Acceleron Pharma Inc.
ACCELERON PHARMA INC (Form: 10-Q, Received: 11/07/2017 07:12:04)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
 
FORM 10-Q
 
 
(Mark One)
x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
For the quarterly period ended September 30, 2017  
OR
o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36065
   
 
ACCELERON PHARMA INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
2836
(Primary Standard Industrial
Classification Code Number)
 
27-0072226
(I.R.S. Employer
Identification Number)
128 Sidney Street
Cambridge, MA 02139
(617) 649-9200
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
   
 
 
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    x     No    o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    x     No    o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o   (Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
o

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.             o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  x
 
As of October 31, 2017 , there were 45,235,024 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Acceleron Pharma Inc.  
Condensed Consolidated Balance Sheets  
(amounts in thousands except share and per share data)
(unaudited)
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 

Current assets:
 
 
 

Cash and cash equivalents
$
238,959

 
$
20,950

Collaboration receivables (all amounts are with related party)
2,879

 
3,234

Prepaid expenses and other current assets
3,334

 
3,862

Short-term investments
98,266

 
118,740

Total current assets
343,438

 
146,786

Property and equipment, net
7,211

 
5,201

Restricted cash
1,132

 
946

Other assets
124

 
22

Long-term investments
29,372

 
94,692

Total assets
$
381,277

 
$
247,647

Liabilities and stockholders’ equity
 
 
 

Current liabilities:
 
 
 

Accounts payable
$
1,024

 
$
1,590

Accrued expenses
14,141

 
13,249

Deferred revenue
541

 
541

Deferred rent
178

 
769

Total current liabilities
15,884

 
16,149

Deferred revenue, net of current portion
3,297

 
3,704

Deferred rent, net of current portion
1,628

 
953

Warrants to purchase common stock
1,927

 
1,244

Total liabilities
22,736

 
22,050

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 

Undesignated preferred stock, $0.001 par value: 25,000,000 shares authorized and no shares issued or outstanding

 

Common stock, $0.001 par value: 175,000,000 shares authorized; 44,414,694 and 38,251,826 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
45

 
39

Additional paid-in capital
803,907

 
590,474

Accumulated deficit
(445,097
)
 
(364,491
)
  Accumulated other comprehensive loss
(314
)
 
(425
)
Total stockholders’ equity
358,541

 
225,597

Total liabilities and stockholders’ equity
$
381,277

 
$
247,647

 
See accompanying notes to these condensed consolidated financial statements.

3

Table of Contents

Acceleron Pharma Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands except per share data)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 

 
 

 
 

Collaboration revenue:
 
 
 

 
 

 
 

License and milestone
$
135

 
$
135

 
$
406

 
$
15,415

Cost-sharing, net
2,879

 
2,870

 
9,370

 
8,987

Total revenue (all amounts are with related party)
3,014

 
3,005

 
9,776

 
24,402

Costs and expenses:
 
 
 

 
 

 
 

Research and development
21,059

 
17,102

 
64,387

 
49,492

General and administrative
7,533

 
6,411

 
26,735

 
19,029

Total costs and expenses
28,592

 
23,513

 
91,122

 
68,521

Loss from operations
(25,578
)
 
(20,508
)
 
(81,346
)
 
(44,119
)
Other (expense) income, net
(410
)
 
(794
)
 
(683
)
 
5,026

Interest income
496

 
512

 
1,474

 
1,348

Total other income (expense) net
86

 
(282
)
 
791

 
6,374

Loss before income taxes
(25,492
)
 
(20,790
)
 
(80,555
)
 
(37,745
)
Income tax benefit
41

 
20

 
29

 
20

Net loss applicable to common stockholders
$
(25,451
)
 
$
(20,770
)
 
$
(80,526
)
 
$
(37,725
)
 
 
 
 
 
 
 
 
Net loss per share applicable to common stockholders-basic and diluted (Note 9)
$
(0.65
)
 
$
(0.55
)
 
$
(2.08
)
 
$
(1.01
)
 
 
 
 
 


 


Weighted-average number of common shares used in computing net loss per share applicable to common stockholders:
39,361

 
37,616

 
38,804

 
37,268

 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(25,451
)
 
$
(20,770
)
 
$
(80,526
)
 
$
(37,725
)
Net unrealized holding gains (losses) on short-term and long-term investments during the period, net of tax of $59 thousand, $59 thousand, $53 thousand and $53 thousand for the three and nine months ended September 30, 2017 and 2016, respectively
100

 
(374
)
 
170

 
98

Comprehensive loss
$
(25,351
)
 
$
(21,144
)
 
$
(80,356
)
 
$
(37,627
)
 
See accompanying notes to these condensed consolidated financial statements.

4

Table of Contents

Acceleron Pharma Inc.  
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities
 
 
 

Net loss
$
(80,526
)
 
$
(37,725
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 

Depreciation and amortization
2,023

 
1,158

Stock-based compensation
21,877

 
13,387

Change in fair value of warrants
683

 
(5,026
)
Other non-cash items
211

 
(262
)
Changes in assets and liabilities:
 
 
 

Prepaid expenses and other assets
426

 
(1,211
)
Collaboration receivables
355

 
609

Accounts payable
(566
)
 
1,196

Accrued expenses
160

 
389

Restricted cash
(186
)
 
(150
)
Deferred revenue
(407
)
 
(414
)
Deferred rent
22

 
94

Net cash used in operating activities
(55,928
)
 
(27,955
)
Investing Activities
 
 
 

Purchases of investments
(245
)
 
(132,565
)
Proceeds from sales and maturities of investments
86,001

 
21,120

Purchases of property and equipment
(3,639
)
 
(2,246
)
Net cash provided by (used in) investing activities
82,117

 
(113,691
)
Financing Activities
 
 
 

Proceeds from issuance of common stock from public offering, net of issuance costs
187,986

 
140,697

Payments for withholding taxes on restricted stock units
(226
)
 

Proceeds from exercise of stock options and warrants to purchase common stock
3,233

 
3,524

Proceeds from issuances of common stock related to employee stock purchase plan
827

 
658

Net cash provided by financing activities
191,820

 
144,879

Net increase in cash and cash equivalents
218,009

 
3,233

Cash and cash equivalents at beginning of period
20,950

 
27,783

Cash and cash equivalents at end of period
$
238,959

 
$
31,016

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 
 
 

Purchase of property and equipment included in accounts payable and accrued expenses
$
395

 
$
25

Capitalized follow-on public offering costs included in accrued expenses
$
337


$


 
See accompanying notes to these condensed consolidated financial statements.

5

Table of Contents

Acceleron Pharma Inc.  
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
1. Nature of Business
Acceleron Pharma Inc. (Acceleron or the Company) is a Cambridge, Massachusetts-based clinical stage biopharmaceutical company dedicated to the discovery, development, and commercialization of therapeutics to treat serious and rare diseases. The Company’s leadership in the understanding of TGF-beta biology and protein engineering generates innovative compounds that engage the body’s ability to regulate cellular growth and repair.
The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, risk that the Company never achieves profitability, the need for substantial additional financing, risk of relying on third parties, risks of clinical trial failures, dependence on key personnel, protection of proprietary technology and compliance with government regulations.
2. Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB). 
The accompanying interim condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements as of and for the year ended December 31, 2016 except for the adoption of Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which did not have a material impact , and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2017 , the results of its operations for the three and nine months ended September 30, 2017 and 2016 , and its cash flows for the nine months ended September 30, 2017 and 2016
The results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 , any other interim periods, or any future year or period. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2016 , and the notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized events requiring disclosure, other than those disclosed in this Report on Form 10-Q.
The accompanying interim condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the financial statements. As of September 30, 2017 , the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 , have not changed, except for the adoption of Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which is discussed further in Note 16. 
3. Use of Estimates  
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts expensed during the reporting period.
Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether

6


historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the consolidated financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. In preparing these consolidated financial statements, management used significant estimates in the following areas, among others: revenue recognition, stock-based compensation expense, the determination of the fair value of stock-based awards, the fair value of liability-classified warrants, accrued expenses, and the recoverability of the Company’s net deferred tax assets and related valuation allowance.
4. Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one operating segment, which is the discovery, development and commercialization of highly innovative therapeutics to treat serious and rare diseases. All material long-lived assets of the Company reside in the United States. The Company does use contract research organizations (CROs) and research institutions located outside the United States. Some of these expenses are subject to collaboration reimbursement which is presented as a component of cost sharing, net in the consolidated statements of operations and comprehensive loss.
5. Cash Equivalents and Short-term and Long-term Investments
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.
The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified all of its marketable securities at September 30, 2017 as “available-for-sale” pursuant to ASC 320, Investments – Debt and Equity Securities. The Company records available-for-sale securities at fair value, with the unrealized gains and losses included in accumulated other comprehensive income (loss) in stockholders’ equity. There were no realized gains or losses on marketable securities for the three and nine months ended September 30, 2017 and 2016 .
Investments not classified as cash equivalents are presented as either short-term or long-term investments based on both their maturities as well as the time period the Company intends to hold such securities.

The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest income. The cost of securities sold is based on the specific identification method. The Company includes in interest income interest and dividends on securities classified as available-for-sale.
The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.
The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of September 30, 2017 and December 31, 2016 was $53.1 million and $172.2 million , respectively. The aggregate fair value of securities held by the Company in an unrealized loss position for more than twelve months as of September 30, 2017 and December 31, 2016 was $55.8 million and $5.5 million , respectively. The aggregate unrealized loss for those securities in an unrealized loss position for more than twelve months is $0.1 million and $2 thousand , respectively. As a result, the Company determined it did not hold any investments with any other-than-temporary impairment as of September 30, 2017 and December 31, 2016 .

7


The following is a summary of cash, cash equivalents and available-for-sale securities as of September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents due in 90 days or less
$
238,959

 
$

 
$

 
$
238,959

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate obligations due in one year or less
44,789

 
1

 
(47
)
 
44,743

Corporate obligations due in more than one year
11,560

 

 
(47
)
 
11,513

U.S. Treasury securities due in one year or less
10,004

 

 
(31
)
 
9,973

U.S. Treasury securities due in more than one year
4,021

 

 
(27
)
 
3,994

Certificates of deposit due in one year or less
9,092

 

 

 
9,092

Certificates of deposit due in more than one year
1,904

 

 

 
1,904

Mortgage and other asset backed securities due in one year or less
34,497

 

 
(39
)
 
34,458

Mortgage and other asset backed securities due in more than one year
12,026

 

 
(65
)
 
11,961

Total available-for-sale securities
$
127,893

 
$
1

 
$
(256
)
 
$
127,638

Total cash, cash equivalents and available-for-sale securities
$
366,852

 
$
1

 
$
(256
)
 
$
366,597

 
December 31, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents due in 90 days or less
$
20,950

 
$

 
$

 
$
20,950

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate obligations due in one year or less
45,839

 
1

 
(58
)
 
45,782

Corporate obligations due in more than one year
42,895

 

 
(185
)
 
42,710

U.S. Treasury securities due in one year or less
22,490

 

 
(10
)
 
22,480

U.S. Treasury securities due in more than one year
11,541

 

 
(53
)
 
11,488

Certificates of deposit due in one year or less
13,562

 

 

 
13,562

Certificates of deposit due in more than one year
9,811

 

 

 
9,811

Mortgage and other asset backed securities due in one year or less
36,948

 

 
(32
)
 
36,916

Mortgage and other asset backed securities due in more than one year
30,771

 

 
(88
)
 
30,683

Total available-for-sale securities
$
213,857

 
$
1

 
$
(426
)
 
$
213,432

Total cash, cash equivalents and available-for-sale securities
$
234,807

 
$
1

 
$
(426
)
 
$
234,382


6. Restricted Cash
As of September 30, 2017 and December 31, 2016 , the Company maintained letters of credit totaling $1.1 million and $0.9 million, respectively, held in the form of certificates of deposit and money market funds as collateral for the Company's facility lease obligation and its credit cards.
7. Concentrations of Credit Risk and Off-Balance Sheet Risk
The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, restricted cash, short-term and long-term investments and collaboration receivables. The Company maintains its cash and cash equivalent balances and short-term and long-term investments with financial institutions that management believes are creditworthy. Short-term and long-term investments consist of investment grade corporate obligations, treasury notes, asset backed securities, and certificates of deposit. The Company’s investment policy includes

8


guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentrations of credit risk.
The Company routinely assesses the creditworthiness of its customers and collaboration partners. The Company has not experienced any material losses related to receivables from individual customers and collaboration partners, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s collaboration receivables.
8. Fair Value Measurements
The following tables set forth the Company’s financial instruments carried at fair value using the lowest level of input applicable to each financial instrument as of September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
 

 
 

 
 

 
 

Money market funds
$
224,053

 
$

 
$

 
$
224,053

Corporate obligations

 
56,256

 

 
56,256

U.S. Treasury securities

 
13,967

 

 
13,967

Certificates of deposit

 
10,997

 

 
10,997

Mortgage and other asset backed securities

 
46,419

 

 
46,419

Restricted cash
1,132

 

 

 
1,132

Total assets
$
225,185

 
$
127,639

 
$

 
$
352,824

Liabilities:
 

 
 

 
 

 
 

Warrants to purchase common stock
$

 
$

 
$
1,927

 
$
1,927

Total liabilities
$

 
$

 
$
1,927

 
1,927

 
 
December 31, 2016
 
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
 
Significant other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
 

 
 

 
 

 
 

Money market funds
$
19,818

 
$

 
$

 
$
19,818

Corporate obligations

 
88,492

 

 
88,492

U.S. Treasury securities

 
33,968

 

 
33,968

Certificates of deposit

 
23,373

 

 
23,373

Mortgage and other asset backed securities

 
67,599

 

 
67,599

Restricted cash
946

 

 

 
946

Total assets
$
20,764

 
$
213,432

 
$

 
$
234,196

Liabilities:
 

 
 

 
 

 
 

Warrants to purchase common stock
$

 
$

 
$
1,244

 
$
1,244

Total liabilities
$

 
$

 
$
1,244

 
$
1,244

The money market funds noted above are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the nine months ended September 30, 2017 or the year ended December 31, 2016 .
Items measured at fair value on a recurring basis include short-term and long-term investments (Note 5), and warrants to purchase common stock (Note 12). During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs.

9


The following table sets forth a summary of changes in the fair value of the Company’s common stock warrant liabilities, which represent a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Beginning balance
$
1,244

 
$
17,187

Change in fair value
683

 
(5,026
)
Ending balance
$
1,927

 
$
12,161

The fair value of the warrants to purchase common stock on the date of issuance and on each re-measurement date for those warrants classified as liabilities was estimated using either the Monte Carlo simulation framework, which incorporates future financing events over the remaining life of the warrants to purchase common stock, or for certain re-measurement dates, due to the warrants being deeply in the money, the Black-Scholes option pricing model. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. At each reporting period, the Company evaluates the best valuation methodology. At September 30, 2017 , the Black-Scholes option pricing model was used.
The Company measures eligible assets and liabilities at fair value, with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the nine months ended September 30, 2017 or the year ended December 31, 2016 .
9. Net Loss Per Share
The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because their inclusion would have had an anti-dilutive effect (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Outstanding stock options
3,459

 
3,193

 
3,459

 
3,193

Common stock warrants
64

 
397

 
64

 
397

Shares issuable under employee stock purchase plan
19

 
18

 
19

 
18

Outstanding restricted stock units
551

 
670

 
551

 
670

 
4,093

 
4,278

 
4,093

 
4,278

10. Comprehensive Loss  
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, other events, and circumstances from non-owner sources. Comprehensive loss consists of net loss and other comprehensive loss, which includes certain changes in equity that are excluded from net loss. Comprehensive loss has been disclosed in the accompanying consolidated statements of operations and comprehensive loss. Accumulated other comprehensive loss is presented separately on the consolidated balance sheets and consists entirely of unrealized holding gains and losses on investments as of September 30, 2017 and December 31, 2016 .
11. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for the Company on January 1, 2018. Topic 606 allows for either a full retrospective application, in which the standard is applied to all periods presented, or a modified retrospective application, in which the standard is applied to the most current period presented in the financial

10


statements. As of September 30, 2017 , revenue is generated exclusively from the Company's collaboration agreement with Celgene. The Company is currently evaluating the potential impact that Topic 606 may have on its financial position and results of operations as it relates to this single arrangement, and expects to elect the modified retrospective application as its transition method.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Amendments to the FASB Accounting Standards Codification, which replaces the existing guidance for leases. ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. This guidance is effective for annual and interim periods beginning after December 15, 2018 and requires retrospective application. The Company is currently assessing the impact that adopting ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18,  Statement of Cash Flows - Restricted Cash (Topic 230) . This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and requires retrospective application. The Company is currently assessing the impact that adopting ASU 2016-18 will have on its consolidated financial statements and related disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This new standard shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The amendment should be applied on a modified retrospective basis, with the cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that adopting ASU 2017-08 will have on its consolidated financial statements and related disclosures.

12. Warrants
Below is a summary of the number of shares issuable upon exercise of outstanding warrants and the terms and accounting treatment for the outstanding warrants (in thousands, except per share data):
 
Warrants as of
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-
Average
Exercise
 
 
 
Balance Sheet
Classification
 
September 30, 2017
 
December 31, 2016
 
Price Per
Share
 
Expiration
 
September 30, 2017
 
December 31, 2016
Warrants to purchase common stock
61

 
61

 
$
5.88

 
June 10, 2020 - July 9, 2020
 
Liability
 
Liability
Warrants to purchase common stock
3

 
4

 
7.40

 
December 31, 2017
 
Equity(1) (2)
 
Equity(1) (2)
All warrants
64

 
65

 
$
5.94

 
 
 
 
 
 
 

(1)
In March 2017, warrant holders exercised warrants to purchase 1,187 shares of Common Stock on a net basis, resulting in the issuance of 1,014 shares of Common Stock.

(2)
Warrants to purchase common stock were issued in connection with various debt financing transactions that were consummated in periods prior to our initial public offering.
In connection with the Series E redeemable convertible preferred stock (Series E Preferred Stock) financing transactions that took place in June 2010 and July 2010, the Company issued warrants to purchase up to 871,580 shares of common stock. Each warrant was immediately exercisable and expires ten years from the original date of issuance. The warrants to purchase shares of the Company’s common stock have an exercise price equal to the estimated fair value of the underlying instrument as

11


of the initial date such warrants were issued. Each warrant is exercisable on either a physical settlement or net share settlement basis from the date of issuance. The warrant agreement contains a provision requiring an adjustment to the number of shares in the event the Company issues common stock, or securities convertible into or exercisable for common stock, at a price per share lower than the warrant exercise price. The Company concluded the anti-dilution feature required the warrants to be classified as liabilities under ASC Topic 815, Derivatives and Hedging—Contracts in Entity’s Own Equity (ASC 815). The warrants are measured at fair value, with changes in fair value recognized as a gain or loss to other income (expense) in the statements of operations and comprehensive loss for each reporting period thereafter. The fair value of the common stock warrants was recorded as a discount to the preferred stock issued, and the preferred stock was accreted to the redemption value. At the end of each reporting period, the Company re-measured the fair value of the outstanding warrants, using current assumptions, resulting in an increase in fair value of $0.4 million and $0.8 million for the three months ended September 30, 2017 and 2016 , respectively, and an increase in fair value of $0.7 million and a decrease of $5.0 million for the nine months ended September 30, 2017 and 2016 , respectively, which was recorded in other (expense) income in the accompanying consolidated statements of operations and comprehensive loss. The Company will continue to re-measure the fair value of the liability associated with the warrants to purchase common stock at the end of each reporting period until the earlier of the exercise or the expiration of the applicable warrants. All remaining outstanding warrants were fully vested and exercisable as of September 30, 2017 and December 31, 2016 .
13. Commitments and Contingencies
Legal Proceedings
The Company, from time to time, may be party to litigation arising in the ordinary course of its business. The Company was not subject to any material legal proceedings during the three months ended September 30, 2017 , and, to the best of its knowledge, no material legal proceedings are currently pending or threatened.
99 Erie Street Operating Lease
On March 16, 2017, the Company entered into an approximately six and a half year lease for approximately 11,825 square feet of rentable office and lab space located at 99 Erie Street, Cambridge, Massachusetts. The lease commenced on May 1, 2017 and ends on September 30, 2023. Excluding operating costs and real estate taxes, rent for the first year is $0.7 million with annual rent escalations thereafter. The total operating lease obligation for the term of this agreement, excluding operating costs and real estate taxes, is $5.1 million . The Company has the option to extend the lease by an additional three years. In accordance with the lease, the Company entered into a cash-collateralized, irrevocable standby letter of credit in the amount of $0.2 million , naming the landlord as beneficiary.

On July 27, 2017, the Company entered into a one -year sublease with Rubius Therapeutics, Inc. (the "sublessee") under which Rubius will sublease approximately 11,825 square feet of office and lab space at 99 Erie Street, Cambridge, Massachusetts (the "sublease"). The sublease commenced on August 1, 2017 and ends on July 31, 2018. The sublessee has the right to extend the sublease by an additional five months. The total operating lease obligation, excluding operating costs and real estate taxes, for the term of this agreement is approximately $0.7 million . In connection with this sublease, we recognized a loss of $0.1 million during the third quarter of 2017, which represents the difference between the Company's lease obligation to the landlord and the sublessee's lease obligation to the Company and other expenses associated with the sublease.

128/149 Sidney Street Operating Leases

On July 18, 2017, the Company entered into a five -year lease extension for approximately 37,700 square feet of office, manufacturing and lab space located at 128 Sidney Street, Cambridge, Massachusetts, our principal headquarters and manufacturing facility. The lease commences on October 1, 2018 and ends on September 30, 2023. The total operating lease obligation for the term of this agreement, excluding operating costs and real estate taxes, is approximately $13.0 million . The Company has the option to extend the lease by an additional five years.

On July 18, 2017, the Company entered into a five -year lease extension for approximately 37,116 square feet of office and lab space located at 149 Sidney Street, Cambridge, Massachusetts. The lease commences on October 1, 2018 and ends on September 30, 2023. The total operating lease obligation for the term of this agreement, excluding operating costs and real estate taxes, is approximately $12.8 million . The Company has the option to extend the lease by an additional five years.
Other
The Company is also party to various agreements, principally relating to licensed technology, that require future payments relating to milestones which had not been met at September 30, 2017 and December 31, 2016 , or royalties on future sales of

12


specified products. No milestones or royalty payments under these agreements are expected to be payable in the immediate future. See Note 14 for discussion of these arrangements. 
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.
14. Significant Agreements
Celgene
Overview
On February 20, 2008, the Company entered into a collaboration, license, and option agreement with Celgene Corporation (Celgene) relating to sotatercept, which the Company and Celgene amended on August 2, 2011 (as amended, the Original Sotatercept Agreement), and then amended and restated in its entirety on September 18, 2017 (as amended and restated, the Restated Sotatercept Agreement). On August 2, 2011, the Company entered into a second collaboration, license and option agreement with Celgene for luspatercept (the Luspatercept Agreement). These agreements provide Celgene an exclusive license to luspatercept in all indications, an exclusive license to sotatercept outside of the pulmonary hypertension (PH) field, as well as exclusive rights to obtain a license to certain future compounds.
Since December 31, 2016 , there have been no material changes to the key terms of the Luspatercept Agreement, and the material changes to the Original Sotatercept Agreement pursuant to the Restated Sotatercept Agreement are described below. For further information on the terms of the agreements as well as the historical accounting analysis, please see the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2016 .
Restated Sotatercept Agreement
Under the Restated Sotatercept Agreement, Celgene granted the Company worldwide rights to develop and commercialize sotatercept for the treatment, prevention, modulation and diagnosis of pulmonary hypertension in humans. In addition, Celgene agreed not to develop or commercialize in the field of pulmonary hypertension any compound developed under the Restated Sotatercept Agreement or the Luspatercept Agreement, and the Company agreed not to develop or commercialize any compound developed under the Restated Sotatercept Agreement or the Luspatercept Agreement in any field outside of pulmonary hypertension. The Company has the right to license, transfer or sell its rights to develop and commercialize sotatercept in pulmonary hypertension, subject to Celgene’s right of first negotiation.
The Company is responsible for 100% of the costs related to the Company’s development and commercialization of sotatercept in pulmonary hypertension. The Company is not required to make any upfront payments or milestone payments to Celgene in connection with the Company’s development and commercialization of sotatercept in pulmonary hypertension. If sotatercept is commercialized to treat pulmonary hypertension and the Company recognizes such revenue, then Celgene will be eligible to receive a royalty in the low 20% range on global net sales. In certain circumstances Celgene may recognize revenue related to the commercialization of sotatercept in pulmonary hypertension, and in this scenario, the Company will be eligible to receive a royalty from Celgene such that the economic position of the parties is equivalent to the scenario in which the Company recognizes such revenue. With respect to the development and commercialization of sotatercept outside of pulmonary hypertension or the development and commercialization of any other compound under the Restated Sotatercept Agreement, the terms of the Original Sotatercept Agreement remain unchanged, and Celgene will continue to have responsibility to fund and conduct all such development and commercialization activities, with the Company eligible to receive tiered royalty payments in the low-to-mid 20% range on global net sales.
 Pursuant to the Restated Sotatercept Agreement, Celgene will provide to the Company certain quantities of Celgene’s existing clinical supply of sotatercept at no cost to the Company. For clinical or commercial supply of sotatercept in excess of that which is agreed under the Restated Sotatercept Agreement, Celgene can elect to provide the Company with such clinical and commercial supply of sotatercept at a negotiated price or provide a tech transfer to the Company to enable the Company to manufacture on its own behalf. The conduct of the collaboration is managed by a Joint Development Committee and Joint Commercialization Committee. In the event of a deadlock of a committee, the Company shall determine the resolution of issues specifically related to the development or commercialization of sotatercept in pulmonary hypertension (other than pricing which shall be determined by consensus), and Celgene shall determine the resolution of all other issues. The Joint

13


Commercialization Committee will oversee commercialization of sotatercept and sotatercept pricing will be determined by mutual agreement of the Company and Celgene in the Joint Commercialization Committee.
 The Restated Sotatercept Agreement is terminable by either party upon a breach that is uncured and continuing or by Celgene for convenience on a country by country or product by product basis, or in its entirety. Celgene may also terminate the Restated Sotatercept Agreement, in its entirety or on a product by product basis, for failure of a product to meet a development or clinical trial endpoint. Termination for cause by us or termination by Celgene for convenience or failure to meet an endpoint will have the effect of terminating the applicable license to Celgene and the rights granted to the Company with respect to the development of sotatercept in pulmonary hypertension shall become irrevocable. Termination for cause by either party shall result in reducing the remaining royalties due to the breaching party by a certain percentage. Upon termination by Celgene for convenience or for failure to meet an endpoint, Celgene and the Company will enter into a termination agreement pursuant to which, among other things, Celgene will continue to be eligible to receive a royalty in the low 20% range on global net sales of sotatercept in pulmonary hypertension.
The Company and Celgene will continue to collaborate worldwide for the joint development and commercialization of sotatercept outside of the pulmonary hypertension field. The Company also previously granted Celgene an option to license three discovery stage compounds under the Original Sotatercept Agreement.
The Company retained responsibility for research and development of sotatercept outside of the pulmonary hypertension field through the end of Phase 2a clinical trials, as well as manufacturing the clinical supplies for these trials. These activities were substantially completed in 2011. Outside of pulmonary hypertension, Celgene will also be responsible for any Phase 3 clinical trials, as well as additional Phase 2 clinical trials, and will be responsible for overseeing the manufacture of Phase 3 and commercial supplies by third party contract manufacturing organizations.
Through September 30, 2017 , the Company has received $44.1 million in research and development funding and milestone payments for sotatercept under the original and amended and restated agreements. The next likely clinical milestone payment would be $10.0 million and result from Celgene’s start of a Phase 3 study.

Luspatercept Agreement
Under the terms of the Luspatercept Agreement, the Company and Celgene collaborate worldwide for the joint development and commercialization of luspatercept. The Company also granted Celgene an option for future products for which the Company files an Investigational New Drug application for the treatment of anemia. The Company has not yet identified additional compounds for the treatment of anemia. Accordingly, there is no assurance that the Company will generate future value from additional programs.
The Company retains responsibility for research and development through the end of Phase 1 and initial Phase 2 clinical trials, as well as manufacturing the clinical supplies for these studies. Celgene will conduct any subsequent Phase 2 and Phase 3 clinical studies. The Company will manufacture luspatercept for the Phase 1 and Phase 2 clinical trials and Celgene will be responsible for overseeing the manufacture of Phase 3 and commercial supplies by third party contract manufacturing organizations.
Through September 30, 2017 , the Company has received $96.6 million in research and development funding and milestone payments for luspatercept. The next likely milestone payment would be $25.0 million and result from U.S. Food and Drug Administration or European Medical Association acceptance of a Biologics Licensing Application or equivalent for luspatercept in either myelodysplastic syndromes or beta-thalassemia.
Both Agreements
Under both agreements, Celgene is responsible for paying 100% of worldwide development costs and 100% of any commercialization costs worldwide for sotatercept (outside of the pulmonary hypertension field) and luspatercept. The Company has the right to co-promote sotatercept (outside of the pulmonary hypertension field), luspatercept and future products in North America. The Company will receive tiered royalties in the low-to-mid 20% range on net sales of sotatercept (outside of the pulmonary hypertension field) and luspatercept, and these royalty schedules are the same for both agreements. 
Accounting Analysis
As a result of the changes to the economic terms under the Restated Sotatercept Agreement, the Company concluded the modification did not represent a material modification under ASU 2009-13. Further, the Company concluded there are no new deliverables which arise from the agreement. There have been no material changes to the accounting under the Luspatercept Agreement, or the Original Sotatercept Agreement pursuant to the Restated Sotatercept Agreement. For further information on

14


the historical accounting analysis, please see the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2016 .
During the three months ended September 30, 2017 and 2016 , the Company recognized $0.1 million and $0.1 million , respectively, and during the nine months ended September 30, 2017 and 2016 , $0.4 million and $0.4 million , respectively, of the total deferred revenue as license and milestone revenue in the accompanying consolidated statements of operations and comprehensive loss.
As noted above, under the terms of the Luspatercept Agreement the Company retained responsibility for certain research and development activities. In November 2013, the Company agreed to conduct additional activities for the benefit of the luspatercept program including certain clinical and non-clinical services. These activities are reimbursed under the same terms and rates of the existing Agreements and are accounted for as the services are delivered. 
Pursuant to the terms of the agreements, Celgene and the Company shared development costs incurred by either party, with Celgene responsible for substantially more than half of the costs for sotatercept and luspatercept until December 31, 2012. Beginning January 1, 2013, Celgene is responsible for 100% of the costs for luspatercept and for sotatercept outside of the pulmonary hypertension field. Payments from Celgene with respect to research and development costs incurred by the Company are recorded as cost-sharing revenue. The Company recorded net cost-sharing revenue of $2.9 million and $2.9 million during the three months ended September 30, 2017 and 2016 , respectively, and $9.4 million and $9.0 million during the nine months ended September 30, 2017 and 2016 , respectively.
Other Agreements
Other  
In 2004, the Company entered into a license agreement with a non-profit institution for an exclusive, sublicensable, worldwide, royalty-bearing license to certain patents developed by the institution (Primary Licensed Products). In addition, the Company was granted a non-exclusive, non-sub-licensable license for Secondary Licensed Products. As compensation for the licenses, the Company issued 62,500 shares of its common stock to the institution, the fair value of which was $25 thousand , and was expensed during 2004 to research and development expense. The Company also agreed to pay specified development milestone payments totaling up to $2.0 million for sotatercept and $0.7 million for luspatercept. In addition, the Company is obligated to pay milestone fees based on the Company’s research and development progress, and U.S. sublicensing revenue ranging from 10% - 25% , as well as a royalty ranging from 1.0% - 3.5% of net sales on any products under the licenses. During the three months ended September 30, 2017 and 2016 , the Company expensed zero and zero , respectively, and during the nine months ended September 30, 2017 and 2016 , respectively, the Company expensed $0.1 million and $1.0 million of milestones and fees defined under the agreement.
In May 2014, the Company executed a collaboration agreement with a research technology company. The Company paid an upfront research fee of $0.3 million upon execution of the agreement. The Company also received an option to obtain a commercial license to the molecules developed during the collaboration. During the three months ended September 30, 2017 and 2016 , the Company expensed $0.9 million and $0.4 million , respectively, and during the nine months ended September 30, 2017 and 2016 , the Company expensed $1.2 million and $0.9 million , respectively, of milestones and fees, which is recorded as research and development expense.
15. Stockholders' Equity

On September 25, 2017, the Company completed its underwritten public offering of 5,405,406 shares of common stock at a public offering price of $37.00 per share. The aggregate net proceeds received by the Company, after underwriting discounts and other estimated offering expenses, were approximately $187.6 million .

On October 4, 2017, in connection with the public offering of common stock on September 20, 2017, the underwriters of the Company's public offering fully exercised their over-allotment option to purchase an additional 810,810 shares of the Company's common stock at the public offering price of $37.00 per share, less underwriting discounts and commissions, resulting in additional net proceeds of approximately $28.2 million .

16. Stock-Based Compensation
The Company recognized stock-based compensation expense related to the 2003 Stock Option and Restricted Stock Plan (the 2003 Plan), the 2013 Equity Incentive Plan (the 2013 Plan), and the 2013 Employee Stock Purchase Plan (the 2013 ESPP) totaling $5.7 million , $4.6 million , $21.9 million , and $13.4 million during the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2017 and 2016 , respectively.

15


Total compensation cost recognized for all stock-based compensation awards in the consolidated statements of operations and comprehensive loss is as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Research and development
$
3,173

 
$
1,942

 
$
10,268

 
$
5,617

General and administrative
2,533

 
2,646

 
11,609

 
7,770

 
$
5,706

 
$
4,588

 
$
21,877

 
$
13,387

On January 1, 2017, the Company adopted ASU 2016-09, which identifies areas for simplification involving several aspects of accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities, an option to make a policy election to recognize gross share based compensation expense with actual forfeitures recognized as they occur as well as certain classification changes on the statement of cash flows. In connection with the adoption of this standard, the Company changed its accounting policy to record actual forfeitures as they occur, rather than estimating forfeitures by applying a forfeiture rate. The provisions of the standard related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method. Accordingly, a cumulative adjustment of $0.1 million was booked to retained earnings for the impact of the forfeitures. The Company also recorded $21.5 million f or the excess tax benefit related to equity awards, which was offset by a $21.5 million increase to the valuation allowance. The provisions of the standard related to the recognition of the excess tax benefits in the income statement and classification in the statement of cash flows were adopted prospectively and prior periods were not retrospectively adjusted.
In December 2016, the Company entered into a consulting agreement with its former Chief Executive Officer. In accordance with the 2003 Plan and 2013 Plan, any vested shares remain exercisable and any outstanding and unvested options and restricted stock units will continue to vest in accordance with their terms so long as he continues to provides services as a non-employee consultant. During the three and nine months ended September 30, 2017 , the Company recognized $1.0 million and $3.1 million of stock-based compensation expense within research and development expense associated with these awards.
In April 2017, the Company amended the employment agreement with its former Chief Operating Officer as a result of his diagnosis of amyotrophic lateral sclerosis (ALS). The amended agreement modified the vesting conditions of his stock options and restricted stock units in the event his termination of employment as a result of death or disability and extended the post termination exercise period of the options. These modifications resulted in zero and $3.6 million of stock-based compensation, recognized within general and administrative expense during the three and nine months ended September 30, 2017 , respectively.
Stock Options
The fair value of each stock option issued to employees was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Expected volatility
65.1
%
 
65.4
%
 
65.8
%
 
64.5
%
Expected term (in years)
6.0

 
6.0

 
6.0

 
5.9

Risk-free interest rate
1.9
%
 
1.2
%
 
2.1
%
 
1.4
%
Expected dividend yield
%
 
%
 
%
 
%
The following table summarizes the stock option activity under the Company’s 2003 Plan and 2013 Plan during the nine months ended September 30, 2017 (in thousands, except per share amounts and years):

16


 
Number
of Stock Options
 
Weighted-
Average
Exercise
Price
Per Share
 
Weighted-
Average
Contractual
Life (in years)
 
Aggregate
Intrinsic
Value(1)
Outstanding at December 31, 2016
3,316

 
$
25.96

 
7.03
 
 

Granted
669

 
$
30.51

 
 
 
 

Exercised
(442
)
 
$
7.32

 
 
 
 

Canceled or forfeited
(84
)
 
$
34.16

 
 
 
 

Outstanding at September 30, 2017
3,459

 
$
29.02

 
6.99
 
$
32,169

Exercisable at September 30, 2017
1,907

 
$
25.88

 
5.55
 
$
24,324

(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in the money at September 30, 2017 .
During the nine months ended September 30, 2017 , the Company granted stock options to purchase an aggregate of 669,184 shares of its common stock, with a weighted-average grant date fair value of options granted of $18.44 per share. 
During the nine months ended September 30, 2017 , current and former employees of the Company exercised a total of 441,842 options, resulting in total proceeds of $3.2 million
The aggregate intrinsic value of options exercised during the nine months ended September 30, 2017 was $9.5 million
As of September 30, 2017 , there was $25.4 million of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 2.57 years. 
Restricted Stock Units
The following table summarizes the restricted stock unit (RSU) activity under the 2013 Plan during the nine months ended September 30, 2017 (in thousands, except per share amounts):
 
Number
of RSUs
 
Weighted-
Average
Grant Date Fair Value Per Share
Unvested balance at December 31, 2016
732

 
$
31.55

Granted
129

 
$
29.53

Vested
(289
)
 
$
31.00

Forfeited
(21
)
 
$
32.27

Unvested balance at September 30, 2017
551

 
$
31.34

During the nine months ended September 30, 2017 , the Company issued 100,692 RSUs to employees which are subject to time-based vesting. As of September 30, 2017 , 214,120 of these restricted stock units remained unvested and outstanding, and there was approximately $4.7 million of related unrecognized compensation cost, which the Company expects to recognize over a remaining weighted-average period of 1.63 years .
During the nine months ended September 30, 2017 , the Company issued 28,333 RSUs to employees which are subject to performance-based vesting conditions, and vesting accelerates upon the occurrence of certain milestone events. In September 2019, any of these unvested RSUs will vest. As a result, when a milestone becomes probable, compensation cost is recognized from the grant date through the estimated date of achievement. If achievement is not considered probable, the expense is recognized from the grant date through September 2019. As of September 30, 2017 , 337,122 of these performance-based RSUs remained outstanding, and there was approximately $5.6 million of related unrecognized compensation cost, which the Company expects to recognize over a remaining weighted-average period of 1.66 years .
Employee Stock Purchase Plan
The Company recorded stock-based compensation expense related to the ESPP Plan during the three months ended September 30, 2017 and 2016 of $0.1 million and $0.1 million , respectively, and during the nine months ended September 30, 2017 and 2016 of $0.2 million and $0.2 million , respectively.

17


17. Income Taxes
For the three months and nine months ended September 30, 2017 , the Company recognized an income tax benefit of $41 thousand and $29 thousand and tax expense in other comprehensive loss of $59 thousand and $59 thousand related to the unrealized gain on available-for-sale securities. At September 30, 2017 , the Company recorded an accrued tax provision of $17 thousand related to this tax benefit included within accrued expenses and other current liabilities in the condensed consolidated balance sheet, which is expected to be generated from continuing operations.
For the three and nine months ended September 30, 2016 , the Company recognized an income tax benefit of $20 thousand and $20 thousand and tax expense in other comprehensive loss of $53 thousand and $53 thousand related to the unrealized gain on available-for-sale securities. At September 30, 2016 , the Company recorded an accrued tax provision of $17 thousand related to this tax benefit included within accrued expenses and other current liabilities in the condensed consolidated balance sheet, which is expected to be generated from continuing operations.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of September 30, 2017 and December 31, 2016 .
The Company files income tax returns in the United States, and various state jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2013 through December 31, 2016 . To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state taxing authorities to the extent utilized in a future period.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of September 30, 2017 and December 31, 2016 , the Company did not have any significant uncertain tax positions.
18. Related Party Transactions
Celgene Corporation
In connection with the Company's September 2017 public offering, Celgene purchased 745,592 shares of common stock. In connection with this and prior transactions, Celgene owned 12.7% and 12.9% of the Company’s fully diluted equity as of September 30, 2017 and December 31, 2016 , respectively. Refer to Note 14 for additional information regarding this collaboration arrangement.
During the three and nine months ended September 30, 2017 and 2016 , all revenue recognized by the Company was recognized under the Celgene collaboration arrangement and, as of September 30, 2017 , the Company had $3.8 million of deferred revenue related to the Celgene collaboration arrangement.

18


Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016.
Certain matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Quarterly Report on Form 10-Q, words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may," "plan," "potential," "project," "should," "strategy," "target," "vision," "will," "would," or, in each case, the negative or other variations thereon or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things:
our ongoing and planned preclinical studies and clinical trials;
clinical trial data and the timing of results of our ongoing clinical trials; 
our plans to develop and commercialize ACE-083 and our other preclinical therapeutic candidates, our and Celgene’s plans to develop and commercialize luspatercept and sotatercept; 
the potential benefits of strategic partnership agreements and our ability to enter into selective strategic partnership arrangements; 
the timing of anticipated milestone payments under our collaboration agreements with Celgene;
the timing of, and our and Celgene’s ability to, obtain and maintain regulatory approvals for our therapeutic candidates; 
the rate and degree of market acceptance and clinical utility of any approved therapeutic candidate, particularly in specific patient populations; 
our ability to quickly and efficiently identify and develop therapeutic candidates; 
our commercialization, marketing and manufacturing capabilities and strategy; 
our intellectual property position; and 
our estimates regarding our operating capital requirements, results of operations, financial condition, liquidity, capital requirements, prospects, growth and strategies.    
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and industry changes and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and events in the industry in which we operate may differ materially from the forward-looking statements contained herein.
Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of such statements, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
You should also read carefully the factors described in the section “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, press releases, and our website.
You should read the following discussion and analysis of financial condition and results of operations together with Part I Item 1“Financial Statements” and related notes included elsewhere in this Quarterly Report on Form 10-Q.

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Overview
We are a leading biopharmaceutical company in the discovery and development of TGF-beta therapeutics to treat serious and rare diseases. Our research focuses on key natural regulators of cellular growth and repair, particularly the transforming growth factor-beta, or TGF-beta, protein superfamily. By combining our discovery and development expertise, including our proprietary knowledge of the TGF-beta superfamily, and our internal protein engineering and manufacturing capabilities, we have generated several innovative therapeutic candidates, all of which encompass novel potential first-in-class mechanisms of action. We have focused and prioritized our research and development activities within three key therapeutic areas: hematology, neuromuscular and pulmonary. If successful, these candidates could have the potential to significantly improve clinical outcomes for patients across these areas of high, unmet need.
Luspatercept, our lead program, and sotatercept, are partnered with Celgene Corporation, or Celgene. Luspatercept is designed to promote red blood cell production through a novel mechanism, and is being developed to treat chronic anemia and associated complications in myelodysplastic syndromes, or MDS, beta-thalassemia, and myelofibrosis. Celgene is currently conducting two Phase 3 clinical trials with luspatercept; one for the treatment of patients with lower risk MDS, known as the "MEDALIST" trial, and another for the treatment of patients with transfusion-dependent beta-thalassemia, also known as the "BELIEVE" trial. Celgene recently initiated a Phase 2 clinical trial for the treatment of patients with myelofibrosis, a rare bone marrow disorder, and we expect Celgene to enroll the first patient in this study by the end of this year. We further expect Celgene to initiate a Phase 3 clinical trial, the "COMMANDS" trial, in first-line, lower-risk MDS patients in first half of 2018. In addition, a Phase 2 trial in non-transfusion-dependent beta-thalassemia patients, referred to as the "BEYOND" trial, is in the planning stages and we expect Celgene to initiate the BEYOND trial by the end of this year.
For sotatercept, we recently announced that Celgene granted rights to us to fund, develop, and lead the global commercialization of sotatercept in pulmonary arterial hypertension, or PAH. PAH is a rare and chronic, rapidly progressing disorder characterized by the constriction of small pulmonary arteries, resulting in abnormally high blood pressure in the pulmonary arteries. We expect to initiate a Phase 2 clinical trial for the treatment of patients with PAH in the first half of 2018.
Celgene is responsible for paying 100% of the development costs for all clinical trials for luspatercept as well as clinical trials with sotatercept, outside of pulmonary hypertension. We may receive a maximum of $545.0 million for the potential development, regulatory and commercial milestone payments. If luspatercept and, outside of pulmonary hypertension, sotatercept, are commercialized, we are eligible to receive a royalty on net sales in the low-to-mid 20% range. We have the right to co-promote luspatercept and, outside of pulmonary hypertension, sotatercept, if approved, in North America, for which our commercialization costs will be entirely funded by Celgene. With regard to sotatercept in pulmonary hypertension, we have the right to fund and conduct all development and commercialization activities. If sotatercept is commercialized to treat pulmonary hypertension and we recognize such revenue, then Celgene will be eligible to receive a royalty in the low 20% range on global net sales. In certain circumstances Celgene may recognize revenue related to the commercialization of sotatercept in pulmonary hypertension, and in this scenario we will be eligible to receive a royalty from Celgene such that the economic position of the parties is equivalent to the scenario in which we recognize such revenue.
We are independently developing our wholly-owned neuromuscular candidate, ACE-083. ACE-083 is designed for the treatment of focal muscle loss disorders, and we are currently conducting a Phase 2 clinical trial with ACE-083 in patients with facioscapulohumeral dystrophy, or FSHD, as well as a Phase 2 clinical trial with ACE-083 in patients with Charcot-Marie-Tooth disease, or CMT. We expect to report part 1 preliminary results from dose cohort 1 of our Phase 2 clinical trial in patients with FSHD in January 2018, and we expect to report preliminary results from part 1 of all dose-escalation cohorts in both of our Phase 2 clinical trials with ACE-083 in 2018. We previously reported data from the Phase 1 clinical trial of ACE-083 showing marked increases in the volume of muscles treated with ACE-083, measured using magnetic resonance imaging or MRI.
In addition to our clinical programs, we are conducting research within our three focused disease areas-hematologic, neuromuscular and pulmonary-in order to identify new therapeutic candidates to advance into clinical trials. To this end, we expanded our discovery efforts with our proprietary platform technology, IntelliTrap™. We have nominated an IntelliTrap™ molecule, ACE-2494, a systemic muscle agent, as a candidate for clinical development, and we expect to initiate a Phase 1 healthy volunteer study by the end of 2017.
As of September 30, 2017 , our operations have been primarily funded by $105.1 million in equity investments from venture investors, $509.7 million from public investors, $123.7 million in equity investments from our collaboration partners and $270.8 million in upfront payments, milestones, and net research and development payments from our collaboration partners.
We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, if and as we:

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conduct clinical trials for ACE-083, sotatercept, ACE-2494 or any future therapeutic candidates;
continue our preclinical studies and potential clinical development efforts of our existing preclinical therapeutic candidates;
continue research activities for the discovery of new therapeutic candidates;
manufacture therapeutic candidates for our preclinical studies and clinical trials;
acquire or in-license other therapeutic candidates and patents;
seek regulatory approval for our therapeutic candidates; and
operate as a public company.
We will not generate revenue from product sales unless and until we or a partner successfully complete development and obtain regulatory approval for one or more of our therapeutic candidates. We expect that this will take a number of years and is subject to significant uncertainty. All current and future development and commercialization costs for luspatercept and, outside of pulmonary hypertension, sotatercept, are paid by Celgene. If we obtain regulatory approval for ACE-083, sotatercept, ACE-2494, or any future therapeutic candidate, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such costs are not paid by future partners. We will seek to fund our operations through the sale of equity, debt financings or other sources, including potential additional collaborations. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such other arrangements as, and when, needed, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our therapeutic candidates.
Our ability to generate product revenue and become profitable depends upon our and our partners’ ability to successfully commercialize products. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our therapeutic candidates and potentially begin to commercialize any approved products. For a description of the numerous risks and uncertainties associated with product development, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 .
Financial Operations Overview  
Revenue
Collaboration Revenue
We have not generated any revenue from the sale of products. Our revenue to date has been predominantly derived from collaboration revenue, which includes license and milestone revenues and cost sharing revenue, generated through collaboration and license agreements with partners for the development and commercialization of our therapeutic candidates. Cost sharing revenue represents amounts reimbursed by our collaboration partners for expenses incurred by us for research and development activities and, potentially, co-promotion activities, under our collaboration agreements. Cost sharing revenue is recognized in the period that the related activities are performed.
Costs and Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs directly incurred by us for the development of our therapeutic candidates, which include:
direct employee-related expenses, including salaries, benefits, travel and stock-based compensation expense of our research and development personnel;
expenses incurred under agreements with clinical research organizations, or CROs, and investigative sites that will conduct our clinical trials;
the cost of acquiring and manufacturing preclinical and clinical study materials and developing manufacturing processes;
allocated facilities, depreciation, and other expenses, which include rent and maintenance of facilities, insurance and other supplies;
expenses associated with obtaining and maintaining patents; and

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costs associated with preclinical activities and regulatory compliance.
Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.
We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our therapeutic candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our therapeutic candidates for which we or any partner obtain regulatory approval. We or our partners may never succeed in achieving regulatory approval for any of our therapeutic candidates. The duration, costs and timing of clinical trials and development of our therapeutic candidates will depend on a variety of factors, including:
the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;
future clinical trial results;
potential changes in government regulation; and
the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of a therapeutic candidate could mean a significant change in the costs and timing associated with the development of that therapeutic candidate. For example, if the U.S. Food and Drug Administration, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of the clinical development of our therapeutic candidates, or if we experience significant delays in the enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
From inception through September 30, 2017 , we have incurred $529.5 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of our TGF-beta platform therapeutic candidates, the discovery and development of preclinical therapeutic candidates, and the development of our clinical programs. Expenses associated with luspatercept and, outside of pulmonary hypertension, sotatercept, are reimbursed 100% by Celgene. These reimbursements are recorded as revenue. We are expensing the costs of eight Phase 2 clinical trials for luspatercept, dalantercept and ACE-083, of which the four for luspatercept are reimbursed by Celgene and the two for dalantercept are being discontinued. With respect to the luspatercept Phase 3 clinical trials directly conducted by Celgene, we do not incur and are not reimbursed for expenses related to these development activities.
We manage certain activities such as clinical trial operations, manufacture of therapeutic candidates, and preclinical animal toxicology studies through third-party CROs. The only costs we track by each therapeutic candidate are external costs such as services provided to us by CROs, manufacturing of preclinical and clinical drug product, and other outsourced research and development expenses. We do not assign or allocate to individual development programs internal costs such as salaries and benefits, facilities costs, lab supplies and the costs of preclinical research and studies. Our external research and development expenses during the three and nine months ended September 30, 2017 and  2016 are as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Luspatercept(1)
 
$
1,329

 
$
1,693

 
$
4,783

 
$
5,012

Dalantercept(2)
 
939

 
1,128

 
3,688

 
5,215

ACE-083
 
2,249

 
1,820

 
7,434

 
3,434

ACE-2494
 
1,139

 

 
3,586

 

Total direct research and development expenses
 
5,656

 
4,641

 
19,491

 
13,661

Other expenses(3)
 
15,403

 
12,461

 
44,896

 
35,831

Total research and development expenses
 
$
21,059

 
$
17,102

 
$
64,387

 
$
49,492

 

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(1)
Expenses associated with luspatercept are reimbursed 100% by Celgene.

(2)
Development of dalantercept is being discontinued.

(3)
Other expenses include unallocated employee and contractor-related expenses, facility expenses, lab supplies, and miscellaneous expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance and human resource functions and other general and administrative expenses including directors’ fees and professional fees for accounting and legal services.
We continue to incur expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, director and officer insurance premiums, and investor relations costs associated with being a public company. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our therapeutic candidates. Additionally, if and when we believe regulatory approval of a therapeutic candidate appears likely, to the extent that we are undertaking commercialization of such therapeutic candidate ourselves, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of the re-measurement gain or loss associated with the change in the fair value of our common stock warrant liabilities and interest income earned on cash, cash equivalents and investments.
To estimate the fair value of our liability classified warrants, we use either the Monte Carlo simulation framework, which incorporates future financing events over the remaining life of the warrants to purchase common stock, or for certain re-measurement dates, due to the warrants being deeply in the money, the Black-Scholes option pricing model. We base the estimates in the pricing models, in part, on subjective assumptions, including stock price volatility, risk-free interest rate, dividend yield, and the fair value of the common stock underlying the warrants. The Black-Scholes option pricing model was used at September 30, 2017 .
Critical Accounting Policies and Estimates  
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and stock-based compensation. We also utilize significant estimates and assumptions in determining the fair value of our liability-classified warrants to purchase common stock. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies since December 31, 2016 . For further information on our critical and other significant accounting policies, see the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016 .  

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Results of Operations  
Comparison of the Three Months Ended September 30, 2017 and 2016
 
 
Three Months Ended 
 September 30,
 
Increase
(in thousands)
 
2017
 
2016
 
(Decrease)
Revenue:
 
 
 
 

 
 

Collaboration revenue:
 
 
 
 

 
 

License and milestone
 
$
135

 
$
135

 
$

Cost-sharing, net
 
2,879

 
2,870

 
9

Total revenue
 
3,014

 
3,005

 
9

Costs and expenses:
 
 
 
 

 
 

Research and development
 
21,059

 
17,102

 
3,957

General and administrative
 
7,533

 
6,411

 
1,122

Total costs and expenses
 
28,592

 
23,513

 
5,079

Loss from operations
 
(25,578
)
 
(20,508
)
 
(5,070
)
Other income (expense), net
 
86

 
(282
)
 
368

Loss before income taxes
 
(25,492
)
 
(20,790
)
 
(4,702
)
Income tax benefit
 
41

 
20

 
21

Net loss
 
$
(25,451
)
 
$
(20,770
)
 
$
(4,681
)
 
Revenue.   We recognized revenue of $3.0 million in the three months ended September 30, 2017 , compared to $3.0 million in the same period in 2016 . All of the revenue in both periods was derived from the Celgene agreements.
Research and Development Expenses.   Research and development expenses were $21.1 million in the three months ended September 30, 2017 , compared to $17.1 million in the same period in 2016 . This $4.0 million increase was primarily due to an increase in personnel expenses totaling $2.8 million , to support development of our wholly owned therapeutic candidates and preclinical programs, which includes an increase in stock-based compensation expense of $1.2 million. Other increases include clinical trial and toxicology expenses of $1.4 million .
General and Administrative Expenses.   General and administrative expenses were $7.5 million in the three months ended September 30, 2017 , compared to $6.4 million for the same period in 2016 . This $1.1 million increase was primarily due to an increase in personnel expense of $1.0 million .
Other Income (Expense), Net.   Other income, net was $0.1 million in the three months ended September 30, 2017 , compared to other expense, net of $0.3 million for the same period in 2016 . This $0.4 million change was primarily due to a $0.4 million decrease in the loss associated with marking the common warrant liability to market in each period.
Income Tax Benefit. Income tax benefit is attributable to the realization of current year losses that offset unrealized gains, recognized in other comprehensive income, from our investment portfolio.

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Comparison of the Nine Months Ended September 30, 2017 and 2016
 
 
Nine Months Ended 
 September 30,
 
Increase
(in thousands)
 
2017
 
2016
 
(Decrease)
Revenue:
 
 
 
 
 
 
Collaboration revenue:
 
 
 
 
 
 
License and milestone
 
$
406

 
$
15,415

 
$
(15,009
)
Cost-sharing, net
 
9,370

 
8,987

 
383

Total revenue
 
9,776

 
24,402

 
(14,626
)
Costs and expenses:
 
 
 
 
 
 
Research and development
 
64,387

 
49,492

 
14,895

General and administrative
 
26,735

 
19,029

 
7,706

Total costs and expenses
 
91,122

 
68,521

 
22,601

Loss from operations
 
(81,346
)
 
(44,119
)
 
(37,227
)
Other income, net
 
791

 
6,374

 
(5,583
)
Loss before income taxes
 
(80,555
)
 
(37,745
)
 
(42,810
)
Income tax benefit
 
29

 
20

 
9

Net loss
 
$
(80,526
)
 
$
(37,725
)
 
$
(42,801
)
Revenue.   We recognized revenue of $9.8 million in the nine months ended September 30, 2017 , compared to $24.4 million in the same period in 2016 . All of the revenue in both periods was derived from the Celgene agreements. This $14.6 million decrease was primarily due to the receipt of a $15 million milestone payment from Celgene for the initiation of a Phase 3 clinical trial with luspatercept in 2016, offset in part by an increase in cost sharing revenue of $0.4 million primarily related to an increase in reimbursement for personnel compared to the prior year.
Research and Development Expenses.   Research and development expenses were $64.4 million in the nine months ended September 30, 2017 , compared to $49.5 million in the same period in 2016 . This $14.9 million increase was primarily due to an increase in personnel expenses totaling $9.3 million to support development of our wholly owned therapeutic candidates and preclinical programs, which includes an increase in stock-based compensation expense of $4.7 million. Other increases include clinical trial and toxicology expenses of $6.0 million . These increases were partially offset by a decrease in licensing expense related to payments that we made in connection with the achievement of a milestone in 2016 totaling $0.9 million .
General and Administrative Expenses.   General and administrative expenses were $26.7 million in the nine months ended September 30, 2017 , compared to $19.0 million for the same period in 2016 . This $7.7 million increase was primarily due to an increase in personnel expense of $7.9 million , which includes an increase in stock-based compensation expense of $3.8 million, primarily due to modifications of a former executive officer’s equity awards, which was announced in May 2017.
Other Income, Net.   Other income, net was $0.8 million in the nine months ended September 30, 2017 , compared to $6.4 million for the same period in 2016 . This $5.6 million decrease was primarily due to a $5.7 million decrease in the gain associated with marking the common warrant liability to market.
Income Tax Benefit. Income tax benefit is attributable to the realization of current year losses that offset unrealized gains, recognized in other comprehensive income, from our investment portfolio.

Liquidity and Capital Resources
We have incurred losses and cumulative negative cash flows from operations since our inception in June 2003, and as of September 30, 2017 , we had an accumulated deficit of $445.1 million . We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of the sale of equity, debt financings or other sources, including potential additional collaborations. 
As of September 30, 2017 , our operations have been primarily funded by $105.1 million in equity investments from venture investors, $509.7 million from public investors, $123.7 million in equity investments from our collaboration partners and $270.8 million in upfront payments, milestones, and net research and development payments from our collaboration partners.

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As of September 30, 2017 , we had $366.6 million in cash, cash equivalents and investments. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. We believe that our existing cash, cash equivalents and investments, including the net proceeds from the offering and the exercise of the underwriters' over-allotment, will be sufficient to fund our projected operating requirements into 2021.
Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):
 
 
Nine Months Ended September 30,
(in thousands)
 
2017
 
2016
Net cash (used in) provided by:
 
 
 
 

Operating activities
 
$
(55,928
)
 
$
(27,955
)
Investing activities
 
82,117

 
(113,691
)
Financing activities
 
191,820

 
144,879

Net increase in cash and cash equivalents
 
$
218,009

 
$
3,233

Operating Activities  
Net cash used in operating activities was $55.9 million for the nine months ended September 30, 2017 compared to $28.0 million during the same period in 2016 . The change was driven primarily by an increase in net loss of $42.8 million , which includes lower revenue due to a $15.0 million milestone recognized in 2016 and a $5.7 million decrease in the gain associated with marking the common warrants to market. Operating expenses increased by $22.6 million for 2017, including an $8.5 million increase in non-cash stock-based compensation expense, in part due to modifications of the equity awards of our former Chief Operating Officer.
Investing Activities
Net cash provided by investing activities was $82.1 million for the nine months ended September 30, 2017 compared to net cash used in investing activities of $113.7 million for the nine months ended September 30, 2016 . This increase in net cash provided by investing activities was primarily due to net maturities of our investments of $85.8 million during the nine months ended September 30, 2017 in connection with managing the portfolio to meet our cash requirements, compared to net purchases of $111.4 million in the nine months ended September 30, 2016 , in connection with implementing our investment policy.
Financing Activities
Net cash provided by financing activities was $191.8 million for the nine months ended September 30, 2017 compared to $144.9 million for the same period in 2016 . The increase is primarily attributable to $187.6 million of proceeds received from our public offering in September 2017, compared to $140.3 million of proceeds received during the comparable period in 2016 from our public offering.
Operating Capital Requirements
To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We will not generate revenue from product sales unless and until we or our partners obtain regulatory approval of and commercialize one of our current or future therapeutic candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek and obtain regulatory approvals for ACE-083, sotatercept, ACE-2494 and any future therapeutic candidates, and begin to commercialize any approved products. We are subject to all of the risks inherent in the development of therapeutic candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We have incurred, and expect to continue to incur, additional costs associated with operating as a public company. We anticipate that we will need additional funding in connection with our continuing operations.
We believe that our existing cash, cash equivalents and investments, including the net proceeds from the offering and the exercise of the underwriters' over-allotment option, will be sufficient to fund our projected operating requirements into 2021. However, we will require additional capital for the further development of our existing therapeutic candidates and may also need to raise additional funds sooner to pursue other development activities related to additional therapeutic candidates.
Until we can generate a sufficient amount of revenue from our products, if ever, we expect to fund our operations through a combination of equity offerings, debt financings or other sources, including potential additional collaborations. Additional

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capital may not be available on favorable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our therapeutic candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders and increased fixed payment obligations, and these securities may have rights senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We may not be able to enter into new collaboration arrangements for any of our proprietary therapeutic candidates. Any of these events could significantly harm our business, financial condition and prospects.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
the achievement of milestones under our agreement with Celgene;

the terms and timing of any other collaborative, licensing and other arrangements that we may establish;

the initiation, progress, timing and completion of preclinical studies and clinical trials for our therapeutic candidates and potential therapeutic candidates;

the number and characteristics of therapeutic candidates that we pursue;

the progress, costs and results of our clinical trials;

the outcome, timing and cost of regulatory approvals;

delays that may be caused by changing regulatory requirements;

the cost and timing of hiring new employees to support our continued growth;

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

the costs and timing of procuring clinical and commercial supplies of our therapeutic candidates;

the extent to which we acquire or invest in businesses, products or technologies; and

the costs involved in defending and prosecuting litigation regarding in-licensed intellectual property.
Net Operating Loss (NOL) Carryforwards  
We had deferred tax assets of approximately $136.5 million as of December 31, 2016 , which have been fully offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily composed of federal and state tax net operating loss, or NOL, carryforwards, research and development tax credit carryforwards, and deferred revenue, accruals, and other temporary differences. As of December 31, 2016 , we had federal NOL carryforwards of approximately $339.3 million and state NOL carryforwards of $293.7 million available to reduce future taxable income, if any. These federal and state NOL carryforwards expire at various times through 2036. In general, if we experience a greater than 50 percent aggregate change in ownership of certain significant stockholders over a three-year period, or a Section 382 ownership change, utilization of our pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state laws. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial. If we experience a Section 382 ownership change in connection with our public offerings or as a result of future changes in our stock ownership, some of which changes are outside our control, the tax benefits related to the NOL carryforwards may be limited or lost. For additional information about our taxes, see Note 13 to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 .

27

Table of Contents

Contractual Obligations and Commitments  
During the three months ended September 30, 2017 , there were no material changes to our contractual obligations and commitments described under “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 except as described in Note 13 of the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on the Form 10-Q.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Recently Issued and Adopted Accounting Standards in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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 in the rules and regulations of the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to market risk related to changes in interest rates. As of September 30, 2017 and December 31, 2016 , we had cash, cash equivalents and investments of $366.6 million and $234.4 million , respectively. Our cash equivalents are invested primarily in bank deposits and money market mutual funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our investments are subject to interest rate risk and could fall in value if market interest rates increase. Due to the duration of our investment portfolio and the low risk profile of our investments, we do not believe an immediate 100 basis point change in interest rates would have a material effect on the fair market value of our portfolio. We have the ability to hold our investments until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.
We contract with CROs and manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollars and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, or the Exchange Act, is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As of  September 30, 2017 , management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports 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 the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017 , the design and operation of our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2017 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
While we are not currently a party to any material legal proceedings, we could become subject to legal proceedings in the ordinary course of business. We do not expect any such potential items to have a significant impact on our financial position.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 .
Item 6. Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.

29

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SIGNATURES  
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ACCELERON PHARMA INC.
 
 
Date: November 7, 2017
By:
/s/ HABIB J. DABLE
 
 
Habib J. Dable
 
 
Chief Executive Officer, President and Director
 
 
 
Date: November 7, 2017
By:
/s/ KEVIN F. MCLAUGHLIN
 
 
Kevin F. McLaughlin
 
 
Senior Vice President, Chief Financial Officer and Treasurer


30

Table of Contents

EXHIBIT INDEX

Exhibit Number
 
Description of Exhibit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
_______________________________________________________________________________
+
Confidential treatment has been granted by, or is being requested from, the Securities and Exchange Commission as to certain portions of this Exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as applicable.


31
Exhibit 10.2

THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST.  REDACTED MATERIAL IS MARKED WITH [* * *] AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.



AMENDED AND RESTATED COLLABORATION, LICENSE AND OPTION AGREEMENT
by and between
ACCELERON PHARMA, INC.
and
CELGENE CORPORATION



           


THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST.  REDACTED MATERIAL IS MARKED WITH [* * *] AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

TABLE OF CONTENTS

 
 
 
 
Page
Article 1

 
DEFINITIONS
 
2

Article 2

 
COLLABORATION
 
21

2.1

 
Development
 
21

2.2

 
Records
 
22

2.3

 
Regulatory Matters
 
23

2.4

 
Manufacture and Supply
 
25

2.5

 
Commercialization Plan/Budget
 
28

2.6

 
Commercialization
 
28

2.7

 
Commercialization Activities in the Celgene Field
 
29

2.8

 
Third Parties
 
31

2.9

 
Information Sharing
 
32

2.10

 
ACE-536 Agreement
 
32

Article 3

 
COLLABORATION MANAGEMENT
 
33

3.1

 
Joint Development Committee
 
33

3.2

 
Joint Commercialization Committee
 
34

3.3

 
Joint Responsibilities of the Joint Development Committee and Joint Commercialization Committee
 
37

3.4

 
Appointment of Subcommittees and Project Teams
 
37

3.5

 
Decision-Making
 
37

3.6

 
Dispute Resolution
 
38

3.7

 
Dissolution
 
38

3.8

 
Appointment of Joint Development Committee and Joint Commercialization Committee Members
 
38

Article 4

 
LICENSES, GRANTS OF RIGHTS AND INTELLECTUAL PROPERTY OWNERSHIP
 
38

4.1

 
License Grants to Celgene
 
38


i

THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST.  REDACTED MATERIAL IS MARKED WITH [* * *] AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

4.2

 
License Grant to Acceleron
 
38

4.3

 
Retained Rights of Acceleron
 
39

4.4

 
Sublicenses
 
39

4.5

 
Right of Reference
 
40

4.6

 
Ownership of and Rights to Intellectual Property
 
41

4.7

 
Salk License
 
42

4.8

 
Right of First Negotiation
 
44

4.9

 
No Other Rights
 
45

Article 5

 
FINANCIAL PROVISIONS
 
45

5.1

 
Upfront Payments
 
45

5.2

 
ActRIIA Development Milestones
 
45

5.3

 
Option Compound Development Milestones
 
47

5.4

 
Ex-North American Sales Milestones
 
49

5.5

 
Sharing Costs
 
49

5.6

 
Royalties Payable for Celgene Field Net Sales
 
52

5.7

 
Royalties Payable for PH Field Net Sales
 
56

5.8

 
Payment Provisions Generally
 
59

Article 6

 
EXCLUSIVITY
 
62

6.1

 
Prohibitions
 
62

6.2

 
Third Party Acquisitions
 
64

6.3

 
Acquisitions of Third Parties
 
65

6.4

 
Termination of ACE-536 Agreement
 
66

Article 7

 
OPTION PROGRAM
 
66

7.1

 
Conduct of Option Compound Programs
 
66

7.2

 
Option Program Payments
 
67

7.3

 
Updates; Reports
 
67


ii

THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST.  REDACTED MATERIAL IS MARKED WITH [* * *] AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Article 8

 
INTELLECTUAL PROPERTY PROTECTION AND RELATED MATTERS
 
68

8.1

 
Salk Patent Rights
 
68

8.2

 
Prosecution of Patent Rights
 
68

8.3

 
Enforcement of Patent Rights
 
74

8.4

 
Claimed Infringement of Third Party Rights
 
76

8.5

 
Other Infringement Resolutions
 
77

8.6

 
Product Trademarks & Product Designation
 
77

8.7

 
Marking
 
78

8.8

 
Patent Term Extensions
 
78

Article 9

 
CONFIDENTIALITY
 
79

9.1

 
Confidential Information
 
79

9.2

 
Publication Review
 
80

9.3

 
Public Announcements and Use of Names
 
81

Article 10

 
TERM AND TERMINATION
 
82

10.1

 
Term
 
82

10.2

 
Termination for Cause
 
82

10.3

 
Termination for Convenience
 
84

10.4

 
Termination for Failure to Meet End Points
 
85

10.5

 
Other Effects of Termination
 
85

10.6

 
Sell-Down
 
89

10.7

 
Transfer of Records
 
90

10.8

 
Rights in Bankruptcy
 
90

10.9

 
Effect of Expiration or Termination; Survival
 
90

Article 11

 
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
 
90

11.1

 
Mutual Representations and Warranties
 
90

11.2

 
Acceleron Representations, Warranties and Covenants
 
91


iii

THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST.  REDACTED MATERIAL IS MARKED WITH [* * *] AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

11.3

 
Option Compound Representations and Warranties
 
93

11.4

 
Celgene Representations, Warranties and Covenants
 
93

11.5

 
Warranty Disclaimer
 
93

11.6

 
No Consequential Damages
 
93

11.7

 
Indemnification and Insurance
 
93

Article 12

 
MISCELLANEOUS PROVISIONS
 
96

12.1

 
Dispute Resolution; Governing Law
 
96

12.2

 
Assignment
 
96

12.3

 
Amendments
 
97

12.4

 
Notices
 
97

12.5

 
Force Majeure
 
97

12.6

 
Compliance with Applicable Laws
 
98

12.7

 
Independent Contractors
 
98

12.8

 
Further Assurances
 
98

12.9

 
No Strict Construction
 
98

12.10

 
Headings
 
98