$BLUE Form 10-Q

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Form 10-Q for BLUEBIRD BIO, INC.

7-Aug-2015

Quarterly Report

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or the SEC, on February 25, 2015.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified under Part II, Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage biotechnology company committed to developing potentially transformative gene therapies for severe genetic and rare diseases and in the field of T cell-based immunotherapy. With our lentiviral-based gene therapy and gene editing capabilities, we have built an integrated product platform with broad potential application in these areas. We believe that gene therapy for severe genetic diseases has the potential to change the way these patients are treated by correcting the underlying genetic defect that is the cause of their disease, rather than offering treatments that only address their symptoms. We and our scientific collaborators have generated what we believe is human proof-of-concept data for our gene therapy platform in three underserved diseases, each of which has been granted orphan drug status by U.S. and European regulatory authorities.

We are conducting a Phase II/III clinical study, called the Starbeam Study, of our most advanced product candidate, Lenti-D, to evaluate its safety and efficacy in subjects with childhood cerebral adrenoleukodystrophy, or CCALD, a rare, hereditary neurological disorder affecting young boys that is often fatal. In October 2013, we announced that the first subject had been treated in this study and in May 2015 we announced the achievement of enrollment of 18 subjects in this study. We are also conducting an observational study of subjects with CCALD treated by allogeneic hematopoietic stem-cell transplant referred to as the ALD-103 study.

We are also conducting two Phase I/II clinical studies in the United States, Australia, and Thailand and in France, called the Northstar (HGB-204) and HGB-205 studies, respectively, of our product candidate, LentiGlobin, to evaluate its safety and efficacy in subjects with beta-thalassemia major and sickle cell disease, or SCD, which are rare, hereditary blood disorders that often lead to severe anemia and shortened lifespans. We have initiated a Phase I clinical study in the United States, called the HGB-206 Study, to evaluate the safety and efficacy of LentiGlobin in subjects with severe SCD. In June 2015, we announced that the first patient with severe SCD had been infused in the HGB-206 Study.

We recently announced clinical data from our ongoing clinical studies of LentiGlobin in subjects with beta-thalassemia major and SCD. These data are summarized below.

� In December 2014, at the annual meeting of the American Society of Hematology (ASH), we announced data from the first eight subjects treated with LentiGlobin in these studies. As of December 2014, in the first four subjects, each of whom had at


least three months of follow-up, treatment with LentiGlobin resulted in sufficient hemoglobin production to reduce or eliminate the need for transfusion support among patients with beta-thalassemia major who would otherwise require chronic blood transfusions. These data included the first five subjects treated in the Northstar study and the first three subjects (two with beta-thalassemia major and one with severe SCD) from the HGB-205 study.

� In June 2015, at the 20th Congress of the European Hematology Association, we announced long-term follow up of two subjects with beta-thalassemia major and early safety and efficacy data in the first subject with severe SCD treated with LentiGlobin in the HGB-205 study. As of May 2015, the two patients with beta-thalassemia major remained transfusion-independent for 16 and 14 months, respectively, and neither experienced a LentiGlobin-related adverse event. As of May 2015, the proportion of anti-sickling hemoglobin being produced by the first-ever subject with severe SCD treated with gene therapy has risen steadily and accounted for 45% of all hemoglobin production at the patient’s six-month visit post-drug product infusion; this is above the 30% threshold expected to potentially achieve a disease-modifying clinical effect. Further, as of May 2015, the patient with severe SCD had been free of transfusions for more than three months without complications or hospitalizations for SCD-related events post-transplant, and has demonstrated improvement in hemolysis markers.

We also plan to initiate two new clinical trials of LentiGlobin, called HGB-207, for adult and adolescent patients with beta-thalassemia major, and HGB-208, for pediatric patients with beta-thalassemia major. Each of these trials, once initiated, are expected to enroll approximately 15 patients to be evaluated for 24 months following treatment, and we expect that the primary endpoint of these trials will be 12 months of transfusion independence following treatment.

In May 2015, we announced that we believe we have reached general agreement with regulatory authorities in Europe and the United States regarding our development plans for LentiGlobin, which could potentially result in accelerated approvals in these jurisdictions. These discussions are summarized below.

� In Europe, we are participating in the Adaptive Pathways (formerly referred to as Adaptive Licensing) pilot program of the European Medicines Agency, or EMA. Based on our discussions with EMA, we believe it is possible to seek conditional approval of LentiGlobin for the treatment of adults and adolescents with beta-thalassemia major on the basis of the totality of clinical data, in particular reduction in transfusion need, from the ongoing Northstar study and supportive HGB-205 study. We believe that conversion to full approval will be subject to the successful completion of the HGB-207 and HGB-208 clinical trials, and collection of supportive long-term follow-up data and “real-life” post-approval data.

� In the United States, we believe we have reached general agreement with the U.S. Food and Drug Administration, or FDA, on the major elements of our planned HGB-207 and HGB-208 clinical trials. Based on our discussions with the FDA, we believe that the data from these trials, together with data from our ongoing beta-thalassemia major clinical studies (Northstar and HGB-205), could form the basis for a Biologics License Application, or BLA, submission for LentiGlobin for the treatment of beta-thalassemia major.

In June 2015, the National Institutes of Health (NIH) Recombinant DNA Advisory Committee’s (RAC) recommended that we delay the initiation of the HGB-208 clinical trial for pediatric patients with beta-thalassemia major for an additional one to two years in order to obtain more safety and efficacy data in adults and adolescents to demonstrate a higher benefit with LentiGlobin as compared to alternative treatments. We believe this recommendation has no impact on our planned HGB-207 clinical trial for adult and adolescent patients with beta-thalassemia major. We still expect to initiate the HGB-208 clinical trial for pediatric patients in the United States and Europe after consultation with the appropriate regulatory agencies, institutional review boards and clinical trial sites.

In March 2013, we entered into a global strategic collaboration with Celgene Corporation, or Celgene, to discover, develop and commercialize chimeric antigen receptor-modified T cells, or CAR T cells, as potentially disease-altering therapies in oncology. This collaboration had an initial term of three years, and Celgene made a $75.0 million up-front, non-refundable cash payment to us as consideration for entering into the collaboration. In June 2015, we amended and restated the collaboration agreement, or the Amended Collaboration Agreement, to focus exclusively on anti-BCMA product candidates for an additional three-year term. B-cell maturation antigen, or BCMA, is a cell surface protein that is expressed in normal plasma cells and in most multiple myeloma cells, but is absent from other normal tissues. As consideration for the Amended Collaboration Agreement, we received an upfront, non-refundable cash payment of $25.0 million to fund research and development under the collaboration. During the three and six months ended June 30, 2015, we recognized $4.9 million and $11.3 million, respectively, of revenue associated with our collaboration with Celgene related to the research and development services performed. As of June 30, 2015, we have classified $44.4 million of deferred revenue related to our collaboration with Celgene in the accompanying balance sheets. We expect the first product candidate from this collaboration, bb2121, to enter clinical trials in early 2016.

In June 2014, we acquired Precision Genome Engineering, Inc., or Pregenen, a privately-held biotechnology company headquartered in Seattle, Washington. Through the acquisition, we obtained rights to Pregenen’s gene editing and cell signaling technology. The agreement provided for up to $135.0 million in future contingent cash payments by us upon the achievement of


certain preclinical, clinical and commercial milestones related to the Pregenen technology, of which $15.0 million relates to preclinical milestones, $20.1 million relates to clinical milestones and $99.9 million relates to commercial milestones. During the second quarter of 2015, a $1.0 million milestone was achieved, which resulted in a $1.0 million payment to the former equityholders of Pregenen during the third quarter of 2015. We estimate future contingent cash payments have a fair value of $7.9 million as of June 30, 2015, $3.4 million of which is current.

As of June 30, 2015, we had cash, cash equivalents and marketable securities of approximately $936.4 million. We expect our cash, cash equivalents and marketable securities to fund operations through 2018.

Since our inception in 1992, we have devoted substantially all of our resources to our development efforts relating to our product candidates, including activities to manufacture product in compliance with good manufacturing practices, or GMP, to conduct clinical studies of our product candidates, to provide general and administrative support for these operations and to protect our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through the sale of common stock in our public offerings, private placements of preferred stock and warrants and through collaborations.

We have never been profitable and have incurred net losses in each year since inception. Our net losses were $76.6 million for the six months ended June 30, 2015 and our accumulated deficit was $224.0 million as of June 30, 2015. Substantially all our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing and planned activities, as we:

� conduct clinical studies for our Lenti-D and LentiGlobin product candidates;

� increase research and development-related activities for the discovery and development of oncology product candidates;

� continue our research and development efforts;

� manufacture clinical study materials and develop large-scale manufacturing capabilities;

� seek regulatory approval for our product candidates; and

� add personnel to support our product development and commercialization efforts.

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. We have no commercial-scale manufacturing facilities, and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party contract research organizations, or CROs, to carry out our clinical development activities; and we do not yet have a sales and marketing organization. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. Accordingly, we will seek to fund our operations through public or private equity or debt financings, strategic collaborations, or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our products.

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

Financial operations overview

Revenue

To date, we have not generated any revenues from the sale of products. Our revenues have been derived from collaboration arrangements, research fees, license fees and grant revenues.

Collaboration revenue is generated exclusively from our collaboration arrangement with Celgene. The terms of this arrangement contain multiple deliverables, which include: (i) research and development services,
(ii) participation on the joint steering committee (iii) participation on the patent committee, (iv) a license to the first product candidate, (v) manufacture of vectors and associated payload for incorporation into the first optioned product candidate under the license, and (vi) participation on the joint governance


committee under the co-development and co-promotion agreement for the first optioned product candidate under the license. We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, or ASC 605, are satisfied for that particular unit of accounting. $17.3 million of revenue from the Celgene arrangement associated with research and development services, joint steering committee services and patent committee services will be recognized ratably over the associated period of performance, which is initially estimated to be three years.

Research and license fee revenue is primarily generated through license and research and development agreements with strategic partners and nonprofit organizations for the development and commercialization of our product candidates. There are no performance, cancellation, termination, or refund provisions in any of our arrangements that contain material financial consequences to us.

Nonrefundable license fees are recognized as revenue upon delivery provided there are no undelivered elements in the arrangement. Research fees are recognized as revenue over the period we perform the associated services or on a straight-line basis if the pattern of performance cannot be estimated.

Research and development expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

� employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

� expenses incurred under agreements with CROs and clinical sites that conduct our clinical studies;

� costs of acquiring, developing, and manufacturing clinical study materials;

� facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies;

� costs associated with our research platform and preclinical activities;

� costs associated with in-licensing other product candidates or technologies for use in preclinical and clinical activities;

� costs associated with our regulatory, quality assurance and quality control operations; and

� amortization of intangible assets.

Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites. We cannot determine with certainty the duration and completion costs of the current or future clinical studies of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical studies and development of our product candidates will depend on a variety of factors, including:

� the scope, rate of progress, and expense of our ongoing as well as any additional clinical studies and other research and development activities we undertake;

� future clinical study results;

� uncertainties in clinical study enrollment rates;

� changing standards for regulatory approval; and

� the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical studies beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical studies, we could be required to expend significant additional financial resources and time on the completion of clinical development for our product candidates.


We plan to increase our research and development expenses for the foreseeable future as we continue to advance the clinical development of our Lenti-D and LentiGlobin product candidates, conduct research and development activities in the field of oncology and continue the research and development of product candidates using our gene editing technology platform. Our research and development activities include the following:

� We are conducting a Phase II/III clinical study to examine the safety and efficacy of our Lenti-D product candidate in the treatment of CCALD. In October 2013, we announced that the first subject had been treated in this study and in May 2015 we announced the achievement of enrollment of 18 subjects in this study. We are also conducting an observational study of subjects with CCALD treated by allogeneic hematopoietic stem-cell transplant.

� We are conducting a Phase I/II clinical study in the United States, Australia and Thailand to study the safety and efficacy of our LentiGlobin product candidate in the treatment of subjects with beta-thalassemia major. In March 2014, we announced that the first subject had been treated in this study. We recently amended the protocol for this study to expand enrollment to include up to three adolescent patients.

� We are conducting a Phase I/II clinical study in France to study the safety and efficacy of our LentiGlobin product candidate in the treatment of subjects with beta-thalassemia major and severe SCD. In December 2013, we announced that the first subject beta-thalassemia major had been treated in this study and in October 2014, we announced that the first subject with SCD had been treated in this study.

� We have initiated a Phase I clinical study in the United States to study the safety and efficacy of our LentiGlobin product candidate in the treatment of subjects with severe SCD. In June 2015, we announced that the first patient with severe SCD had been infused in the HGB-206 Study.

� We are conducting research and development activities in the field of oncology and expect the first product candidate from our collaboration with Celgene, bb2121 to treat multiple myeloma, to enter clinical trials in early 2016.

� We are planning to initiate two new clinical trials of LentiGlobin, called HGB-207, for adult and adolescent patients with beta-thalassemia major, and HGB-208, for pediatric patients with beta-thalassemia major.

� We will continue to manufacture clinical study materials in support of our clinical studies.

Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical studies, costs to in-license product candidates and new technologies, and costs related to acquiring and manufacturing clinical study materials. We allocate salary and benefit costs directly related to specific programs. We do not allocate personnel-related discretionary bonus or stock-based compensation costs, costs associated with our general discovery platform improvements, depreciation or other indirect costs that are deployed across multiple projects under development and, as such, the costs are separately classified as personnel and other expenses in the table below:

                                          Three months ended June 30,               Six months ended June 30,
                                            2015                 2014                 2015                2014
                                                (in thousands)                           (in thousands)
Lenti-D                               $        3,440       $        2,232       $       7,892       $       5,042
LentiGlobin                                    7,042                6,273              14,133              10,138
Pre-clinical programs                          5,266                1,160               7,916               2,257
Total direct research and development
expense                                       15,748                9,665              29,941              17,437
Employee- and contractor-related
expenses                                       2,993                1,295               5,461               2,233
Stock-based compensation expense              12,066                1,061              15,300               2,124
Platform-related expenses                     11,885                  250              14,062                 516
Facility expenses                              1,483                1,005               2,986               2,060
Other expenses                                    91                  655                 235               1,024
Unallocated personnel and other
expenses                                      28,518                4,266              38,044               7,957
Total research and development
expense                               $       44,266       $       13,931       $      67,985       $      25,394

Refer to the “Results of Operations” section below for additional discussion on one-time, non-recurring charges included within unallocated personnel and other expenses.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, business development, and human


resource functions. Other general and administrative expenses include facility-related costs, professional fees for accounting and legal services, directors’ fees and expenses associated with obtaining and maintaining patents.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. Additionally, if and when we believe a regulatory approval of the first product candidate appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Other income, net

Other income, net consists primarily of interest income earned on investments, foreign currency gain or loss and tax incentives from the Massachusetts Life Sciences Center.

Critical accounting policies and estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued research and development expenses, revenue, stock-based compensation, income taxes and contingent consideration. We base our estimates . . .

 

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