials, if any, delay or cease our efforts to build our commercial

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capabilities, limit strategic opportunities, or undergo reductions in our workforce or other corporate restructuring activities. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish development or commercialization rights to some of our technologies or product candidates that we would otherwise pursue on our own. We do not expect to realize revenue from product sales or royalties in the foreseeable future, if at all, and milestone payments, if any, are based on third-party determinations and/or events outside our control. Our revenue sources currently are, and will remain, extremely limited unless and until our product candidates are clinically tested, approved for commercialization, and successfully marketed. To date, we have financed our operations primarily through the sale of securities, research collaborations and license agreements, debt financings, and credit and loan facilities. We will be required to seek additional funding in the future and intend to do so through a combination of public or private equity offerings, debt financings, and research collaborations and license agreements. Our ability to raise additional funds will depend on financial, economic, and other factors, many of which are beyond our control. For example, a number of factors, including the timing and outcomes of our clinical activities, our status as a smaller reporting company under SEC regulations, as well as conditions in the global financial markets, may present significant challenges to accessing the capital markets at a time when we would like or require, and at an increased cost of capital. Additional funds may not be available to us on acceptable terms or at all. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution, and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, may involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of equity securities receive any distribution of corporate assets.
We have a history of operating losses; we expect to continue to incur significant losses for the foreseeable future and may never achieve or maintain profitability, which could result in a decline in the market value of our common stock.
We are a biopharmaceutical company with a limited operating history focused on the discovery and development of treatments based on the emerging therapeutic modality RNAi, a biological process in which RNA molecules inhibit gene expression. Since our inception in October 2006, we have devoted our resources to the development of RNAi molecules and delivery technologies. We have had significant operating losses since our inception. As of June 30, 2019, we had an accumulated deficit of $454.9 million. For the six months ended June 30, 2019 and for the years ended December 31, 2018, 2017, and 2016, our net loss attributable to common stockholders was $50.0 million, $88.9 million, $80.3 million, and $59.5 million, respectively. Substantially all of our operating losses have resulted from expenses incurred in connection with our research and development programs, from general and administrative costs associated with our operations, and, prior to 2019, litigation expenses associated with the Alnylam Pharmaceuticals, Inc. (“Alnylam”) litigation settled in April 2018. Our technologies and product candidates are in early stages of development, and we are subject to the risks of failure inherent in the development of product candidates based on novel technologies.
We have not generated, and do not expect to generate, any revenue from product sales for the foreseeable future, and we expect to continue to incur significant operating losses for the foreseeable future due to the cost of research and development, preclinical studies and clinical trials, and the regulatory approval process for product candidates. The amount of future losses is uncertain. Our ability to achieve profitability, if ever, will depend on, among other things, us or our existing collaborators, or any future collaborators, successfully developing product candidates, obtaining regulatory approvals to market and commercialize product candidates, manufacturing any approved products on commercially reasonable terms, establishing a sales and marketing organization or suitable third-party alternatives for any approved product, and raising sufficient funds to finance business activities. If we or our existing collaborators, or any future collaborators, are unable to develop and commercialize one or more of our product candidates or if sales revenue from any product candidate that receives approval is insufficient, we will not achieve profitability, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
variations in the level of expense related to our product candidates or future development programs;
delays in enrolling subjects in, initiating, conducting, or releasing results of clinical trials, or the addition or termination of clinical trials or funding support by us, our existing collaborators, or any future collaborator or licensor;
the timing of the release of results from any clinical trials conducted by us or our collaborators or licensors;
our execution of any collaboration, licensing, or similar arrangement, and the timing of payments we may make or receive under such existing or future arrangements or the termination or modification of any such existing or future arrangements;
any intellectual property infringement or misappropriation lawsuit or opposition, interference, re-examination, post-grant review, inter partes review, nullification, derivation action, or cancellation proceeding in which we may become involved;

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additions and departures of key personnel;
strategic decisions by us and our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business strategy;
if any of our product candidates receive regulatory approval, market acceptance and demand for such product candidates;
delays in engagement of our third-party manufacturers for our product candidates or their failure to execute on our manufacturing requirements or perform in accordance with current good manufacturing practices (“cGMP”);
timing of regulatory decisions and regulatory developments affecting our product candidates or those of our competitors;
disputes concerning patents, proprietary rights, or license and collaboration agreements that negatively impact our receipt of milestone payments or royalties or require us to make significant payments arising from licenses, settlements, adverse judgments, or ongoing royalties;
changes in general market and economic conditions; and
changes in tax laws.
If our quarterly operating results fluctuate or fall below the expectations of investors or securities analysts, the price of our common stock could fluctuate or decline substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
Our approach to the discovery and development of innovative therapeutic treatments based on novel technologies is unproven and may not result in marketable products.
We plan to develop subcutaneously delivered RNAi-based pharmaceuticals using our GalXC RNAi platform for the treatment of rare diseases involving the liver and for other therapeutic areas involving the liver such as chronic liver diseases, as well as cardiovascular diseases and viral infectious diseases. We believe that product candidates identified with our drug discovery and delivery platform may offer an improved therapeutic approach to small molecules and monoclonal antibodies, as well as several advantages over earlier generation RNAi molecules. However, the scientific research that forms the basis of our efforts to develop product candidates is relatively new. The scientific evidence to support the feasibility of developing therapeutic treatments based on RNAi and GalXC is both preliminary and limited.
Relatively few product candidates based on RNAi have been tested in animals or humans, and a number of clinical trials conducted by other companies using RNAi technologies have not been successful. We may discover that GalXC does not possess certain properties required for a drug to be safe and effective, such as the ability to remain stable in the human body for the period of time required for the drug to reach the target tissue or the ability to cross the cell wall and enter into cells within the target tissue for effective delivery. We currently have only limited data, and no conclusive evidence, to suggest that we can introduce these necessary drug-like properties into GalXC. We may spend substantial funds attempting to introduce these properties and may never succeed in doing so. In addition, product candidates based on GalXC may demonstrate different chemical and pharmacological properties in patients than they do in laboratory studies. Even if product candidates, such as DCR‑PHXC, have successful results in animal studies, they may not demonstrate the same chemical and pharmacological properties in humans and may interact with human biological systems in unforeseen, ineffective, or harmful ways. As a result, we may never succeed in developing a marketable product, we may not become profitable, and the value of our common stock will decline.
Further, the United States (“U.S.”) Food and Drug Administration (“FDA”) has relatively limited experience with RNAi or GalXC-based therapeutics. We and our current collaborators, or any future collaborators, may never receive approval to market and commercialize any product candidate. Even if we or a collaborator obtain regulatory approval, the approval may be for disease indications or patient populations that are not as broad as we intended or desired or may require labeling that includes significant use or distribution restrictions or safety warnings. We or a collaborator may be required to perform additional or unanticipated clinical trials to obtain approval or be subject to post-marketing testing requirements to maintain regulatory approval. If our technologies based on GalXC prove to be ineffective, unsafe, or commercially unviable, our entire platform and pipeline would have little, if any, value, which would have a material adverse effect on our business, financial condition, results of operations, and prospects.
The market may not be receptive to our product candidates based on a novel therapeutic modality, and we may not generate any future revenue from the sale or licensing of product candidates.
Even if approval is obtained for a product candidate, we may not generate or sustain revenue from sales of the product due to numerous factors, including whether the product can be sold at a competitive price and otherwise is accepted in the market. The product candidates that we are developing are based on new technologies and therapeutic approaches. Market participants with significant influence over acceptance of new treatments, such as physicians and third-party payors, may not adopt a treatment based

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on GalXC technology, and we may not be able to convince the medical community and third-party payors, including health insurers, to accept and use, or to provide favorable coverage or reimbursement for, any product candidates developed by us or our existing collaborator or any future collaborators. Market acceptance of our product candidates will depend on, among other factors:
the timing of our receipt of any marketing and commercialization approvals and those of our competitors;
the terms of any approvals and the countries in which approvals are obtained;
the safety and efficacy of our product candidates;
the prevalence and severity of any adverse side effects associated with our product candidates;
limitations or warnings contained in any labeling approved by the FDA or other regulatory authority;
relative convenience and ease of administration of our product candidates;
the willingness of physicians and patients to accept any new methods of administration;
the success of our physician education programs;
the availability of adequate government and third-party payor coverage and reimbursement;
the pricing of our products, particularly as compared to alternative treatments and the recommendations or public or private pricing review agencies or organizations regarding our products;
our ability to market and sell our products in compliance with applicable law; and
availability of alternative effective treatments for the disease indications our product candidates are intended to treat and the relative risks, benefits and costs of those treatments.
With our focus on the emerging therapeutic modality RNAi, these risks may increase to the extent the market becomes more competitive or less favorable to this approach. Additional risks apply to any disease indications we pursue which are for rare diseases. Because of the small patient population for a rare disease, if pricing is not approved or accepted in the market at an appropriate level for an approved rare disease product, such drug may not generate enough revenue to offset costs of development, manufacturing, marketing, and commercialization, despite any benefits received from our efforts to obtain orphan drug designation by regulatory agencies in major commercial markets, such as the U.S., the European Union (“EU”), and Japan. These benefits may include market exclusivity, assistance in clinical trial design, or a reduction in user fees or tax credits related to development expense. Market size is also a variable in disease indications that are not classified as rare. Our estimates regarding potential market size for any indication may be materially different from what we discover to exist if we ever get to the point of product commercialization, which could result in significant changes in our business plan and have a material adverse effect on our business, financial condition, results of operations, and prospects.
If a product candidate that has orphan drug designation subsequently receives the first FDA approval for the indication for that designation, the product candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for seven years. Orphan drug exclusivity, however, could also block the approval of one of our product candidates for seven years if a competitor obtains approval of the same drug for the same indication as defined by the FDA.
Even if we, or any future collaborators, obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective, or makes a major contribution to patient care.
On August 3, 2017, the Congress passed the FDA Reauthorization Act of 2017 (“FDARA”). FDARA, among other things, codified the FDA’s preexisting regulatory interpretation, to require that a drug sponsor demonstrate the clinical superiority of an orphan drug that is otherwise the same as a previously approved drug for the same rare disease in order to receive orphan drug exclusivity. The law reverses prior precedent holding that the Orphan Drug Act unambiguously requires that the FDA recognize the orphan exclusivity period regardless of a showing of clinical superiority. The FDA may further reevaluate the Orphan Drug Act and its regulations and policies. We do not know if, when, or how the FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business could be adversely impacted.
As in the U.S., we may apply for designation of a product candidate as an orphan drug for the treatment of a specific indication in the EU before the application for marketing authorization is made. For example, in August 2018, the European Medicines Agency’s Committee for Orphan Medicinal Products designated DCR‑PHXC as an orphan medicinal product for the treatment of PH in the EU.

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Sponsors of orphan drugs in the EU can enjoy economic and marketing benefits, including up to 10 years of market exclusivity for the approved indication. During such period, marketing authorization applications for a “similar medicinal product” will not be accepted, unless another applicant can show that its product is safer, more effective, or otherwise clinically superior to the orphan-designated product. In the EU, a “similar medicinal product” is a medicinal product containing a similar active substance or substances as contained in a currently authorized orphan medicinal product, and which is intended for the same therapeutic indication. The respective orphan designation and exclusivity frameworks in the U.S. and in the EU are subject to change, and any such changes may affect our ability to obtain U.S. or EU orphan designations in the future.
Our product candidates are in early stages of development and may fail or suffer delays that materially and adversely affect their commercial viability.
We currently have no products on the market and all of our product candidates are in varied stages of development. Our ability to achieve and sustain profitability depends on obtaining regulatory approvals, including ethics committee approval to conduct clinical trials at particular sites, successfully completing our clinical trials, and successfully commercializing our product candidates, either alone or with third parties, such as our collaborators. Before obtaining regulatory approval for the commercial distribution of our product candidates, we or a collaborator must conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical testing and clinical trials are expensive, difficult to design and implement, can take many years to complete, and are uncertain as to outcome. The start or end of a clinical study is often delayed or halted due to changing regulatory requirements, manufacturing challenges, required clinical trial administrative actions, slower than anticipated patient enrollment, changing standards of care, availability or prevalence of use of a comparative drug or required prior therapy, clinical outcomes, and financial constraints. For instance, delays or difficulties in patient enrollment or difficulties in retaining trial participants can result in increased costs, longer development times, or termination of a clinical trial. Clinical trials of a new product candidate require the enrollment of a sufficient number of patients, including patients who are suffering from the disease the product candidate is intended to treat and who meet other eligibility criteria. Rates of patient enrollment are affected by many factors, including the size of the patient population, the eligibility criteria for the clinical trial, the age and condition of the patients, the stage and severity of disease, the nature of the protocol, the proximity of patients to clinical sites, and the availability of effective treatments for the relevant disease. Thus, enrollment of sufficient patients can be challenging for rare disease drug development programs where patient populations are inherently small in size, particularly when there are competitive clinical trials.
A product candidate can unexpectedly fail at any stage of preclinical and clinical development. The historical failure rate for product candidates is high due to many factors, including scientific feasibility, safety, efficacy, and changing standards of medical care. The results from preclinical testing or early clinical trials of a product candidate may not predict the results that will be obtained in later phase clinical trials of the product candidate. We, the FDA or other applicable regulatory authorities, an individual Institutional Review Board (“IRB”) with respect to its institution, or an independent ethics committee may suspend clinical trials of a product candidate at any time for various reasons, including a belief that individuals participating in such trials are being exposed to unacceptable health risks or adverse side effects. We may not have the financial resources to continue development of, or to enter into collaborations for, a product candidate if we experience any problems or other unforeseen events that delay or prevent regulatory approval of, or our ability to commercialize, product candidates, including:
negative or inconclusive results from our clinical trials or the clinical trials of others for product candidates similar to ours, leading to a decision or requirement to conduct additional preclinical testing or clinical trials or abandon a program;
serious and unexpected drug-related side effects experienced by participants using our products in our clinical trials or by individuals using drugs similar to our product candidates;
delays in submitting INDs or comparable foreign applications or delays or failure in obtaining the necessary approvals from regulators or IRBs to commence a clinical trial, or a suspension or termination of a clinical trial once commenced;
conditions imposed by the FDA or comparable foreign authorities, such as the European Medicines Agency (“EMA”), regarding the scope or design of our clinical trials;
competition for subjects in competitive clinical trials and delays in enrolling individuals in clinical trials;
high drop-out rates of study participants;
inadequate supply or quality of drug product or product candidate components or materials or other supplies necessary for the conduct of our clinical trials;
greater than anticipated clinical trial costs;
poor effectiveness of our product candidates during clinical trials;
unfavorable FDA or other regulatory agency inspection and review of a clinical trial site;

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failure of our third-party contractors or investigators to comply with regulatory requirements or otherwise meet their contractual obligations in a timely manner, or at all;
delays and changes in regulatory requirements, policy and guidelines, including the imposition of additional regulatory oversight around clinical testing generally or with respect to our technology in particular; and
varying interpretations of data by the FDA and foreign regulatory agencies.
We are dependent on our collaboration partners for the successful development of product candidates and, therefore, are subject to the efforts of these partners and our ability to successfully collaborate with these partners.
We have entered into collaboration agreements with Lilly, Alexion, and BI (our “Collaboration Partners”) providing joint development of certain RNAi therapies. The success of our collaborations with our Collaboration Partners and the realization of the milestone and royalty payments under the collaboration agreements depends upon the efforts of our Collaboration Partners, any of which may not be successful in obtaining approvals for the product candidates developed under the collaboration or in marketing, or arranging for necessary supply, manufacturing, or distribution relationships for, any approved products. Our Collaboration Partners may change their strategic focus or pursue alternative technologies in a manner that results in reduced, delayed, or no additional payments to us under the collaboration agreements. Our Collaboration Partners have a variety of marketed products and product candidates under collaboration with other companies, possibly including some of our competitors, and our Collaboration Partners’ own corporate objectives may not be consistent with our interests. If our Collaboration Partners fail to develop, obtain regulatory approval for, or ultimately commercialize any product candidate under our collaborations, or if any of our Collaboration Partners terminates their applicable collaboration, our business, financial condition, results of operations, and prospects could be materially and adversely affected. Each of our collaboration agreements is terminable by the applicable collaboration partner any time at will, subject to compliance with applicable notice periods. In addition, if we have a dispute or enter into litigation with any of our Collaboration Partners in the future, it could delay development programs, create uncertainty as to ownership of intellectual property rights, distract management from other business activities, and generate substantial expense.
If third parties on which we depend to conduct our preclinical studies, or any future clinical trials, do not perform as contractually required, fail to satisfy regulatory or legal requirements, or miss expected deadlines, our development program could be delayed with materially adverse effects on our business, financial condition, results of operations, and prospects.
We rely on third-party clinical investigators, contract research organizations (“CROs”), clinical data management organizations, and consultants to design, conduct, supervise, and monitor preclinical studies of our product candidates and will do the same for any clinical trials. Because we rely on third parties and do not have the ability to conduct preclinical studies or clinical trials independently, we have less control over the timing, quality, compliance, and other aspects of preclinical studies and clinical trials than we would if we conducted them on our own. These investigators, CROs, and consultants are not our employees and we have limited control over the amount of time and resources that they dedicate to our programs. These third parties may have contractual relationships with other entities, some of which may be our competitors, which may draw time and resources from our programs. The third parties with which we contract might not be diligent, careful, compliant, or timely in conducting our preclinical studies or clinical trials, resulting in the preclinical studies or clinical trials being delayed or unsuccessful.
If we cannot contract with acceptable third parties on commercially reasonable terms, or at all, or if these third parties do not carry out their contractual duties, satisfy legal and regulatory requirements for the conduct of preclinical studies or clinical trials, or meet expected deadlines, our clinical development programs could be delayed and otherwise adversely affected. In all events, we are responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with the general investigational plan and protocols for the trial as well as applicable laws and regulations. The FDA and certain foreign regulatory authorities, such as the EMA, require preclinical studies to be conducted in accordance with applicable good laboratory practices and clinical trials to be conducted in accordance with applicable FDA regulations and applicable good clinical practices, including requirements for conducting, recording, and reporting the results of preclinical studies and clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity, and confidentiality of clinical trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Any such event could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Because we rely on third-party manufacturing and supply partners, our supply of research and development, preclinical studies, and clinical trial materials may become limited or interrupted or may not be of satisfactory quantity or quality.
We rely on third-party supply and manufacturing companies and organizations to supply the materials, components, and manufacturing services for our research and development, preclinical study, and clinical trial drug supplies. We do not own or lease manufacturing facilities or supply sources for such components and materials. Our manufacturing requirements include oligonucleotides and custom amidites, some of which we procure from a single source supplier on a purchase order basis. In addition, for each product candidate, we typically contract with only one manufacturer for the formulation and filling of drug product. There

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can be no assurance that our supply of research and development, preclinical study, and clinical trial drugs and other materials will not be limited, interrupted, restricted in certain geographic regions, or of satisfactory quality, or continue to be available at acceptable prices. In particular, any replacement of our drug substance manufacturer could require significant effort and expertise because there may be a limited number of qualified replacements.
If we are at any time unable to provide an uninterrupted supply of our product candidates or, following regulatory approval, any products to patients, we may lose patients, physicians may elect to utilize competing therapeutics instead of our products, and our clinical trials may be adversely affected, which could materially and adversely affect our clinical trial outcomes.
The manufacturing process for a product candidate is subject to FDA and foreign regulatory authority review. Suppliers and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required by regulatory authorities in order to comply with regulatory standards, such as cGMP. In the event that any of our suppliers or manufacturers fails to comply with such requirements or to perform its obligations regarding quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, we may experience shortages resulting in delayed shipments, supply constraints and/or stock-outs of our products, be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture our product candidates may be unique or proprietary to the original manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills or technology to another third party and a feasible alternative may not exist. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our product candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget.
We expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product candidate. To the extent that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercialize our product candidates successfully. Our or a third party’s failure to execute on our manufacturing requirements could adversely affect our business in a number of ways, including:
an inability to initiate or continue preclinical studies or clinical trials of product candidates under development;
delay in submitting regulatory applications, or receiving regulatory approvals, for product candidates;
lack of or loss of the cooperation of a collaborator;
subjecting manufacturing facilities of our product candidates to additional inspections by regulatory authorities;
requirements to cease distribution or to recall batches of our product candidates; and
in the event of approval to market and commercialize a product candidate, an inability to meet commercial demands for our products.
We may not successfully engage in strategic transactions, including any additional collaborations we seek, which could adversely affect our ability to develop and commercialize product candidates, impact our cash position, increase our expense, and present significant distractions to our management.
From time to time, we may consider strategic transactions, such as collaborations, acquisitions of companies, asset purchases, and out- or in-licensing of product candidates or technologies. In addition to our current collaborations with BI, Alexion, and Lilly, we will evaluate and, if strategically attractive, seek to enter into additional collaborations, including with major biopharmaceutical, biotechnology, or pharmaceutical companies. The competition for collaborators is intense, and the negotiation process is time-consuming and complex. Any new collaboration may be on terms that are not optimal for us, and we may be unable to maintain any new or existing collaboration if, for example, development or approval of a product candidate is delayed, sales of an approved product do not meet expectations, or the collaborator terminates the collaboration. Any such collaboration, or other strategic transaction, may require us to incur non-recurring or other charges, increase our near- and long-term expenditures, and pose significant integration or implementation challenges or disrupt our management or business. These transactions entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business, and diversion of our management’s time and attention in order to obtain and manage a collaboration or develop acquired products, product candidates, or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition, or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in

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facilitating the collaboration or combining the operations and personnel of any acquired business, deterioration of relationships with key suppliers, manufacturers, or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business. Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that we do complete may be subject to the foregoing or other risks and have a material adverse effect on our business, results of operations, financial condition, and prospects. Conversely, failure to enter any collaboration or other strategic transaction that would be beneficial to us could delay the development and potential commercialization of our product candidates and have a negative impact on the competitiveness of any product candidate that reaches market.
We face competition from entities that have developed or may develop product candidates for our target disease indications, including companies developing novel treatments and technology platforms based on modalities and technology similar to ours. If these companies develop technologies or product candidates more rapidly than we do or their technologies, including delivery technologies, are more effective, our ability to develop and successfully commercialize product candidates may be adversely affected.
The development and commercialization of drugs is highly competitive. We compete with a variety of multinational pharmaceutical companies and specialized biotechnology companies, as well as technology being developed at universities and other research institutions. Our competitors have developed, are developing, or may develop product candidates and processes competitive with our product candidates, some of which may become commercially available before any of our product candidates. Competitive therapeutic treatments include those that have already been approved and accepted by the medical community and any new treatments that enter the market. We are aware of many companies that are working in the field of RNAi therapeutics, including major pharmaceutical companies and a number of biopharmaceutical companies including Alnylam, Arrowhead Pharmaceuticals, Inc. (“Arrowhead”), and Arbutus Biopharma Corporation. We believe that a significant number of products are currently under development, and may become commercially available in the future, for the treatment of conditions for which we may try to develop product candidates.
We also compete with companies working to develop antisense and other RNA-based drugs. Like RNAi therapeutics, antisense drugs target mRNA with the objective of suppressing the activity of specific genes. The development of antisense drugs is more advanced than that of RNAi therapeutics, and antisense technology may become the preferred technology for products that target mRNAs. Significant competition also exists from companies such as Alnylam and Arrowhead to discover and develop safe and effective means to deliver therapeutic RNAi molecules to the relevant cell and tissue types.
Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and supply resources or experience than we have. Some of our competitors may be in the lead in the development of competitive products. If we successfully obtain approval for any product candidate, we will face competition based on many different factors, including safety and effectiveness, ease with which our products can be administered, the timing of product entry into the market, the extent to which patients and physicians accept relatively new routes of administration, timing and scope of regulatory approvals, availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage, and patent position of our products. Competing products could present superior treatment alternatives, including by being more effective, safer, less expensive or marketed and sold more effectively than any products we may develop. Competitive products may make any products we develop obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. Competitive products that enter the market before our products could capture significant market share and create barriers to entry to our products. Competitors could also recruit our employees, which could negatively impact our level of expertise and our ability to execute our business plan.
Any inability to attract and retain qualified key management and technical personnel would impair our ability to implement our business plan.
Our success largely depends on the continued service of key management and other specialized personnel, including: Douglas M. Fambrough, III, Ph.D., our chief executive officer; Bob D. Brown, Ph.D., our chief scientific officer; Ralf Rosskamp, M.D., our chief medical officer; John B. Green, our chief financial officer; James B. Weissman, our chief business officer; and Rob Ciappenelli, our chief commercial officer. The loss of one or more members of our management team or other key employees or advisors could delay our research and development programs and materially harm our business, financial condition, results of operations, and prospects. The relationships that our key managers have cultivated within our industry make us particularly dependent upon their continued employment with us. We are dependent on the continued service of our technical personnel because of the highly complex nature of our product candidates and technologies and the specialized nature of the regulatory approval process. Because our management team and key employees are not obligated to provide us with continued service, they could terminate their employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our management team members or key employees. Our future success will depend in large part on our continued ability to attract and retain other highly qualified scientific, technical, and management personnel, as well as personnel with expertise in clinical testing, manufacturing, governmental

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regulation and commercialization. We face competition for personnel from other companies, universities, public and private research institutions, government entities, and other organizations.
If our product candidates advance into clinical trials, we may experience difficulties in managing our growth and expanding our operations.
We have limited experience in drug development and with clinical trials of product candidates. As our product candidates enter and advance through preclinical studies and any clinical trials, we will need to expand our development, regulatory, and manufacturing capabilities or contract with other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators, contract research organizations, clinical trial sites, investigators, suppliers, and other firms. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial, and management controls, reporting systems, and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.
If any of our product candidates are approved for marketing and commercialization and we are unable to develop sales, marketing, and distribution capabilities on our own or enter into agreements with third parties to perform these functions on acceptable terms, we will be unable to successfully commercialize any such future products.
We currently have no sales, marketing, or distribution capabilities or experience. If any of our product candidates are approved, we will need to implement sales, marketing, and distribution capabilities to commercialize such products, which would be expensive and time-consuming, or enter into collaborations with third parties to perform these services. If we decide to market our products directly, we will need to commit significant financial, legal, and managerial resources to develop a marketing and sales force with technical expertise and supporting distribution, administration, and compliance capabilities. If we rely on third parties with such capabilities to market our approved products or decide to co-promote products with collaborators, we will need to establish and maintain marketing and distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements on acceptable, compliant terms, or at all. In entering into third-party marketing or distribution arrangements, any revenue we receive will depend upon the efforts of the third parties and there can be no assurance that such third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance of any approved product. If we are not successful in commercializing any product approved in the future, either on our own or through third parties, our business, financial condition, results of operations, and prospects could be materially and adversely affected.
If we fail to comply with U.S. and foreign regulatory requirements, regulatory authorities could limit or withdraw any marketing or commercialization approvals we may receive and subject us to other penalties that could materially harm our business.
The Company, our product candidates, our suppliers, and our contract manufacturers, distributors, and contract testing laboratories are subject to extensive regulation by governmental authorities in the EU, the U.S., and other countries, with the regulations differing from country to country.
Even if we receive marketing and commercialization approval of a product candidate, we and our third-party services providers will be subject to continuing regulatory requirements, including a broad array of regulations related to establishment registration and product listing, manufacturing processes, risk management measures, quality and pharmacovigilance systems, post-approval clinical studies, labeling, advertising and promotional activities, record keeping, distribution, adverse event reporting, import and export of pharmaceutical products, pricing, sales and marketing, and fraud and abuse requirements. We are required to submit safety and other post market information and reports and are subject to continuing regulatory review, including in relation to adverse patient experiences with the product and clinical results that are reported after a product is made commercially available, both in the U.S. and any foreign jurisdiction in which we seek regulatory approval. The FDA and certain foreign regulatory authorities, such as the EMA, have significant post-market authority, including the authority to require labeling changes based on new safety information and to require post-market studies or clinical trials to evaluate safety risks related to the use of a product or to require withdrawal of the product from the market. The FDA also has the authority to require a risk evaluation and mitigation strategy (“REMS”) plan after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug. The EMA now routinely requires risk management plans (“RMPs”) as part of the marketing authorization application process, and such plans must be continually modified and updated throughout the lifetime of the product as new information becomes available. In addition, for nationally authorized medicinal products, the relevant governmental authority of any EU member state can request an RMP whenever there is a concern about a risk affecting the benefit risk balance of the product. The manufacturer and manufacturing facilities we use to make a future product, if any, will also be subject to periodic review and inspection by the FDA and other regulatory agencies, including for continued compliance with cGMP requirements. The discovery of any new or previously unknown problems with our third-party manufacturers, manufacturing processes, or facilities may result in restrictions on the product, manufacturer, or facility, including withdrawal of the product from the market. If we rely on third-party manufacturers, we will not have control over compliance with applicable rules and regulations by such manufacturers. Any product promotion and advertising will also be subject to regulatory requirements and continuing regulatory review. If we or our collaborators, manufacturers, or service providers fail to

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comply with applicable continuing regulatory requirements in the U.S. or foreign jurisdictions in which we seek to market our products, we or they may be subject to, among other things, fines, warning and untitled letters, clinical holds, delay or refusal by the FDA or foreign regulatory authorities to approve pending applications or supplements to approved applications, suspension, refusal to renew or withdrawal of regulatory approval, product recalls, seizures or administrative detention of products, refusal to permit the import or export of products, operating restrictions, inability to participate in government programs including Medicare and Medicaid, and total or partial suspension of production or distribution, injunction, restitution, disgorgement, debarment, civil penalties, and criminal prosecution.
We face risks arising from the results of the public referendum held in United Kingdom and its membership in the European Union.
We have a subsidiary located in the United Kingdom (the “UK”), which we established in order to allow us to conduct clinical trials in EU member states. On June 23, 2016, the UK held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” The withdrawal of the UK from the EU will take effect either on the effective date of the withdrawal agreement or, in the absence of agreement, two years after the UK provides a notice of withdrawal pursuant to the EU Treaty. On March 29, 2017, the Prime Minister of the UK delivered a formal notice of withdrawal to the EU. On May 22, 2017, the Council of the EU (the “Council”), adopted a decision authorizing the opening of Brexit negotiations with the UK and formally nominated the European Commission as EU negotiator. The Council also adopted negotiating directives for the talks, which began on April 18, 2018. Because of the regulatory uncertainty surrounding Brexit, we have established a subsidiary in Ireland for ongoing regulatory initiatives in the EU.
The ongoing developments following from the UK’s public referendum vote to exit from the EU could cause disruptions to and create uncertainty surrounding our business, including affecting our relationships with existing and potential suppliers, manufacturers, and other third parties. Negotiations have commenced to determine the terms of the UK’s future relationship with the EU, including the terms of trade between the UK and the EU, and the UK’s current deadline to complete its exit from the EU is October 31, 2019. The effects of Brexit will depend upon any agreements the UK makes to retain access to EU markets either during a transitional period or more permanently. The measures could potentially have corporate structural consequences, adversely change tax benefits or liabilities in these or other jurisdictions and could disrupt some of the markets and jurisdictions in which we operate. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. In addition, the announcement of Brexit has caused significant volatility in global stock markets and currency exchange rate fluctuations, including the strengthening of the USD against some foreign currencies, and the Brexit negotiations may continue to cause significant volatility. The progress and outcomes of Brexit negotiations also may create global economic uncertainty. Any of these effects of Brexit, among others, could materially adversely affect the business, business opportunities, and financial condition of our company.
Price controls imposed in foreign markets and downward pricing pressure in the U.S. may adversely affect our future profitability.
In some countries, particularly member states of the EU, the pricing of prescription drugs may be subject to governmental control, at national as well as at regional levels. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, in the U.S. and elsewhere, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic, and regulatory developments may further complicate pricing and reimbursement negotiations, and pricing negotiations may continue after coverage or reimbursement has been obtained. Reference pricing used by various EU member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we or our collaborators may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our RNAi therapeutic candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of any product candidate approved for marketing is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business, financial condition, results of operations, or prospects could be adversely affected.
Our business entails a significant risk of product liability and our ability to obtain sufficient insurance coverage could harm our business, financial condition, results of operations, or prospects.
Our business exposes us to significant product liability risks inherent in the development, testing, manufacturing, and marketing of therapeutic treatments. Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing products, such claims could result in an investigation by certain regulatory authorities, such as the FDA or foreign regulatory authorities, of the safety and effectiveness of our products, our manufacturing processes and facilities, or our marketing programs and potentially a recall of our products or more serious enforcement action, limitations on the approved indications for

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which they may be used, or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for our products, injury to our reputation, costs to defend related litigation, a diversion of management’s time and our resources, substantial monetary awards to clinical trial participants or patients, and a decline in our stock price. We currently have product liability insurance that we believe is appropriate for our stage of development and may need to obtain higher levels prior to marketing any of our product candidates. Any insurance we have or may obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims that could have a material adverse effect on our business.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include, but is not limited to, intentional failures to comply with FDA or U.S. healthcare laws and regulations or applicable laws, regulations, guidance, or codes of conduct set by foreign governmental authorities or self-regulatory industry organizations, provide accurate information to any governmental authorities such as the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws, regulations, guidance, and codes of conduct intended to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws, regulations, guidance, and codes of conduct may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, business or conduct involving healthcare professionals, and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions, including debarment or disqualification of those employees from participation in FDA-regulated activities, and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, regulations, guidance, or codes of conduct. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines, exclusion from government programs, or other sanctions.
Our internal computer systems, or those of third parties with which we do business, including our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs or the theft of Company or patient confidential information.
Despite the implementation of security measures, our internal computer systems and those of third parties with which we do business, including our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. Such events, as well as power outages, natural disasters (including extreme weather), terrorist attacks, phishing or ransomware attacks, or other similar events, could cause interruptions of our operations. For instance, the loss of preclinical data or data from any future clinical trial involving our product candidates could result in delays in our development and regulatory filing efforts and significantly increase our costs. Certain data breaches must also be reported to affected individuals and the government, and in some cases to the media, under provisions of the U.S. federal Health Insurance Portability and Accountability Act (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), other U.S. federal and state law, and requirements of non-U.S. jurisdictions, including the European Union Data Protection Directive, and financial penalties may also apply. To the extent that any disruption or security breach were to result in a loss of, or damage to, internal computer systems, or those used by our CROs or other independent organizations, advisors, contractors or consultants, our data, or inappropriate disclosure of confidential or proprietary information of the Company or patients, we could incur liability, reputational harm, and the development of our product candidates could be delayed.
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research, development, and manufacturing involve the use of hazardous materials and various chemicals. We maintain quantities of various flammable and toxic chemicals in our facilities in Cambridge, Massachusetts, that are required for our research, development, and manufacturing activities. We are subject to federal, state, and local laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. We believe our procedures for storing, handling, and disposing these materials in our Cambridge facilities comply with the relevant guidelines of Cambridge, the Commonwealth of Massachusetts, and the Occupational Safety and Health Administration of the U.S. Department of Labor. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards mandated by applicable regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health, and workplace safety laws and

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regulations, including those governing laboratory procedures, exposure to blood-borne pathogens, and the handling of animals and biohazardous materials. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials. Additional federal, state, and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate any of these laws or regulations.
Our information technology systems could face serious disruptions that could adversely affect our business.
Despite the use of off-site (cloud-based) information storage systems for certain key corporate information, our internal information technology and other infrastructure systems, including corporate firewalls, servers, leased lines, and connection to the Internet, face the risk of systemic failure that could disrupt our operations. A significant disruption in the availability of our information technology and other internal infrastructure systems could cause interruptions in our collaborations and delays in our research and development work. While we qualify and seek to ensure our cloud-based information systems have appropriate cybersecurity and operations controls, we are dependent on third parties to assure their operations meet our information technology requirements.
Our current operations are largely concentrated in one location and any events affecting this location may have material adverse consequences.
Our current operations are carried out primarily in our facilities located in Cambridge, Massachusetts. Any unplanned event, such as flood, fire, explosion, earthquake, extreme weather condition, medical epidemics, power shortage, telecommunication failure, or other natural or manmade accidents, or incidents that prevent us from fully utilizing the facilities, may have a material adverse effect on our ability to operate our business, particularly on a daily basis, and have significant negative consequences on our financial and operating conditions. Loss of access to these facilities may result in increased costs, delays in the development of our product candidates, or interruption of our business operations. As part of our risk management policy, we maintain insurance coverage at levels that we believe are appropriate for our business. However, in the event of an accident or incident at these facilities, we cannot assure you that the amounts of insurance will be sufficient to satisfy any damages and losses. If our facilities are unable to operate because of an accident or incident or for any other reason, even for a short period of time, any or all of our research and development programs may be harmed. Any business interruption may have a material adverse effect on our business, financial position, results of operations, and prospects.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history, do not expect to become profitable for the foreseeable future, and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before such unused losses expire. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change by value in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be further limited. We are in the process of performing an analysis on whether we have experienced any ownership changes in the past. Our preliminary analysis indicates that we may have experienced ownership changes in November 2007, October 2010, February 2014, and March 2018. While this analysis is still preliminary, it is likely that our net operating losses are subject to such limitation. As of June 30, 2019, we had significant U.S. federal and Massachusetts net operating loss carryforwards that could be reduced or lost if we have or do experience an ownership change, which could have an adverse effect on our business, financial position, results of operations, and prospects.
The investment of our cash, cash equivalents, and held-to-maturity investments is subject to risks which may cause losses and affect the liquidity of these investments.
As of June 30, 2019, we had $345.3 million in cash and cash equivalents and held-to-maturity investments. We historically have invested substantially all of our available cash and cash equivalents in corporate bonds, commercial paper, securities issued by the U.S. government, certificates of deposit, and money market funds meeting the criteria of our investment policy, which is focused on the preservation of our capital. These investments are subject to general credit, liquidity, market, and interest rate risks. For example, the impact of U.S. sub-prime mortgage defaults in recent years affected various sectors of the financial markets and caused credit and liquidity issues. We may realize losses in the fair value of these investments or a complete loss of these investments, which would have a negative effect on our consolidated financial statements.

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In addition, should our investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. The market risks associated with our investment portfolio may have an adverse effect on our results of operations, liquidity, and financial condition.
Changes in accounting rules and regulations, or interpretations thereof, could result in unfavorable accounting charges or require us to change our compensation policies.
Accounting methods and policies for public companies and biopharmaceutical companies, including policies governing revenue recognition, research and development and related expenses, and accounting for stock-based compensation, are subject to review, interpretation, and guidance from our auditors and relevant accounting authorities, including the SEC. Changes to accounting methods or policies, or interpretations thereof, may require us to reclassify, restate, or otherwise change or revise our consolidated financial statements, including those contained in our Annual Reports on Form 10-K.
Risks Related to Intellectual Property
If we are not able to obtain and enforce patent protection for our technologies or product candidates, development and commercialization of our product candidates may be adversely affected.
Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property rights, including in-licenses of intellectual property rights of others, for our product candidates, methods used to manufacture our product candidates and methods for treating patients using our product candidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights, and to operate without infringing upon the proprietary rights of others. There can be no assurance that an issued patent will remain valid and enforceable in a court of law through the entire patent term. Should the validity of a patent be challenged, the legal process associated with defending the patent may be costly and time consuming. Issued patents can be subject to oppositions, interferences, post-grant proceedings, and other third-party challenges that can result in the revocation of the patent or limit patent claims such that patent coverage lacks sufficient breadth to protect subject matter that is commercially relevant. Competitors may be able to circumvent our patents. Development and commercialization of pharmaceutical products can be subject to substantial delays and it is possible that at the time of commercialization any patent covering the product will have expired or will be in force for only a short period of time thereafter.
As of June 30, 2019, our worldwide patent estate, not including the patents and patent applications that we have licensed from third parties, included 69 issued patents or allowed patent applications and 133 pending patent applications supporting commercial development of our RNAi molecules and delivery technologies. We may not be able to apply for patents on certain aspects of our product candidates or delivery technologies in a timely fashion or at all. Our existing issued and granted patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technology or from developing competing products and technology. There is no guarantee that any of our pending patent applications will result in issued or granted patents, that any of our issued or granted patents will not later be found to be invalid or unenforceable, or that any issued or granted patents will include claims that are sufficiently broad to cover our product candidates or delivery technologies or to provide meaningful protection from our competitors. Moreover, the patent position of biotechnology and pharmaceutical companies can be highly uncertain because it involves complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our current and future proprietary technology and product candidates are covered by valid and enforceable patents or are effectively maintained as trade secrets. If third parties disclose or misappropriate our proprietary rights, it may materially and adversely impact our position in the market.
The U.S. Patent and Trademark Office (“USPTO”) and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. The standards applied by the USPTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology and pharmaceutical patents. As such, we do not know the degree of future protection that we will have on our proprietary products and technology. While we will endeavor to protect our product candidates with intellectual property rights such as patents, as appropriate, the process of obtaining patents is time-consuming, expensive, and sometimes unpredictable.
In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. The U.S. Supreme Court has ruled on several patent cases in recent years, some of which cases either narrow the scope of patent protection available in certain circumstances or weaken the rights of patent owners in certain situations. The 2013 decision by the U.S. Supreme Court in Association for Molecular Pathology v. Myriad Genetics, Inc. precludes a claim to a nucleic acid having a stated nucleotide sequence which is identical to a sequence found in nature and unmodified. We currently are not aware of an immediate impact of this decision on our

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patents or patent applications because we are developing nucleic acid products that are not found in nature. However, this decision has yet to be clearly interpreted by courts and by the USPTO. We cannot assure you that the interpretations of this decision or subsequent rulings will not adversely impact our patents or patent applications. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing U.S. patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Once granted, patents may remain open to opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices or similar proceedings for a given period before or after allowance or grant, during which time third parties can raise objections against such initial grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the allowed or granted claims thus attacked or may lose the allowed or granted claims altogether. Our patent risks include that:
others may, or may be able to, make, use, or sell compounds that are the same as or similar to our product candidates but that are not covered by the claims of the patents that we own or license;
we or our licensors, collaborators, or any future collaborators may not be the first to file patent applications covering certain aspects of our inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
a third party may challenge our patents, and, if challenged, a court may not hold that our patents are valid, enforceable, and infringed;
a third party may challenge our patents in various patent offices, and, if challenged, we may be compelled to limit the scope of our allowed or granted claims or lose the allowed or granted claims altogether;
any issued patents that we own or have licensed from others may not provide us with any competitive advantages, or may be challenged by third parties;
we may not develop additional proprietary technologies that are patentable;
the patents of others could harm our business; and
our competitors could conduct research and development activities in countries where we will not have enforceable patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.
Intellectual property rights of third parties could adversely affect our ability to commercialize our product candidates, and we might be required to litigate or obtain licenses from third parties in order to develop or market our product candidates. Such litigation could be costly and licenses may be unavailable on commercially reasonable terms.
Research and development of RNAi-based therapeutics and other oligonucleotide-based therapeutics has resulted in many patents and patent applications from organizations and individuals seeking to obtain patent protection in the field. Our efforts are based on RNAi technology that we have licensed and that we have developed internally and own or co-own. We have chosen this approach to increase our likelihood of technical success and our freedom to operate. We have obtained grants and issuances of RNAi-based patents and have licensed other patents from third parties on exclusive and non-exclusive bases. The issued patents and pending patent applications in the U.S. and in key markets around the world that we own, co-own, or license claim many different methods, compositions, and processes relating to the discovery, development, manufacture, and commercialization of RNAi therapeutics. Specifically, we own, co-own, or have licensed a portfolio of patents, patent applications, and other intellectual property covering: (1) certain aspects of the structure and uses of RNAi molecules, including their manufacture and use as therapeutics, and RNAi-related mechanisms, (2) chemical modifications to RNAi molecules that improve their properties and suitability for therapeutic uses, (3) RNAi molecules directed to specific gene sequences and drug targets as treatments for particular diseases, and (4) delivery technologies, such as in the field of lipid nanoparticles and lipid nanoparticle formulation, and chemical modifications such as conjugation to targeting moieties.
The RNAi-related intellectual property landscape, including patent applications in prosecution where no definitive claims have yet issued, is still evolving, and it is difficult to conclusively assess our freedom to operate. Other companies are pursuing patent applications and possess issued patents broadly directed to RNAi compositions, methods of making and using RNAi, and to RNAi-related delivery and modification technologies. Our competitive position may suffer if patents issued to third parties cover our products, or our manufacture or uses relevant to our commercialization plans. In such cases, we may not be in a position to commercialize products unless we enter into a license agreement with the intellectual property right holder, if available, on

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commercially reasonable terms or successfully pursue litigation, opposition, interference, re-examination, post-grant review, inter partes review, nullification, derivation action, or cancellation proceeding to limit, nullify, or invalidate the third-party intellectual property right concerned. Even if we are successful in limiting, nullifying, or invalidating third-party intellectual property rights through such proceedings, we may incur substantial costs and could require significant time and attention of our personnel.
While we believe our intellectual property allows us to pursue our current development programs, the biological process of RNAi is a natural process and cannot be patented. Several companies in the space are pursuing alternate methods to exploit this phenomenon and have built their intellectual property around these methods. For example, Alnylam controls three patent families containing both pending patent applications and issued patents (e.g., U.S. Patent Numbers 8,853,384 and 9,074,213, and European Patent EP 1 352 061 B1) that pertain to RNAi. These are referred to in their corporate literature as the “Tuschl family” (e.g. patents and applications claiming priority to WO2002/044321, filed November 29, 2001, and their priority filings) and the “Kreutzer-Limmer family” (e.g. patents and applications claiming priority to WO 2002/044895, filed January 29, 2000, WO 2002/055693, filed January 9, 2002, and their priority filings). Both families contain patent applications still in prosecution, with the applicants actively seeking to extend the reach of this intellectual property in ways that might strategically impact our business. Additional areas of intellectual property pursued by Alnylam and others include oligonucleotide delivery-related technologies (such as conjugation to targeting moieties) and oligonucleotides directed to specific gene targets. In addition, Silence Therapeutics owns patents directed to certain chemical modifications of RNAi molecules, including U.S. Patent Number 9,222,092, with a priority date of August 5, 2002.
Patent applications in the U.S. and elsewhere are generally published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our product candidates or platform technology could have been filed by others without our knowledge. Additionally, pending claims in patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our product candidates, or the use of our product candidates. Third-party intellectual property right holders may also bring patent infringement claims against us. No such patent infringement actions have been brought against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve any future infringement claims. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable, and time-consuming litigation, and may be prevented from or experience substantial delays in marketing our products. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing any of our product candidates that are held to be infringing. We might also be forced to redesign product candidates so that we no longer infringe the third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.
As the field of RNAi therapeutics matures, patent applications are being processed by national patent offices around the world. There is uncertainty about which patents they will issue, and, if they do, as to when, to whom, and with what claims. It is likely that there will be significant litigation in the courts and other proceedings, such as interferences, re-examinations, oppositions, post-grant reviews, inter partes reviews, nullifications, derivation actions, or cancellation proceedings, in various patent offices relating to patent rights in the RNAi therapeutics field. In many cases, the possibility of appeal or opposition exists for either us or our opponents, and it may be years before final, unappealable rulings are made with respect to these patents in certain jurisdictions. The timing and outcome of these and other proceedings is uncertain and may adversely affect our business if we are not successful in defending the patentability and scope of our pending and issued patent claims or if third parties are successful in obtaining claims that cover our RNAi technology or any of our product candidates. In addition, third parties may attempt to invalidate our intellectual property rights. Even if our rights are not directly challenged, disputes could lead to the weakening of our intellectual property rights. Our defense against any attempt by third parties to circumvent or invalidate our intellectual property rights could be costly to us, could require significant time and attention of our management, and could have a material adverse effect on our business and our ability to successfully compete in the field of RNAi therapeutics.
There are many issued and pending patents that claim aspects of oligonucleotide chemistry and modifications that we may need to apply to our therapeutic candidates. There are also many issued patents that claim targeting genes or portions of genes that may be relevant for drugs we wish to develop. Thus, it is possible that one or more organizations will hold patent rights to which we will need a license. If those organizations refuse to grant us a license to such patent rights on reasonable terms, we may be unable to market products or perform research and development or other activities covered by these patents.
We may license patent rights from third-party owners or licensees. If such owners or licensees do not properly or successfully obtain, maintain, or enforce the patents underlying such licenses, or if they retain or license to others any competing rights, our competitive position and business prospects may be adversely affected.
We may, in the future, rely on intellectual property rights licensed from third parties to protect our technology, including licenses that give us rights to third-party intellectual property that is necessary or useful for our business. We also may license additional third-party intellectual property in the future. Our success may depend in part on the ability of our licensors to obtain, maintain, and enforce patent protection for our licensed intellectual property, in particular, those patents to which we have secured

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exclusive rights. Our licensors may not successfully prosecute the patent applications licensed to us. Even if patents issue or are granted, our licensors may fail to maintain these patents, such patents may have claim breadth coverage insufficient to protect our interests, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue litigation less aggressively than we would. Further, we may not obtain exclusive rights, which would allow for third parties to develop competing products. Without protection for, or exclusive right to, the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects. In addition, we sublicense certain of our rights under our third-party licenses to BI and may sublicense such rights to current or future collaborators. Any impairment of these sublicensed rights could result in reduced revenue under our collaboration agreement with BI or result in termination of an agreement by one or more of our existing or any other future collaborators.
We may be unable to protect our intellectual property rights throughout the world.
Obtaining a valid and enforceable issued or granted patent covering our technology in the U.S. and worldwide can be extremely costly. In jurisdictions where we have not obtained patent protection, competitors may use our technology to develop their own products, and further, may export otherwise infringing products to territories where we have patent protection, but where it is more difficult to enforce a patent compared to the U.S. We also may face competition in jurisdictions where we do not have issued or granted patents or where our issued or granted patent claims or other intellectual property rights are not sufficient to prevent competitor activities in these jurisdictions. The legal systems of certain countries, particularly certain developing countries, make it difficult to enforce patents and such countries may not recognize other types of intellectual property protection, particularly that relating to biopharmaceuticals. This could make it difficult for us to prevent the infringement of our patents or marketing of competing products in violation of our proprietary rights generally in certain jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
We generally file a provisional patent application first (a priority filing) at the USPTO. A U.S. utility application and/or international application under the Patent Cooperation Treaty (“PCT”) are usually filed within 12 months after the priority filing. Based on the PCT filing, national and regional patent applications may be filed in the EU, Japan, Australia, and Canada and, depending on the individual case, also in any or all of, inter alia, China, India, South Korea, Singapore, Taiwan, and South Africa. We have so far not filed for patent protection in all national and regional jurisdictions where such protection may be available. In addition, we may decide to abandon national and regional patent applications before grant. Finally, the grant proceeding of each national or regional patent is an independent proceeding which may lead to situations in which applications might be refused in some jurisdictions, while granted by others. Depending on the country, various scopes of patent protection may be granted on the same product candidate or technology.
The laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in such jurisdictions. These difficulties could impact the future commercialization of our Hepatitis B Virus infection product candidate because a substantial share of the global market is in non-Western countries. If we or our licensors encounter difficulties in protecting, or are otherwise precluded from effectively protecting, the intellectual property rights important for our business in such jurisdictions, the value of these rights may be diminished and we may face additional competition from others in those jurisdictions. Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position in the relevant jurisdiction may be impaired and our business and results of operations may be adversely affected.
We, our licensors, or existing or future collaborators may become subject to third-party claims or litigation alleging infringement of patents or other proprietary rights or seeking to invalidate patents or other proprietary rights, and we may need to resort to litigation to protect or enforce our patents or other proprietary rights, all of which could be costly, time consuming, delay, or prevent the development and commercialization of our product candidates, or put our patents and other proprietary rights at risk.
We, our licensors, or existing or future collaborators may be subject to third-party claims for infringement or misappropriation of patent or other proprietary rights. We are generally obligated under our license or collaboration agreements to indemnify and hold harmless our licensors or collaborators for damages arising from intellectual property infringement by us. If we, our licensors, or existing or future collaborators are found to infringe a third-party patent or other intellectual property rights, we could be required to pay damages, potentially including treble damages, if we are found to have willfully infringed. In addition, we, our licensors, or existing or future collaborators may choose to seek, or be required to seek, a license from a third party, which may not be available on acceptable terms, if at all. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. If we fail to obtain a required license, we, our licensors, or existing or future collaborators may be unable to effectively market product candidates based on our technology, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to

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sustain our operations. In addition, we may find it necessary to pursue claims or initiate lawsuits to protect or enforce our patent or other intellectual property rights. The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations.
If we were to initiate legal proceedings against a third party to enforce a patent covering one of our products or our technology, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during patent prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during patent prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of our platform technology. Such a loss of patent protection could have a material adverse impact on our business. Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without legally infringing our patents or other intellectual property rights.
If we fail to comply with our obligations under any license, collaboration, or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary for developing and protecting our product candidates and delivery technologies, or we could lose certain rights to grant sublicenses.
Any future licenses we enter are likely to impose various development, commercialization, funding, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement, and other obligations on us. If we breach any of these obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages, and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture, and sell products that are covered by the licensed technology, or enable a competitor to gain access to the licensed technology. Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, while we cannot currently determine the amount of the royalty obligations we would be required to pay on sales of future products, if any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patent protection for certain aspects of our product candidates and delivery technologies, we also consider trade secrets, including confidential and unpatented know-how, important to the maintenance of our competitive position. We protect trade secrets and confidential and unpatented know-how, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, some courts in the U.S. and certain foreign jurisdictions are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or indep