Document
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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 September 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 November 4, 2019, there were 68,431,048 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, Investigational New Drug Applications, Clinical Trial Applications, New Drug Applications, and other regulatory submissions;
our alignment with the U.S. Food and Drug Administration on regulatory approval requirements;
our ability to identify and develop product candidates for the 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 existing and 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 to 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, F. Hoffmann-La Roche Ltd (“Roche Basel”), and Hoffmann-La Roche Inc. (“Roche US,” and together with Roche Basel, “Roche”); 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

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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 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)
 
 
SEPTEMBER 30,
2019
 
DECEMBER 31,
2018
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
47,226

 
$
54,239

Held-to-maturity investments
 
265,484

 
248,387

Contract receivables
 
3,000

 
100,000

Prepaid expenses and other current assets
 
4,688

 
2,888

Total current assets
 
320,398

 
405,514

NONCURRENT ASSETS:
 
 
 
 
Property and equipment, net
 
5,508

 
2,718

Right-of-use assets
 
2,224

 

Restricted cash equivalents
 
3,544

 
744

Other noncurrent assets
 
4,576

 
65

Total noncurrent assets
 
15,852

 
3,527

TOTAL ASSETS
 
$
336,250

 
$
409,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
3,407

 
$
5,013

Accrued expenses and other current liabilities
 
18,585

 
9,649

Lease liability, current
 
1,710

 

Litigation settlement payable
 

 
10,500

Deferred revenue, current
 
95,659

 
68,893

Total current liabilities
 
119,361

 
94,055

NONCURRENT LIABILITIES:
 
 
 
 
Lease liability, noncurrent
 
545

 

Deferred revenue, noncurrent
 
81,977

 
114,293

Total noncurrent liabilities
 
82,522

 
114,293

TOTAL LIABILITIES
 
201,883

 
208,348

COMMITMENTS AND CONTINGENCIES (NOTE 10)
 


 


STOCKHOLDERS’ EQUITY:
 
 
 
 
Preferred stock, $0.0001 par value – 5,000,000 shares authorized; no shares issued or outstanding at September 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 September 30, 2019 and December 31, 2018, respectively
 
7

 
7

Additional paid-in capital
 
620,009

 
605,495

Accumulated other comprehensive loss
 
(3
)
 

Accumulated deficit
 
(485,646
)
 
(404,809
)
Total stockholders’ equity
 
134,367

 
200,693

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
336,250

 
$
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 AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except share and per share data)
 
 
THREE MONTHS ENDED
SEPTEMBER 30,
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue from collaborative arrangements
 
$
8,035

 
$
1,545

 
$
16,824

 
$
4,635

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
30,086

 
11,695

 
74,521

 
31,927

General and administrative
 
10,619

 
5,354

 
29,126

 
14,449

Litigation expense
 

 
3,694

 

 
29,122

Total operating expenses
 
40,705

 
20,743

 
103,647

 
75,498

Loss from operations
 
(32,670
)
 
(19,198
)
 
(86,823
)
 
(70,863
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
1,880

 
401

 
6,034

 
1,020

Interest expense
 

 
(223
)
 

 
(399
)
Total other income, net
 
1,880

 
178

 
6,034

 
621

Net loss
 
$
(30,790
)
 
$
(19,020
)
 
$
(80,789
)
 
$
(70,242
)
Foreign currency translation adjustment
 
(3
)
 

 
(3
)
 

Comprehensive loss
 
$
(30,793
)
 
$
(19,020
)
 
$
(80,792
)
 
$
(70,242
)
 
 
 
 
 
 
 
 
 
Net loss per share – basic and diluted
 
$
(0.45
)
 
$
(0.35
)
 
$
(1.18
)
 
$
(1.32
)
Weighted average common shares outstanding – basic and diluted
 
68,360,051

 
54,799,644

 
68,315,074

 
53,037,516

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)
 
 
NINE MONTHS ENDED
SEPTEMBER 30, 2019
 
 
COMMON
STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED
DEFICIT
 
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
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

Stock-based compensation expense
 

 

 
4,995

 

 

 
4,995

Other comprehensive loss
 

 

 

 

 
(3
)
 
(3
)
Net loss
 

 

 

 
(30,790
)
 

 
(30,790
)
BALANCE – September 30, 2019
 
68,360,051

 
$
7

 
$
620,009

 
$
(485,646
)
 
$
(3
)
 
$
134,367



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NINE MONTHS ENDED
SEPTEMBER 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 in settlement of litigation
 
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

Proceeds from issuance of common stock from public offering, net or underwriting fees and issuance costs
 
8,832,565

 
1

 
107,749

 

 
107,750

Exercises of common stock options and sales of common stock under Employee Stock Purchase Plan
 
188,870

 

 
926

 

 
926

Stock-based compensation expense
 

 

 
2,148

 

 
2,148

Net loss
 

 

 

 
(19,020
)
 
(19,020
)
BALANCE – September 30, 2018
 
61,889,206

 
$
6

 
$
542,572

 
$
(386,199
)
 
$
156,379

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)
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(80,789
)
 
$
(70,242
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Non-cash litigation expense

 
10,315

Stock-based compensation expense
13,715

 
5,673

Depreciation and amortization expense
876

 
580

Loss on disposal of property and equipment

 
9

Amortization of premium on investments
(3,179
)
 
(390
)
Lease expense
1,387

 

Changes in operating assets and liabilities:
 
 
 
Litigation settlement payable
(10,500
)
 
12,797

Deferred revenue
(5,550
)
 
(4,635
)
Prepaid expenses and other assets
(6,311
)
 
312

Accounts payable
191

 
(1,389
)
Contract receivables
97,000

 

Withholding tax receivable

 
1,583

Accrued expenses and other liabilities
8,840

 
2,045

Lease liability
(1,448
)
 

Net cash provided by (used in) operating activities
14,232

 
(43,342
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Maturities of held-to-maturity investments
306,000

 
50,000

Purchases of held-to-maturity investments
(319,919
)
 
(138,699
)
Purchases of property and equipment
(5,314
)
 
(245
)
Net cash used in investing activities
(19,233
)
 
(88,944
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock, net of underwriters’ commissions

 
108,099

Payments of common stock offering costs
(50
)
 

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

 
1,832

Settlement of restricted stock for tax withholding

 
(35
)
Net cash provided by financing activities
792

 
109,896

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash equivalents
(4
)
 

 
 
 
 
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH EQUIVALENTS
(4,213
)
 
(22,390
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH EQUIVALENTS – Beginning of period
54,983

 
69,533

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH EQUIVALENTS – End of period
$
50,770

 
$
47,143

 
 
 
 
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
$

 
$
44

NONCASH FINANCING ACTIVITIES
 
 
 
Common stock offering costs included in accounts payable or accrued expenses
$

 
$
349


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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:
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
Cash and cash equivalents
$
47,226

 
$
46,399

Restricted cash equivalents
3,544

 
744

Total cash, cash equivalents, and restricted cash equivalents shown in the condensed consolidated statements of cash flows
$
50,770

 
$
47,143

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 F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together, “Roche”), 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 September 30, 2019 and its results of operations, changes in stockholders’ equity, and cash flows for the interim periods ended September 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 nine months ended September 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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The Company determines the expected term for its operating leases considering 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.
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. Initial implementation of 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 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 share after giving consideration to the dilutive effect of stock options, warrants, and unvested 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 calculations of net loss per share because such securities would have been anti-dilutive due to the Company’s net loss during each of the three and nine months ended on the dates presented.
 
SEPTEMBER 30,
2019
 
SEPTEMBER 30,
2018
Options to purchase common stock
12,801,016

 
7,573,698

Warrants to purchase common stock
2,198

 
2,198

Total
12,803,214

 
7,575,896

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:
 
 
SEPTEMBER 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
 
$
265,484

 
$
202

 
$
(3
)
 
$
265,683

 
 
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:
 
 
SEPTEMBER 30, 2019
DESCRIPTION
 
TOTAL FAIR VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
47,934

 
$
47,934

 
$

 
$

Held-to-maturity investments
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
265,683

 

 
265,683

 

Restricted cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
3,544

 
3,544

 

 

Total
 
$
317,161

 
$
51,478

 
$
265,683

 
$

 
 
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 September 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 September 30, 2019 and December 31, 2018.
As of September 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 10) 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.    PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
 
SEPTEMBER 30,
2019
 
DECEMBER 31,
2018
Laboratory equipment
$
8,111

 
$
4,607

Office and computer equipment
1,290

 
1,021

Furniture and fixtures
479

 
479

Leasehold improvements
257

 
257

Construction in process
1,554

 
1,661

Property and equipment, at cost
11,691

 
8,025

Less accumulated depreciation and amortization
(6,183
)
 
(5,307
)
Property and equipment, net
$
5,508

 
$
2,718

6.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
 
SEPTEMBER 30,
2019
 
DECEMBER 31,
2018
Accrued clinical, contract research, and manufacturing costs
$
8,593

 
$
3,960

Accrued compensation and related benefits
4,059

 
3,684

Accrued professional fees
5,004

 
1,693

Accrued other expenses
929

 
312

Accrued expenses and other current liabilities
$
18,585

 
$
9,649

7.    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 (the “GalXC platform”) to progress new drug targets toward clinical development and commercialization. In addition, the Company and Lilly will collaborate to extend the GalXC platform 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

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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 the extension of the GalXC 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 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 $5.2 million and $8.3 million of revenue under the Lilly Collaboration Agreement during the three and nine months ended September 30, 2019, respectively. The amount of the Company’s partially unsatisfied performance obligation, recorded as a contract liability presented in deferred revenue at September 30, 2019, is $140.2 million, of which $69.2 million is included in the current portion of deferred revenue. As of September 30, 2019, the Company expected to recognize this amount over the remaining research term of the agreement, which is expected to extend through the fourth quarter of 2022, with the majority being recognized as revenue 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

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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.
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 grant 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) 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 licenses, and were not distinct within the context of the contract, and should therefore be combined into a single performance obligation for 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. The Company also concluded that, while participation on the joint steering committee was capable of being distinct, participation is not distinct from the R&D services within the context of the contract, as they are both inputs to the combined output of a target that successfully achieves IND approval. This is highlighted as an indicator in Accounting Standards Codification (“ASC”) 606, Contracts with Customers, that a significant integration service is being provided. As a result, the combination of the license of intellectual property together with the provision of research and development services and participation on the joint steering committee 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. The transfer of control occurs over time and, in management’s judgment, this input method is the

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best measure of progress towards satisfying the performance obligations and reflects a faithful depiction of the transfer of goods and services.
During the three and nine months ended September 30, 2019, the Company recognized $1.5 million and $3.0 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 September 30, 2019 is $34.4 million, of which $23.7 million is included in the current portion of deferred revenue. As of September 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 provides 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 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 promises 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 that 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 was recognized through July 2019, which was the point where the Company’s obligation to provide research support services to BI ended. Related revenue was recognized on a straight-line basis, which was, in management’s judgment, an appropriate measure of progress toward satisfying the performance obligation. The Company recognized

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$0.5 million and $3.2 million associated with the first target under the BI Agreement during the three and nine months ended September 30, 2019, respectively. The performance obligation associated with the first target had been satisfied as of September 30, 2019.
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 and reimbursement of $0.7 million for certain third party expenses 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 is 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 arrangement for accounting purposes, and management determined that the $5.0 million exercise price with the $0.7 million of reimbursable expenses 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.
The Company began recognizing the $5.7 million transaction price as revenue in January 2019 and will continue recognizing as revenue 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 October 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. The Company recognized $0.8 million and $2.3 million associated with the Second Target under the BI Agreement during the three and nine months ended September 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 September 30, 2019 is $3.0 million, $2.7 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 arrangement 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:
 
NINE MONTHS ENDED
SEPTEMBER 30, 2019
 
BALANCE AT BEGINNING OF PERIOD
 
ADDITIONS
 
DEDUCTIONS
 
BALANCE AT END OF PERIOD
Deferred revenue, current and noncurrent
$
183,186

 
$
11,274

 
$
(16,824
)
 
$
177,636


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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

8.    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 nine months ended September 30, 2019, the Company granted stock options to purchase 861,000 and 5,317,000 shares of common stock with aggregate grant date fair values of $8.9 million and $46.2 million, respectively, compared to stock options to purchase 175,500 and 1,936,850 shares of common stock granted with aggregate grant date fair values of $1.7 million and $14.0 million for the three and nine months ended September 30, 2018, respectively.
The assumptions used to estimate the grant date fair value using the Black-Scholes option pricing model were as follows:
 
THREE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
Common stock price
$13.46 - $15.61
 
$12.74 - $15.74
Expected option term (in years)
5.93 - 6.04
 
5.50 - 6.25
Expected volatility
79.40% - 79.56%
 
77.00% - 77.90%
Risk-free interest rate
1.37% - 1.84%
 
2.76% - 2.90%
Expected dividend yield
—%
 
—%
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
Common stock price
$10.31 - $15.61
 
$9.14 - $15.74
Expected option term (in years)
5.28 - 6.07
 
5.50 - 6.25
Expected volatility
78.33% - 80.80%
 
75.89% - 78.33%
Risk-free interest rate
1.37% - 2.62%
 
2.32% - 2.90%
Expected dividend yield
—%
 
—%
The Company has classified stock-based compensation in its condensed consolidated statements of operations as follows:
 
THREE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
Research and development expenses
$
2,219

 
$
718

General and administrative expenses
2,776

 
1,430

Total
$
4,995

 
$
2,148

 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
Research and development expenses
$
5,978

 
$
2,275

General and administrative expenses
7,737

 
3,398

Total
$
13,715

 
$
5,673


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9.
LEASES
On July 11, 2014, the Company executed a noncancelable operating lease for office and laboratory space in Cambridge, Massachusetts (the “First Cambridge Lease”). 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 September 30, 2019 and December 31, 2018. The Company also leases a small office in Cambridge, Massachusetts which has a 30-month term without a renewal option (the “Second Cambridge Lease” and together with the First Cambridge Lease, the “Cambridge Leases”).
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 assets and are recognized when the event on which those payments are assessed occurs. None of the Company’s operating leases contain residual value guarantees. In adopting ASC 842, Leases, the Company elected not to bifurcate payments between lease and nonlease components associated with leases for office and laboratory real estate.
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 (the “Lexington Lease”) that had not commenced for accounting purposes as of September 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 Lexington Lease. The term of the Lexington Lease is seven years with approximately $30.1 million in fixed payments. The Company has the option to extend the lease term at a prevailing market rate as of the extension date, which is seven years after the Lexington Lease commencement date. The Company currently expects the Lexington Lease to commence in the fourth quarter of 2019.
On August 26, 2019, the Company entered into a lease agreement for 15,871 square feet of office space in Boulder, Colorado (the “Boulder Lease”) that had not commenced as of September 30, 2019. Due to the fact that the Boulder Lease had not commenced as of September 30, 2019, the Company has not yet recognized an ROU asset or lease liability on the condensed consolidated balance sheet for the Boulder Lease. The term of the lease is 87 months full calendar months plus any partial month from the commencement date to the end of the month in which the commencement date falls with approximately $3.0 million in aggregate fixed payments over the term of the lease arrangement. The Boulder Lease also provides the option to extend the term for up to two additional periods of 87 months each. As part of the agreement for the Boulder Lease, the Company is required to establish a $0.4 million letter of credit, secured by a restricted money market account, which will be presented as restricted cash equivalents at December 31, 2019. The Company currently expects the lease to commence for accounting purposes in the second quarter of 2020.
Future lease payments for noncancelable operating leases as of September 30, 2019 is as follows:
 
 
OPERATING
LEASES
(1)
Remaining 2019
 
$
335

2020
 
1,901

2021
 
193

Total undiscounted operating lease payments
 
2,429

Less: imputed interest expense
 
(174
)
Total operating lease liabilities
 
$
2,255

__________________________
(1) Excluded from the table above are the lease payments associated with the Lexington Lease and the Boulder Lease that have not commenced as of the end of the period, which is the date the asset is made available to the Company by each lessor.
The components of lease cost for the three and nine months ended September 30, 2019 are as follows:
 
 
 THREE MONTHS ENDED
SEPTEMBER 30, 2019
 
NINE MONTHS ENDED
SEPTEMBER 30, 2019
Operating lease cost
 
$
471

 
$
1,387

Variable lease cost
 
509

 
1,095

Total lease cost
 
$
980

 
$
2,482


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Amounts reported in the condensed consolidated balance sheet for leases where the Company is the lessee as of September 30, 2019 were as follows:
 
 
SEPTEMBER 30, 2019
Operating leases
 
 
Operating lease ROU assets
 
$
2,224

Operating lease liabilities
 
$
2,255

 
 
 
Weighted average remaining lease term
 
 
Operating leases
 
1.32 years

 
 
 
Weighted average discount rate
 
 
Operating leases
 
10.00
%
Other information related to leases for the nine months ended September 30, 2019 is as follows:
 
 
NINE MONTHS ENDED
SEPTEMBER 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
1,448

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

10.    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 the 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 September 30, 2019.
11.    SUBSEQUENT EVENTS
Roche Collaboration and License Agreement
On October 30, 2019, the Company and Roche entered into a Collaboration and License Agreement (the “Roche Collaboration Agreement”). Under the terms of the Roche Collaboration Agreement, the Company and Roche will seek to progress DCR-HBVS, the Company’s investigational therapy in Phase 1 clinical development, toward worldwide development and commercialization as well as

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an option for the companies to collaborate in the discovery, development, and commercialization of oligonucleotide therapeutics intended for the treatment of hepatitis B virus (“HBV”).
The Roche Collaboration Agreement provides that Roche will lead the development and commercialization of the DCR-HBVS program after completion of the Phase 1 clinical trial by the Company. Roche also has until receipt of interim Phase 1 data from the DCR-HBVS Phase 1 study (but no later than December 31, 2020) to initiate a research and development collaboration with the Company to pursue up to five targets selected by Roche which are intended primarily to treat HBV. Under the terms of the Roche Collaboration Agreement, the goal of such research collaboration will be to select compounds developed by the Company or Roche for Roche’s continued development and commercialization. The Roche Collaboration Agreement provides that the Company and Roche’s research and early development organization will work exclusively with each other during the research collaboration period on the discovery, research, and development of such targets selected by Roche. Under the Roche Collaboration Agreement, the Company will provide Roche with exclusive and non-exclusive licenses to support Roche’s activities and to enable Roche to commercialize products derived from or containing compounds developed pursuant to such agreement.
Roche will pay the Company a non-refundable upfront payment of $200.0 million. The Company is also eligible to receive additional payments totaling up to approximately $1.47 billion, which includes payments upon achievement of specified development, regulatory, and commercial milestones for DCR-HBVS. In addition, the Roche Collaboration Agreement provides that Roche will pay to the Company up to mid- teens percent royalties on product sales. Royalties are payable until the later of 10 years after first commercial sale of each product in a country, expiration of patent rights in a country, or for products containing DCR-HBVS in a given country, the expiration of data or regulatory exclusivity, subject to certain royalty step-down provisions set forth in the agreement. In addition, the Company has an option to co-fund the development of products under the agreement and, if exercised, receive high twenties to mid thirties royalty rates on the net sales of products in the United States. If the Company exercises the co-funding option, it shall also have an option to co-promote products containing DCR-HBVS in the United States.
The Roche Collaboration Agreement includes various representations, warranties, covenants, indemnities, and other customary provisions. Roche may terminate the Roche Collaboration Agreement at any time without cause following the notice periods described in the agreement. Either party may terminate the Roche Collaboration Agreement in the event of an uncured material breach of the other party. The Roche Collaboration Agreement is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions.
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.
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 F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together, “Roche”), 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.

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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 or an Investigational New Drug (“IND”) application filed. 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.
The table below sets forth the state of development of our various GalXC RNAi platform product candidates as of November 7, 2019.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13188625&doc=12
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

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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. We initiated dosing of participants rolling over from the PHYOX1 trial into the recently approved PHYOX3 study, a long-term, multi-dose, open-label, roll-over extension study. Additionally, we’re enrolling patients in our registration trial, PHYOX2. In discussions with the FDA, we received feedback indicating alignment on a path to the full approval of DCR-PHXC for the treatment of PH type 2 (“PH2”) based on achievement of substantial reduction of high baseline urinary oxalate in patients with PH2 in the PHYOX2 pivotal trial. With this feedback, we believe we have a path to full approval in both PH type 1 (“PH1”) and PH2 based on PHYOX2 results. 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 3 (“PH3”) as part of the PHYOX clinical development program for DCR-PHXC and potentially an expansion of the Breakthrough Therapy Designation for PH2. In the first half of 2020, further clinical studies will be initiated in PH1 and PH2 patients aged 2-5 years, with relatively intact renal function, in PH1 and PH2 patients with severe renal impairment, including those in dialysis, and in patients with PH3, pending regulatory approvals.
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 Group B dosing was completed in January 2019. We first reported interim results from the PHYOX1 trial on September 5, 2018 and subsequently presented updated results at the American Society of Nephrology’s (“ASN”) 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, at the Oxalosis and Hyperoxaluria Foundation International Hyperoxaluria Workshop in Boston, Massachusetts on June 20, 2019, and at the ASN’s Kidney Week Annual Meeting in Washington, D.C. on November 7, 2019.
As of September 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, five serious adverse events (“SAEs”) have occurred in four participants in Group B, none was deemed related to the study drug, and all five SAEs have resolved. A total of seven participants dosed with DCR-PHXC experienced mild or moderate injection site reactions, all of which resolved without intervention in a mean of 25 hours. No clinically meaningful safety signals were observed, including from liver function tests.
With respect to efficacy data in PHYOX1, as of September 2019, among the four participants with PH1 dosed at 6.0-mg/kg, the mean maximal reduction in urinary oxalate was 72% (range: 35% to 100%); three participants in this cohort reached normalization (defined as 24-hour urinary oxalate excretion <0.46 mmol) at one or more post-dose time points; one other achieved near-normalization (defined as 24-hour urinary oxalate excretion ≥ 0.46 and < 0.6 mmol). A single 3.0-mg/kg dose of DCR-PHXC was associated with a mean maximal reduction of 24-hour urinary oxalate of 72% (range: 62% to 80%) in participants with PH1. The 3.0-mg/kg dose brought urinary oxalate levels into the normal range at one or more post-dose time points in five of six participants with PH1. Additionally, the investigators reported a mean maximal reduction in urinary oxalate of 51% (range: 28% to 72%) among participants

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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 49% (range: 39% to 66%) with one participant reaching normalization and another participant reaching near-normalization at one or more post-dose time points.
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 Hepatitis B Foundation. 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.
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 from all planned cohorts of our DCR-HBVS Phase 1 clinical trial to be available mid-year 2020.
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 received 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 A dosing was completed in August 2019. Group B is a single-dose arm in which eight participants with chronic 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 initiated 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 chronic 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. The final patient’s last dose was administered in October 2019.
Participants with chronic HBV 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 alpha-1 antitrypsin (“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

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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.    
The initial DCR-A1AT-101 clinical trial is a Phase 1/2 randomized, placebo-controlled study designed to evaluate the safety and tolerability of DCR-A1AT in HVs and in patients with Alpha-1 antitrypsin deficiency-associated liver disease. Secondary objectives are to characterize the pharmacokinetic profile of DCR-A1AT, to evaluate preliminary pharmacodynamics on serum A1AT protein concentrations, and characterize the effect of DCR-A1AT on A1AT deficiency-associated liver disease evaluated by liver biopsy. Exploratory objectives include characterization of the effect of DCR-A1AT on A1AT deficiency-associated liver disease evaluated by biochemical markers as well as the effect on liver stiffness. The DCR-A1AT-101 clinical trial is divided into two phases or groups:

In Group A, up to 36 HVs are to receive a single ascending-dose of DCR-A1AT (0.1, 1.0, 3.0, 6.0, or 12.0-mg/kg) or placebo, with a minimum 8-week follow-up. Group B is a multiple ascending dose arm in which DCR-A1AT (doses yet to be determined) or placebo will be administered to up to 24 participants with A1AT with a treatment and follow-up period of 12 weeks or more. Group A is expected to begin enrollment in the fourth quarter of 2019.
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 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
Roche Collaboration
On October 30, 2019, we entered into a Collaboration and License Agreement with Roche (the “Roche Collaboration Agreement”). Under the terms of the Roche Collaboration Agreement, we and Roche will seek to progress DCR-HBVS, our investigational therapy in Phase 1 clinical development, toward worldwide development and commercialization as well as an option for the companies to collaborate in the discovery, development, and commercialization of oligonucleotide therapeutics intended for the treatment of HBV.

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The Roche Collaboration Agreement provides that Roche will lead the development and commercialization of the DCR-HBVS program after we complete the Phase 1 clinical trial. Roche also has until receipt of interim Phase 1 data from the DCR-HBVS Phase 1 study (but no later than December 31, 2020) to initiate a research and development collaboration with us to pursue up to five targets selected by Roche which are intended primarily to treat HBV. Under the terms of the Roche Collaboration Agreement, the goal of such research collaboration will be to select compounds developed by us or Roche for Roche’s continued development and commercialization. The Roche Collaboration Agreement provides that we and Roche’s research and early development organization will work exclusively with each other during the research collaboration period on the discovery, research, and development of such targets selected by Roche. Under the Roche Collaboration Agreement, we will provide Roche with exclusive and non-exclusive licenses to support Roche’s activities and to enable Roche to commercialize products derived from or containing compounds developed pursuant to such agreement.
Roche will pay us a non-refundable upfront payment of $200.0 million. We are also eligible to receive additional payments totaling up to approximately $1.47 billion, which includes payments upon achievement of specified development, regulatory, and commercial milestones for DCR-HBVS. In addition, the Roche Collaboration Agreement provides that Roche will pay us up to mid- teens percent royalties on product sales. Royalties are payable until the later of 10 years after first commercial sale of each product in a country, expiration of patent rights in a country, or for products containing DCR-HBVS in a given country, the expiration of data or regulatory exclusivity, subject to certain royalty step-down provisions set forth in the agreement. In addition, we have an option to co-fund the development of products under the agreement and, if exercised, receive high twenties to mid thirties royalty rates on the net sales of products in the U.S. If we exercise the co-funding option, we shall also have an option to co-promote products containing DCR-HBVS in the U.S.
The Roche Collaboration Agreement includes various representations, warranties, covenants, indemnities, and other customary provisions. Roche may terminate the Roche Collaboration Agreement at any time without cause following the notice periods described in the agreement. Either party may terminate the Roche Collaboration Agreement in the event of an uncured material breach of the other party. The Roche Collaboration Agreement is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions.

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 nine months ended September 30, 2019, $5.2 million and $8.3 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

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will lead development efforts beginning with Phase 1 studies. We will be responsible for manufacturing of the GalXC candidates for use 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 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 are 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 nine months ended September 30, 2019, we recognized $1.5 million and $3.0 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 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. 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

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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 nine months ended September 30, 2019, $1.3 million and $5.5 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 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 nine months ended September 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. Initial implementation of the standard did not have a material impact on the statement of operations or statement of cash flows.
Recent Developments
Colorado lease
On August 26, 2019, we entered into a non-cancelable real property lease agreement for 15,871 square feet of office space in Boulder, Colorado (the “Boulder Lease”). We intend to relocate our currently remote Colorado employees to this facility upon lease commencement, which we currently anticipate will occur in the second quarter of 2020.
The term of the Boulder Lease is 87 full calendar months plus any partial month from the commencement date to the end of the month in which the commencement date falls. The Boulder Lease commences on the earlier of the date on which (a) we occupy any portion of the facility and begin conducting business therein, (b) the landlord delivers the facility to us with the work in the facility

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substantially completed, or (c) the work in the facility would have been substantially completed but for the occurrence of any delays caused by us. The Boulder Lease provides for an aggregate fixed rent of approximately $3.0 million during the 87-month term. In addition to the annual fixed rent, we will be responsible for certain customary operating expenses and real estate taxes specified in the agreement.
Lexington lease
On January 2, 2019, we entered into a non-cancelable real property lease agreement 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 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 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.
Roche collaboration
On October 30, 2019, we entered into a Collaboration and License Agreement with Roche (the “Roche Collaboration Agreement”). Under the terms of the Roche Collaboration Agreement, we and Roche will seek to progress DCR-HBVS, our investigational therapy in Phase 1 clinical development, toward worldwide development and commercialization as well as an option for the companies to collaborate in the discovery, development, and commercialization of oligonucleotide therapeutics intended for the treatment of HBV.
Roche will pay us a non-refundable upfront payment of $200.0 million. We are also eligible to receive additional payments totaling up to approximately $1.47 billion, which includes payments upon achievement of specified development, regulatory, and commercial milestones for DCR-HBVS. In addition, the Roche Collaboration Agreement provides that Roche will pay us up to mid- teens percent royalties on product sales. Royalties are payable until the later of 10 years after first commercial sale of each product in a country, expiration of patent rights in a country, or for products containing DCR-HBVS in a given country, the expiration of data or regulatory exclusivity, subject to certain royalty step-down provisions set forth in the agreement. In addition, we have an option to co-fund the development of products under the agreement and, if exercised, receive high twenties to mid thirties royalty rates on the net sales of products in the U.S. If we exercise the co-funding option, we shall also have an option to co-promote products containing DCR-HBVS in the U.S. Refer to “Part I, Item II — Management’s Discussion and Analysis of Financial Condition and Results of Operations – Development Programs” for further information.

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Executive Summary
Our results of operations and liquidity and capital resources for and as of the three and nine months ended September 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 September 30, 2019 the right-of-use asset was $2.2 million, and the short-term and long-term lease liabilities were $1.7 million and $0.5 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.
On August 26, 2019, we entered into an 87-month non-cancelable real property lease agreement for 15,781 square feet of office space in Boulder, Colorado. We intend to relocate our currently remote Colorado employees to this facility in the second quarter of 2020.
On October 30, 2019, we entered into a Collaboration and License Agreement with Roche (the “Roche Collaboration Agreement”). Under the terms of the Roche Collaboration Agreement, we and Roche will seek to progress DCR-HBVS, our investigational therapy in Phase 1 clinical development, toward worldwide development and commercialization as well as an option for the companies to collaborate in the discovery, development, and commercialization of oligonucleotide therapeutics intended for the treatment of HBV. Roche will pay us a non-refundable upfront payment of $200.0 million. We are also eligible to receive additional payments totaling up to approximately $1.47 billion, which includes payments upon achievement of specified development, regulatory, and commercial milestones for DCR-HBVS. In addition, the Roche Collaboration Agreement provides that Roche will pay us up to mid- teens percent royalties on product sales. We also have an option to co-fund the development of products under the agreement and, if exercised, receive high twenties to mid thirties royalty rates on the net sales of products in the U.S. If we exercise the co-funding option, we shall also have an option to co-promote products containing DCR-HBVS in the U.S. The Roche Collaboration Agreement is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions.
Revenue from collaborative arrangements during the three months ended September 30, 2019 reflects $5.2 million, $1.5 million, and $1.3 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $1.6 million solely related to the BI collaboration during the three months ended September 30, 2018.
Revenue from collaborative arrangements during the nine months ended September 30, 2019 reflects $8.3 million, $3.0 million, and $5.5 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $4.6 million solely related to the BI collaboration during the nine months ended September 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 Roche, 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’

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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.
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 legal fees (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 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 Nine Months Ended September 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
SEPTEMBER 30,
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Revenue from collaborative arrangements
$
8,035

 
$
1,545

 
$
6,490

 
420.1
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
30,086

 
11,695

 
18,391

 
157.3
 %
General and administrative
10,619

 
5,354

 
5,265

 
98.3
 %
Litigation expense

 
3,694

 
(3,694
)
 
(100.0
)%
Total operating expenses
40,705

 
20,743

 
19,962

 
96.2
 %
Loss from operations
(32,670
)
 
(19,198
)
 
(13,472
)
 
70.2
 %
Other income (expense):
 
 
 
 
 
 
 
Interest income
1,880

 
401

 
1,479

 
368.8
 %
Interest expense

 
(223
)
 
223

 
(100.0
)%
Total other income, net
1,880

 
178

 
1,702

 
*

Net loss
$
(30,790
)
 
$
(19,020
)
 
$
(11,770
)
 
61.9
 %
 
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Revenue from collaborative arrangements
 
$
16,824

 
$
4,635

 
$
12,189

 
263.0
 %
Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
74,521

 
31,927

 
42,594

 
133.4
 %
General and administrative
 
29,126

 
14,449

 
14,677

 
101.6
 %
Litigation expense
 

 
29,122

 
(29,122
)
 
(100.0
)%
Total operating expenses
 
103,647

 
75,498

 
28,149

 
37.3
 %
Loss from operations
 
(86,823
)
 
(70,863
)
 
(15,960
)
 
22.5
 %
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
6,034

 
1,020

 
5,014

 
491.6
 %
Interest expense
 

 
(399
)
 
399

 
(100.0
)%
Total other income, net
 
6,034

 
621

 
5,413

 
*

Net loss
 
$
(80,789
)
 
$
(70,242
)
 
$
(10,547
)
 
15.0
 %
* Percentage change not meaningful
Revenue from collaborative arrangements
Revenue from collaborative arrangements during the three months ended September 30, 2019 reflects $5.2 million, $1.5 million, and $1.3 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $1.6 million solely related to the BI collaboration during the three months ended September 30, 2018.
Revenue from collaborative arrangements during the nine months ended September 30, 2019 reflects $8.3 million, $3.0 million, and $5.5 million from the Lilly, Alexion, and BI collaborations, respectively, compared to $4.6 million solely related to the BI collaboration during the nine months ended September 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
SEPTEMBER 30,
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Direct research and development expenses
$
17,116

 
$
6,207

 
$
10,909

 
175.8
%
Platform-related expenses
4,319

 
1,636

 
2,683

 
164.0
%
Employee-related expenses
7,797

 
3,018

 
4,779

 
158.3
%
Facilities, depreciation, and other expenses
854

 
834

 
20

 
2.4
%
Total
$
30,086

 
$
11,695

 
$
18,391

 
157.3
%
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
 
 
 
 
2019
 
2018
 
$ CHANGE
 
% CHANGE
Direct research and development expenses
$
40,628

 
$
16,037

 
$
24,591

 
153.3
%
Platform-related expenses
9,782

 
4,174

 
5,608

 
134.4
%
Employee-related expenses
21,399

 
9,274

 
12,125

 
130.7
%
Facilities, depreciation, and other expenses
2,712

 
2,442

 
270

 
11.1
%
Total
$
74,521

 
$
31,927

 
$
42,594

 
133.4
%
Research and development expenses increased for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to direct research and development expenses and employee-related expenses. The $10.9 million increase in direct research and development expenses in the three months ended September 30, 2019 included a $6.2 million increase in manufacturing costs to support our clinical studies and a $3.6 million increase in clinical study costs, reflecting increased activities associated with our DCR-PHXC and DCR-HBVS programs. Research and development expenses were also impacted by a $4.8 million increase in employee-related expenses, such as compensation and benefits.
Research and development expenses increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to direct research and development expenses and employee-related expenses. The $24.6 million increase in direct research and development expenses in the nine months ended September 30, 2019 included a $14.2 million increase in manufacturing costs to support our clinical studies and a $9.5 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 $2.3 million decrease in preclinical study costs. Research and development expenses were also impacted by a $12.1 million increase in employee-related expenses, such as compensation and benefits. The increase in employee-related expenses in both the three and nine months ended September 30, 2019, is a result of a 145% increase in research and development headcount necessary to support our growth.
We expect our overall research and development expenses to continue to increase throughout 2019 for the foreseeable future, as we ramp our clinical manufacturing activities, continue clinical activities associated with our three proprietary product candidates, and increase activities under the Lilly, Alexion, and BI agreements and potentially under the Roche agreement, if they choose to select additional targets.
General and administrative expenses
General and administrative expenses increased for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase in the three months ended September 30, 2019 is primarily related to a $3.2 million increase in employee-related expenses, due to increased stock-based compensation and headcount growth, and a $0.9 million increase in general and business development consulting costs.
General and administrative expenses increased for the nine months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase in the nine months ended September 30, 2019 is primarily related to a $8.7 million increase in employee-related expenses, due to increased stock-based compensation and headcount growth, and a $2.6 million increase in general and business development consulting costs.
We expect general and administrative expenses to continue to increase in 2019, as compared to 2018, largely due to investments in staffing and market readiness activities.

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Litigation expenses
Litigation expenses of $3.7 million and $29.1 million, for the three and nine months ended September 30, 2018, respectively, were comprised solely of litigation and settlement 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 nine months ended September 30, 2019 were largely due to higher balances in money market funds and U.S. Treasury securities as a result of cash received from the collaboration agreements executed with Lilly and Alexion in October 2018.
Interest expense
Interest expense of $0.2 million and $0.4 million during the three and nine months ended September 30, 2018, respectively, 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 September 30, 2019, we had cash and cash equivalents and held-to-maturity investments of $312.7 million compared to $302.6 million as of December 31, 2018. The balance of cash, cash equivalents, and held-to-maturity investments as of September 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.
On May 31, 2018, a universal shelf registration statement on Form S-3 permitting the sale of up to $250.0 million of our common stock and other securities was declared effective by the SEC. In September 2018, we sold an aggregate of 8,832,565 shares of our common stock for gross proceeds of $115.0 million pursuant to this registration statement. We currently intend to use the net proceeds from the offering for preclinical studies and clinical trials, and to use the remainder of any net proceeds for continued technology platform development, working capital, and general corporate purposes.
We believe that our cash, cash equivalents, and held-to-maturity investments, together with the $200.0 million upfront payment expected upon closing of our recently announced agreement with Roche, provides us with sufficient resources to continue our planned operations and clinical activities beyond the year ended December 31, 2021.
Cash flows
The following table shows a summary of our condensed consolidated cash flows for the periods indicated (amounts in thousands):
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2019
 
2018
Net cash provided by (used in) operating activities
$
14,232

 
$
(43,342
)
Net cash used in investing activities
$
(19,233
)
 
$
(88,944
)
Net cash provided by financing activities
$
792

 
$
109,896

Operating activities
Net cash provided by (used in) operating activities increased $57.6 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to a $97.0 million decrease in contract receivables largely due to the upfront cash payment received from Lilly in January 2019 in connection with our collaboration agreement. This increase in cash was offset by a $23.3 million decrease in the litigation settlement payable as a result of the final settlement payment in the first quarter of 2019 and a $10.3 million decrease in non-cash litigation expense in the nine months ended September 30, 2018, as there were no such expenses in the nine months ended September 30, 2019.

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Investing activities
Net cash used in investing activities decreased $69.7 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease in net cash used in investing activities primarily relates to a $256.0 million increase in proceeds from the maturities of held-to-maturity investments that were partially offset by a $181.2 million increase in purchases of held-to-maturity investments for the nine months ended September 30, 2019. Net cash used in investing activities was additionally impacted by a $5.1 million increase in purchases of property and equipment in the nine months ended September 30, 2019.
Financing activities
Net cash provided by financing activities for the nine months ended September 30, 2019 decreased $109.1 million compared to the nine months ended September 30, 2018. The decrease was primarily due to the receipt of $107.7 million in net proceeds in September 2018 from a follow-on public offering of our common stock.
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 November 7, 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 Roche Collaboration Agreement, 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;
our alignment with the U.S. Food and Drug Administration on regulatory approval requirements;
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,

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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.
Contractual Obligations and Commitments
The following is a summary of our significant contractual obligations as of September 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*
$
2,429

 
$
1,868

 
$
561

 
$

 
$

______________________________________
*
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 September 30, 2019.
Off-Balance Sheet Arrangements
As of September 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 September 30, 2019, we had cash, cash equivalents, and held-to-maturity investments of $312.7 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, 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.

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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 September 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, sales, and general and administrative operations 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 September 30, 2019, we had $312.7 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, together with the $200.0 million upfront payment expected upon closing of our recently announced agreement with Roche, will be sufficient to fund the execution of our current clinical and operating plan beyond 2021. 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.

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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 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, 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 September 30, 2019, we had an accumulated deficit of $485.6 million. For the nine months ended September 30, 2019 and for the years ended December 31, 2018, 2017, and 2016, our net loss attributable to common stockholders was $80.8 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 unless we enter into new significant collaboration agreements with significant upfront payments, 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;

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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;
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, DCR-HBVS, and DCR-A1AT, 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 commercial 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

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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 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 of 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 of 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.

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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. 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