# Arbutus Biopharma Corp: Form 10-Q for the period ended Sep 30, 2017

- Company: [Arbutus Biopharma Corp](/companies/abus.md) (CIK 1447028)
- Form: 10-Q
- Filed: 2017-11-02
- Accepted by EDGAR: Nov 2, 2017, 17:23 ET
- Period: 2017-09-30
- Accession: 0001628280-17-010727
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1447028/000162828017010727/arbutusq32017.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1447028/000162828017010727/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-07-01 to 2017-09-30 | $6.9m | us-gaap:Revenues |
| Revenue | 9 months, 2017-01-01 to 2017-09-30 | $8.2m | us-gaap:Revenues |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $15.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2017-01-01 to 2017-09-30 | $44.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | −$12.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | −$50.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $76.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $186.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | −$11.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | −$48.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.21 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | −$0.89 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2017-07-01 to 2017-09-30 | −$15.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Operating cash flow | 9 months, 2017-01-01 to 2017-09-30 | −$38.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2017-07-01 to 2017-09-30 | $538.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $7.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-09-30 | $15.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $90.8m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $239.8m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $8.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $72.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-09-30 | $167.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,656 characters.

*You should read the following discussion and analysis by our management of our financial position and results of operations in conjunction with our audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2016 and our unaudited condensed consolidated financial statements for the three and nine month periods ended September 30, 2017. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.*

### FORWARD-LOOKING STATEMENTS

The information in this report contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and forward looking information within the meaning of Canadian securities laws (collectively, “forward-looking statements”). Forward-looking statements in this report include statements about our strategy, future operations, clinical trials, prospects and the plans of management; the discovery, development and commercialization of a cure for HBV; our beliefs and development path and strategy to achieve a cure for HBV; obtaining necessary regulatory approvals; obtaining adequate financing through a combination of financing activities and operations; the possibility of receiving total milestone payments of up to $18,000,000 on Alocrest and Brakiva; an additional investment of $66,400,000 from Roivant and the expected timing thereof; the filing of a proxy statement by the Company with respect to the additional investment from Roivant; potential payments from the Gritstone license agreement; evaluating different treatment durations to determine the optimal finite duration of therapy; selecting combination therapy regimens and treatment durations to conduct Phase III clinical trials intended to ultimately support regulatory filings for marketing approval; approval for a single product from our pipeline by combining with available agents to improve upon the cure rate with the current standard of care; expanding our HBV drug candidate pipeline through internal development, acquisitions and in-licenses; initiating a 30-week Phase II study of ARB-1467 in combination with tenofovir and pegylated interferon in 4Q17, with interim results from this study expected in the second half of 2018, followed by final results in 2019; initiating an AB-423 Phase II multi ascending dose (MAD) study in HBV patients in 1Q18; an IND (or equivalent) filing for AB-506 in mid-2018; an IND (or equivalent) filing for AB-452 in mid-2018; nominating a clinical development candidate in early 2018; possible low to mid-single-digit royalty payments escalating based on sales performance as Alnylam’s LNP-enabled products are commercialized; payments from the Gritstone licensing agreement; the belief that current legal proceedings will not have a material adverse effect on our consolidated results of operations, cash flows, or financial condition; the expected return from strategic alliances, licensing agreements, and research collaborations; statements with respect to revenue and expense fluctuation and guidance; having sufficient cash resources to fund our operations for at least the next 12 months; and the quantum and timing of potential funding.

With respect to the forward-looking statements contained in this report, we have made numerous assumptions regarding, among other things: meeting the conditions to close the additional investment of $66,400,000 from Roivant (including shareholder approval) LNP’s status as a leading RNAi delivery technology; our research and development capabilities and resources; the effectiveness of our products as a treatment for chronic HBV infection or other diseases; continued positive results from pre-clinical and clinical trials; the timing and quantum of payments to be received under contracts with our partners; assumptions related to our share price volatility, expected lives of warrants, and warrant issuances and/or exercises; and our financial position and its ability to execute our business strategy. While we consider these assumptions to be reasonable, these assumptions are inherently subject to significant business, economic, competitive, market and social uncertainties and contingencies.

Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of important factors, including the risk factors discussed in this report and the risk factors discussed in our Annual Report on Form 10-K under the heading “Risk Factors,” and the risks discussed in our other filings with the Securities and Exchange Commission and Canadian Securities Regulators. In addition, a further discussion with respect to the risks and uncertainties related to the additional investment of $66,400,000 from Roivant will appear in the Company’s Management Proxy Circular and Proxy Statement on Form 14A, which will be available at www.sedar.com and www.sec.gov once filed. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. All forward-looking statements herein are qualified in their entirety by this cautionary statement, and we explicitly disclaim any obligation to revise or update any such forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, except as required by law.

### OVERVIEW

Arbutus Biopharma Corporation ("Arbutus", the "Company", "we", "us", and "our") is a publicly traded industry-leading Hepatitis B Virus (HBV) therapeutic solutions company. HBV represents a significant, global unmet medical need. Our goal is to develop curative treatment regimens of finite dosing duration. We believe that development can be accelerated when multiple components of a combination therapy regimen are controlled by the same company, therefore we have assembled a HBV pipeline consisting of multiple drug candidates with complementary mechanisms of action, each of which have the potential to improve upon the standard of care and contribute to curative combination treatment regimen. In addition to our HBV pipeline, our lipid nanoparticle (LNP) delivery technology is a key asset that has the potential to generate significant value through both new and existing partnerships and licenses.

### HBV Product Pipeline

Our HBV product pipeline consists of multiple programs, with different mechanisms of action that have the objective of intervening at different points in the viral life cycle and reactivating the host immune system. For each program, we begin clinical development by evaluating the safety and activity of each drug individually in patients with chronic HBV infection. We will then study these new product candidates in combination with other treatments. While we will initially evaluate combinations with approved therapies, we also intend to study combinations of multiple complementary development stage agents that are proprietary to Arbutus. Once we have established a curative regimen with finite dosing duration, we will seek to improve that regimen in terms of efficacy, tolerability, duration, and convenience.

We intend to continue to expand our HBV pipeline through internal development, acquisitions, and in-licenses. We also have a research collaboration agreement with the Baruch S. Blumberg Institute that provides exclusive rights to in-license any intellectual property generated through the collaboration.

### RNAi (ARB-1467)

Our lead RNA interference (RNAi) HBV candidate, ARB-1467 (formerly TKM-HBV), is designed to reduce Hepatitis B surface antigen (HBsAg) expression in patients chronically infected with HBV. Reducing HBsAg is thought to be a key prerequisite to enable a patient’s immune system to raise an adequate immune response against the virus. The ability of ARB-1467 to inhibit numerous viral elements in addition to HBsAg increases the likelihood of affecting the viral infection.

ARB-1467 is a multi-component RNAi therapeutic that simultaneously targets three sites on the HBV genome, including the HBsAg coding region. Targeting three distinct and highly conserved sites on the HBV genome is intended to facilitate potent knockdown of all viral mRNA transcripts and viral antigens across a broad range of HBV genotypes and reduce the risk of developing antiviral resistance. In preclinical models, ARB-1467 treatment results in reductions in intrahepatic and serum HBsAg, HBV DNA, covalently closed circular DNA (cccDNA), Hepatitis B e antigen (HBeAg) and Hepatitis B c antigen (HBcAg). ARB-1467 was evaluated in a Phase I Single Ascending Dose (SAD) trial designed to assess the safety, tolerability, and pharmacokinetics of intravenous administration of the product in healthy adult subjects. In the Phase I SAD study, healthy volunteer subjects were dosed up to a dose of 0.4 mg/kg but a defined maximum tolerated dose was not reached.

The Phase II trial is a multi-dose study in chronic HBV patients who are also receiving nucleot(s)ide analog (NA) therapy. The trial consists of four cohorts. The first three cohorts each enrolled eight subjects; six receiving three monthly doses of ARB-1467, and two receiving placebo. Cohort 4 enrolled twelve patients, all receiving five bi-weekly doses of ARB-1467, followed by monthly dosing for the reminder of a year for patients who meet a predefined response criteria. Cohorts 1, 2, and 4 enrolled HBeAg- patients and Cohort 3 enrolled HBeAg+ patients. ARB-1467 is administered at 0.2 mg/kg in Cohort 1 and 0.4 mg/kg in Cohorts 2, 3, and 4. Results from this trial based on multiple dose administration of ARB-1467 in Cohorts 1, 2 and 3 demonstrated significant reductions in serum HBsAg levels and showed a step-wise, additive reduction in serum HBsAg with each subsequent dose. The HBsAg reduction achieved after three monthly doses of 0.4mg/kg in Cohort 2 was greater than that seen at 0.2 mg/kg in Cohort 1, demonstrating a dose-response seen with repeat dosing. There were no significant differences in serum HBsAg reductions between HBeAg-negative and HBeAg-positive patients. In Cohort 4, five doses of ARB-1467 were administered on a bi-weekly dosing schedule. Initial results from the first three months demonstrated that all twelve patients had reductions in serum HBsAg levels with an average reduction of 1.4 log10, which was greater than that observed with monthly dosing in Cohorts 1-3. Seven of the twelve patients met the predefined response criteria at or before day 71 and five of the seven patients who met the response criteria had their serum HBsAg reduced to low absolute levels (below 50 IU/mL) during the bi-weekly dosing period. Initial results for the monthly dosing extension suggest that monthly dosing is not sufficient to maintain or improve upon these reductions in HBsAg levels. As a result, we have discontinued the monthly extension and new studies will utilize bi-weekly dosing. Overall treatment was well tolerated in all four cohorts (Cohorts 1, 2, 3, and 4).

We are initiating a triple combination study of our RNAi agent, ARB-1467, with current standard of care NAs and interferon (IFN) therapies, to evaluate the opportunity to improve current cure rates with a finite dosing period. The Phase II triple combination trial is a 30-week multi-dose study in HBV DNA positive chronic HBV patients. The trial will enroll 20 HBeAg- patients who will receive bi-weekly doses of ARB-1467 at 0.4 mg/kg and daily oral tenofovir NA doses for 30 weeks. Predefined treatment responders at 6 weeks will qualify for the addition of weekly pegylated interferon treatment, while continuing to receive bi-weekly doses of ARB-1467 and daily doses of tenofovir for the remaining 24 weeks. Patients will be followed for 24 weeks after the treatment period concludes. Interim on-treatment results from this trial are expected in the second half of 2018 followed by final results in 2019. Combination treatment has the potential to result in sustained HBV DNA and HBsAg loss in patients. Achieving this in a significant proportion of patients would put this Arbutus therapeutic on a potential late stage development and approval pathway.

### Capsid Inhibitor (AB-423 & AB-506)

HBV core protein, or capsid, is required for viral replication and core protein may have additional roles in cccDNA function. Current NA therapy significantly reduces HBV DNA levels in the serum but HBV replication continues in the liver, thereby enabling HBV infection to persist. Effective therapy for patients requires new agents which will effectively block viral replication. We are developing core protein inhibitors (also known as capsid assembly inhibitors) as oral therapeutics for the treatment of chronic HBV infection. By inhibiting assembly of the viral capsid, the ability of HBV to replicate is impaired, resulting in reduced cccDNA.

AB-423 was evaluated in a Phase I Single Ascending Dose (SAD) and Multiple Ascending Dose (MAD) trial designed to assess the safety, tolerability, and pharmacokinetics (PK) of oral administration of the product in healthy volunteers. AB-423 has been generally well-tolerated in this trial, with no serious adverse events following single doses up to 800mg and multiple doses up to 400mg twice daily. AB-423’s favorable safety and PK profile following single and multiple doses in healthy volunteers supports further evaluation of multiple-dose administration of AB-423 in patients with chronic HBV, which is expected to begin in HBV patients in the first quarter of 2018. Following initial studies of AB-423 in patients we will consider inclusion in a combination study with our other proprietary HBV assets, NAs, and IFN.

We recently nominated AB-506, a next-generation capsid inhibitor, for Investigational New Drug (IND)-enabling studies. In preclinical studies, this new capsid inhibitor has shown to have improved PK and potency through increased binding interaction with its target when compared to AB-423. Pending successful IND-enabling studies, this product candidate could be the subject of an IND (or equivalent) filing in 2018.

### HBV RNA Destabilizer (AB-452)

In addition to our clinical candidates, we have a number of research programs aimed at the discovery and development of proprietary HBV candidates with different and complementary mechanisms of action. One of our most advanced preclinical programs, AB-452, a HBV RNA Destabilizer (formerly known as our oral surface antigen (HBsAg) inhibitor program) has novel activity in destabilizing HBV RNA, broad activity against HBV RNAs, and reduces HBsAg. In preclinical studies, AB-452 has shown synergistic effects when combined with two of Arbutus’ proprietary HBV RNAi agents in vitro. In in vivo, twice-a-day oral administration of AB-452 resulted in up to 1.4 log10 reduction of serum HBsAg in a dose dependent manner and correlated well with liver HBV RNA levels as well. This molecule has the potential for once daily oral dosing. Pending successful IND-enabling studies, this product candidate could be the subject of an IND (or equivalent) filing in 2018.

### Additional Research Programs

We have designed a number of highly potent HBV-targeting RNAi payloads for use with our proprietary GalNAc conjugate platform to enable subcutaneous delivery. In preclinical models, our molecules display acute knockdown of viral proteins and a duration of effect that is highly competitive in the field. We observe a significant dose response, and a stepwise reduction in viral proteins when multi-dosing. We expect to nominate a clinical development candidate in early 2018. We also have ongoing discovery efforts focused on cccDNA targeting and checkpoint inhibition.

### Our Proprietary Delivery Technology

Development of RNAi therapeutic products is currently limited by the instability of the RNAi trigger molecules in the bloodstream and the inability of these molecules to access target cells or tissues following administration. Delivery technology is necessary to protect these drugs in the bloodstream to allow efficient delivery and cellular uptake by the target cells. Arbutus has developed a proprietary delivery LNP platform. The broad applicability of this platform to RNAi development has established Arbutus as a leader in this new area of innovative medicine.

Our proprietary LNP delivery technology allows for the successful encapsulation of RNAi trigger molecules in LNP administered intravenously, which travel through the bloodstream to target tissues or disease sites. LNPs are designed to protect the triggers, and stay in the circulation long enough to accumulate at disease sites, such as the liver or cancerous tumors. LNPs are then taken up into the target cells by a process called endocytosis. Subsequent activation by the changing environment inside the cell causes the LNP to release the trigger molecules, which can then successfully mediate RNAi.

### Ongoing Advancements in LNP Technology

Our LNP technology represents the most widely adopted delivery technology in RNAi, which has enabled several clinical trials and has been administered to hundreds of human subjects. We continue to explore opportunities to generate value from our LNP platform technology, which is well suited to deliver therapies based on RNAi, mRNA, and gene editing constructs. We have also made progress in developing a proprietary GalNAc conjugate technology to enable subcutaneous delivery of an RNAi therapeutic targeting HBsAg and/or other HBV targets.

### Partner Programs

### Patisiran (ALN-TTR02)

Alnylam has a license to use our intellectual property to develop and commercialize products and may only grant access to our LNP technology to its partners if it is part of a product sublicense. Alnylam’s license rights are limited to patents that we have filed, or that claim priority to a patent that was filed, before April 15, 2010. Alnylam's patisiran (ALN-TTR02) program represents the most clinically advanced application of our LNP delivery technology, and results demonstrate that multi-dosing with our LNP has been well-tolerated with treatments out to 25 months. In September 2017, Alnylam announced that its Phase III study of patisiran met its primary efficacy endpoint and all secondary endpoints. Alnylam announced its intention to file a New Drug Application (NDA) in late 2017 and a Marketing Authorisation Application (MAA) in early 2018 for patisiran. We are entitled to single-digit royalty payments escalating based on sales performance as Alnylam’s LNP-enabled products are commercialized.

### Gritstone Oncology

In October 2017, we entered into a license agreement with Gritstone Oncology (Gritstone) that granted them worldwide access to our portfolio of proprietary and clinically validated LNP products and associated intellectual property to deliver Gritstone’s RNA-based neoantigen immunotherapy products. Gritstone will pay us an upfront payment, payments for achievement of development, regulatory, and commercial milestones, royalties, and will reimburse us for conducting technology development and providing manufacturing and regulatory support for Gritstone’s product candidates.

### Marqibo®

Marqibo, originally developed by Arbutus, is a novel, sphingomyelin/cholesterol liposome-encapsulated formulation of the FDA-approved anticancer drug vincristine. Marqibo’s approved indication is for the treatment of adult patients with Philadelphia chromosome-negative acute lymphoblastic leukemia (Ph-ALL) in second or greater relapse or whose disease has progressed following two or more lines of anti-leukemia therapy. Our licensee, Spectrum Pharmaceuticals, Inc. (Spectrum), launched Marqibo through its existing hematology sales force in the United States. Spectrum has ongoing trials evaluating Marqibo in three additional indications, which are: first line use in patients with Philadelphia Negative Acute Lymphoblastic Leukemia (Ph-ALL), Pediatric ALL and Non-Hodgkin’s lymphoma. We are receiving mid-single digit royalty payments on sales of Marqibo.

### Recent Developments

### Acuitas Therapeutics Inc.

In December 2013, we entered into a cross-license agreement with Acuitas Therapeutics Inc., or Acuitas. The terms of the cross-license agreement provided Acuitas with access to certain of our earlier intellectual property (IP) generated prior to April 2010 for a specific field. On August 29, 2016, we provided Acuitas with notice that Arbutus considered Acuitas to be in material breach of the cross-license agreement. On October 25, 2016, Acuitas filed a Notice of Civil Claim in the Supreme Court of British Columbia seeking an order that we perform our obligations under the cross-license agreement , for damages ancillary to specific performance, injunctive relief, interest and costs. We disputed Acuitas' position and filed a counterclaim seeking a declaration that Acuitas is in breach of the cross-license agreement, and claiming injunctive relief, damages, interest and costs. On January 10, 2017, we filed an application seeking an order to enjoin Acuitas from entering into any further agreements purporting to sublicense Arbutus' technology from the date of the order to the date of trial or further order from the court. Acuitas filed a response to Arbutus' application and the matter was the subject of a hearing on January 26, 2017, which resulted in the Supreme Court of British Columbia granting a pre-trial injunction against Acuitas. On February 8, 2017, Arbutus announced that the Supreme Court of British Columbia granted Arbutus’ request for a pre-trial injunction against Acuitas, preventing Acuitas from further sublicensing of Arbutus’ LNP technology until the end of October 2017, or further order of the Court. Under the terms of the pre-trial injunction, Acuitas is prevented from entering into any new agreements, which include sublicensing of Arbutus’ LNP. On March 7, 2017, Acuitas sought leave to appealed from the injunction decision and on April 3, 2017, the application for leave to appeal was denied. On September 29, 2017, the injunction order was extended by consent to March 2, 2018. The contractual issues concerning the cross-license agreement (excluding the claims for damages) are set for trial for 10 days commencing on February 19, 2018.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There are no changes to our critical accounting policies and estimates from those disclosed in our annual MD&A contained in our Annual Report Form 10-K for the year ended December 31, 2016.

### RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Please refer to Note 2 to our consolidated financial statements included in Part I, Item 1, "Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements applicable to our business.

### SUMMARY OF QUARTERLY RESULTS

The following table presents our unaudited quarterly results of operations for each of our last eight quarters. These data have been derived from our unaudited condensed consolidated financial statements, which were prepared on the same basis as our annual audited financial statements and, in our opinion, include all adjustments necessary, consisting solely of normal recurring adjustments, for the fair presentation of such information.

(in millions $ except per share data) – unaudited

|  | Q3 2017 | Q2 2017 | Q1 2017 | Q4 2016 | Q3 2016 | Q2 2016 | Q1 2016 | Q4 2015 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Total revenue** | **6.8** | **1.0** | **0.2** | **(0.2)** | **0.7** | **0.3** | **0.6** | **12.7** |
| Expenses | (19.8) | (20.5) | (18.5) | (257.2) | (19.7) | (195.6) | (20.6) | (24.4) |
| Other income (losses) | 1.3 | 1.2 | (0.3) | (1.4) | (0.6) | 0.4 | 4.1 | 5.5 |
| **Loss before income taxes** | **(11.7)** | **(18.3)** | **(18.6)** | **(258.8)** | **(19.6)** | **(194.9)** | **(15.9)** | **(6.2)** |
| Income tax benefit | **—** | **—** | **—** | 40.1 | — | 64.9 | — | 1.0 |
| **Net loss** | **(11.7)** | **(18.3)** | **(18.6)** | **(218.7)** | **(19.6)** | **(130.0)** | **(15.9)** | **(5.2)** |
| **Basic and diluted net loss per share** | **$(0.21)** | **$(0.33)** | **$(0.34)** | **$(4.05)** | **$(0.37)** | **$(2.47)** | **$(0.31)** | **$(0.10)** |

### Quarterly Trends

**Revenue** / Our revenue is derived from research and development collaborations and contracts, licensing fees, milestone and royalty payments.

In January 2014, we signed an Option Agreement and a Services Agreement with Monsanto for the use of our proprietary delivery technology and related intellectual property in agriculture. In Q4 2015, we recognized the remaining deferred revenue balance of $11.8 million as the estimated option period ended. In March 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of Protiva Agricultural Development Company Inc. (PADCo), for which Monsanto paid us an exercise fee of $1.0 million in Q1 2016. We recorded this receipt in Q1 2016 as Other income (losses).

In November 2014, we signed a License Agreement and a Development and Supply Agreement with Dicerna for the use of our proprietary delivery technology and related technology intended to develop, manufacture, and commercialize products related to the treatment of PH1. In Q3 2016, Dicerna announced the discontinuation of their DCR-PH1 program using our technology, and we recognized the remaining balance of Dicerna license fee revenue of $0.6 million, as well as other Dicerna collaboration revenue for the provision of development services.

In March 2017, we signed a License Agreement with Alexion that granted them exclusive use of our proprietary lipid nanoparticle (LNP) technology in one of Alexion's rare disease programs. Under the terms of the license agreement, we received a $7.5 million non-refundable upfront payment in April 2017, which was recognized over the expected period we provide services to Alexion. In Q3 2017, we received notice of termination from Alexion for our LNP license agreement, and completed close out procedures. The termination was driven by a strategic review of Alexion's business and research and development portfolio, which included a decision to discontinue development of mRNA therapeutics. As such, we recorded the remaining deferred revenue of $6.7 million for the non-refundable upfront payment, as well as revenue for any work done related to closeout procedures.

Under our licensing and collaboration arrangements with Alnylam and Acuitas, we earn licensing fee revenue from Acuitas as well as further potential development and commercial milestones and royalties from Alnylam for the use of our LNP technology.

In 2013, we began to earn royalties from Spectrum with respect to the commercial sales of Marqibo.

**Expenses /** Expenses consist primarily of clinical and pre-clinical trial expenses, personnel expenses, consulting and third party expenses, reimbursable collaboration expenses, consumables and materials, patent filing expenses, facilities, stock-based compensation and general corporate costs. Impairment of intangible assets and goodwill is also included in operating expenses.

Since Q4 2015, we have incurred significant R&D expense related to our HBV programs, including initiation of our ARB-1467 in Phase 2 clinical trials, and incurred costs in Q4 2016 to Q3 2017 to advance our AB-423 to Phase 1 clinical trials. In Q2 and Q3 2017, we also incurred costs related to our recently nominated product candidates: a second capsid inhibitor (AB-506) and a HBV RNA destabilizer (AB-452, formerly known as our oral surface antigen (HBsAg) inhibitor program). In Q2, 2016, we recorded an impairment charge of $156.3 million (before deferred tax) for the discontinuance of the ARB-1598 program in the Immune Modulators drug class after extensive research and analysis, as well as a delay for additional exploration of the biology of the cccDNA Sterilizer drug class. In Q4 2016, we recorded an impairment charge of $96.9 million for our intangible assets (before deferred tax) and impairment charge of $138.1 million for our goodwill which resulted from a change in estimated cost of capital and resulting discount rate used in our annual impairment assessment.

Following the merger with Arbutus Inc., we have recorded, to date, non-cash compensation expense of $57.1 million related to the expiry of repurchase rights on shares issued as part of the consideration paid for the merger with Arbutus Inc. - see "Results of Operations". The final tranche of repurchase rights expired in Q3 2017 so there won't be any further expense to record in this regard.

**Other income (losses) /** Other income (losses) consist primarily of changes in the fair value of our contingent consideration, interest income and expense and foreign exchange gains and losses. We have recorded increases in the fair value of contingent consideration since first recording this liability as a result of the merger with Arbutus Inc. in March 2015. This reflects the progress of our HBV programs that bring us closer to triggering the contingent amounts.

We have recorded foreign exchange gains and losses over the past eight quarters, largely related to U.S. dollar cash and investment holdings and fluctuations in the U.S./Canadian dollar exchange rate. We expect to record future foreign exchange gains and losses, on translation from the Canadian dollar, to the U.S. dollar, as the functional currency for the company changed to the U.S. dollar effective January 1, 2016. This change in functional currency results in a smaller proportion of our cash and investments being held in a foreign currency and therefore reduces the level of gains and losses we expect to record in this respect compared to periods prior to January 1, 2016.

**Income tax benefit** / Income tax benefit relates to the decrease in deferred tax liability associated with impairment charges recorded on acquired intangible assets as discussed above.

**Net loss /** Fluctuations in our net loss are explained by changes in revenue, expenses, other income (losses) and taxes as discussed above.

### RESULTS OF OPERATIONS

The following summarizes the results of our operations for the periods shown, in thousands (except for per share figures):

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Total revenue | **$6,892** | $774 | **$8,166** | $1,686 |
| Operating expenses | **19,789** | 19,749 | **58,847** | 235,886 |
| Loss from operations | **(12,897)** | (18,975) | **(50,681)** | (234,200) |
| Net loss | **$(11,600)** | $(19,595) | **$(48,482)** | $(165,469) |
| Basic and diluted loss per share | **(0.21)** | (0.37) | **(0.89)** | (3.15) |

**Revenue** / Revenue is summarized in the following table, in thousands:

|  | Three months ended September 30, 2017 | % of Total | 2016 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Alexion | **$6,859** | **100%** | $— | —% |
| Dicerna | — | **—%** | $727 | 94% |
| Other milestone and royalty payments | **33** | **—%** | 47 | 6% |
| **Total revenue** | **$6,892** |  | **$774** |  |

|  | Nine months ended September 30, 2017 | % of Total | 2016 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Alexion | **$7,956** | **97%** | **$—** | —% |
| Dicerna | — | **—%** | $1,292 | 77% |
| Other milestone and royalty payments | **210** | **3%** | 394 | 23% |
| **Total revenue** | **$8,166** |  | **$1,686** |  |

***Revenue contracts are addressed in detail in the Overview section of Item 2 above.***

### Dicerna revenue

In November 2014, we signed a License Agreement and a Development and Supply Agreement with Dicerna for the use of our proprietary delivery technology and related technology intended to develop, manufacture, and commercialize products related to the treatment of PH1. Licensing fee revenue recognized in the three and nine months ended September 30, 2016 relates to the earned portion of the upfront payment of $2.5 million for the use of our technology, which was being recognized over the period we provided services to Dicerna. In September 2016, Dicerna announced the discontinuation of their DCR-PH1 program using the Company's technology. As such, we revised the estimated completion date of performance period to September 30, 2016, at which time we had no further remaining performance obligations.

### Alexion revenue

In March 2017, we signed a License Agreement with Alexion that granted them exclusive use of our proprietary lipid nanoparticle (LNP) technology in one of Alexion's rare disease programs. Licensing fee revenue recognized in the three and nine months ended September 30, 2017 relates to the non-refundable upfront payment of $7.5 million for the use of our technology. In addition, we recognized collaboration revenue on the services provided to Alexion related to technology development, manufacturing and regulatory support for the advancement of Alexion's mRNA product candidate.

In July 2017, we received notice of termination from Alexion for our LNP license agreement. The termination was driven by a strategic review of Alexion's business and research and development portfolio, which included a decision to discontinue development of mRNA therapeutics. We recorded the remaining deferred revenue for the non-refundable upfront payment, as well as revenue for any work done related to closeout procedures in the three and nine months ended September 30, 2017.

### Other milestone and royalty payments

Under our licensing and collaboration arrangements with Alnylam and Acuitas, we earn licensing fee revenue from Acuitas as well as further potential development and commercial milestones from Alnylam for the use of our LNP technology.

In September 2013, Spectrum announced that they had shipped the first commercial orders of Marqibo. We continue to earn royalties on the sales of Marqibo, which uses a license to our technology.

**Expenses** / Expenses are summarized in the following table, in thousands:

|  | Three months ended September 30, 2017 | % of Total | 2016 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Research, development, collaborations and contracts | **$15,537** | **79%** | $15,738 | 80% |
| General and administrative | **3,659** | **18%** | 3,720 | 19% |
| Depreciation | **593** | **3%** | 291 | 1% |
| **Total operating expenses** | **$19,789** |  | $19,749 |  |

|  | Nine months ended September 30, 2017 | % of Total | 2016 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Research, development, collaborations and contracts | **$44,854** | **76%** | $44,097 | 19% |
| General and administrative | **12,586** | **21%** | 34,705 | 15% |
| Depreciation | **1,407** | **2%** | 760 | —% |
| Impairment of intangible assets | **—** | **—%** | $156,324 | 66% |
| **Total operating expenses** | **$58,847** |  | $235,886 |  |

### Research, development, collaborations and contracts

Research, development, collaborations and contracts expenses consist primarily of clinical and pre-clinical trial expenses, personnel expenses, consulting and third party expenses, consumables and materials, as well as a portion of stock-based compensation and general overhead costs.

R&D expenses remained consistent in the three months and nine months ended September 30, 2017 and September 30, 2016. In all periods presented. our R&D expense relates to our HBV programs. During the first nine months of 2017, we initiated a Phase 1 clinical trial for AB-423 and incurred clinical costs as we continued our trials for ARB-1467, as well as costs for IND enabling studies for our recent candidate nominations, a second capsid inhibitor (AB-506) and a HBV RNA destabilizer (AB-452, formerly known as our oral surface antigen (HBsAg) inhibitor program). We also continue to incur costs related to research and preclinical activities for our other HBV programs.

A significant portion of our research, development, collaborations and contracts expenses are not tracked by project as they benefit multiple projects or our technology platform and because our most-advanced programs are not yet in late-stage clinical development. However, our collaboration agreements contain cost-sharing arrangements pursuant to which certain costs incurred under the project are reimbursed. Costs reimbursed under collaborations typically include certain direct external costs and hourly or full-time equivalent labor rates for the actual time worked on the project. As a result, although a significant portion of our research, development, collaborations and contracts expenses are not tracked on a project-by-project basis, we do, however, track direct external costs attributable to, and the actual time our employees worked on our collaborations.

### General and administrative

General and administrative expenses decreased in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to a decrease in non-cash compensation expense related to the expiry of repurchase rights effective Q2 2016 related to the departure of two of the four former Arbutus Inc. founders in June 2016. As a result of this change, our quarterly non-cash compensation general and administrative expense decreased to $1.5 million per quarter. We recorded $4.0 million in the first nine months of 2017 compared to $24.5 million in the first nine months of 2016. The following table summarizes the non-cash compensation expense recorded related to the expiry of repurchase rights since the Arbutus Inc. acquisition in March 2015:

|  | Q3 2017 | Q2 2017 | Q1 2017 | Q4 2016 | Q3 2016 | Q2 2016 | Q1 2016 | Q4 2015 | Q3 2015 | Q2 2015 | Q1 2015 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $1.5 | $1.5 | $1.5 | $1.5 | $1.5 | $1.5 | $1.5 | $1.5 | $1.4 | $1.0 | $0.3 |
| General and administrative | 1.0 | 1.5 | 1.5 | 1.5 | 1.5 | 18.5 | 4.5 | 4.5 | 4.3 | 3.1 | 0.9 |
| **Total non-cash compensation for repurchase rights expiration** | $2.5 | $3.0 | $3.0 | $3.0 | $3.0 | $20.0 | $6.0 | $6.0 | $5.7 | $4.1 | $1.2 |

### Impairment of intangible assets

For the nine months ended September 30, 2016, we recorded an impairment charge of $156.3 million for the discontinuance of the ARB-1598 program in the Immune Modulator drug class after extensive research and analysis, as well as a delay for additional exploration of the biology of the cccDNA Sterilizer drug class. No impairment has been recognized in 2017.

**Other income (losses) /** Other income (losses) are summarized in the following table, in thousands:

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | **$337** | $425 | **$1,095** | $1,104 |
| Interest expense | **(76)** | — | **(186)** | — |
| Foreign exchange gains (losses) | **1,233** | (795) | **2,458** | 2,180 |
| Gain on disposition of financial instrument | **—** | — | **—** | 1,000 |
| Decrease (increase) in fair value of warrant liability | **—** | 10 | **(22)** | 339 |
| Increase in fair value of contingent consideration | **(197)** | (260) | **(1,146)** | (756) |
| **Total other income (losses)** | **$1,297** | $(620) | **$2,199** | $3,867 |

### Foreign exchange gains (losses)

We continue to incur substantial expenses and hold cash and investment balances in Canadian dollars, and as such, will remain subject to risks associated with foreign currency fluctuations. For the three and nine months ended September 30, 2017, we recorded a foreign exchange gain of $1.2 million and $2.5 million, respectively, which is primarily an unrealized gain related to an appreciation in the value of our Canadian dollar funds, from the previous period, when converted to our functional currency of U.S. dollars.

### Gain on disposition of financial instrument

On March 4, 2016, Monsanto exercised its option to acquire 100% of the outstanding shares of our wholly-owned subsidiary, PADCo, as described above, and paid us an exercise fee of $1.0 million.

### Decrease in fair value of warrant liability

On March 1, 2017, any remaining outstanding warrants expired. The increase in the fair value of warrants in the first nine months of 2017 relates to warrants exercised offset by reducing our warrant liability balance to nil as at September 30, 2017.

### Increase in fair value of contingent consideration

Contingent consideration is a liability assumed by the Company from our acquisition of Arbutus Inc. in March 2015. In general, increases in the fair value of the contingent consideration are related to the progress of our programs as they get closer to triggering contingent payments.

### Income tax benefit

During the nine months ended September 30, 2016, we recorded an income tax benefit of $64.9 million due to the decrease in deferred tax liability resulting from the impairment charge we recorded, as discussed above.

### LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash flow activities for the periods indicated, in thousands:

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net loss for the period | **$(11,600)** | $(19,595) | **$(48,482)** | $(165,469) |
| Adjustments to reconcile net loss to net cash provided by operating activities | **3,441** | 5,821 | **13,582** | 124,985 |
| Changes in operating assets and liabilities | **(7,521)** | (938) | **(3,398)** | (2,579) |
| Net cash used in operating activities | **(15,680)** | (14,712) | **(38,298)** | (43,063) |
| Net cash provided by (used in) investing activities | **5,305** | (880) | **27,116** | (99,854) |
| Net cash provided by financing activities | **61** | 76 | **419** | 637 |
| Effect of foreign exchange rate changes on cash & cash equivalents | **1,327** | (824) | **2,575** | 2,131 |
| Net decrease in cash and cash equivalents | **(8,987)** | (16,340) | **(8,188)** | (140,149) |
| Cash and cash equivalents, beginning of period | **24,212** | 42,970 | **23,413** | 166,779 |
| **Cash and cash equivalents, end of period** | **15,225** | 26,630 | **15,225** | 26,630 |

Since our incorporation, we have financed our operations through the sales of shares, units, debt, revenues from research and development collaborations and licenses with corporate partners, interest income on funds available for investment, and government contracts, grants and tax credits.

At September 30, 2017, we had an aggregate of $100.8 million in cash and cash equivalents, short-term investments, and restricted investments as compared to an aggregate of $143.2 million in cash and cash equivalents, short-term investments, and restricted investments at December 31, 2016.

For the nine months ended September 30, 2017, operating activities used $38.3 million in cash as compared to $43.1 million of cash used in the nine months ended September 30, 2016. The decrease in net cash used from operating activities is largely related to the $7.5 million license payment we received from Alexion during the nine months ended September 30, 2017.

For the nine months ended September 30, 2017, investing activities increased cash by $27.1 million primarily due to the maturation of investments, offset by acquisition of capital assets for our new U.S. facility in Warminster. For the nine months ended September 30, 2016, investing activities used $100.0 million in cash as we acquired short-term investments.

For the nine months ended September 30, 2017, financing activities increased cash by $0.4 million due to options and warrants exercised during the period. All unexercised outstanding warrants expired on March 1, 2017.

**Cash requirements /** At September 30, 2017 we held an aggregate of $100.8 million in cash, comprised of $15.2 million in cash and cash equivalents, $73.0 million in short-term investments, and $12.6 million in restricted investments. In October 2017, we announced that entered into a subscription agreement with Roivant Sciences LTd. ("Roivant") for the sale of Series A participating convertible preferred shares ("Preferred Shares") to Roivant for gross proceeds of $116.4 million. The initial investment of $50,000,000 closed on October 16, 2017, and the remaining amount of $66,400,000 is expected to close by the end of the year upon satisfaction of customary closing conditions including regulatory and shareholder approvals, as applicable, under Canadian securities law. For further details with respect to the Preferred Shares, please refer to our Form 8-K filed with the U.S. Securities and Exchange Commission on October 3, 2017 or our material change report filed with the Canadian securities regulatory authorities on SEDAR on October 5, 2017.

We believe we have sufficient cash resources to fund our operations for at least the next 12 months. In the future, substantial additional funds will be required to continue with the active development of our pipeline products and technologies. In particular, our funding needs may vary depending on a number of factors including:

- the need for additional capital to fund future business development programs;
- revenue earned from our legacy collaborative partnerships and licensing agreements, including royalty payments from Alnylam and royalties from sales of Marqibo from Spectrum;
- revenue earned from ongoing collaborative partnerships, including milestone and royalty payments;
- the extent to which we continue the development of our product candidates, add new product candidates to our pipeline, or form collaborative relationships to advance our products;
- our decisions to in-license or acquire additional products or technology for development, in particular for our HBV therapeutics programs;
- our ability to attract and retain corporate partners, and their effectiveness in carrying out the development and ultimate commercialization of our product candidates;
- whether batches of drugs that we manufacture fail to meet specifications resulting in delays and investigational and remanufacturing costs;
- the decisions, and the timing of decisions, made by health regulatory agencies regarding our technology and products;
- competing technological and market developments; and
- costs associated with prosecuting and enforcing our patent claims and other intellectual property rights, including litigation and arbitration arising in the course of our business activities.

We intend to seek to obtain funding to maintain and advance our business from a variety of sources including public or private equity or debt financing, collaborative arrangements with pharmaceutical companies and government grants and contracts. There can be no assurance that funding will be available at all or on acceptable terms to permit further development of our products.

If adequate funding is not available, we may be required to delay, reduce or eliminate one or more of our research or development programs or reduce expenses associated with non-core activities. We may need to obtain funds through arrangements with collaborators or others that may require us to relinquish most or all of our rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise seek if we were better funded. Insufficient financing may also mean failing to prosecute our patents or relinquishing rights to some of our technologies that we would otherwise develop or commercialize.

### OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

### CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as at September 30, 2017:

*(in millions)*

| Contractual Obligations | Payments Due by Period Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Facility leases | $8.4 | $1.6 | $2.1 | $1.4 | $3.3 |
| Loan payable | $12.0 | $— | $12.0 | $— | $— |
| **Total** | **$20.4** | **$1.6** | **$14.1** | **$1.4** | **$3.3** |

### IMPACT OF INFLATION

Inflation has not had a material impact on our operations.

### RELATED PARTY TRANSACTIONS

We have not entered into any related party transactions in the periods covered by this discussion.

### OUTSTANDING SHARE DATA

As of October 31, 2017, we had 55,051,995 common shares, no par value, outstanding. In addition, we had outstanding 500,000 Series A participating convertible preferred shares, which will be mandatorily convertible into 7,037,839 common shares on October 16, 2021. Assuming the convertible preferred shares were converted as of October 31, 2017, we would have had 62,089,834 common shares outstanding at October 31, 2017.

## Market risk

As filed, 194 characters.

There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

## Controls and procedures

As filed, 2,488 characters.

As of September 30, 2017, an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) was carried out by our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based upon this evaluation, the CEO and CFO have concluded that as of September 30, 2017, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (the “Commission”) rules and forms and (ii) accumulated and communicated to the management of the registrant, including the CEO and CFO, to allow timely decisions regarding required disclosure.

It should be noted that while the CEO and CFO believe that our disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

During management's year-end assessment process for the period-ended December 31, 2016, a material weakness was identified over management's review of the annual impairment evaluation of intangible assets and goodwill; specifically the judgments made with respect to the estimated discount rate and the mathematical accuracy of the impairment calculation. Management did not perform a quantitative calculation of impairment at September 30, 2017 (refer to Note 3 of the condensed consolidated interim financial statements), and therefore, no application of the controls to which this material weakness related occurred during the period ended September 30, 2017. Management intends to continue to evaluate and, to the extent possible, remediate this material weakness throughout 2017.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 443 characters.

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. However, a further discussion with respect to the risks and uncertainties related to the additional investment of $66,400,000 by Roivant will appear in Arbutus Management Proxy Circular and Proxy Statement on Form 14A, which will be available at www.sedar.com and www.sec.gov once filed.

Filed Nov 2, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-010727. Last ingested by Listed: Nov 12, 2026, 17:55 ET. No prices; not investment advice.