# Arbutus Biopharma Corp: Form 10-Q for the period ended Sep 30, 2018

- Company: [Arbutus Biopharma Corp](/companies/abus.md) (CIK 1447028)
- Form: 10-Q
- Filed: 2018-11-07
- Accepted by EDGAR: Nov 7, 2018, 17:11 ET
- Period: 2018-09-30
- Accession: 0001628280-18-013909
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1447028/000162828018013909/arbutusq32018.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1447028/000162828018013909/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $1.6m | us-gaap:Revenues |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $4.3m | us-gaap:Revenues |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $16.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $46.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | −$32.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | −$72.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $0 | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $104.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | −$4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | −$4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$24.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$38.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.84 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2018-07-01 to 2018-09-30 | −$13.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | −$50.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-07-01 to 2018-09-30 | $237.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $911.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-09-30 | $21.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $144.0m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $245.4m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $12.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $30.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | $215.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,395 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, 2017 and our unaudited condensed consolidated financial statements for the three and nine month periods ended September 30, 2018. 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, as amended (the "Exchange Act"), 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, preclinical research, clinical trials, prospects and the plans of management; the discovery, development and commercialization of a cure for chronic hepatitis B infection, a disease of the liver caused by the hepatitis B virus ("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 payment of one-time employee termination benefits, employee relocation costs, and site closure costs, totaling approximately $5,000,000; the expected timing of certain triggering events for payments related to Enantigen Therapeutics, Inc.'s programs; the potential of our proprietary lipid nanoparticle ("LNP") platform to provide royalties and significant additional capital to fund development of our many HBV assets; the potential of our drug candidates to improve upon the standard of care and contribute to a curative combination treatment regimen; royalty entitlements for Onpattro; developing a suite of products that intervene at different points in the viral life cycle, with the potential to reactivate the host immune system; using preclinical results to adaptively design clinical studies for additional cohorts of patients, testing the combination and the 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; expanding our HBV drug candidate pipeline through internal development, acquisitions and in-licenses; interim results from a 30-week Phase II trial of ARB-1467 in combination with tenofovir and pegylated interferon expected in the second half of 2018, followed by final results; continuing to focus on rapidly advancing AB-506, with topline results by mid-2019; the potential of AB-506 to be a 'best-in-class' capsid inhibitor with once-daily dosing; the potential further development of AB-452; an Investigational New Drug ("IND")/Clinical Trial Authorization ("CTA") filing in 2019 for AB-729; possible low to mid-single-digit royalty payments escalating based on sales performance as Alnylam Pharmaceuticals, Inc.'s ("Alnylam") LNP-enabled products, including Onpattro, are commercialized; payments from the Gritstone Oncology, Inc. ("Gritstone") licensing agreement; the expectation for organizational changes to result in increased efficiency, a more flexible variable cost structure, and additional preservation of our cash reserves; 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; obtaining 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; 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: LNP’s status as a leading RNA interface ("RNAi ") delivery technology; our research and development capabilities and resources; the effectiveness of our HBV pipeline as a treatment for chronic HBV infection or other diseases; results from pre-clinical and clinical trials; the timing and quantum of payments to be received under contracts with our partners; and our financial position and our 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 for the year ended December 31, 2017, under the heading “Risk Factors,” and the risks discussed in our other filings with the Securities and Exchange Commission (the "SEC") and Canadian Securities Regulators. 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 (Nasdaq Global Market: ABUS) industry-leading therapeutic solutions company dedicated to discovering, developing, and commercializing a cure for patients suffering from chronic HBV infection. HBV represents a significant, global unmet medical need. The World Health Organization estimates that more than 257 million people worldwide are chronically infected, and other estimates suggest this could include approximately 2 million people in the United States.

To pursue our strategy of developing a curative combination regimen for chronic HBV, we have assembled a robust pipeline consisting of multiple drug candidates with complementary mechanisms of action ("MOA"), each of which has the potential to improve upon the standard of care and contribute to a curative combination treatment regimen. Our pipeline includes agents that have the potential to form an effective proprietary combination therapy.

In addition to our drug pipeline focused on HBV, we have additional assets that have the potential to provide value to our Company. The first is our approximate 40% equity ownership interest in Genevant Sciences Ltd. ("Genevant"), a newly created company to which we have licensed our LNP platform and conjugate delivery platform (the "Delivery Platforms") for all applications except HBV. Secondly, we retain a royalty entitlement on Onpattro™ (Patisiran), a drug developed by Alnylam that incorporates our LNP technology and was approved by the U.S. Food and Drug Administration ("FDA") during the third quarter of 2018. This royalty entitlement has the potential to provide an active royalty stream or to be otherwise monetized in full or in part. These additional assets have the potential to provide significant non-dilutive capital to fund development of our HBV pipeline.

### HBV Product Pipeline

Our product pipeline is entirely focused on finding a cure for chronic HBV infection, with the objective of developing a suite of products that intervene at different points in the viral life cycle and reactivate the host immune system. We are currently conducting one clinical trial and several preclinical combination studies to evaluate combinations of proprietary HBV therapeutic agents in addition to standard of care therapies to support their clinical use in combination. We expect to use the results from these studies to adaptively design additional clinical trials to test the efficacy of the combination therapy and the duration of the result in patients. We plan to identify a combination regimen to conduct Phase III clinical trials intended to ultimately support regulatory filings for marketing approval.

Our HBV product pipeline consists of the following programs:

In October 2018, we announced that we became aware of emerging nonclinical safety findings in the AB-452 RNA Destabilizer program. Given the nature of these observations and the novel mechanism of action of this drug, we feel a sufficient amount of time must be allocated to understanding these findings and their implications before potentially commencing a clinical program. Given these observations we will continue to advance back-up compounds which are now in the lead optimization stage. This decision does not hamper our commitment to fully understand the nature of the AB-452 pre-clinical findings and continue to pursue the search for other oral HBsAg reducing agents in the RNA destabilizer space.

We will continue to expand our HBV pipeline through internal discovery and development and possibly acquisitions and in-licenses.

### Agents for combination therapy

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

HBV core protein assembles into a capsid structure, which is required for viral replication. The current standard of care therapy (nucleoside analogues) 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 capsid inhibitors (also known as core protein inhibitors) as oral therapeutics which, in combination with nucleoside analog therapy, could block HBV DNA replication for the treatment of chronic HBV infection. By inhibiting assembly of the viral capsid, the ability of HBV to replicate is impaired. Capsid inhibitor molecules also inhibit the uncoating step of the viral life cycle and thus reduce the formation of new cccDNA, the viral structure which resides in the cell nucleus.

Our capsid inhibitor discovery effort generated promising second generation compounds in 2017, which led to the nomination AB-506 for IND/CTA-enabling studies. AB-506 is an orally administered, highly selective capsid inhibitor that has shown improved potency and PK over AB-423 in preclinical studies. We presented these preclinical data at the American Association for the Study of Liver Disease ("AASLD") annual meeting in October 2017 in a presentation titled, "Antiviral Characterization of a Next Generation Chemical Series of HBV Capsid Inhibitors In Vitro and In Vivo," which showed potent inhibition of HBV replication and pgRNA encapsidation, an accelerated rate of capsid assembly, and binding to the HBV core protein at the dimer:dimer interface that indicates improved target engagement compared to first generation capsid inhibitors, including AB-423.

We received regulatory approval of our CTA for AB-506 in the second quarter of 2018. During the third quarter of 2018, AB-506 progressed through the healthy volunteer portion of a multi-component phase 1a/1b clinical trial in which it was demonstrated to be generally safe and well-tolerated after 10 days of dosing. In October 2018, AB-506 entered into the 28-day HBV patient portion of the trial, where it is being evaluated both with and without a nucleoside analog. Top-line results of the phase 1a/1b clinical trial are expected in the second quarter of 2019.

AB-423 was our first-generation capsid inhibitor candidate, which 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 candidate in healthy volunteers. AB-423 was well-tolerated with no serious adverse events.

Due to the successful progression of AB-506 through clinical testing into patients, we have indefinitely deferred further development of AB-423.

### RNAi Agents

Our RNAi HBV candidates, ARB-1467 and AB-729, are 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.

### GalNAc RNAi (AB-729)

Early in 2018, we nominated for development a second generation RNAi therapeutic, AB-729, targeted to hepatocytes using our novel covalently conjugated N-acetylgalactosamine (GalNAc) delivery technology to enable subcutaneous delivery. This is a promising new agent that acts on multiple HBV viral transcripts, which is designed to inhibit viral replication and suppress all viral antigens. AB-729 will be administered to patients subcutaneously and our preclinical in vivo findings support more durable HBsAg reduction than earlier generation RNAi agents, such as ARB-1467. We are completing IND/CTA enabling studies, and pending success of those studies, this agent is expected to enter clinical trials in the second quarter of 2019. We believe this compound could be combined with our Capsid Inhibitor AB-506 in our first proprietary combination therapy for HBV patients. Provided the clinical trials for AB-506 and AB-729 proceed as expected, we anticipate initiating combination clinical trials with these two agents in the first half of 2020.

### RNAi (ARB-1467)

ARB-1467, one of our early LNP delivered, intravenous administered, RNAi agents targeting HBV, is currently in a 30-week trial in HBV patients, in combination with tenofovir and pegylated interferon ("PEG-IFN"). To date, six HBV patients have enrolled and been treated. Two of these patients have met the predetermined criteria to proceed into the PEG-IFN treatment phase of the trial. The results from this proof-of-concept trial suggest that this regimen has the potential to drive HBsAg levels to undetectable in some patients thus confirming our hypothesis that a combination of multiple mechanisms will be required to improve clinical outcomes for HBV patients. While the trial remains open to enrollment, the Company does not plan to advance this program beyond this trial. We intend to present results from this trial in a future scientific meeting.

### Additional Research Programs

In addition to our clinical candidates, we have a number of research programs aimed at discovery and development of proprietary HBV candidates with different and complementary MOAs. We have ongoing discovery efforts focused on cccDNA targeting and checkpoint inhibition to identify novel, orally administered small molecule drug candidates to complement our pipeline of agents to form an effective combination therapy.

### Partner Programs

### Onpattro™ (patisiran / ALN-TTR02)

Alnylam (Nasdaq: ALNY), has a license to use our LNP delivery intellectual property to develop and commercialize products. Alnylam's patisiran (ALN-TTR02) program represents the most clinically advanced application of our LNP delivery technology.

Onpattro™ is Alnylam\`s RNAi therapeutic targeting transthyretin ("TTR") for the treatment of TTR-mediated amyloidosis ("ATTR"), which was approved by the FDA and the European Medicines Agency ("EMA") during the third quarter of 2018.

We retain full rights to royalties on patisiran global sales and are entitled to low-to-mid single-digit royalty payments escalating based on sales performance as Alnylam’s LNP-enabled products are commercialized. We could receive our first royalty payments in 2018, or seek to otherwise monetize all or part of this royalty stream as a source of non-dilutive cash.

### Gritstone Oncology

In October 2017, we entered into a license agreement with 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 paid us an upfront payment and agreed to future payments for achievement of development, regulatory, and commercial milestones as well as royalties, and reimbursements for conducting technology development, manufacturing and regulatory support for Gritstone’s product candidates. Genevant will be entitled to 50% of any milestones and royalties that may be payable by Gritstone. During the third quarter of 2018, we received a milestone payment from Gritstone of $2.5 million of which we retained $1.25 million.

### Recent Developments

### Genevant Sciences

In April 2018, we entered into an agreement with Roivant to launch Genevant, a jointly-owned company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by our Delivery Technologies. We have licensed exclusive rights to our LNP and ligand conjugate delivery platforms to Genevant for RNA-based applications outside of HBV. Genevant plans to develop products in-house and pursue industry partnerships to build a diverse pipeline of therapeutics across multiple modalities, including RNAi, mRNA, and gene editing.

Under the terms of the agreement, Roivant contributed $37.5 million in transaction-related seed capital for Genevant, consisting of an initial $22.5 million and a subsequent investment of $15 million at a pre-determined, stepped-up valuation. We retain all rights to our LNP and conjugate delivery platforms for HBV, and are entitled to a tiered royalty from Genevant on future sales of products enabled by those delivery platforms. We also retain the entirety of our royalty entitlement on the commercialization of Alnylam’s Onpattro. The initial investment and the subsequent investment were completed during the second quarter of 2018. As of September 30, 2018, we held an equity interest in Genevant of approximately 40%. We recorded a $24.9 million non-cash gain in the second quarter of 2018 as a result of this transaction.

### Acuitas Therapeutics Inc.

In accordance with a settlement agreement signed in November 2012, we finalized and entered a cross-license agreement with Acuitas Therapeutics Inc. ("Acuitas") in December 2013. The terms of the cross-license agreement provided Acuitas with access to certain of our early IP generated prior to mid-April 2010 in the fields of gene replacement therapy and antisense. Acuitas was only able to grant access to our LNP technology to its partners if it is part of a product sublicense. At the same time, the terms of the cross-license agreement provided us with certain access to Acuitas’ technology and licenses in the RNAi field, along with a percentage of each milestone and royalty payment with respect to certain products. Acuitas had agreed that it would not compete in the RNAi field for a period of five years, ending in November 2017. We considered Acuitas to be in material breach of its cross-license agreement and provided notice to Acuitas in August 2016 to terminate the cross license agreement, resulting in litigation between the two parties. In February 2018, we reached a settlement with Acuitus terminating Acuitas’ right to further use or sublicense Arbutus' LNP technology. Please refer to "Item 1. Legal Proceedings" for additional information.

### Site Consolidation

In February 2018, we announced a site consolidation and organizational restructuring to better align our HBV business in Warminster, PA. These organizational changes are expected to result in increased efficiency, a more flexible variable cost structure, and additional preservation of our cash reserves. To achieve this alignment, during the second quarter of 2018 we reduced our global workforce by approximately 35% and closed our Burnaby BC facility. These activities were successfully completed during the second quarter. For further detail, refer to note 9 "Site Consolidation" in the condensed consolidated financial statements in Part I.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

**Equity method investment** / We account for our investment in associated companies in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") ASC 323, *Investments - Equity Method and Joint Ventures*. ("ASC 323") In accordance with ASC 323, associated companies are accounted for as equity method investments. Our share of the results of associated companies are presented on a one-line basis. Investments in, and advances to, associated companies are presented on a one-line basis in the caption “Investment in Genevant” in our condensed consolidated balance sheets, net of allowance for losses, which represents our best estimate of probable losses inherent in such assets. The investment in Genevant balance recorded was based on the fair value of equity received. Our proportionate share of an associated company's net income or loss is presented on a one-line basis in the caption "Gain on Investment" in our condensed consolidated statements of operations. Transactions between the Company and an associated company are eliminated on a basis proportional to our ownership interest. Financial results of Genevant are recorded on a one-quarter lag basis.

**Site consolidation expense** / We account for site consolidation expense in accordance with ASC 420, *Exit or Disposal Cost Obligations* ("ASC 420"). ASC 420 specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, except for a liability where employees are required to render service until they are terminated in order to receive termination benefits and will be retained to render service beyond the minimum retention period. A liability for such one-time termination benefits shall be measured initially at the communication date based on the fair value of the liability as of the termination date and recognized ratably over the future service period.

**Revenue recognition** / We adopted ASC 606, *Revenue From Contracts With Customers* ("ASC 606"), effective January 1, 2018, using the modified retrospective method under which previously presented financial statements are not restated and the cumulative effect of adopting ASC 606 on contracts in process is recognized by an adjustment to retained earnings at the effective date. The adoption of ASC 606 did not change recognized revenue under our ongoing significant collaborative research and license agreements and no cumulative effect adjustment was required.

The new guidance in ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as a performance obligation is satisfied.

We generate revenue primarily through collaboration agreements, which may require delivery of various rights and/or services, including intellectual property rights or licenses and research and development services. Under such collaboration agreements, we are generally eligible to receive non-refundable upfront payments, funding for research and development services, milestone payments, and royalties.

In contracts where more than one performance obligation exists to provide its customer with goods or services, each performance obligation is evaluated to determine whether it is distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated stand-alone selling price of each deliverable reflects the our best estimate of what the selling price would be if the deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to the customer for the related goods or services. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

**Stock-based compensation** / In June 2018, the FASB issued ASU 2018-07, *Compensation - Stock Compensation* (Topic 718), *Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07")*. The amendments in ASU 2018-07 provide guidance about aligning nonemployee and employee share-based payment accounting. The amendments in ASU 2017-07 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We early adopted the new standard as of January 1, 2018. The adoption of this ASU 2018-07 did not have a material impact on the Company's financial position and results of operations.

There are no other 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, 2017.

### RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the FASB 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 condensed 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.

### 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, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Total revenue | **$1,587** | $6,892 | **$4,267** | 8,166 |
| Operating expenses | **34,013** | 19,789 | **77,144** | 58,847 |
| Loss from operations | **(32,426)** | (12,897) | **(72,877)** | (50,681) |
| Net income (loss) | **$(28,755)** | $(11,600) | **$(43,093)** | (48,482) |
| Net income (loss) attributable to common shares | **(27,040)** | (11,600) | **(46,255)** | (48,482) |
| Basic and diluted loss per common share | **(0.49)** | (0.21) | **(0.84)** | (0.89) |

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

|  | Three months ended September 30, 2018 | % of Total | 2017 | % of Total | Nine months ended September 30, 2018 | % of Total | 2017 | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Alexion | **$—** | **—%** | $6,859 | 100% | **$—** | **—%** | $7,956 | 97% |
| Gritstone | **313** | **20%** | — | —% | **2,400** | **56%** | — | —% |
| Gritstone Milestone | **1,250** | **79%** | — | —% | **1,250** | **29%** | — | —% |
| Other milestone and royalty payments | **24** | **1%** | 33 | —% | **617** | **15%** | 210 | 3% |
| **Total revenue** | **$1,587** |  | $6,892 |  | **$4,267** |  | $8,166 |  |

***Revenue contracts are addressed in detail in the Overview section of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" above.***

### Alexion revenue

In March 2017, we signed a License Agreement with Alexion Pharmaceuticals, Inc. ("Alexion") that granted them exclusive use of our proprietary LNP technology in one of Alexion's rare disease programs, and began recognizing a portion of the non-refundable upfront payment and services provided. 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.

### Gritstone revenue

On October 16, 2017, we entered into a license agreement with Gritstone that entitles Gritstone to research, develop, manufacture and commercialize products with the Company’s LNP technology. In October 2017, we received the upfront license payment, and are eligible to receive further potential payments for development and commercial milestone payments and royalty payments on future product sales. Revenue recognized in the three and nine months ended September 30, 2018 relates to the earned portion of the upfront license fee, as well as services provided to Gritstone. As a result of our agreement with Genevant (see note 3 of the financial statements for details), from April 11, 2018 onwards, Genevant is entitled to 50% of the revenues earned (excluding the upfront license payment discussed above) by Arbutus from Gritstone. We record service revenues from Gritstone net of charges by Genevant for services provided to Gritstone.

During the three months ended September 30, 2018, Gritstone paid a milestone payment of $2,500,000 pursuant to the license agreement, half of which went to the Company and half of which went to Genevant.

### 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. Our cross-license agreement with Acuitas has been terminated in accordance with the settlement agreement described under Part II, Item 1, "Legal Proceedings."

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 utilizes a license to our technology.

In the third quarter of 2010 we signed a contract with the U.S. Department of Defense ("DoD") to develop TKM-Ebola and have since incurred significant program costs related to equipment, materials and preclinical and clinical studies. In the fourth quarter of 2015, the DoD contract was terminated and in the second quarter of 2018 we completed contract close out procedures with the DoD and recorded the final reimbursement.

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

|  | Three months ended September 30, 2018 | % of Total | 2017 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Research, development, collaborations and contracts | **$16,566** | **49%** | $15,537 | 79% |
| General and administrative | **2,631** | **8%** | 3,659 | 18% |
| Depreciation | **497** | **1%** | 593 | 3% |
| Site consolidation | **(492)** | **(1)%** | — | —% |
| Impairment of intangible assets | **14,811** | **43%** | $— | **—%** |
| **Total operating expenses** | **$34,013** |  | $19,789 |  |

|  | Nine months ended September 30, 2018 | % of Total | 2017 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Research, development, collaborations and contracts | **$46,871** | **61%** | $44,854 | 76% |
| General and administrative | **10,075** | **13%** | 12,586 | 22% |
| Depreciation | **1,677** | **2%** | 1,407 | 2% |
| Site consolidation | **3,710** | **5%** | — | —% |
| Impairment of intangible assets | **14,811** | **19%** | **—** | **—** |
| **Total operating expenses** | **$77,144** |  | $58,847 |  |

### 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 increased in both the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. Stock based compensation expense for the nine months ended September 30, 2018 was roughly $4.0 million less than the nine months ended September 30, 2017 due to the expiry of certain share repurchase rights in the third quarter of 2017. Program R&D expenses, however, have increased in the first nine months of 2018 over the first nine months of 2017 as our pipeline expands and goes further into the clinic. In early 2017, we initiated a Phase 1 clinical trial for AB-423. In the first half of 2018 we initiated a Phase I clinical trial in healthy volunteers for AB-506 (capsid inhibitor), which we anticipate to progress into HBV patients in the fourth quarter of 2018. Given the progression of AB-506, we have decided to discontinue additional clinical evaluation of AB-423. During the nine month period ended September 30, 2018, we continued to incur costs related to our clinical programs including IND/CTA-enabling work and CTA regulatory filings for AB-452 (HBV RNA Destabilizer), pre-IND/CTA work on AB-729 (GalNAc-RNAi), as well as our ongoing clinical trial of ARB-1467 in combination with nucs and interferon. In addition, we continue to incur research costs related to our discovery and pre-clinical 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 three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017, due primarily to a decrease in non-cash compensation expense related to the expiry of repurchase rights in the third quarter of 2017, offset by professional fees incurred related to the launch of Genevant Sciences - see Overview.

### Site consolidation charges

In February 2018, we announced a site consolidation and organizational restructuring to better align our HBV business in Warminster, PA, by reducing our global workforce and closing our Burnaby facility. Most of the employee-related site consolidation expenses have been expensed ratably over the period that employees have provided services, which was substantially complete by June 30, 2018. Further, in the second quarter of 2018, we recorded the cost of remaining lease payments for the remaining term of the Burnaby lease to July 2019, offset by income that we expected to receive under a sublease contract entered into prior to June 30, 2018. There were further sub-leases of our Burnaby facility signed in the third quarter of 2018. These resulted in a credit to site consolidation expense in the third quarter. We have now sub-let approximately 80% of our Burnaby facility. We continue to expect total site consolidation expenses to be approximately $5.0 million.

### Impairment of intangible assets

In the three and nine months ended September 30, 2018, we recorded a non-cash expense for the impairment of intangible assets of $14.8 million ($10.5 million net of tax benefit) for the indefinite delay of further development of our AB-423 program due to the successful progression of our AB-506 program.

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

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | **$756** | $337 | **$2,319** | $1,095 |
| Interest expense | **—** | (76) | **(104)** | (186) |
| Foreign exchange gains (losses) | **145** | 1,233 | **(740)** | 2,458 |
| Gain on investment | **—** | — | **24,884** | — |
| (Increase) in fair value of warrant liability | **—** | — | **—** | (22) |
| Equity investment income (loss) | **(2,838)** | — | **(2,838)** | — |
| Decrease (increase) in fair value of contingent consideration | **5,608** | (197) | **6,263** | (1,146) |
| **Total other income (losses)** | **$3,671** | $1,297 | **$29,784** | $2,199 |

### Interest income

As described in our quantitative and qualitative disclosures about market risk in our Annual Report on Form 10-K for the year ended December 31, 2017, we invest our cash reserves in high interest savings accounts and guaranteed investment certificates and term deposits with varying terms to maturity (not exceeding two years) issued by major banks. The increase in interest income for the three and nine months ended September 30, 2018 is due to the proceeds received from the Series A participating convertible preferred shares (the "Preferred Shares") sold to Roivant (as further described in note 6 of our condensed consolidated financial statements) and more favorable interest rates during 2018.

### 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 nine months ended September 30, 2018, we recorded foreign exchange losses, which are primarily unrealized losses related to the depreciation in value of our Canadian dollar funds, from the previous period, when converted to our functional currency of U.S. dollars. For the three months ended September 30, 2018, we recorded a foreign exchange gain as the Canadian dollar appreciated against the U.S. dollar. In the future, we expect that the proportion of cash and investment balances and expenses incurred in Canadian dollars, relative to U.S. dollars, will continue to decrease as a result of the site consolidation.

### Gain on investment in Genevant

As described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview section of this discussion and in the Notes to the Condensed Consolidated Financial Statements, in the second quarter of 2018, together with Roivant, we launched Genevant, a jointly-owned company focused on the discovery, development, and commercialization of a broad range of RNA-based therapeutics enabled by our Delivery Technologies. This transaction, together with a subsequent secondary financing of Genevant, resulted in a gain on investment of $24.9 million.

### Decrease (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. The decrease in contingent consideration for the three and nine months ended September 30, 2018 is primarily due to our decision in the third quarter of 2018 to indefinitely delay further clinical development of AB-423 thereby reducing the probability of achieving future development milestones, as well as a recalibration in the timing of future sales milestones being achieved, resulting in a reduction in the estimated fair value of the liability.

### LIQUIDITY AND CAPITAL RESOURCES

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

|  | Three Months Ended September 30, 2018 | 2017 | Nine months ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net income loss for the period | **$(24,473)** | $(11,600) | **$(38,811)** | $(48,482) |
| Adjustments to reconcile net loss to net cash provided by operating activities | **9,927** | 3,441 | **(9,493)** | 13,582 |
| Changes in operating assets and liabilities | **1,342** | (7,521) | **(2,487)** | (3,398) |
| Net cash used in operating activities | **(13,204)** | (15,680) | **(50,791)** | (38,298) |
| Net cash provided by (used in) investing activities | **24,378** | 5,305 | **(48,911)** | 27,116 |
| Net cash provided by financing activities | **435** | 61 | **55,537** | 419 |
| Effect of foreign exchange rate changes on cash & cash equivalents | **131** | 1,327 | **(795)** | 2,575 |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | **11,740** | (8,987) | **(44,960)** | (8,188) |
| Cash, cash equivalents, and restricted cash, beginning of period | **10,193** | 24,212 | **66,893** | 23,413 |
| **Cash, cash equivalents, and restricted cash, end of period** | **$21,933** | $15,225 | **$21,933** | 15,225 |

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.

As of September 30, 2018, we had an aggregate of $142.0 million in cash and cash equivalents and short-term investments, as compared to an aggregate of $139.0 million in cash and cash equivalents, short-term investments, and restricted investments at December 31, 2017.

For the nine months ended September 30, 2018, operating activities used $50.8 million in cash as compared to $38.3 million of cash used in the nine months ended September 30, 2017. The increase in net cash used in operating activities is largely related to increased development spending along with site consolidation expenses in the nine months ended September 30, 2018 and, conversely, cash in-flows from the Alexion collaboration in the nine months ended September 30, 2017.

For the nine months ended September 30, 2018, investing activities decreased cash by $48.9 million as we invested the cash received from the preferred share financing in short-term investments.

For the nine months ended September 30, 2018, financing activities increased cash by $55.5 million due to the completion of the second tranche of the Preferred Shares financing netting $66.3 million, offset by repayment of our promissory note to Wells Fargo.

**Cash requirements /** As of September 30, 2018 we held an aggregate of $142.0 million in cash, comprised of $21.9 million in cash and cash equivalents and $120.1 million in short-term investments. In October 2017, we announced that we had entered into a subscription agreement with Roivant for the sale of Preferred Shares to Roivant for gross proceeds of $116.4 million. The initial investment of $50.0 million closed in October 2017, and the remaining amount of $66.4 million closed in January 2018.

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 potential royalty payments from Alnylam's Onpattro;
- 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;
- 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; and
- costs associated with our site consolidation plans.

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.

## 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, 2017.

## Controls and procedures

As filed, 1,949 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2018, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

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, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 155 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, 2017.

Filed Nov 7, 2018.
Source: SEC EDGAR, the filing index for accession 0001628280-18-013909. Last ingested by Listed: Nov 12, 2026, 17:55 ET. No prices; not investment advice.