UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_____________________________

FORM 10-Q

 

_____________________________

(Mark One)

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period-ended March 31, 2017

OR

◻TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-37359

_____________________________

 

BLUEPRINT MEDICINES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

_____________________________

 

(617) 374-7580

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

_____________________________

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑     No  ◻

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑     No  ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑

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

Number of shares of the registrant’s common stock, $0.001 par value, outstanding on May 1, 2017: 39,018,392

 

 

TABLE OF CONTENTS

 

 

 

Unless otherwise stated, all references to “us,” “our,” “Blueprint,” “Blueprint Medicines,” “we,” the “Company” and similar designations in this Quarterly Report on Form 10-Q refer to Blueprint Medicines Corporation and its consolidated subsidiary, Blueprint Medicines Security Corporation.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative of these words or other comparable terminology, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Given these uncertainties, you should not place undue reliance on these forward-looking

statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Blueprint Medicines Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

Blueprint Medicines Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Blueprint Medicines Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Blueprint Medicines Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Business

Blueprint Medicines Corporation (the Company), a Delaware corporation incorporated on October 14, 2008, is a biopharmaceutical company focused on improving the lives of patients with genomically defined diseases driven by abnormal kinase activation. The Company’s approach is to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and to craft drug candidates that may provide significant and durable clinical response to patients without adequate treatment options.

The Company is devoting substantially all of its efforts to research and development, initial market development, and raising capital. The Company is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals; establishing safety and efficacy in clinical trials for its drug candidates; the need to develop commercially viable drug candidates; competition from other companies, many of which are larger and better capitalized; and the need to obtain adequate additional financing to fund the development of its drug candidates. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, eliminate or out‑license certain of its research and development programs or future commercialization efforts.

On May 5, 2015, the Company completed an initial public offering (IPO) of its common stock, which resulted in the sale of 9,367,708 shares of its common stock at a price to the public of $18.00 per share, including 1,221,874 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering. The Company received net proceeds of $154.8 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

On December 13, 2016, the Company closed a follow-on public offering of 5,750,000 shares of its common stock at a price to the public of $25.00 per share, including 750,000 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering. The Company received net proceeds of $134.5 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

On April 4, 2017, the Company closed a follow-on public offering of 5,750,000 shares of its common stock at a price to the public of $40.00 per share, including 750,000 shares of common stock sold by the Company pursuant to the exercise in full by the underwriters of their option to purchase additional shares in connection with the offering (the April 2017 follow-on public offering). The Company received net proceeds of $215.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

As of March 31, 2017, the Company had cash, cash equivalents and investments of $236.3 million. Based on the Company’s current plans, the Company believes its existing cash, cash equivalents and investments, including the $215.6 million in net proceeds from its April 2017 follow-on public offering but excluding any potential option fees and milestone payments under our existing collaborations, will be sufficient to enable the Company to fund its operating expenses and capital expenditure requirements into the second half of 2019.

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

The unaudited interim condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) as found in the Accounting Standards Codification (ASC), Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB) and the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2016 and notes thereto

included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 9, 2017.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include the accounts of the Company and its wholly-owned subsidiary, Blueprint Medicines Security Corporation, which is a Massachusetts subsidiary created to buy, sell, and hold securities. All intercompany transactions and balances have been eliminated. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of March 31, 2017 and the results of its operations and cash flows for the three months ended March 31, 2017. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2017 are not necessarily indicative of the results for the year ending December 31, 2017, or for any future period.

On December 13, 2016, the Company closed its underwritten public offering of 5,750,000 shares. The significant increase in shares outstanding is expected to impact the year-over-year comparability of the Company’s net loss per share calculations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. Management’s estimation process often may yield a range of potentially reasonable estimates and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: stock‑based compensation expense; revenue recognition; accrued expenses; and income taxes.

Significant Accounting Policies

The Company’s critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our financial statements. Management has determined that the Company’s most critical accounting policies are those relating to revenue recognition, accrued research and development expenses, available-for-sale investments and stock-based compensation.

There have been no significant changes to the Company’s critical accounting policies discussed in its Annual Report on Form 10-K for the year ended December 31, 2016 related to available-for-sale investments, revenue recognition, accrued research and development expenses and stock-based compensation.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes the revenue recognition requirements in ASC 605-25, Multiple-Element Arrangements and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance will be effective for annual reporting periods (including interim reporting periods within those years) beginning January 1, 2018.  Early adoption in 2017 is permitted. Companies have the option of applying this new guidance retrospectively to each prior reporting period presented (the full retrospective method) or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application (the modified retrospective method). The Company currently anticipates adoption of the new standard effective January 1, 2018 under the modified retrospective method. The Company believes there may be a potential impact in the way it recognizes revenue under its agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively, Roche) as well as the recognition of milestone

revenue prior to achievement. The Company is in the process of determining the impact of the new guidance on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (ASU No. 2016-09), which amends ASC Topic 718, Compensation – Stock Compensation. The new standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The new standard was effective for the Company on January 1, 2017. The Company applied ASU 2016-09 using a modified retrospective approach and adopted the option to recognize gross stock compensation expense with actual forfeitures recognized as they occur. Given that the application of the estimated forfeiture rate prior to January 1, 2017 resulted in an insignificant reduction in stock-based compensation expense, the cumulative-effect adjustment to retained earnings recognized as of January 1, 2017 was not material to the consolidated financial statements. The adoption of ASU 2016-09 also requires all income tax adjustments to be recognized in the consolidated statements of operations. As the increase in net deferred tax assets is fully offset by a corresponding increase to the deferred tax asset valuation allowance, there was no material impact of the adoption of this standard. The amount of deferred tax assets that had not been previously recognized due to the recognition of excess tax benefits is $1.1 million.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will change the way the Company recognizes its leased assets. ASU No. 2016-02 will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities representing the rights and obligations created by those leases. ASU No. 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard is effective for annual reporting periods (including interim reporting periods within those years) beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect that adoption of the standard is expected to have on the Company’s consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) (ASU No. 2016-15), which simplifies certain elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for annual periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of ASU No. 2016-15 will have on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (ASU No. 2016-18). The amendments in ASU No. 2016-18 require an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows. ASU No. 2016-18 is effective for fiscal years (including interim reporting periods within those years) beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU No. 2016-18 using a full retrospective approach. The Company believes that the adoption of this guidance will not have a significant impact on its consolidated financial statements and related disclosures.

3. Cash Equivalents and Investments

Cash equivalents are highly liquid investments that are readily convertible into cash with original maturities of three months or less when purchased. Investments consist of securities with original maturities greater than 90 days when purchased. The Company classifies these investments as available-for-sale and records them at fair value in the accompanying condensed consolidated balance sheets. Unrealized gains or losses are included in accumulated other comprehensive income (loss). Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.

Cash equivalents and investments, available-for-sale, consisted of the following at March 31, 2017 and December 31, 2016 (in thousands):

 

 

 

 

Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During the three months ended March 31, 2017, there were no realized gains or losses on sales of investments, and no investments were adjusted for other than temporary declines in fair value.

At March 31, 2017, the Company held 33 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of March 31, 2017 was $179.9 million, and there were no securities held by the Company in an unrealized loss position for more than twelve months. The Company has the intent and ability to hold such securities until recovery. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than temporary impairment as of March 31, 2017.

4. Fair Value of Financial Instruments

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

Financial instruments measured at fair value as of March 31, 2017 are classified below based on the fair value hierarchy described above:

 

 

Financial instruments measured at fair value as of December 31, 2016 are classified below based on the fair value hierarchy described above:

 

The fair value of the Company’s term loan payable is determined using current applicable rates for similar instruments as of the balance sheet date. The carrying value of the Company’s term loan payable approximates fair value because the Company’s interest rate yield approximates current market rates. The Company’s term loan payable is a Level 3 liability within the fair value hierarchy.

5. Restricted Cash

As of March 31, 2017 and December 31, 2016, $1.3 million of restricted cash was included in long-term assets on the Company’s balance sheet related to a security deposit for the lease agreement for the Company’s corporate headquarters.

 

 

6. Collaborations

Roche

In March 2016, the Company entered into a collaboration and license agreement (as amended, Roche agreement) Roche for the discovery, development and commercialization of up to five small molecule therapeutics targeting kinases believed to be important in cancer immunotherapy, as single products or possibly in combination with other therapeutics. The parties initiated activities for three of the collaboration programs in 2016, and the parties have agreed to work together to use the Company’s novel target discovery engine and proprietary compound library to select targets for up to two additional collaboration programs.

Under the Roche agreement, Roche is granted up to five option rights to obtain an exclusive license to exploit products derived from the collaboration programs in the field of cancer immunotherapy. Such option rights are triggered upon the achievement of Phase 1 proof-of-concept. For up to three of the five collaboration programs, if Roche exercises its option, Roche will receive worldwide, exclusive commercialization rights for the licensed products. For up to two of the five collaboration programs, if Roche exercises its option, the Company will retain commercialization rights in the United States for the licensed products, and Roche will receive commercialization rights outside of the United States for the licensed products. The Company will also retain worldwide rights to any products for which Roche elects not to exercise its applicable option.

Prior to Roche’s exercise of an option, the Company will have the lead responsibility for drug discovery and pre-clinical development of all collaboration programs. In addition, the Company will have the lead responsibility for the conduct of all Phase 1 clinical trials other than those Phase 1 clinical trials for any product in combination with Roche’s portfolio of therapeutics, for which Roche will have the right to lead the conduct of such Phase 1 clinical trials. Pursuant to the Roche agreement, the parties will share the costs of Phase 1 development for each collaboration program. In addition, Roche will be responsible for post-Phase 1 development costs for each licensed product for which it retains global commercialization rights, and the Company and Roche will share post-Phase 1 development costs for each licensed product for which the Company retains commercialization rights in the United States.

Subject to the terms of the Roche agreement, the Company received an upfront cash payment of $45.0 million and will be eligible to receive up to approximately $965.0 million in contingent option fees and milestone payments related to specified research, pre-clinical, clinical, regulatory and sales-based milestones. Of the total contingent payments, up to approximately $215.0 million are for option fees and milestone payments for research, pre-clinical and clinical development events prior to licensing across all five potential collaboration programs, including contingent milestone payments for initiation of each of the collaboration programs for which the parties will work together to select targets (pre-option exercise milestones). In addition, for any licensed product for which Roche retains worldwide commercialization rights, the Company will be eligible to receive tiered royalties ranging from low double-digits to high-teens on future net sales of the licensed product. For any licensed product for which the Company retains commercialization rights in the United States, the Company and Roche will be eligible to receive tiered royalties ranging from mid-single-digits to low double-digits on future net sales in the other party’s respective territories in which it commercializes the licensed product. The upfront cash payment and any payments for milestones, option fees and royalties are non-refundable, non-creditable and not subject to set-off.

The Roche agreement will continue until the date when no royalty or other payment obligations are or will become due, unless earlier terminated in accordance with the terms of the Roche agreement. Prior to its exercise of its first option, Roche may terminate the Roche agreement at will, in whole or on a collaboration target-by-collaboration target basis, upon 120 days’ prior written notice to the Company. Following its exercise of an option, Roche may terminate the Roche agreement at will, in whole, on a collaboration target-by-collaboration target basis, on a collaboration program-by-collaboration program basis or, if a licensed product has been commercially sold, on a country-by-country basis, (i) upon 120 days’ prior written notice if a licensed product has not been commercially sold or (ii) upon 180 days’ prior written notice if a licensed product has been commercially sold. Either party may terminate the Roche agreement for the other party’s uncured material breach or insolvency and in certain other circumstances agreed to by the parties. In certain termination circumstances, the Company is entitled to retain specified licenses to be able to continue to exploit the licensed products.

The Company determined that there were five deliverables under the Roche agreement: (i) a non-transferable, sub-licensable and non-exclusive license to use the Company’s intellectual property and collaboration compounds to conduct research activities;(ii) conducting research and development activities through Phase 1 clinical trials under the research plan; (iii) providing pre-clinical and clinical supply of collaboration compounds; (iv) participation on a joint research committee (JRC) and joint development committee (JDC); and (v) regulatory responsibilities under Phase 1 clinical trials.

The Company determined that the license did not have value to Roche on a stand-alone basis due to the specialized nature of the research activities to be provided by the Company that are not available in the marketplace and the fact that the license is to perform research and development only. Therefore, the license has limited value without the performance of the research and development activities and is not separable. The pre-clinical and clinical supply activities are integral to the performance of the research and development activities and can only be used for the performance of such activities, and the regulatory responsibilities are dependent on the research and development activities. The Company determined that the best estimate for the selling price of the JRC and JDC participation was inconsequential. Accordingly, the Company combined the license, pre-clinical and clinical supply, JRC and JDC participation and regulatory responsibilities deliverables with the research and development activities, the last item to be delivered in the arrangement, as one unit of accounting. The Company is recognizing the total allocable arrangement consideration consisting of the upfront payment of $45.0 million as revenue on a straight-line basis over the Company’s best estimate of the period it expects to perform research and development activities. The Company expects the services to be delivered ratably.

The Company evaluated whether the option fees that may be received in connection with the Roche agreement are substantive. The Company concluded that the option fees were substantive due to the uncertainty around whether the goals of the collaboration will be achieved, and therefore the options are not a deliverable in the current arrangement. If Roche elects to exercise the options, the exercises and related contingent deliverables would be accounted for as a separate arrangement.

The Company evaluated whether the milestones that may be received in connection with the Roche agreement are substantive milestones. Pre-option exercise milestones, of up to $215.0 million, that are expected to be achieved as a result of the Company’s efforts during the performance of the research and development activities are considered substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met. The development event milestones are not considered substantive because the Company does not contribute effort to the achievement of such milestones as they are expected to be achieved after the performance of the research and development activities. Consideration received with respect to these milestones will be added to the total arrangement consideration that has been allocated to the identified units of accounting. As a result, that amount is recognized as revenue ratably over the period starting from the effective date of the agreement to the date that the Company will complete all of its obligations, with a cumulative catch-up from the effective date through the date of achievement of the milestone. If the consideration is received after the completion of all of the Company’s obligations, the amount will be recognized as revenue immediately.

During the three months ended March 31, 2017 and 2016, the Company recognized revenue under the Roche agreement of $1.4 million and $0.2 million, respectively, which represents a portion of the $45.0 million upfront payment.

Alexion

In March 2015, the Company entered into a research, development and commercialization agreement (Alexion agreement) with Alexion Pharma Holding (Alexion) to research, develop and commercialize drug candidates for an undisclosed activated kinase target, which is the cause of a rare genetic disease. Under the terms of the Alexion agreement, the Company is responsible for research and pre‑clinical development activities related to drug candidates and Alexion is responsible for all clinical development, manufacturing and commercialization activities related to drug candidates.

Alexion is responsible for funding 100% of the Company’s research and development costs incurred under the research plan, including pass‑through costs and a negotiated yearly rate per full‑time equivalent for its employees’ time and their associated overhead expenses. The Company received a $15.0 million non‑refundable upfront payment in March 2015 upon execution of the Alexion agreement and is eligible to receive over $250.0 million in payments upon the successful achievement of pre‑specified pre‑clinical, clinical, regulatory and commercial milestones as follows: (i) up to $6.0 million in pre‑clinical milestone payments for the first licensed product, (ii) up to $83.0 million and $61.5 million in development milestone payments for the first and second licensed products, respectively, and (iii) up to $51.0 million in commercial milestone payments for each of the first and second licensed products. Alexion will pay the Company tiered royalties, ranging from mid‑single to low‑double digit percentages, on a country‑by‑country and licensed-product‑by‑licensed product basis, on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of such licensed product in such country and ending on the later of (i) the expiration of the last‑to‑expire valid claim of specified patents covering such licensed product, (ii) the expiration of the applicable regulatory exclusivity period, and (iii) 10 or 15 years from specified commercial sales. There are no refund provisions in the Alexion agreement.

Alexion has the right to terminate the Alexion agreement if the Company undergoes a change of control or becomes an affiliate of a biotechnology or pharmaceutical company, and may terminate the Alexion agreement at will upon 90 days prior written notice. The Company and Alexion have the right to terminate the Alexion agreement in the event of the other party’s uncured breach or insolvency, and in certain other circumstances agreed to by the parties.

The Company determined that there were three deliverables under the Alexion agreement: (i) an exclusive license to research, develop, manufacture and commercialize the licensed products and the compounds in the field in the territory, (ii) conducting research and development activities under the research plan and (iii) participation on a joint steering committee (JSC) and joint project team (JPT).

The Company determined that the license did not have value to Alexion on a stand-alone basis due to the specialized nature of the research services to be provided by the Company that are not available in the marketplace. Therefore, the deliverables are not separable and, accordingly, the license, undelivered research and development activities and JSC and JPT participation are a single unit of accounting. When multiple deliverables are accounted for as a single unit of accounting, the Company bases its revenue recognition model on the final deliverable. Under the Alexion agreement, the last deliverable to be completed is its research and development activities and participation on the JSC and JPT, which are expected to be delivered over the same performance period. The Company is utilizing a proportional performance model to recognize revenue under the Alexion agreement.

The Company evaluated whether the milestones that may be received in connection with the Alexion agreement are substantive or non-substantive milestones. The Company concluded that the first pre-clinical milestone payment in the Alexion agreement is non-substantive due to the certainty at the date the arrangement was entered into that the event will be achieved. In the second quarter of 2015, the Company achieved the first pre-clinical milestone under the Alexion agreement and received a $1.8 million payment from Alexion. The Company is recognizing revenues from the related milestone payment over the period of performance.

The remaining non-refundable pre-clinical milestones that are expected to be achieved as a result of the Company’s efforts during the period of substantial involvement are considered substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met. The Company has recognized and received an aggregate of $2.0 million in substantive milestones through March 31, 2017. Milestones that are expected to be achieved after the period of substantial involvement are not considered substantive because the Company does not contribute effort to the achievement of such milestones. These milestones are recognized as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met, as there are no undelivered elements remaining and no continuing performance obligations.

During the three months ended March 31, 2017, the Company recognized revenue under the Alexion agreement of $4.4 million, which represents $2.8 million of reimbursable research and development costs, as well as a portion of the $15.0 million upfront payment and the $1.75 million non-substantive milestone payment previously received. During the three months ended March 31, 2016, the Company recognized revenue under the Alexion agreement of $6.6 million, which represents $4.2 million of reimbursable research and development costs, a $0.75 million milestone payment, which was recognized upon achievement, as well as a portion of the $15.0 million upfront payment and the $1.75 million non-substantive milestone payment previously received. During the three months ended March 31, 2017, the Company received $3.6 million related to reimbursable research and development costs under the Alexion agreement. As of March 31, 2017, the Company has recorded unbilled accounts receivable of $2.8 million related to reimbursable research and development costs under the Alexion agreement for activities performed during the first quarter of 2017.

7. Term Loan

In May 2013, the Company entered into a loan and security agreement with Silicon Valley Bank (the 2013 Term Loan), which provided for up to $5.0 million in funding, to be made available in three tranches. Loan advances accrue interest at a fixed rate of 2% above the prime rate. In June 2013, the Company drew the first loan advance of $1.0 million under the 2013 Term Loan and was required to make interest‑only payments until April 1, 2014, and consecutive monthly payments of principal, plus accrued interest, over the remaining term through March 2017. In September 2013, the Company drew the second loan advance of $2.0 million under the 2013 Term Loan and was required to make interest‑only payments until April 1, 2014, and consecutive monthly payments of principal, plus accrued interest, over the remaining term through March 2017. In June 2014, the Company drew the remaining $2.0 million advance under the 2013 Term Loan and was required to make interest‑only payments until January 1, 2015, and consecutive monthly payments of principal, plus accrued interest, over the remaining term through December 2017. In November 2014, the Company amended the 2013 Term Loan to allow the Company to borrow an additional $5.0 million (the 2014 Term Loan). The Company accounted for the amendment as a modification to the existing 2013 Term Loan. The Company immediately drew the additional $5.0 million under the 2014 Term Loan and was required to make interest‑only payments until December 1, 2015, and consecutive monthly payments of principal, plus accrued interest, over the remaining term through November 2018. The Company is required to pay a fee of 4% of the total loan advances at the end of the term of each of the 2013 Term Loan and the 2014 Term Loan. The fee is being accreted to interest expense over the term of the 2013 Term Loan and the 2014 Term Loan. In the event of prepayment, the

Company is obligated to pay 1% to 2% of the amount of the outstanding principal depending upon the timing of the prepayment.

The 2013 Term Loan and 2014 Term Loan are collateralized by a blanket lien on all corporate assets, excluding intellectual property, and by a negative pledge of the Company’s intellectual property. The 2013 Term Loan and 2014 Term Loan contain customary default provisions that include material adverse events, as defined therein. The Company has determined that the risk of subjective acceleration under the material adverse events clause is remote and therefore has classified the outstanding principal in current and long‑term liabilities based on scheduled principal payments.

The Company assessed all terms and features of the 2013 Term Loan and the 2014 Term Loan in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the term loan, including put and call features. The Company determined that all features of each of the 2013 Term Loan and the 2014 Term Loan are clearly and closely associated with a debt host and do not require bifurcation as a derivative liability, or the fair value of the feature is immaterial to the Company’s financial statements. The Company will continue to reassess the features on a quarterly basis to determine if they require separate accounting.

Future minimum payments, which include principal and interest due under each of the 2013 Term Loan and the 2014 Term Loan, are $1.9 million, in the aggregate, for the remainder of 2017 and $1.6 million, in the aggregate, thereafter.

In connection with the 2013 Term Loan, the Company issued a warrant to Silicon Valley Bank to purchase 150,000 shares of Series A convertible preferred stock at an exercise price of $1.00 per share (the Series A Warrant). In connection with the 2014 Term Loan, the Company issued an additional warrant to Silicon Valley Bank to purchase 83,333 shares of Series B convertible preferred stock at an exercise price of $1.20 per share (the Series B Warrant).

On May 13, 2015, Silicon Valley Bank exercised the Series A Warrant and the Series B Warrant pursuant to the cashless exercise feature of the warrants. In connection with the exercise of the Series A Warrant under the 2013 Term Loan, the Company issued 21,281 shares of common stock to Silicon Valley Bank. Warrants to purchase 5,991 shares of common stock were cancelled as payment for the aggregate exercise price of the Series A Warrant to Silicon Valley Bank. In connection with the exercise of the Series B Warrant under the 2014 Term Loan, the Company issued 11,157 shares of common stock. Warrants to purchase 3,994 shares of common stock were cancelled as payment for the aggregate exercise price of the Series B Warrant.

   The Company recorded a debt discount upon issuance of the warrants, which is being accreted as interest expense over the remaining term of the loan. The Company recorded interest expense related to the Series A Warrant and the Series B Warrant of less than $0.1 million in the three months ended March 31, 2017 and 2016, respectively.

8. Stock Awards

2015 Stock Option and Incentive Plan

 

In 2015, the Company’s board of directors and stockholders approved the 2015 Stock Option and Incentive Plan (the 2015 Plan), which replaced the Company’s 2011 Stock Option and Grant Plan, as amended (the 2011 Plan). The 2015 Plan includes incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance share awards and cash‑based awards. The Company initially reserved a total of 1,460,084 shares of common stock for the issuance of awards under the 2015 Plan. The 2015 Plan provides that the number of shares reserved and available for issuance under the 2015 Plan will be cumulatively increased on January 1 of each calendar year by 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser amount as specified by the compensation committee of the board of directors. For the calendar year beginning January 1, 2017, the number of shares reserved for issuance under the 2015 Plan was increased by 1,325,019 shares. In addition, the total number of shares reserved for issuance is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. At March 31, 2017, there were 2,138,101 shares available for future grant under the 2015 Plan.

Awards

Options and restricted stock awards granted by the Company generally vest ratably over four years, with a one‑year cliff for new employee awards, and are exercisable from the date of grant for a period of ten years.

A summary of the Company’s unvested restricted stock and related information follows:

 

 

The total fair value of restricted stock that vested during the three months ended March 31, 2017 and 2016 was $0.1 million and $0.7 million, respectively.

A summary of the Company’s stock option activity and related information follows:

 

 

The fair value of stock options is estimated on the grant date using the Black‑Scholes option‑pricing model based on the following weighted average assumptions:

 

 

The weighted‑average grant date fair value of options granted in the three months ended March 31, 2017 and 2016 was $23.98 and $10.29 respectively. The total intrinsic value of options exercised in the three months ended March 31, 2017 and 2016 was $3.5 million and $0.4 million, respectively.

Total stock‑based compensation expense recognized for all stock‑based compensation awards in the condensed consolidated statements of operations and comprehensive loss is as follows (in thousands):

 

 

At March 31, 2017, the Company had $31.4 million of total unrecognized compensation cost related to non-vested stock awards, which is expected to be recognized over a weighted‑average period of 2.73 years. Due to an operating loss, the Company does not record tax benefits associated with stock‑based compensation or option exercises. Tax benefit will be recorded when realized.

2015 Employee Stock Purchase Plan

 

In 2015, the Company’s board of directors and stockholders approved the 2015 Employee Stock Purchase Plan (the 2015 ESPP), which became effective upon the closing of the IPO in May 2015. The Company initially reserved a total of 243,347 shares of common stock for issuance under the 2015 ESPP. The 2015 ESPP provides that the number of shares reserved and available for issuance under the 2015 ESPP will be cumulatively increased on January 1 of each calendar year by 1% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser amount as specified by the compensation committee of the board of directors. For the calendar year beginning January 1, 2017, the number of shares reserved for issuance under the 2015 ESPP was increased by 331,254 shares. The Company issued no shares under the ESPP during the three months ended March 31, 2017.

 

9. Net Loss per Share

Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share applicable to common stockholders is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period. For purposes of the dilutive net loss per share applicable to common stockholders calculation, stock options, and unvested restricted stock are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share applicable to common stockholders, as their effect would be anti‑dilutive; therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented as a result of the Company’s net loss. The following common stock equivalents were excluded from the calculation of diluted net loss per share applicable to common stockholders for the periods indicated because including them would have had an anti‑dilutive effect.

The weighted average number of common shares used in net loss per share applicable to common stockholders on a basic and diluted basis were 33,189,759 and 27,087,919 for the three months ended March 31, 2017 and 2016, respectively.

 

 

10. Commitments

On February 12, 2015, the Company entered into a lease for approximately 38,500 rentable square feet of office and laboratory space in Cambridge, Massachusetts, which the Company gained control over on June 15, 2015, and occupancy commenced in October 2015. The lease ends on October 31, 2022. The Company has an option to extend the lease for five additional years. The lease has a total commitment of $17.8 million over the seven year term. The Company has agreed to pay an initial annual base rent of approximately $2.3 million, which rises periodically until it

reaches approximately $2.8 million. The Company is recording rent expense on a straight-line basis through the end of the lease term. The Company has recorded deferred rent on the condensed consolidated balance sheet at March 31, 2017, accordingly. The lease provides the Company with an allowance for leasehold improvements of $4.3 million. The Company accounts for leasehold improvement incentives as a reduction to rent expense ratably over the lease term. The balance from the leasehold improvement incentives is included in lease incentive obligations on the balance sheets. The lease agreement required the Company to pay a security deposit of $1.3 million, which is recorded in restricted cash on the Company’s balance sheet. For the three months ended March 31, 2017 and 2016, rent expense was $0.5 million and $0.6 million, respectively.

 

11. Subsequent Events

Follow-On Public Offering

On April 4, 2017, the Company closed the April 2017 follow-on public offering and received net proceeds of $215.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

Lease Agreement

On April 28, 2017, the Company entered into a lease agreement (the Lease Agreement) with UP 45/75 Sidney Street, LLC (Landlord) for approximately 99,833 rentable square feet of office and laboratory space located at 45 Sidney Street in Cambridge, Massachusetts. The initial term of the Lease Agreement will be for a 146 month period, which the Company currently anticipates will commence on October 1, 2017. The Lease Agreement also provides the Company with an option to extend the lease for two consecutive five-year periods. During the initial term of the Lease Agreement, the Company’s monthly base rent will start at approximately $641,000 beginning on the commencement date through the 14 month anniversary of the commencement date. The monthly base rent will increase by 3.0% on the 14 month anniversary of the commencement date and will increase by an additional 3.0% on an annual basis for the remainder of the initial term up to a maximum monthly base rent of approximately $887,000. The Landlord has also agreed to provide the Company with a tenant improvement allowance of approximately $14.2 million for improvements to be made to the premises. The Company will be obligated to maintain a security deposit with the Landlord in the amount of $3.5 million, which is subject to reduction by up to $1.0 million during the term of the Lease Agreement, subject to the satisfaction of specified terms and conditions.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission, or the SEC, on March 9, 2017. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of this Quarterly Report on Form 10-Q, our actual results or timing of certain events could differ materially from the results or timing described in, or implied by, these forward-looking statements.

Overview

We are a biopharmaceutical company focused on improving the lives of patients with genomically defined diseases driven by abnormal kinase activation. Our approach is to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and to craft drug candidates that may provide significant and durable clinical responses for patients without adequate treatment options. This integrated biology and chemistry approach enables us to identify, characterize and design drug candidates to inhibit novel kinase targets that have been difficult to selectively inhibit. By focusing on diseases in genomically defined patient populations, we believe that we will have a more efficient development path with a greater likelihood of success. Leveraging our novel target discovery engine, we have developed a robust small molecule drug pipeline in cancer and a rare genetic disease.

Our most advanced drug candidates are BLU-285, BLU-554 and BLU-667. BLU-285 is an orally available, potent and highly selective inhibitor that targets KIT, including Exon 17 mutations, and targets PDGFRα, including the D842V mutation. These mutations abnormally activate receptor tyrosine kinases that are drivers of cancer and proliferative disorders, including gastrointestinal stromal tumors, or GIST, and systemic mastocytosis, or SM. We are currently evaluating BLU-285 in an ongoing Phase 1 clinical trial for defined subsets of patients with GIST and an ongoing Phase 1 clinical trial for advanced SM. GIST is a rare disease that is a sarcoma, or tumor of bone or connective tissue, of the gastrointestinal tract, or GI tract, and SM is a rare disorder that causes an overproduction of mast cells and the accumulation of mast cells in the bone marrow and other organs, which can lead to a wide range of debilitating symptoms and organ dysfunction and failure. We plan to report updated data from our Phase 1 clinical trial for GIST at the 2017 ASCO Annual Meeting in Chicago, IL on June 5, 2017, and we plan to report updated data from our Phase 1 clinical trial for advanced SM in the second half of 2017. BLU-554 is an orally available, potent and highly selective inhibitor that targets FGFR4, a kinase that is aberrantly activated in a defined subset of patients with hepatocellular carcinoma, or HCC, the most common type of liver cancer. We are currently evaluating BLU-554 in an ongoing Phase 1 clinical trial in patients with advanced HCC. We plan to report updated data from our Phase 1 clinical trial for advanced HCC in the second half of 2017. BLU-667 targets RET, a receptor tyrosine kinase that is abnormally activated by mutations or translocations, and RET resistant mutants that we predict will arise from treatment with first generation therapies. RET is a driver of disease in non-small cell lung cancer, or NSCLC, and cancers of the thyroid, including medullary thyroid carcinoma, or MTC, and our research suggests that RET may be a driver of disease in subsets of colon cancer, breast cancer and other cancers. In March 2017, we dosed the first patient in our Phase 1 clinical trial for BLU-667 in patients with NSCLC, MTC and other advanced solid tumors, and enrollment is ongoing.

In September 2015, the U.S. Food and Drug Administration, or FDA, granted orphan drug designation to BLU-554 for the treatment of HCC, and in January 2016, the FDA granted orphan drug designation to BLU-285 for the treatment of GIST and SM. In addition, in October 2016, the FDA granted fast track designation to BLU-285 for the treatment of patients with unresectable or metastatic GIST that progressed following treatment with imatinib and a second tyrosine kinase inhibitor and for the treatment of patients with unresectable or metastatic GIST with the PDGFRα D842V mutation regardless of prior therapy. We have worldwide development and commercialization rights to BLU-285, BLU-554 and BLU-667.

We also have initiated a discovery program targeting protein kinase cAMP-activated catalytic subunit alpha, or PRKACA, fusions for the treatment of fibrolamellar carcinoma, or FLC, a rare and distinct subtype of liver cancer that typically arises in young adults. PRKACA fusions are the only known recurrent genomic events in FLC and are

considered to be the driver gene of the disease. Currently, there are no approved therapies for FLC, and surgery is the only available treatment option for some patients, but most patients inevitably progress. We plan to continue to leverage our discovery platform to systematically and reproducibly identify kinases that are drivers of diseases in genomically defined patient populations and craft drug candidates that potently and selectively target these kinases. We anticipate nominating at least one additional discovery program in 2017.

In addition to our wholly-owned clinical and pre-clinical programs, we have leveraged our discovery platform to enter into collaboration programs with Alexion Pharma Holding, or Alexion, and F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., which we refer to collectively as Roche.

Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property, building our discovery platform, including our proprietary compound library and new target discovery engine, identifying kinase drug targets and potential drug candidates, producing drug substance and drug product material for use in pre-clinical studies and clinical trials, conducting pre-clinical studies, including GLP toxicology studies and commencing clinical development activities. We do not have any drugs approved for sale and have not generated any revenue from drug sales.

To date, we have financed our operations primarily through public offerings of our common stock, private placements of our convertible preferred stock, collaborations and a debt financing. Through March 31, 2017, we have received an aggregate of $501.3 million from such transactions, including $312.4 million in aggregate gross proceeds from the sale of common stock in our May 2015 initial public offering, or IPO, and December 2016 follow‑on public offering, $115.1 million in gross proceeds from the issuance of convertible preferred stock, $18.8 million of upfront and milestone payments from Alexion, a $45.0 million upfront payment from Roche and $10.0 million in gross proceeds from the debt financing. In addition, we received gross proceeds of $230.0 million from the sale of common stock in our April 2017 follow-on public offering.

Since inception, we have incurred significant operating losses. Our net losses were $28.0 million for the three months ended March 31, 2017 and $72.5 million, $52.8 million and $40.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of March 31, 2017, we had an accumulated deficit of $235.4 million. We expect to continue to incur significant expenses and operating losses over the next several years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, particularly as we:

Financial Operations Overview

Revenue

To date, we have not generated any revenue from drug sales and do not expect to generate any revenue from the sale of drugs in the near future. Our revenue consists of collaboration revenue under our research, development and commercialization agreement that we entered into with Alexion in March 2015, which we refer to as the Alexion Agreement, and our collaboration and license agreement that we entered into with Roche in March 2016, which we refer to as the Roche agreement, including amounts that are recognized related to upfront payments, milestone payments and amounts due to us for research and development services. In the future, revenue may include additional milestone payments and royalties on any net product sales under the respective collaboration agreements. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development reimbursements, payments for manufacturing services, and milestone and other payments.

In the future, we will seek to generate revenue from a combination of drug sales and additional strategic relationships we may enter into.

Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our drug candidates, which include:

Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

The successful development of our drug candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of these drug candidates. We are also unable to predict when, if ever, material net cash inflows will commence from our drug candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

A change in the outcome of any of these variables with respect to the development of any of our drug candidates would significantly change the costs and timing associated with the development of that drug candidate.

Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our drug candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

A significant portion of our research and development expenses have been external expenses, which we track on a program-by-program basis following nomination of a development candidate. Our internal research and development expenses are primarily personnel-related expenses, including stock-based compensation expense. We do not track our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development.

The following table summarizes our external research and development expenses by program for the three months ended March 31, 2017 and 2016. Pre-development candidate expenses and unallocated expenses and internal research and development expenses have been classified separately.

We expect that our research and development expenses will increase in future periods as we expand our operations and incur additional costs in connection with our clinical trials. These increases will likely include the costs related to the implementation and expansion of clinical trial sites and related patient enrollment, monitoring, program management, drug product and drug substance manufacturing expenses and development activities for companion diagnostic tests, including our companion diagnostic tests with Ventana and Qiagen. In addition, we expect that our research and development expenses will increase in future periods as we incur additional costs in connection with research and development activities under our existing collaboration agreements. 

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development, legal and human resources

functions. Stock-based compensation includes expense associated with stock-based awards issued to non-employees, including directors for non-board related services. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We expect that our general and administrative expenses will increase in the future to support continued research and development activities, including as we continue our existing clinical trials and initiate additional clinical trials, as well as pre-commercial development activities. These increases will likely include increased costs related to the hiring of additional personnel, legal, auditing and filing fees and general compliance and consulting expenses, among other expenses. We have incurred and will continue to incur additional costs associated with operating as a public company.

Other Income (Expense), net

Other income (expense), net consists primarily of income earned on cash equivalents and investments.

Interest Expense

Interest expense consists primarily of interest expense on amounts outstanding under a loan and security agreement that we entered into with Silicon Valley Bank in May 2013 and amortization of debt discount.

Critical Accounting Policies and Estimates

Our critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition, accrued research and development expenses, available-for-sale investments and stock-based compensation.

There have been no significant changes to our critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2016 related to available-for-sale investments, revenue recognition, accrued research and development expenses and stock-based compensation.

Results of Operations

Comparison of Three Months Ended March 31, 2017 and 2016

The following table summarizes our results of operations for the three months ended March 31, 2017 and 2016, together with the changes in those items in dollars and as a percentage:

Collaboration Revenue

Collaboration revenue decreased by $1.0 million from $6.8 million for the three months ended March 31, 2016 to $5.8 million for the three months ended March 31, 2017. Collaboration revenue for the three months ended March 31, 2017 was related to the Alexion and Roche agreements. We recorded collaboration revenue of $4.4 million and $6.6 million under the Alexion agreement for the three months ended March 31, 2017 and March 31, 2016, respectively. The decrease in collaboration revenue under the Alexion agreement was primarily related to a decrease in reimbursable research and development costs and a decrease in recognition of portions of the $15.0 million upfront payment and $1.8 million in milestone payments received from Alexion that are recognized over the period of performance. Also contributing to the decrease was the impact of the recognition of a milestone payment upon achievement included in the three months ended March 31, 2016. We entered into the Roche agreement in March 2016 and recorded $1.4 million and $0.2 million in collaboration revenue under the Roche agreement for the three months ended March 31, 2017 and March 31, 2016, respectively.

Research and Development Expense

Research and development expense increased by $10.9 million from $17.6 million for the three months ended March 31, 2016 to $28.5 million for the three months ended March 31, 2017. The increase in research and development expense was primarily related to the following:

General and Administrative Expense

General and administrative expense increased by $1.0 million from $4.6 million for the three months ended March 31, 2016 to $5.6 million for the three months ended March 31, 2017. The increase in general and administrative expense was primarily related to approximately $0.9 million in increased personnel expenses due to an increase of 25% in general and administrative headcount to support our overall growth as a publicly traded company and an increase in stock-based compensation expense.

Other Income (Expense), Net

Other income (expense), net, increased by $0.4 million from less than $0.1 million of income for the three months ended March 31, 2016 to $0.4 million of income for the three months ended March 31, 2017. The increase in other income (expense), net, was primarily related to an increase in investment income during the three months ended March 31, 2017.

Interest Expense

Interest expense decreased by less than $0.1 million from $0.1 million for the three months ended March 31, 2016 to less than $0.1 million for the three months ended March 31, 2017. The decrease was primarily related to a decrease in the average outstanding principle balance under the loan and security agreement with Silicon Valley Bank for the three months ended March 31, 2017. We expect that interest expense will continue to decrease in subsequent periods as the principal amount under the loan decreases.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily through public offerings of our common stock, private placements of our convertible preferred stock, collaborations and a debt financing. Through March 31, 2017, we have received an aggregate of $501.3 million from such transactions, including $312.4 million in aggregate gross proceeds from the sale of common stock in our May 2015 IPO and December 2016 follow‑on public offering, $115.1 million in gross proceeds from the issuance of convertible preferred stock, $18.8 million of upfront and milestone payments from Alexion, a $45.0 million upfront payment from Roche and $10.0 million in gross proceeds from the debt financing. In addition, we received gross proceeds of $230.0 million from the sale of common stock in our April 2017 follow-on public offering.

As of March 31, 2017, we had cash, cash equivalents and investments of $236.3 million.

Cash Flows

The following table provides information regarding our cash flows for the three months ended March 31, 2017 and 2016:

Net Cash (Used in) Provided by Operating Activities. Net cash used in operating activities was $31.1 million during the three months ended March 31, 2017 compared to net cash provided by operating activities of $30.8 million during the three months ended March 31, 2016. The change in net cash used in operating activities was primarily due to changes in deferred revenue related to the timing of the upfront payment from Roche. In the three months ended March 31, 2016, we received a $45.0 million upfront payment from Roche, and in the three months ended March 31, 2017 we did not receive any upfront payments. Further, the change in net cash used by operating activities was related to an increase in net loss of $12.5 million for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

Net Cash Provided by (Used in) Investing Activities. Net cash provided by investing activities was $35.8 million during the three months ended March 31, 2017 compared to net cash used in investing activities of $70.4 million during the three months ended March 31, 2016. Net cash provided by investing activities for the three months ended March 31, 2017 consisted primarily of maturities of investments offset by purchases of investments. We classify these investments as available-for-sale and record them at fair value in the accompanying condensed consolidated balance sheets. Net cash used in investing activities for three months ended March 31, 2016 consisted primarily of purchases of investments and purchases of property and equipment.

Net Cash Used in Financing Activities. Net cash used in financing activities was $0.4 million during the three months ended March 31, 2017 compared to net cash used in financing activities of $0.8 million during the three months ended March 31, 2016. Net cash used in financing activities for the three months ended March 31, 2017 was primarily due to principal payments under the loan and security agreement with Silicon Valley Bank offset by net proceeds from the issuance of common stock upon the exercise of outstanding stock options. Net cash used in financing activities for the three months ended March 31, 2016 was primarily due to principal payments under the loan and security agreement with Silicon Valley Bank.

Borrowings

In May 2013, we entered into the loan and security agreement with Silicon Valley Bank. Under the terms of the loan and security agreement, we borrowed $5.0 million. Loan advances accrue interest at a fixed rate of 2.0% above the prime rate. In November 2014, we amended the loan and security agreement and borrowed an additional $5.0 million. Each loan advance included an interest only payment period. Through March 31, 2017, we have made principal payments of $6.7 million on the $10.0 million of advances. We are required to pay a fee of 4% of the total loan advances at the end of the term of the loan. There are no financial covenants associated with the loan and security agreement. As of March 31, 2017, we had $3.3 million in outstanding principal under the loan and security agreement.

The term loan is collateralized by a blanket lien on all corporate assets, excluding intellectual property, and by a negative pledge of our intellectual property. The term loan contains covenants, including restrictions on dividends and default provisions. We have determined that the risk of subjective acceleration under the material adverse events clause is remote and therefore have classified the outstanding principal in current and long term liabilities based on scheduled principal payments.

See Note 7, “Term Loan,” in the accompanying notes to our unaudited consolidated financial statements for additional information.

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue and initiate clinical trials of, and seek marketing approval for, our drug candidates. In addition, if we obtain marketing approval for any of our drug candidates, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

As of March 31, 2017, we had cash, cash equivalents and investments of $236.3 million. Based on our current plans, we believe our existing cash, cash equivalents and investments, including the $215.6 million of net proceeds from our April 2017 follow-on public offering but excluding any potential option fees and milestone payments under our existing collaborations, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into the second half of 2019. Our future capital requirements will depend on many factors, including:

Identifying potential drug candidates and conducting pre-clinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve drug sales. In addition, our drug candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, as we can generate substantial drug revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. At this time, we do not have any committed external source of funds outside of those to be earned in connection with our agreements with Alexion and Roche. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations

As of March 31, 2017, there have been no material changes to our contractual obligations and commitments from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year ended December 31, 2016.

On April 28, 2017, we entered into a lease agreement with UP 45/75 Sidney Street, LLC, as the landlord, pursuant to which we will lease approximately 99,833 rentable square feet of office and laboratory space located at 45 Sidney Street, Cambridge, Massachusetts 02139, which we refer to as the new premises, and will relocate our corporate headquarters to the new premises. We currently anticipate relocating our corporate headquarters in the first quarter of 2018.  See Part II, Item 5. “Other Information” of this Quarterly Report on Form 10-Q for additional information on the lease agreement.

Off‑Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.