Adaptimmune Therapeutics PLC: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2022, included in our Annual Report on Form 10-K that was filed with the SEC on March 6, 2023. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2022, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company focused on providing novel cell therapies to people with cancer. We are a leader in the development of T-cell therapies for solid tumors and have reported clinical responses in multiple solid tumor indications.

Our proprietary platform enables us to identify cancer targets, find and develop cell therapy candidates active against those targets and produce therapeutic candidates for administration to patients. Our cell therapies are currently manufactured on an autologous or per patient basis and we have a proprietary preclinical allogeneic platform for the development of “off the shelf” cell therapies.

BLA Filing for afami-cel

Adaptimmune’s lead product, afami-cel targets the MAGE-A4 antigen. Clinical data from the pivotal SPEARHEAD-1 trial for this product will support the filing of our first BLA submission in Q4 2023. An overall response rate of approximately 39% and median duration of response of approximately 12 months was reported at the Connective Tissue Oncology Society (“CTOS”) in 2022. Additional data for cohort 1 of the SPEARHEAD-1 trial was reported at CTOS in November 2023, with a median overall survival of approximately 17 months and 70% of people with advanced synovial sarcoma who responded to afami-cel being alive two years post treatment.

Submission of the preclinical (Part 1) and clinical (Part 2) modules of the BLA to the FDA has been completed and submission of the final modules remains on target for Q4 2023. The submission to the FDA for the companion diagnostic for the MAGE-A4 antigen has been completed. The FDA has agreed that cohort 2 of the SPEARHEAD-1 trial will act as confirmatory evidence for full approval for afami-cel. Mature data from cohort 2 is expected in mid 2024.

Clinical progress

Phase 2 clinical programs are ongoing with the Mage-A4 targetd T-cells and NY-ESO targeted T-cells:

• SPEARHEAD-1 Phase 2 Trial with afami-cel (ADP-A2M4) targeting MAGE-A4: A registration directed Phase 2 clinical trial is ongoing in synovial sarcoma in which the MAGE-A4 antigen is expressed. Enrollment in Cohorts 1 and 2 are complete. Cohort 3 is now open to provide ongoing access to afami-cel prior to the planned commericalization.
• IGNYTE Phase 2 Trial with lete-cel targeting NY-ESO: We are currently in the process of transitioning the IGNYTE trial in synovial sarcoma and myxoid round cell liposarcoma (MRCLS) from GSK, with completion of transition of IGNYTE trial expected by the end of 2023.We announced agreement of terms for the transfer of the NY-ESO Target programs back to Adaptimmune from GSK in April 2023. The IGNYTE trial has two sub-studies. Interim data from sub-study 2, the phase 2 portion of the trial was presented at CTOS in November 2023 with 40% of people with synovial sarcoma or MRCLS (18/45) having clinical responses by independent review and the trial meeting its primary endpoint for efficacy. A median duration of response of approximately 11 months was reported. Data from sub-study 1 from the trial in which treatment naïve synovial sarcoma patients received lete-cel was also presented at CTOS. 4 out of the 5 patients treated responded in sub-study 1.

Responses by independent review from interim analysis of IGNYTE-ESO

• SURPASS-3 Phase 2 Trial with ADP-A2M4CD8 targeting MAGE-A4. A Phase 2 trial for people with platinum resistant ovarian cancer has been initiated. We have received RMAT designation (Regenerative Medicine Advanced Therapy designation) for ADP-A2M4CD8 for the treatment of this indication from the FDA. In the Phase 1 SURPASS trial an ORR of 40% in ovarian cancer (6/15 people treated) was reported at the European Society for Medical Oncology (“ESMO”) in October 2023, with one complete response and 5 partial responses. The Phase 2 trial will evaluate ADP-A2M4CD8 in both monotherapy and in combination with a checkpoint inhibitor, nivolumab, in platinum resistant ovarian cancer.

An earlier stage clinical trial is ongoing with our MAGE-A4 targeted TCR-T-cell therapy (ADP-A2M4CD8).

• SURPASS Phase 1 Trial with ADP-A2M4CD8: Enrolment is ongoing in a Phase 1 trial for ADP-A2M4CD8, focusing on treatment of patients with head and neck and urothelial cancers in which the MAGE-A4 antigen is expressed and in earlier line treatment settings. Updated data from the trial was presented in October 2023 at ESMO. Across all indications the trial reported an overall response rate of 35%. In the 26 patients with ovarian, urothelial and head and neck cancers the response rate is 50% and in patients who received 3 or fewer prior lines of therapy, the response rate increases to 75%. The trial includes a combination cohort where participants receive a combination of ADP-A2M4CD8 together with a checkpoint inhibitor (nivolumab). Early data from the combination cohort was presented at ESMO in October 2023 and is still evolving. As of August 14, 2023 one patient in the combination cohort had a confirmed response. Subsequent to the data cut off, there has been one additional confirmed response.

CR=complete response; PR=partial response; SD=stable disease; PD=progressive disease; ESMO 2023 data cut off August 14, 2023

We also have trials ongoing with TC-510 focussing on the treatment of patients with mesothelin-expressing MPM, ovarian cancer, pancreatic cancer, colorectal cancer or triple negative breast cancer and gavo-cel focussing on treatment of patients with ovarian cancer in combination with Opdivo® (nivolumab). Based on the review of clinical data from both trials, those clinical trials are being halted and no additional patients will be enrolled in those trials.

Outside of the clinical programs, we have a preclinical program for T-cell therapies directed to the PRAME target which is expressed in a broad range of tumors. Dependent on the data arising from the preclinical program, we plan to file an IND for the first cell therapy targeting PRAME in 2024. The PRAME program was previously part of a prior collaboration with GSK. We also have a preclinical program for TC-520, a TRuC T-cell targeting CD70 and enhanced with IL-15. CD70 is expressed in certain hematological malignancies and solid tumours specifically acute myeloid leukemia and renal cell carcinoma. Depending on the data arising from the preclinical program we are targeting IND readiness by the end of 2024.

We are also developing allogeneic or “off-the-shelf” cell therapies utilizing a proprietary allogeneic platform. The platform utilizes cells derived from Induced Pluripotent Stem Cells (“iPSCs”), which can be gene-edited to express our engineered TCRs or other constructs and then differentiated into the required end cell type, for example T-cells. The platform is applicable to all of our cell therapies. We have a strategic collaboration with Genentech Inc. (“Genentech”). The collaboration with Genentech covers the research and development of “off-the-shelf” cell therapies for up to five shared cancer targets (“off-the-shelf” products) and the development of a novel allogeneic personalized cell therapy platform.

We have several other development and research collaborations.

• A prior collaboration with GSK terminated in December 2022. On April 11, 2023, we announced the entry into a Termination and Transfer Agreement with GSK (the “Termination and Transfer Agreement”) regarding the return of rights and materials comprised within the PRAME and NY-ESO cell therapy programs. The parties will work collaboratively to ensure continuity for patients in ongoing lete-cel clinical trials forming part of the NY-ESO cell therapy program. In addition, under the Termination and Transfer Agreement, Adaptimmune has received an upfront amount of £7.5 million in June 2023 and will receive milestone payments totalling £22.5 million in relation to the transfer of the clinical trials for the NY-ESO cell therapy program.
• We have an agreement with Bristol-Myers Squibb in relation to the phase 1/2 trial evaluating gavo-cel in combination with Opdivo® (nivolumab) and Yervoy® (ipilimumab) in mesothelin-expressing solid tumors.

During the quarter, Dr Karen Chagin joined the Company as Senior Vice President of Early Stage Development. Effective from November 1, 2023, Kristen M Hege M.D. joined the Board of Directors and Elliot Sigal M.D.. PhD stood down from the Board.

Financial Operations Overview

Revenue

The Company had two contracts with customers in the three months ended September 30, 2023, and three in the nine months ended September 30, 2023: the Astellas Collaboration Agreement (until March 6, 2023), the Genentech Collaboration Agreement and the GSK Termination and Transfer Agreement (from April 11, 2023). A previous collaboration, the GSK Collaboration and License Agreement, was terminated on October 24, 2022 (effective December 23, 2022).

The Astellas Collaboration Agreement

In January 2020, the Company entered into a collaboration agreement with Astellas. The Company received $50.0 million as an upfront payment after entering into the agreement. Under the agreement the parties would agree on up to three targets and would co-develop T-cell therapies directed to those targets pursuant to an agreed research plan. For each target, Astellas would fund co-development up until completion of a Phase 1 trial for products directed to such target. In addition, Astellas was also granted the right to develop, independently of Adaptimmune, allogeneic T-cell therapy candidates directed to two targets selected by Astellas. Astellas would have sole rights to develop and commercialize products resulting from these two targets.

The agreement consisted of the following performance obligations: (i) research services and rights granted under the co-exclusive license for each of the three co-development targets and (ii) the rights granted for each of the two independent Astellas targets. The revenue allocated to the co-development targets was recognized as the development of products directed to the targets progressed up until completion of a Phase 1 trial. The revenue allocated to each of the research licenses for the targets being independently developed by Astellas was to be recognized when the associated license commenced, which was upon designation of a target by Astellas.

The Company and Universal Cells mutually agreed to terminate the Astellas Collaboration Agreement as of March 6, 2023 (the “Termination Date”). In connection with the termination, all licenses and sublicenses granted to either party pursuant to the Collaboration Agreement ceased as of the Termination Date. There were no termination penalties in connection with the termination, however the Company was still entitled to receive reimbursement for research and development work performed up to and including a period of 30 days after the Termination Date.

The termination was accounted for as a contract modification and the modification resulted in the remaining unsatisfied and partially satisfied performance obligations under the collaboration becoming fully satisfied. The aggregate transaction price of the contract modification was $42.4 million, which was primarily comprised of deferred income relating to the third co-development target and the two independent targets, and was recognized in full in March 2023. No revenue was recognized for Astellas in the three months ended September 30, 2023.

The Genentech Collaboration Agreement

On September 3, 2021, Adaptimmune Limited, a wholly owned subsidiary of Adaptimmune Therapeutics Plc, entered into a Strategic Collaboration and License Agreement with Genentech, Inc. (“Genentech”) and F. Hoffman-La Roche Ltd. The collaboration has two components:

1) development of allogeneic T-cell therapies for up to five shared cancer targets

2) development of personalized allogeneic T-cell therapies utilizing αβ T-cell receptors (TCRs) isolated from a patient, with such therapies being administered to the same patient.

The parties will collaborate to perform a research program, initially during an eight-year period (which may be extended for up to two additional two-year terms at Genentech’s election upon payment of an extension fee for each two-year term), to develop the cell therapies, following which Genentech will determine whether to further develop and commercialize such therapies. The Company received an upfront payment of $150 million in October 2021 and a $20 million milestone payment in December 2022.

The Company identified the following performance obligations under the agreement: (i) research services and rights granted under the licenses for each of the initial “off-the-shelf” collaboration targets, (ii) research services and rights granted under the licenses for the personalized therapies, (iii) material rights relating to the option to designate additional “off-the-shelf” collaboration targets and (iv) material rights relating to the two options to extend the research term. The revenue allocated to the initial “off-the-shelf” collaboration targets and the personalized therapies is recognized as development progresses. The revenue allocated to the material rights to designate additional ‘off-the-shelf’ collaboration targets is recognized from the point that the options are exercised and then as development progresses, in line with the initial “off-the-shelf” collaboration targets, or at the point in time that the rights expire. The revenue from the material rights to extend the research term is recognized from the point that the options are exercised and then over the period of the extension, or at the point in time that the options expire.

The GSK Termination and Transfer Agreement

On April 11, 2023, the Company announced the entry of the Company and GSK into a Termination and Transfer regarding the return to Adaptimmune of rights and materials comprised within the PRAME and NY-ESO cell therapy programs. The parties will work collaboratively to ensure continuity for patients in ongoing lete-cel clinical trials forming part of the NY-ESO cell therapy program.

As part of the agreement, sponsorship of the ongoing IGNYTE and long-term follow-up (“LTFU”) trials relating to the NY-ESO cell therapy program will transfer to Adaptimmune. In return for this, Adaptimmune received an upfront payment of £7.5 million in June 2023 following the signing of the agreement and a milestone payment of £3 million in September 2023. Further milestone payments totalling £19.5 million will be due in relation to successive stages of transfer of the trials.

The Company has identified the following performance obligations under the agreement: (i) to take over sponsorship for the IGNYTE trial and (ii) to take over sponsorship for the LTFU trial. The revenue allocated to the IGNYTE obligation is recognized as sponsorship of the active trials that make up the IGNYTE trial transfer, based on the number of patients transferring in each trial. The revenue allocated to the LTFU obligation is recognized as sponsorship of the trials that make up the LTFU trial transfers, including trials for potential future patients transferring to the LTFU trial from the IGNYTE trial, based on the number of active and potential patients transferring in each trial.

No revenue was recognized for the agreement in the three and nine months ended September 30, 2023.

Research and Development Expenses

Research and development expenditures are expensed as incurred. Research and development expenses consist principally of the following:

• salaries for research and development staff and related expenses, including benefits;
• costs for production of preclinical compounds and drug substances by contract manufacturers;
• fees and other costs paid to contract research organizations in connection with additional preclinical testing and the performance of clinical trials;
• costs associated with the development of a process to manufacture and supply our lentiviral vector and cell therapies for use in clinical trials;
• costs to develop manufacturing capability at our U.S. facility for manufacture of cell therapies for use in clinical trials;
• costs relating to facilities, materials and equipment used in research and development;
• costs of acquired or in-licensed research and development which does not have alternative future use;
• costs of developing assays and diagnostics;
• an allocation of indirect costs clearly related to research and development;
• amortization and depreciation of property, plant and equipment and intangible assets used to develop our cells therapies; and
• share-based compensation expenses.

These expenses are partially offset by:

• reimbursable tax and expenditure credits from the U.K. government.

Research and development expenditure is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K. government.

As a company that carries out extensive research and development activities, we benefit from the U.K. research and development tax credit regime for small and medium sized companies (“SME R&D Tax Credit Scheme”), whereby our principal research subsidiary company, Adaptimmune Limited, is able to surrender the trading losses that arise from its research and development activities for a payable tax credit of up to approximately 33.4% of eligible research and development expenditures, decreasing to 18.6% after April 1, 2023. Qualifying expenditures largely comprise employment costs for research staff, consumables and certain internal overhead costs incurred as part of research projects for which we do not receive income. Subcontracted research expenditures are eligible for a cash rebate of up to approximately 21.7%, decreasing to 12.1% after April 1, 2023. A large proportion of costs in relation to our pipeline research, clinical trials management and manufacturing development activities, all of which are being carried out by Adaptimmune Limited, are eligible for inclusion within these tax credit cash rebate claims.

Expenditures incurred in conjunction with our collaboration agreements are not qualifying expenditures under the SME R&D Tax Credit Scheme but certain of these expenditures can be reimbursed through the U.K. research and development expenditure credit scheme (the “RDEC Scheme”). Under the RDEC Scheme tax relief is given at 13% of allowable R&D costs, which may result in a payable tax credit at an effective rate of approximately 10.5% of qualifying expenditure for the three months ended March 31, 2023. The RDEC Scheme tax relief rate is scheduled to increase to 20% after April 1, 2023, which may result in a payable tax credit at an effective rate of 15%.

On July 18, 2023, the U.K. Government released draft legislation on proposed changes to the U.K. research and development regimes. These changes include combining the current SME R&D Tax Credit Scheme and RDEC Schemes with a single 20% gross rate applying to all claims with an exception for R&D Intensive SMEs. For entities which qualify as R&D Intensive SMEs, a higher effective cash tax benefit of 27% will be available. The draft legislation also includes changes to other rules and types of qualifying expenditure, such as the treatment of subcontracted and overseas costs. The Company is currently evaluating the impact of the draft legislation on its future tax credit claims.

Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, which depends upon the timing of initiation of clinical trials and the rate of enrollment of patients in clinical trials. The duration, costs, and timing of clinical trials and development of our cell therapies will depend on a variety of factors, including:

• the scope, rate of progress, and expense of our ongoing as well as any additional clinical trials and other research and development activities;
• uncertainties in clinical trial enrollment rates;
• future clinical trial results;
• significant and changing government regulation;
• the timing and receipt of any regulatory approvals; and
• supply and manufacture of lentiviral vector and cell therapies for clinical trials.

A change in the outcome of any of these variables may significantly change the costs and timing associated with the development of that cell therapy. For example, if the FDA, or another regulatory authority, requires us to conduct clinical trials beyond those that we currently anticipate will be required for regulatory approval, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

Our general and administrative expenses consist principally of:

• salaries for employees other than research and development staff, including benefits;
• business development expenses, including travel expenses;
• professional fees for auditors, lawyers and other consulting expenses, including those incurred in relation to the merger with TCR2;
• costs of facilities, communication, and office expenses;
• cost of establishing commercial operations;
• information technology expenses;
• amortization and depreciation of property, plant and equipment and intangible assets not related to research and development activities; and
• share-based compensation expenses.

Other (Expense) Income, Net

Other (expense) income, net primarily comprises foreign exchange (losses) gains. We are exposed to foreign exchange rate risk because we currently operate in the United Kingdom and United States. Our expenses are generally denominated in the currency in which our operations are located, which are the United Kingdom and United States. However, our primary U.K.-based subsidiary, Adaptimmune Limited, incurs significant research and development costs in U.S. dollars and, to a lesser extent, Euros. Adaptimmune Limited has an intercompany loan balance in U.S. dollars payable to the ultimate parent company, Adaptimmune Therapeutics plc, which is considered of a long-term investment nature as repayment is not planned or anticipated in the foreseeable future. It is Adaptimmune Therapeutics plc’s intent not to request payment of the intercompany loan for the foreseeable future. The foreign exchange gains or losses arising on the revaluation of intercompany loans of a long-term investment nature are reported within other comprehensive (loss) income, net of tax.

Our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. We seek to minimize this exposure by maintaining currency cash balances at levels appropriate to meet forthcoming expenditure in U.S. dollars and pounds sterling. To date, we have not used hedging contracts to manage exchange rate exposure, although we may do so in the future.

In addition to currency fluctuations, adverse macroeconomic conditions, including inflation, slower growth or recession, new or increased tariffs, changes to fiscal and monetary policy, tighter credit, and higher interest rates, could materially adversely affect the Company by, for example, driving higher input costs and/or impacting the Company’s ability to raise future financing.

Taxation

We are subject to corporate taxation in the United Kingdom and the United States. We incur tax losses and tax credit carryforwards in the United Kingdom on an annual basis. No net deferred tax assets are recognized on our U.K. losses and tax credit carryforwards because there is currently no indication that we will make sufficient taxable profits to utilize these tax losses and tax credit carryforwards. On June 10, 2021, the U.K. 2021 Finance Bill received Royal Assent. Under this bill, the rate of U.K. corporation tax will increase to 25% from April 1, 2023, with lower rates and tapered relief to be applied to companies with profits below £250,000.

We benefit from reimbursable tax credits in the United Kingdom through the SME R&D Tax Credit Scheme as well as the RDEC Scheme which are presented as a deduction to research and development expenditure.

Our pre-existing subsidiary in the United States, Adaptimmune LLC, has generated taxable profits due to a Service Agreement between our U.S. and U.K. operating subsidiaries and is subject to U.S. federal corporate income tax of 21%. Due to its activity in the United States, and the sourcing of its revenue, the U.S. subsidiary is not currently subject to any state or local income taxes. The Company also benefits from the U.S Research Tax Credit and Orphan Drug Credit.

TCR2 has incurred net losses since acquisition and generates research and development tax credits. No net deferred tax assets are recognized on our TCR2’s losses and tax credit carryforwards because there is currently no indication that we will make sufficient taxable profits to utilize these tax losses and tax credit carryforwards.

In the future, if we generate taxable income in the United Kingdom on an annual basis, we may benefit from the United Kingdom’s “patent box” regime, which would allow certain profits attributable to revenues from patented products to be taxed at a rate of 10%. As we have many different patents covering our products, future upfront fees, milestone fees, product revenues, and royalties may be taxed at this favorably low tax rate.

U.K. Value Added Tax (“VAT”) is charged on all qualifying goods and services by VAT-registered businesses. An amount of 20% of the value of the goods or services is added to all relevant sales invoices and is payable to the U.K. tax authorities. Similarly, VAT paid on purchase invoices paid by Adaptimmune Limited and Adaptimmune Therapeutics plc is reclaimable from the U.K. tax authorities.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are relevant 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. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies considered to be critical to the judgments and estimates used in the preparation of our financial statements are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Results of Operations

Comparison of Three Months Ended September 30, 2023 and 2022

The following table summarizes the results of our operations for the three months ended September 30, 2023 and 2022, together with the changes to those items (in thousands):

Revenue

Revenue increased by $0.3 million to $7.3 million for the three months ended September 30, 2023 compared to $7.0 million for the three months ended September 30, 2022.

Research and Development Expenses

Research and development expenses increased by 14% to $37.8 million for the three months ended September 30, 2023 from $33.2 million for the three months ended September 30, 2022.

Our research and development expenses comprise the following (in thousands):

(1) These costs are not analyzed by project since employees may be engaged in multiple projects simultaneously.

The net increase in our research and development expenses of $4.6 million for the three months ended September 30, 2023 compared to the same period in 2022 was primarily due to the following:

• A decrease of $5.2 million in reimbursements receivable for research and development tax and expenditure credits due to decreases in the associated research and development costs for which the credits may be claimed and a reduction in the effective rate at which the tax credits can be claimed which was effective from April 1, 2023; offset by
• A decrease of $1.8 million in subcontracted expenditure due to a decrease lentiviral vector manufacturing costs although this was partially offset by an increase in clinical trial costs.

Our subcontracted costs for the three months ended September 30, 2023 were $16.6 million, compared to $18.4 million in the same period of 2022. This includes $6.3 million of costs directly associated with our afami-cel and ADP-A2M4CD8 SPEAR T-cells and $10.3 million of other development costs.

Our research and development expenses are highly dependent on the phases and progression of our research projects and will fluctuate depending on the outcome of ongoing clinical trials. We expect that our research and development expenses will increase in future periods as we continue to invest in our translational sciences and other research and development capabilities.

General and Administrative Expenses

General and administrative expenses decreased by 4% to $16.2 million for the three months ended September 30, 2023 from $16.8 million in the same period in 2022. Our general and administrative expenses consist of the following (in thousands):

The net decrease in our general and administrative expenses of $0.7 million for the three months ended September 30, 2023 compared to the same period in 2022 was largely due to a decrease of $0.8 million in Share-based compensation expense due to a combination of lower fair value of options granted, and fewer employees holding vesting options, for the three months ended September 30, 2023, compared to the equivalent period in 2022.

Gain on Bargain Purchase

The gain on bargain purchase recognized in the three months to September 30, 2023 of $0.1 million represents a remeasurement of provisional amounts relating to replacement share options originally recognized in the second quarter of 2023, from the strategic combination with TCR2 Therapeutics Inc on June 1, 2023.

Income Taxes

Income taxes arise in the United States due to Adaptimmune LLC generating taxable profits. We typically incur taxable losses in the United Kingdom on an annual basis and have incurred losses in TCR2 Therapeutics Inc. since acquisition.

Comparison of September 30, 2023 and 2022

The following table summarizes the results of our operations for the nine months ended September 30, 2023 and 2022, together with the changes to those items (in thousands):

Revenue

Revenue increased by $43.9 million to $60.1 million in the nine months ended September 30, 2023 compared to $16.1 million for the nine months ended September 30, 2022 primarily due to the termination of the Astellas collaboration, resulting in the remaining deferred income for the collaboration being recognized as revenue in March 2023.

Research and Development Expenses

Research and development expenses decreased by 11% to $93.3 million for the nine months ended September 30, 2023 from $104.7 million for the nine months ended September 30, 2022.

Our research and development expenses comprise the following (in thousands):

(1) These costs are not analyzed by project since employees may be engaged in multiple projects simultaneously.

The net decrease in our research and development expenses of $11.4 million for the nine months ended September 30, 2023 compared to the same period in 2022 was primarily due to the following:

• a decrease of $6.7 million in salaries, materials, equipment, depreciation of property, plant and equipment and other employee-related costs, which is mainly driven by a decrease in the average number of employees engaged in research and development;
• a decrease of $10.7 million in subcontracted expenditure due to a decrease in manufacturing costs including external lentiviral vector manufacturing;
• a decrease of $4.3 million in in-process research and development costs due to a credit of $1.9 million relating to the release of a milestone that was previously accrued that is no longer expected to be paid; and
• a decrease of $2.8 million in share-based compensation expense due to a combination of lower fair value of options granted in the nine months ended September 30, 2023 compared to the equivalent period in 2022 and due to high forfeiture credits due to redundancies in the same period; offset by
• a decrease of $14.4 million in reimbursements receivable for research and development tax and expenditure credits due to decreases in the associated research and development costs for which the credits may be claimed and a reduction in the effective rate at which the tax credits can be claimed which was effective from April 1, 2023.

Our subcontracted costs for the nine months ended September 30, 2023 were $37.2 million, compared to $47.9 million in the same period of 2022. This includes $21.4 million of costs directly associated with our afami-cel and ADP-A2M4CD8 SPEAR T-cells and $15.9 million of other development costs.

General and Administrative Expenses

General and administrative expenses increased by 18% to $56.6 million for the nine months ended September 30, 2023 from $48.2 million in the same period in 2022. Our general and administrative expenses consist of the following (in thousands):

The net increase in our general and administrative expenses of $8.5 million for the nine months ended September 30, 2023 compared to the same period in 2022 was largely due to:

• an increase of $2.9 million in salaries, depreciation of property, plant and equipment and other employee-related costs compared to the equivalent period in 2022, due to severance and other related costs for former TCR2 leadership and employees;
• Restructuring charges of $1.7 million, relating to the restructuring programme completed in the first quarter of 2023; and
• an increase of $6.8 million in other corporate costs due to an increase in accounting, legal and professional fees incurred in relation to entering into the TCR2 Therapeutics Inc. merger agreement; offset by
• a decrease in share-based compensation expense of $2.8 million due to a combination of lower fair value of options granted in the nine months ended September 30, 2023 compared to the equivalent period in 2022 and due to high forfeiture credits due to redundancies in the same period.

Gain on Bargain Purchase

The gain on bargain purchase of $22.0 million arose in June 2023 from the strategic combination with TCR2 Therapeutics Inc on June 1, 2023.

Income Taxes

Income taxes arise in the United States due to Adaptimmune LLC generating taxable profits. We typically incur taxable losses in the United Kingdom on an annual basis and have incurred losses in TCR2 Therapeutics Inc. since acquisition.

Liquidity and Capital Resources

Sources of Funds

Since our inception, we have incurred significant net losses and negative cash flows from operations. We financed our operations primarily through sales of equity securities, cash receipts under our collaboration arrangements and research and development tax and expenditure credits. From inception through to September 30, 2023, we have raised:

• $870.8 million, net of issuance costs, through the issuance of shares;
• $406.7 million through collaborative arrangements with Genentech, GSK and Astellas; and
• $110.6 million in the form of reimbursable U.K. research and development tax credits and receipts from the U.K. RDEC Scheme.

$45.3 million in cash and cash equivalents and restricted cash and $39.5 million of marketable securities were also acquired as part of the strategic combination with TCR2 Therapeutics Inc.

We use a non-GAAP measure, Total Liquidity, which is defined as the total of cash and cash equivalents and marketable securities, to evaluate the funds available to us in the near-term. A description of Total Liquidity and reconciliation to cash and cash equivalents, the most directly comparable U.S. GAAP measure, are provided below under “Non-GAAP measures”.

As of September 30, 2023, we had cash and cash equivalents of $90.1 million and Total Liquidity of $161.7 million. We regularly assess Total Liquidity against our activities and make decisions regarding prioritization of those activities and deployment of Total Liquidity. We believe that our Total Liquidity will be sufficient to fund the Company’s current operations, based upon our currently anticipated research and development activities and planned capital spending, we currently estimate that the cash runway will extend into early 2026. This belief is based on estimates that are subject to risks and uncertainties and may change if actual results differ from management’s estimates.

Cash Flows

The following table summarizes the results of our cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):

Operating Activities

Net cash used in operating activities was $126.2 million for the nine months ended September 30, 2023 compared to $143.8 million for the nine months ended September 30, 2022. Our activities typically result in net use of cash in operating activities. The net cash used in operating activities for the nine months ended September 30, 2023 decreased due to a decrease in operating expenditure as a result of the restructuring and re-prioritization of activities that was initiated in the final quarter of 2022, which included a reduction in headcount of approximately 25%. This was partially offset following the business combination with TCR2 which resulted in an increase in headcount of 39 and additional operating expenditures relating to activities originating from TCR2. The impact of these changes resulted in a total decrease of salaries, depreciation of property, plant and equipment and other employee-related costs of $3.8 million and a decrease in subcontracted expenditure of $10.7 million compared to the equivalent period in 2022.

Net cash used in operating activities of $126.2 million for the nine months ended September 30, 2023 comprised a net profit of $66.0 million and a net cash outflow of $53.2 million from changes in operating assets and liabilities, offset by non-cash items of $7.0 million. The changes in operating assets and liabilities include the impact of a $10.4 million increase in reimbursements receivable for research and development tax credits and a reduction in deferred revenue of $42.4 million due to the termination of the Astellas collaboration resulting in the remaining deferred revenue allocated to the collaboration being released as revenue. The non-cash items consisted primarily of a $22.0 million gain on bargain purchase, depreciation expense on plant and equipment of $6.6 million, share-based compensation expense of $8.7 million, unrealized foreign exchange losses of $0.7 million, accretion on available-for-sale debt securities of $1.6 million and other items of $0.6 million.

Investing Activities

Net cash provided by investing activities was $108.3 million for the nine months ended September 30, 2023 compared to $68.2 million for the nine months ended September 30, 2022. The net cash provided by investing activities for the respective periods consisted primarily of:

• purchases of property, plant and equipment of $3.9 million and $26.1 million for the nine months ended September 30, 2023 and 2022, respectively. Purchases of property, plant and equipment were higher in 2022 compared to 2023 due to expanding our manufacturing facilities, which was largely completed in 2022; and
• cash outflows from investment in marketable securities of $73.0 million and $42.2 million for the nine months ended September 30, 2023 and 2022, respectively; offset by
• cash inflows from maturity or redemption of marketable securities of $139.2 million and $136.7 million for the nine months ended September 30, 2023 and 2022, respectively; and
• cash and cash equivalents acquired as part of the business combination with TCR2 Therapeutics Inc. of $45.3 million.

The Company invests surplus cash and cash equivalents in marketable securities.

Financing Activities

Net cash provided by financing activities was $0.8 million and $11.5 million for the nine months ended September 30, 2023 and 2022, respectively. The net cash provided by financing activities in the nine months ended September 30, 2023 consisted primarily of net proceeds of $0.6 million from shares issued in an At-The-Market offering, net of commissions and issuance costs. The net cash provided by financing activities in the nine months ended September 30, 2022 consisted primarily of net proceeds of $11.4 million from shares issued in an At-The-Market offering, net of commissions and issuance costs.

Non-GAAP Measures

Total Liquidity (a non-GAAP financial measure)

Total Liquidity (a non-GAAP financial measure) is the total of cash and cash equivalents and marketable securities. Each of these components appears in the condensed consolidated balance sheet. The U.S. GAAP financial measure most directly comparable to Total Liquidity is cash and cash equivalents as reported in the condensed consolidated financial statements, which reconciles to Total Liquidity as follows (in thousands):

We believe that the presentation of Total Liquidity provides useful information to investors because management reviews Total Liquidity as part of its management of overall solvency and liquidity, financial flexibility, capital position and leverage. The definition of Total Liquidity includes marketable securities, which are highly-liquid and available to use in our current operations.

Safe Harbor

See the section titled “Information Regarding Forward-Looking Statements” at the beginning of this Quarterly Report.

There have been no material changes to the Company’s market risk during the three and nine months ended September 30, 2023. For a discussion of the Company’s exposure to market risk, please refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of September 30, 2023.

Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at September 30, 2023.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d – 15(e)) under the Exchange Act) occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business has significant risks. You should carefully consider the risk factors set out in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and as set out in the Quarterly Report for the quarter ended June 30, 2023, the disclosures set out in our Quarterly Reports for the quarters ended March 31, 2023 and June 30, 2023 and the disclosures set out in this Quarterly Report, including our condensed consolidated financial statements and the related notes, before making an investment decision regarding our securities. The risks and uncertainties described are those material risk factors currently known and specific to us that we believe are relevant to our business, results of operations and financial condition. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also impair our business, results of operations and financial condition.

As of and for the period ended September 30, 2023, save as provided below there have been no material changes from the risk factors previously disclosed by us in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022 and the updated risk factors set out in our Quarterly Reports for the quarters ended March 31, 2023 and June 30, 2023.

The following additional risk factor applies to our business in relation to the listing of our American Depositary Shares (ADSs):

If we are no longer able to meet the listing requirements of the Nasdaq Global Select Market, our ADSs may be delisted.

The Nasdaq Global Select Market (“Nasdaq”), on which our ADSs are listed and traded, has listing requirements that include a $1.00 minimum closing bid price requirement. Nasdaq will issue a deficiency notice if an issuer is in violation of a listing standard for a period of 30 consecutive days. We received a deficiency letter on August 31, 2023, as our ADSs had traded below $1.00 for 30 consecutive days. Such deficiency letter does not result in the immediate delisting of our ADSs and we were provided a compliance period of 180 calendar days to regain compliance with Nasdaq's minimum bid price requirement. If we were to remain out of compliance, Nasdaq may elect, subject to any potential additional cure periods, to initiate a process that could delist our ADSs from trading on Nasdaq. Should such a delisting occur, it would adversely impact the liquidity and price of our ADSs and would impede our ability to raise capital.