UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q/A

Amendment No.1

 

For the quarterly period ended September 30, 2018

OR

For the transition period from                  to                 

Commission File Number: 001-36281

 

DICERNA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

87 Cambridgepark Drive

Cambridge, MA 02140

(Address of principal executive offices and zip code)

(617) 621-8097

(Registrant’s telephone number, including area code)

 

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  ☒    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  ☒    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. (Check one):

 

 

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.  ☒

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

As of November 2, 2018, there were 62,731,942 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

 

 

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EXPLANATORY NOTE

 

This Amendment No. 1 on Form 10-Q/A (this “Amendment”) of Dicerna Pharmaceuticals, Inc., a Delaware corporation (the “Company”), amends the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, as filed with the Securities and Exchange Commission (the “SEC”) on November 5, 2018 (the “Form 10-Q”), and is being filed solely to correct the table appearing under the heading “Financial Operations Overview – Comparison of the Three and Nine Months Ended September 30, 2018 and 2017” under Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Form 10-Q.

 

No other changes were made to the Form 10-Q other than those described above. This Amendment does not reflect subsequent events occurring after the original filing date of the Form 10-Q or modify or update in any way disclosures made in the Form 10-Q. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, as a result of this Amendment, the certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed as exhibits to the Form 10-Q have been re-executed and re-filed as of the date of this Amendment and are included as exhibits hereto.

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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:

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.

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This Quarterly Report on Form 10-Q also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates, and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market, and other 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.

 

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PART I. FINANCIAL INFORMATION

DICERNA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

 

 

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

 

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DICERNA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)

 

 

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)

 

 

Reconciliation of cash, cash equivalents and restricted cash equivalents within the Company’s condensed consolidated balance sheets:  

 

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)

(tabular amounts in thousands, except share and per share data and where otherwise noted)

Business

Dicerna Pharmaceuticals, Inc. (“Dicerna” or the “Company”) is a biopharmaceutical company focused on the discovery and development of innovative subcutaneously delivered ribonucleic acid (“RNA”) interference (“RNAi”)-based pharmaceuticals using its GalXC^TM RNAi platform for the treatment of diseases involving the liver, including rare diseases, viral infectious diseases, chronic liver diseases, and cardiovascular diseases. Within these therapeutic areas, the Company believes its GalXC RNAi platform will allow the Company to build a broad pipeline of therapeutics with commercially attractive pharmaceutical properties, including a subcutaneous route of administration, infrequent dosing (e.g., dosing that is monthly or quarterly, and potentially even less frequent), high therapeutic index, and specificity to a single target gene.

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 in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The year-end condensed 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, 2018 and results of operations and cash flows for the interim periods ended September 30, 2018 and 2017. 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, 2017. The results of the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year.

Stockholders’ Equity

Changes in stockholders’ equity for the nine months ended September 30, 2018 are as follows:

 

 

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

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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 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 value 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.

Grants

The Company records income from various grants as an offset to research and development expenses.

Liquidity

Based on the Company’s current operating plan and liquidity, management believes that, subject to the closing of the transactions contemplated by the Collaboration and License Agreement (the “Lilly Collaboration Agreement”) between the Company and Eli Lilly and Company (“Lilly”) and the share issuance agreement (the “Lilly Share Issuance Agreement”) between the Company and Lilly, available cash, cash equivalents, and held-to-maturity investments will be sufficient to fund the Company’s planned level of operations beyond the year ended December 31, 2020. Subsequent to that period, if the Company is unable to generate funding from one or more sources within a reasonable timeframe, it may have to delay, reduce, or terminate its research and development programs, pre-clinical or clinical trials, limit strategic opportunities, or undergo reductions in its workforce or other corporate restructuring activities.

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. 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed below.

Revenue recognition

The Company generates revenue from research collaboration and license agreements with third-party customers. Goods and services in the agreements typically include (i) the grant of licenses for the use of the Company’s technology and (ii) the provision of services associated with the research and development of customer product candidates. Such agreements may provide for consideration to the Company in the form of upfront payments, research and development services, option payments, milestone payments, and royalty payments on licensed products.

The Company accounts for a contract when the Company has approval and commitment from both parties, when the rights of the parties are identified, when payment terms are identified, when the contract has commercial substance, and when collectability of consideration is probable.

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, management completes the following steps: (i)  identifies the promised goods or services in the contract; (ii) determines whether the promised goods or services are performance obligations; (iii) measures the transaction price, including whether there are any constraints on variable consideration; (iv) allocates the transaction price to the performance obligations; and (v) recognizes revenue when (or as) the Company satisfies each performance obligation. 

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In order to account for its contracts with customers, the Company identifies the promised goods or services in the contract and evaluates whether such promised goods or services represent performance obligations. The Company accounts for those components as separate performance obligations when the following criteria are met:

 

This evaluation requires subjective determinations and requires the Company to make judgments about the promised goods and services and whether such goods and services are separable from the other aspects of the contractual relationship. In determining the performance obligations, the Company evaluates certain criteria, including whether the promised good or service is capable of being distinct and whether such good or service is distinct within the context of the contract, based on consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research, manufacturing, and commercialization capabilities of the partner; the availability of research and manufacturing expertise in the general marketplace; and the level of integration, interrelation, and interdependence among the promises to transfer goods or services.

As part of the accounting for the relevant arrangements, the Company makes key assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the underlying contract, which may include, as applicable, relevant market data, forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success. The transaction price is allocated among the performance obligations using the relative selling price method, and the applicable revenue recognition criteria are applied to each of the separate performance obligations. At contract inception, the Company determines the standalone selling price for each performance obligation identified in the contract. If an observable price of the promised good or service sold separately is not readily available, the Company utilizes assumptions that require judgment to estimate the standalone selling price, which may include development timelines, probabilities of technical and regulatory success, reimbursement rates for personnel costs, forecasted revenues, potential limitations to the selling price of the product, expected technological life of the product, and discount rates.

Licenses of intellectual property: If a license granted to a customer to use the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from consideration allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company applies judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, to conclude upon the appropriate method of measuring progress for purposes of recognizing revenue related to consideration allocated to the performance obligation. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each contract with a customer that includes development or regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or of the licensee, such as regulatory approvals, are assessed as to the probability of achieving the related milestones. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of all milestones and any related constraint, and, if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis and are recorded as revenue and through earnings in the period of adjustment.

Options: Customer options, such as options granted to allow a licensee to choose to research and develop product candidates against target genes to be identified in the future, generally do not provide a material right to the customer and therefore do not give rise to a separate performance obligation. As such, the additional consideration that would result from a customer exercising an option in the future is not included in the transaction price for the current contract. Instead, additional option fee payments are recognized or begin being recognized as revenue when the licensee exercises the options, and the exercise of the option would be treated as a separate contract for accounting purposes.

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Research and development services: Arrangements that include a promise to provide research or development services at the licensee’s discretion are assessed to determine whether the services provide a material right to the licensee and are capable of being distinct, are not highly interdependent or do not significantly modify one another, and if so, the services are accounted for as separate performance obligations as the services are provided to the customer. Otherwise, when research or development services are determined not to be capable of being distinct or distinct within the context of the contract, those services are added to the performance obligation that includes the underlying license.

Royalties: For arrangements that include sales-based royalties, including commercial milestone payments based on the level of sales, and when the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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). To date, the Company has not recognized any royalty revenue resulting from any out-licensing arrangement.

The Company receives payments from its licensees as established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Where applicable, amounts are recorded as contracts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract with a customer has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.

Recent Accounting Pronouncements

Adopted in 2018

Revenue recognition

In May 2014, the FASB issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), which amends the guidance for accounting for revenue from contracts with customers, superseding the revenue recognition requirements in ASC 605, Revenue Recognition. ASC 606 is effective for annual reporting periods beginning after December 15, 2017. Under ASC 606, two adoption methods were allowed: retrospectively to all prior reporting periods presented, with certain practical expedients permitted, or retrospectively with the cumulative effect of initially adopting ASC 606 recognized at the date of initial application. The Company elected to apply ASC 606 retrospectively to all prior periods presented. Adoption of ASC 606 did not have a significant quantitative impact on the Company’s condensed consolidated financial statements; however, adoption of ASC 606 has resulted in additional revenue-related disclosures in the notes to the Company’s condensed consolidated financial statements, as discussed above and in Note 6 – Collaborative Research and License Agreement.

Statement of cash flows

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), a consensus of the FASB’s EITF. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Entities are required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. By requiring that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash, the new guidance eliminates current diversity in practice. The Company adopted ASU 2016-18 on January 1, 2018 and has applied this new guidance retrospectively to all periods presented. Consequently, transfers between restricted and unrestricted cash equivalents accounts are no longer reported as a cash flow in the Company’s condensed consolidated statement of cash flows.

Not yet adopted

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective for the Company beginning in the first quarter of 2019. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is in the process of gathering a complete inventory of its lease contracts and evaluating the impact of the new guidance on its condensed consolidated financial statements and related disclosures; however, management expects that the adoption of ASU 2016-02 will result in the recognition of a

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right of use asset and related liability associated with the Company’s non-cancelable operating lease arrangement for office and laboratory space that was executed in 2014 (see Note 7 – Commitments and Contingencies). The Company is in the process of determining whether it will utilize the optional transition method presented in ASU 2018-11.

 

The Company computes basic net loss per common share by dividing net loss attributable to common stockholders 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”). The Company’s vested restricted shares participated in any dividends declared by the Company and were therefore considered to be participating securities. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods when the Company incurred a net loss, the Company did not allocate a loss to participating securities because they had no contractual obligation to share in the losses of the Company. The outstanding securities presented below were excluded from the calculation of net loss per share, because such securities would have been anti-dilutive due to the Company’s net loss per share during the periods ending on the dates presented.

 

 

The following tables provide information regarding the Company’s held-to-maturity investments.

 

 

 

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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During the three and nine months ended September 30, 2018, the Company granted stock options to purchase 175,500 and 1,936,850 shares, respectively, of common stock with aggregate grant date fair values of $1.7 million and $14.9 million, respectively, compared to stock options to purchase 304,500 and 1,635,497 shares of common stock granted with aggregate grant date fair values of $0.7 million and $3.5 million, for the three and nine months ended September 30, 2017, respectively.

 

The assumptions used to estimate the grant date fair value using the Black-Scholes option pricing model were as follows:

 

 

 

The Company has classified stock-based compensation in its condensed consolidated statements of operations as follows:

 

 

A summary of the Company’s financial assets that are measured or disclosed at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are presented below.

 

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The Company’s 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 as of September 30, 2018 and December 31, 2017.

The Company’s held-to-maturity investments and restricted cash equivalents 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 measurement are valued using observable inputs as of September 30, 2018 and December 31, 2017.

 

As of September 30, 2018 and December 31, 2017, the Company’s accounts payable and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments. As of December 31, 2017, the carrying amount of the withholding tax receivable also approximated its estimated fair value due to the short-term nature of the instrument.

 

The Company has a cash obligation of $13.0 million payable to Alnylam Pharmaceuticals, Inc. (“Alnylam”). Upon receipt of certain upfront cash payments owed to the Company resulting from signing the Alexion Pharmaceuticals, Inc. (“Alexion”) and Lilly agreements in October 2018, the Company anticipates that the cash obligation will be payable in the fourth quarter of 2018, and has therefore adjusted the liability equal to the estimated present value of the obligation of $12.8 million and included the obligation in current liabilities. As the present value was determined using market rates based on the nature of the obligation and the Company’s creditworthiness, the carrying value approximates the fair value. There was no liability recorded related to the settlement as of December 31, 2017.  

The Company’s policy is to recognize transfers between levels of the fair value hierarchy, if any, at the end of the reporting period; however, there have been no such transfers during any of the periods presented.

On October 27, 2017, the Company entered into a collaborative research and license agreement (the “BI Agreement”) with Boehringer Ingelheim International GmbH (“BI”), 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. Pursuant to the BI Agreement, Dicerna granted BI a worldwide license in connection with the research and development of such product candidates and has transferred to BI certain intellectual property rights of the product candidates selected by 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. 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.

During the term of the research program, BI will reimburse Dicerna the cost of certain materials and third-party expenses that have been included in the preclinical studies. 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 option to add a second target would provide for an option fee payment and success-based development and commercialization milestones and royalty payments to Dicerna.

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Milestone payments that are contingent upon the Company’s performance under the BI Agreement include potential developmental milestones totaling $99.0 million, including milestones for the first commercial sale. The Company has excluded the 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 assessed the BI Agreement in accordance with ASC 606 and concluded that BI is a customer. The Company identified the following performance obligations under the contract: the license of intellectual property and conducting agreed-upon research program services. The Company has concluded that the license and research and development services do not have standalone value and are not capable of being distinct; therefore, the Company considers these to be one performance obligation. The Company concluded the option underlying the transfer of future licenses and potential associated research for any not-yet-known target gene is not a performance obligation of the contract at inception because the option fee reflects the standalone selling price of the option, and therefore, the option is not considered to be a material right. The Company considered the level of BI’s therapeutic expertise specifically related to RNAi, as well as BI’s know-how vis-à-vis 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 non-refundable upfront fee and the agreed-upon reimbursable third-party expenses constituted the amount of the consideration to be included in the transaction price and has been allocated to the performance obligation identified based on the Company’s best estimate of the relative standalone selling price via application of a market assessment approach. None of the development milestones have been included in the transaction price, 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 the related sales occur. 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 $10.3 million transaction price is being recognized over the current research term, which is estimated to extend through June 30, 2019, which represents the Company’s best estimate of the period of the obligation to provide research support services to BI, and is the expected period over which the Company estimates the deferred revenue balance will be recognized in revenue. Related revenue is being recognized on a straight-line basis, which is in management’s judgment an appropriate measure of progress toward satisfying the performance obligation, largely in absence of evidence that obligations are fulfilled in a specific pattern.

The following table presents changes in the Company’s deferred revenue accounts during the nine months ended September 30, 2018.

 

 

The Company recognized revenues of $1.5 million and $4.6 million for the three and nine months ended September 30, 2018, as a result of changes in the deferred revenue balances. There was no activity related to the Company’s deferred revenue accounts during the three and nine months ended September 30, 2017.

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Facility lease

Future minimum lease payments on the Company’s non-cancelable operating lease for office and laboratory space are as follows:

 

 

Litigation

On June 10, 2015, Alnylam filed a complaint against the Company in the Superior Court of Middlesex County, Massachusetts (the “Court”). The complaint alleged 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 a Confidential Settlement Agreement and General Release (the “Settlement Agreement”), resolving all ongoing litigation between the Company and Alnylam. The terms of the Settlement Agreement include mutual releases and dismissals with prejudice of all claims and counterclaims in the following litigation between the parties: (i) Alnylam Pharmaceuticals, Inc. v. Dicerna Pharmaceuticals, Inc., No. 15-4126 pending in the Massachusetts Superior Court for Middlesex County and (ii) Dicerna Pharmaceuticals, Inc., v. Alnylam Pharmaceuticals, Inc. No.1:17-cv-11466 pending in the United States District Court for the District of Massachusetts. Pursuant to the terms of the Settlement Agreement, the Company has 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% 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 (the “Shares”) pursuant to a share issuance agreement between the parties (the “Share Issuance Agreement”).

Under the Settlement Agreement, for periods ranging from 18 months up to four years, the Company will be restricted in its development and other activities relating to oligonucleotide-based therapeutics directed toward a defined set of eight Alnylam targets (the “Oligo Restrictions”). The Oligo Restrictions pertain to targets where Dicerna does not have, or does not currently intend to have, a therapeutic program, or are expected to be consistent with Dicerna’s execution on programs in the normal course of business. The Settlement Agreement does not include any admission of liability or wrongdoing by either party or any licenses to any intellectual property from either party.

On April 20, 2018, the Company and Alnylam entered into the Share Issuance Agreement, pursuant to which the Company agreed to issue to Alnylam 983,208 Shares in satisfaction of the Company’s obligation under the Settlement Agreement to deliver Shares to Alnylam. The Share Issuance Agreement contains customary representations and warranties of each party. Pursuant to the terms of the Share Issuance Agreement, Alnylam may not, without the prior approval of the Company, dispose of any of the Shares for a six-month period commencing on the closing date of the Share issuance. Thereafter, through the fifth anniversary of the closing date of the Share issuance, Alnylam will only dispose of the maximum number of Shares that it would be permitted to dispose if the Shares were subject to the volume restrictions set forth in Rule 144(e) of the Securities Act of 1933, as amended.

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The Company paid the upfront payment of $2.0 million dollars in May 2018 and recorded the cash obligation of $13.0 million as a liability discounted to the estimated present value of $8.7 million at an effective interest rate of 10.0%. Ten percent of any first year or upfront consideration or proceeds paid to the Company arising from any new collaboration agreements are payable to Alnylam until the cash obligation is satisfied. If the entire obligation is not paid by the fourth-year anniversary of the agreement, the balance is payable to Alnylam in cash at that time. Upon signing the agreement, the Company recorded a liability equal to the estimated present value of the obligation at that time. The Company applies the effective interest method, as the present value is accreted through maturity. As of September 30, 2018, $0.4 million of interest expense had been recorded on this liability. Upon receipt of certain upfront cash payments owed to the Company resulting from signing the Alexion and Lilly agreements in October 2018, the Company anticipates that the $13.0 million cash obligation will become payable in the fourth quarter of 2018. As a result, the estimated present value of $12.8 million, which was revised based on the expected timing of the remaining payments, is recorded in current liabilities. The impact of revising the expected timing of repayment is recorded as a component of litigation expense in the condensed consolidated statement of operations.

The 983,208 shares issued pursuant to the Share Issuance Agreement was recorded at fair market value of $10.3 million based on the Company’s closing share price on April 18, 2018, the date the Settlement Agreement was executed. The Company did not assign any value to the Oligo Restrictions as the Company did not incur additional losses or give up any value as a result of the restrictions.

Total litigation expense was $3.7 million and $29.1 million for the three and nine months ended September 30, 2018, respectively, all of which related to the litigation and settlement agreement with Alnylam. The litigation expense for the nine months ended September 30, 2018 includes $24.7 million related to the Settlement Agreement. The Company recorded litigation expenses, also related to the Alnylam litigation, of $2.5 million and $6.2 million for three and nine months ended September 30, 2017, respectively, which was previously included as a component of general and administrative expenses and recast to litigation expense for comparative purposes.   

From time to time, the Company may be subject to various claims and legal proceedings. 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, 2018 and December 31, 2017.

Alexion

Alexion Collaborative Research and License Agreement

On October 22, 2018, the Company and Alexion Pharma Holding Unlimited Company (“Alexion Pharma Holding”), an affiliate of Alexion Pharmaceuticals, Inc. (“Alexion Pharmaceuticals” and together with Alexion Pharma Holding, “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 pre-clinical 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 pre-clinical 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, 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 provides Alexion with exclusive worldwide licenses as well as development and commercial rights for two of the Company’s pre-clinical, 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 will pay the Company a non-refundable, non-reimbursable, and non-creditable upfront payment of $22.0 million, with Alexion Pharmaceuticals making a concurrent $15.0 million equity investment at a premium in Dicerna pursuant to a share issuance agreement between the Company and Alexion Pharmaceuticals (the “Alexion Share Issuance Agreement”). The Alexion Collaboration Agreement also provides for potential additional payments to the Company of up to $600.0 million, which is comprised of option exercise fees of up to $20.0 million, representing $10.0 million for each of the candidates selected; development milestones of up to $105.0 million for each product; and aggregate sales milestones of up to $160.0 million. Under the agreement, Alexion will also pay 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.

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The Alexion Collaboration Agreement includes various representations, warranties, covenants, indemnities, and other customary provisions. Alexion may terminate the Alexion Collaboration Agreement at any time without cause following a 90-day notice period.

Alexion Share Issuance Agreement

In connection with the Alexion Collaboration Agreement, the Company and Alexion entered into the Alexion Share Issuance Agreement on October 22, 2018, pursuant to which the Company agreed to issue to Alexion 835,834 shares of the Company’s common stock at a purchase price of $17.95 per share for an aggregate purchase price of approximately $15.0 million.

Pursuant to the terms of the Alexion Share Issuance Agreement, Alexion may not, without the prior approval of the Company, dispose of any of the Alexion Shares for a six-month period of time commencing on the closing date of the Alexion Share issuance.

Lilly

Lilly Collaboration and License Agreement

On October 25, 2018, the Company and Lilly entered into a Collaboration and License Agreement the Lilly Collaboration Agreement. The Lilly Collaboration Agreement is for the discovery, development, and commercialization of potential new medicines in the areas of cardio-metabolic disease, neurodegeneration, and pain. Under the terms of the Lilly Collaboration Agreement, the Company and Lilly will seek to use the Company’s proprietary GalXC RNAi technology platform to progress new drug targets toward clinical development and commercialization. In addition, the Company and Lilly will collaborate to extend the GalXC RNAi platform technology to non-liver 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 cardio-metabolic 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 contemplates in excess of 10 targets.

Under the terms of the Lilly Collaboration Agreement, Lilly will pay the Company a non-refundable, non-creditable upfront payment of $100.0 million, with Lilly making a concurrent $100.0 million equity investment in the Company pursuant to the Lilly Share Issuance Agreement. Under the Lilly Collaboration Agreement, the Company is 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 when the first non-hepatocyte target achieves proof of principle. In addition, the Lilly Collaboration Agreement also provides that Lilly will pay to the Company mid-single to low-double digit royalties on potential 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.  

The Lilly Collaboration Agreement includes various representations, warranties, covenants, indemnities, and other customary provisions. Lilly may terminate the Lilly Collaboration Agreement at any time without cause following a 90-day notice period. The Lilly Collaboration Agreement is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and other customary closing conditions.

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Lilly Share Issuance Agreement

In connection with the Lilly Collaboration Agreement, the Company and Lilly entered into the Lilly Share Issuance Agreement on October 25, 2018, pursuant to which the Company agreed to issue to Lilly 5,414,185 shares of the Company’s common stock at a purchase price of $18.47 per share, for an aggregate purchase price of approximately $100.0 million. The issuance of shares of common stock under the Lilly Share Issuance Agreement is subject to clearance under the HSR Act and other customary closing conditions. The Lilly Share Issuance Agreement contains customary representations, warranties, and covenants of each party. The Lilly Share Issuance Agreement will automatically terminate if the Lilly Collaboration Agreement is terminated prior to the closing of the transactions contemplated by the Lilly Share Issuance Agreement.

Pursuant to the terms of the Lilly Share Issuance Agreement, Lilly may not, without the prior approval of the Company or except in the case of a third party tender offer, dispose of any of the Lilly Shares for a nine-month period of time commencing on the closing date of the Lilly Share issuance.

Alnylam

As a result of the recently executed partnership agreements with Alexion and Lilly, the Company believes that its cash obligation of $13.0 million payable to Alnylam will become due and that it will make this payment during the fourth quarter of 2018. As a result, the estimated present value of $12.8 million, which was revised based on the expected timing of the remaining payments, is recorded in current liabilities. The impact of revising the expected timing of repayment was recorded as a $3.7 million charge to litigation expense in the condensed consolidated statement of operations for three and nine months ended September 30, 2018.

 

 

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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.”

Overview

Dicerna Pharmaceuticals, Inc. (“we”, “the Company,” or “Dicerna”) is a biopharmaceutical company focused on the discovery and development of innovative subcutaneously delivered ribonucleic acid (“RNA”) interference (“RNAi”)-based pharmaceuticals using our GalXC^TM RNAi platform for the treatment of diseases involving the liver, including rare diseases, viral infectious diseases, chronic liver diseases, and cardiovascular diseases. Within these therapeutic areas, we believe our GalXC RNAi platform will allow us to build a broad pipeline of therapeutics with commercially attractive pharmaceutical properties, including a subcutaneous route of administration, infrequent dosing (e.g., dosing that is monthly or quarterly, and potentially even less frequent), high therapeutic index, and specificity to a single target gene.

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. The Company’s 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 particular structure of double-stranded RNA molecules configured for subcutaneous delivery to the liver. Due to the enzymatic nature of RNAi, a single GalXC molecule incorporated into the RNAi machinery can destroy hundreds or thousands of mRNAs from the targeted gene.

The GalXC RNAi platform supports Dicerna’s long-term strategy to retain, subject to the evaluation of potential licensing opportunities as they may arise, a full or substantial ownership stake 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 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 plan to pursue collaborations that can provide the enhanced scale, resources, and commercial infrastructure required to maximize these prospects, such as our existing collaborative research and license agreements, as discussed below.

Development Programs

In choosing which development programs to internally advance, we apply scientific, clinical, and commercial criteria that we believe allow us to best leverage our GalXC RNAi platform and maximize value. The Company is focusing its efforts on three priority therapeutic programs that currently have a Clinical Trial Application (“CTA”) filed, Investigational New Drug application (“IND”) filed, or are in enabling studies in preparation to submit additional regulatory applications that will be necessary to initiate clinical trials. The Company is also focusing its efforts on 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 a program for an undisclosed rare disease. Our potential programs include additional rare disease programs, a program for the treatment of hypercholesterolemia, and multiple programs targeting undisclosed targets in chronic liver diseases and cardiovascular diseases. In May 2018, the Company dosed the first PH patient with DCR-PHXC in the Group B portion of the Phase 1 clinical trial and received notice from the United States (“U.S.”) Food and Drug Administration (“FDA”) granting Orphan Drug Designation to DCR-PHXC for treatment of PH. In August 2018, the European Medicines Agency’s Committee for Orphan Medicinal Products (“COMP”) designated DCR-PHXC as an orphan medicinal product for the treatment of PH in the European Union (“EU”). We have received regulatory and ethical approvals for the PHYOX clinical trial in the United Kingdom, France, Netherlands, and Germany. We expect to submit requests for additional regulatory clearances necessary to commence clinical trials for our programs in 2018 and 2019.

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The table below sets forth the state of development of our various GalXC RNAi platform product candidates as of November 5, 2018.

 

Our current GalXC RNAi platform development programs are as follows:

PHYOX is a Phase 1 single ascending-dose study of DCR-PHXC in normal healthy volunteers (“NHVs”) and study participants with PH. The study is divided into two groups: Group A is a placebo-controlled, single-blind, single center study, which has enrolled 25 NHVs; Group B is an open-label, multi-center study enrolling up to 18 participants with PH type 1 (“PH1”) or PH type 2 (“PH2”). The primary objective of the study is to evaluate the safety and tolerability of single doses of DCR-PHXC in both groups. The secondary objectives are to evaluate the pharmacodynamic effect of single doses of DCR-PHXC on biochemical markers, and to characterize the pharmacokinetics of single doses of DCR-PHXC in NHVs and study participants with PH. We have submitted CTAs for the PHYOX trial in the UK, France, Netherlands, and Germany and have received the required regulatory and ethical approvals. The FDA has accepted the Company’s IND and issued a “study may proceed” letter for the PHYOX trial. We have completed the Group A portion of the study in NHVs and started the Group B portion of the study. Group B consists of three cohorts of participants with PH1 dosed at 1.5, 3, and 6 mg/kg. An additional fourth cohort consists of participants with PH2 dosed at a flexible dosing level. We have enrolled 12 participants out of 18 (four PH1 participants in Cohort 1, four PH1 participants in Cohort 2, three PH1 participants in Cohort 3, and one PH2 participant in Cohort 4). We reported interim results from the PHYOX trial on September 5, 2018 and presented updated results (as of October 1, 2018) at Kidney Week in San Diego on October 25, 2018.

As of October 1, 2018, no severe or serious adverse events have occurred thus far in the PHYOX trial, and there have been no clinically significant changes in electrocardiography (“ECG”), vital signs, laboratory, or hematology values. The investigators have observed in a total of 27 participants dosed (Group A and B together) mild-to-moderate injection site reactions in 5 participants (19%), all of which were transient and resolved without intervention within 24 to 72 hours.

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Investigators reported that a single 3.0-mg/kg dose of DCR-PHXC brought urinary oxalate levels into the normal range (defined as 24-hour excretion ≤0.46 mmol) at one or more post-dose time points in three out of four PH participants dosed at this level, including a mean maximal reduction in 24-hour urinary oxalate of 65% for the cohort, and a single 1.5-mg/kg dose led to near-normalization (defined as 24-hour excretion <0.6 and >0.46 mmol) in three out of four PH1 participants dosed at this level, and led to a mean maximal reduction in urinary oxalate of 50% in the five PH participants dosed at that level, including one PH2 participant.

Additionally, we intend to initiate a multi-dose study, which we hope will serve as a registration trial in the first quarter of 2019, pending regulatory feedback.

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In addition to the GalXC development programs outlined above, we are party to an agreement (the “BI Agreement”) with Boehringer Ingelheim International GmbH (“BI”), pursuant to which the Company and BI 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. 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 pre-clinical 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 pre-clinical 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. Pursuant to 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 us 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 exercise of the option to add a second target, upon completion of a work plan, budget, and other activities, would provide for a $5.0 million option fee payment and provides for success-based development and commercialization milestones and royalty payments to us.

We have also developed a wholly-owned clinical candidate, DCR-BCAT, targeting the β-catenin oncogene. DCR-BCAT is based on an extended version of our earlier generation non-GalXC Dicer Substrate RNAi technology and is delivered by our lipid nanoparticle tumor delivery system, EnCore^TM. We plan to out-license, spin out, or seek external funding to advance the DCR-BCAT opportunity, given our focus on our GalXC platform-based programs.

Corporate Developments

On April 18, 2018, we entered into a Confidential Settlement Agreement and General Release (the “Settlement Agreement”) with Alnylam Pharmaceuticals, Inc. (“Alnylam”), resolving all ongoing litigation between the Company and Alnylam. The terms of the Settlement Agreement include mutual releases and dismissals with prejudice of all claims and counterclaims in the following litigation between the parties: (i) Alnylam Pharmaceuticals, Inc. v. Dicerna Pharmaceuticals, Inc., No. 15-4126 pending in the Massachusetts Superior Court for Middlesex County and (ii) Dicerna Pharmaceuticals, Inc., v. Alnylam Pharmaceuticals, Inc. No.1:17-cv-11466 pending in the United States District Court for the District of Massachusetts. Pursuant to the terms of the Settlement Agreement, we have agreed to make the following payments to Alnylam: (i) a $2.0 million upfront payment in cash, which we made in May 2018; (ii) an additional $13.0 million in cash, to be paid as 10% of any upfront or first year cash consideration that we receive 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 our common stock (the “Shares”) pursuant to a share issuance agreement between the parties (the “Share Issuance Agreement”).

Under the Settlement Agreement, for periods ranging from 18 months up to four years, we will be restricted in our development and other activities relating to oligonucleotide-based therapeutics directed toward a defined set of eight Alnylam targets (the “Oligo Restrictions”). The Oligo Restrictions pertain to targets where Dicerna does not have, or does not currently intend to have, a therapeutic program, or are expected to be consistent with our execution on programs in the normal course of business. The Settlement Agreement does not include any admission of liability or wrongdoing by either party or any licenses to any other intellectual property from either party.

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On April 20, 2018, we entered into the Share Issuance Agreement, pursuant to which we agreed to issue to Alnylam 983,208 Shares in satisfaction of our obligation under the Settlement Agreement to deliver Shares to Alnylam. The Share Issuance Agreement contains customary representations and warranties of each party. Pursuant to the terms of the Share Issuance Agreement, Alnylam may not, without our prior approval, dispose of any of the Shares for a six-month period commencing on the closing date of the Share issuance. Thereafter, through the fifth anniversary of the closing date of the Share issuance, Alnylam will only dispose of the maximum number of Shares that it would be permitted to dispose if the Shares were subject to the volume restrictions set forth in Rule 144(e) of the Securities Act of 1933, as amended.

On September 6, 2018, we entered into an underwriting agreement with Citigroup Global Markets Inc. and Leerink Partners LLC as representatives of the underwriters relating to the underwritten public offering of 7,680,492 shares of our common stock, par value, and the grant to the underwriters of a 30-day option to purchase up to an additional 1,152,073 shares of our common stock. We completed the sale of 8,832,565 shares to the underwriters on September 11, 2018, which resulted in net proceeds to us of approximately $107.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s 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. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

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 our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the SEC on March 8, 2018. There have been no changes to our critical accounting policies during the three or nine months ended September 30, 2018 from those discussed 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 8, 2018, except as discussed below.

Recent Accounting Pronouncements

A summary of recent accounting pronouncements that have been adopted or are expected to be adopted by the Company 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 2018

Revenue recognition

In May 2014, the accounting guidance related to revenue recognition was amended to replace current guidance with a single, comprehensive standard for accounting for revenue from contracts with customers. The new guidance became effective for us on January 1, 2018. The new revenue standard applies to all contracts with customers, and only contracts with customers are in the scope of the new revenue standard. Once a contractual arrangement is scoped into the new guidance, revenue is recognized based on a model that includes identifying performance obligations and determining and allocating the transaction price to the performance obligations identified in the contract. Revenue is recognized as those performance obligations are satisfied. We elected to apply this new guidance retrospectively to all prior periods presented, and adoption of this new guidance did not have a significant quantitative impact on our condensed consolidated financial statements; however, adoption of this guidance has resulted in additional revenue-related disclosures in the notes to our condensed consolidated financial statements.

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Statement of cash flows

In November 2016, new accounting guidance was issued related to the statement of cash flows implications related to restricted cash and cash equivalents. The guidance requires that the statement of cash flows explain the change during the period in the total of cash and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Entities are also required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. We applied this new guidance on January 1, 2018 and have made current and retrospective presentation adjustments such that transfers between restricted and unrestricted cash accounts are no longer reported as a cash flow in our condensed consolidated statement of cash flows.

Not yet adopted

Leases

In February 2016, accounting guidance related to leases was issued that will require an entity to recognize leased assets and the rights and obligations created by those leased assets on the balance sheet and to disclose key information about an entity’s leasing arrangements. This guidance will become effective for us on January 1, 2019, with early adoption permitted. We expect that the adoption of this guidance will impact our condensed consolidated financial statements and notes thereto, resulting, among other factors, from the recognition of a right of use asset and related liability related to our non-cancelable operating lease arrangement for our office and laboratory space in Cambridge, Massachusetts. In July 2018, additional guidance intending to provide some transition relief to the guidance issued in February 2016 was issued. As of September 30, 2018, and as presented in Note 7 – Commitments and Contingencies to our condensed consolidated financial statements (see Part 1, Item 1 – “Financial Statements” of this Quarterly Report on Form 10-Q), our total future minimum lease obligation associated with this lease was $3.7 million, and a substantial portion of this commitment will remain outstanding at the time we adopt the new guidance. Our evaluation of the new lease guidance and its full impact on our condensed consolidated financial statements will continue throughout 2018.

Recent Developments

On October 25, 2018, we announced the presentation of late-breaking data from our ongoing PHYOX Phase 1 trial, in which single-dose administration of DCR-PHXC, our lead GalXC^TM product candidate, was associated with normalization or near-normalization of urinary oxalate levels in a majority of adult patients with PH1 and PH2. In a poster presented at the American Society of Nephrology (“ASN”) Annual Kidney Week 2018 in San Diego, California, investigators reported that a single 3.0-mg/kg dose of DCR-PHXC brought urinary oxalate levels into the normal range (defined as 24-hour excretion ≤0.46 mmol) at one or more post-dose time points in three out of four PH participants dosed at this level, including a mean maximal reduction in 24-hour urinary oxalate of 65% for the cohort. Investigators also reported that a single 1.5-mg/kg dose led to near-normalization (defined as 24-hour excretion <0.6 and >0.46 mmol) in three out of four PH1 participants dosed at this level and led to a mean maximal reduction in urinary oxalate of 50% in the five patients dosed at that level, including one PH2 patient. All patients demonstrated a clinically significant reduction in urinary oxalate (defined as a >30% reduction compared to baseline).

In their poster presentation, which is based on data as of October 1, 2018, the PHYOX investigators also reported that DCR-PHXC is safe and well-tolerated in this ongoing study, based on data from 12 participants with PH1 (n=11) and PH2 (n=1) and 25 adult NHVs. The ASN presentation follows our announcement in September 2018 of preliminary proof-of-concept for DCR-PHXC, based on interim PHYOX data demonstrating substantial and clinically significant reductions in urinary oxalate in all assessed patients with PH. We plan to initiate a Phase 2/3 registration trial for DCR-PHXC in the first quarter of 2019, pending regulatory feedback.

We are investigating DCR-PHXC for the treatment of all forms of PH, a family of severe, rare, inherited disorders of the liver that often result in kidney failure. The Company initiated the PHYOX trial in NHVs in the fourth quarter of 2017 and dosed the first PH patient in May 2018.

The primary objective of the PHYOX trial (ClinicalTrials.gov: NCT03392896) 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:

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In terms of safety, no severe or serious adverse events have occurred as of October 1, 2018, and there have been no clinically significant changes in ECG, vital signs, laboratory, or hematology values. Among the 27 participants dosed with DCR-PHXC in both Groups A and B, the investigators observed a total of five participants with mild-to-moderate injection site reactions (19%), all of which were transient and resolved without intervention within 24 to 72 hours.

Alexion

Alexion Collaborative Research and License Agreement

On October 22, 2018, we and Alexion Pharma Holding Unlimited Company (“Alexion Pharma Holding”), an affiliate of Alexion Pharmaceuticals, Inc. (“Alexion Pharmaceuticals” and together with Alexion Pharma Holding, “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, we will collaborate with Alexion on the discovery and development of subcutaneously delivered GalXC candidates, currently in pre-clinical 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 pre-clinical stage, and Alexion will lead development efforts beginning with Phase 1 studies. We will be responsible for manufacturing of the GalXC candidates through the completion of Phase 1, the costs of which will be paid by Alexion. Alexion will be solely responsible for the manufacturing of any product candidate subsequent to the completion of Phase 1. The Alexion Collaboration Agreement provides Alexion with exclusive worldwide licenses as well as development and commercial rights for two of the Company’s pre-clinical, 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 will pay us a non-refundable, non-reimbursable, and non-creditable upfront payment of $22.0 million, with Alexion Pharmaceuticals making a concurrent $15.0 million equity investment of 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 us of up to $600.0 million, which is comprised of option exercise fees of up to $20.0 million, representing $10.0 million for each of the candidates selected; development milestones of up to $105.0 million for each product; and aggregate sales milestones of up to $160.0 million. Under the agreement, Alexion will also pay us mid-single to low-double digit royalties on potential product sales on a country-by-country, product-by-product basis until the later of the expiration of patent rights in a country, the expiration of market or regulatory exclusivity in such country, or 10 years after the first product sale in such country, subject to certain royalty step-down provisions set forth in the agreement.

Alexion Share Issuance Agreement

In connection with the Alexion Collaboration Agreement, we and Alexion entered into the Alexion Share Issuance Agreement on October 22, 2018, pursuant to which we agreed to issue to Alexion 835,834 shares of our common stock at a purchase price of $17.95 per share for an aggregate purchase price of approximately $15.0 million.

Lilly

Lilly Collaboration and License Agreement

On October 25, 2018, we and Eli Lilly and Company (“Lilly”) entered into a Collaboration and License Agreement (the “Lilly Collaboration Agreement”). The Lilly Collaboration Agreement is for the discovery, development, and commercialization of potential new medicines in the areas of cardio-metabolic 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 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 cardio-metabolic 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.

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Under the terms of the Lilly Collaboration Agreement, Lilly will pay us a non-refundable, non-creditable upfront payment of $100.0 million, with Lilly making a concurrent $100.0 million equity investment in us 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 when the first non-hepatocyte target achieves proof of principle. 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.  

The Lilly Collaboration Agreement includes various representations, warranties, covenants, indemnities, and other customary provisions. Lilly may terminate the Lilly Collaboration Agreement at any time without cause following a 90-day notice period. The Lilly Collaboration Agreement is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and other customary closing conditions.

Lilly Share Issuance Agreement

In connection with the Lilly Collaboration Agreement, the parties entered into the Lilly Share Issuance Agreement on October 25, 2018, pursuant to which we agreed to issue to Lilly 5,414,185 shares of our common stock at a purchase price of $18.47 per share, for an aggregate purchase price of approximately $100.0 million. The issuance of shares of common stock under the Lilly Share Issuance Agreement is subject to clearance under the HSR Act and other customary closing conditions.

Alnylam

As a result of the recently executed partnership agreements with Alexion and Lilly, we expect that our $13.0 million cash obligation payable to Alnylam will become due; we anticipate that we will make this payment during the fourth quarter of 2018. As a result, we recalculated the cash obligation to an estimated present value of $12.8 million, which was revised based on the expected timing of the remaining payments, and recorded it in current liabilities as of September 30, 2018. The impact of revising the expected timing of repayment is recorded as a component of litigation expense in the condensed consolidated statement of operations.

Financial Operations Overview

Comparison of the Three and Nine Months Ended September 30, 2018 and 2017

The following table summarizes the results of our operations for the periods indicated (amounts in thousands, except percentages).