Fulcrum Therapeutics, Inc. (FULC) FY 2023 MD&A

Overview

We are a clinical-stage biopharmaceutical company focused on developing small molecules to improve the lives of patients with genetically defined rare diseases in areas of high unmet medical need. Our most advanced clinical-stage product candidate, losmapimod, is being developed for the potential treatment of FSHD. Our other clinical product candidate is pociredir, which is being developed for the potential treatment of SCD. We initiated REACH, a randomized, double-blind, placebo-controlled, multi-national Phase 3 clinical trial of losmapimod in the second quarter of 2022 and we completed enrollment during September 2023. The trial enrolled 260 patients. We expect to report topline data from REACH in the fourth quarter of 2024.

In January 2023, we announced interim data from our Phase 1b clinical trial of pociredir in SCD. We completed enrollment in the 6 mg and 2 mg dose cohorts, and we do not plan to enroll additional subjects in these cohorts. Although we commenced enrollment in the 12 mg dose cohort, in February 2023 the FDA placed a full clinical hold on the IND application for pociredir for SCD, which was lifted in August 2023. The Phase 1b clinical trial is being re-initiated at the 12 mg once daily dose level, with that cohort expected to enroll approximately 10 patients, and will be followed by an additional cohort of approximately 10 patients at the 20 mg once daily dose level. Following the clinical hold, we amended the protocol to revise the inclusion and exclusion criteria for the Phase 1b clinical trial to target patients with higher disease severity.

In addition to product candidate development, we have developed discovery approach that we employ to systematically identify and validate cellular drug targets that can potentially modulate gene expression to treat known root causes of genetically defined rare diseases. Our discovery approach led to the identification of both losmapimod for FSHD and pociredir for SCD, as well as a robust discovery pipeline. With our priorities focused on the development and potential commercialization of our two clinical-stage assets, losmapimod and pociredir, and ongoing work on our preclinical programs in hematology and muscle diseases, we are realigning our strategy and resources accordingly and will be winding down certain exploratory activities from our discovery efforts.

Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property, building our discovery platform, including our proprietary compound library and technologies, identifying drug targets and potential product candidates, in-licensing assets, producing drug substance and drug product material for use in clinical trials and conducting preclinical studies and clinical trials. To date, we have funded our operations primarily from the sale of shares of our capital stock and from upfront payments received under our collaboration and license agreements.

In January 2023, we issued and sold 9,615,384 shares of our common stock in a public offering at a public offering price of $13.00 per share, less underwriting discounts and commissions. The net proceeds of the offering were $117.3 million, after deducting underwriting discounts and commissions and offering expenses.

We have incurred significant operating losses since our inception and we expect to continue to incur significant operating losses for the foreseeable future. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $97.3 million and $109.9 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $509.7 million. We expect our expenses and operating losses will increase substantially over the next several years in connection with our ongoing activities, as we:

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continue our clinical development of losmapimod and pociredir;

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continue our ongoing preclinical studies;

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advance clinical-stage product candidates into later stage trials such as REACH, the Phase 3 clinical trial of losmapimod for the treatment of FSHD;

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pursue the discovery of drug targets for other genetically-defined rare diseases and the subsequent development of any resulting product candidates, including for Diamond Blackfan Anemia under our recent license agreement with CAMP4;

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seek regulatory approvals for any product candidates that successfully complete clinical trials;

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scale up our manufacturing processes and capabilities, or arrange for a third party to do so on our behalf, to support our clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;

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establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval;

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acquire or in-license products, product candidates, technologies and/or data referencing rights, such as our recent agreement with CAMP4;

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make any milestone payments to affiliates of GSK under our right of reference and license agreement with GSK upon the achievement of specified clinical or regulatory milestones, or to CAMP4 under our license agreement with CAMP4;

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maintain, expand, enforce, defend and protect our intellectual property;

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hire additional clinical, quality control and scientific personnel; and

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add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts and our operations as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates, or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or the timing of when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of December 31, 2023, we had $236.2 million in cash, cash equivalents, and marketable securities. We believe that our existing cash, cash equivalents, and marketable securities as of December 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements into 2026. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

Components of Results of Operations

Revenue

We have not generated any revenue from product sales and do not expect to generate revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval, we may generate revenue in the future from product sales. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

In December 2019, we entered into a collaboration and license agreement with Acceleron to identify biological targets to modulate specific pathways associated with a targeted indication within the pulmonary disease space. The agreement terminated effective October 1, 2022, following notification from Acceleron in June 2022 of its decision to terminate the agreement for convenience. For the years ended December 31, 2023 and 2022, we recognized zero and $1.0 million, respectively of collaboration revenue under the Acceleron collaboration agreement.

In July 2020, we entered into a collaboration and license agreement with MyoKardia, which we amended in April 2023, pursuant to which we granted to MyoKardia an exclusive worldwide license under certain intellectual property rights to research, develop, make, have made, use, have used, sell, have sold, offer for sale, have offered for sale, import, have imported, export, have exported, distribute, have distributed, market, have marketed, promote, have promoted, or otherwise exploit products directed against certain biological targets identified by us that are capable of modulating up to a certain number of genes of interest with relevance to certain genetically defined cardiomyopathies. MyoKardia was subsequently acquired by Bristol-Myers Squibb Company in November 2020. The primary goal of the collaboration is to identify and validate potential biological targets for further research, in order to support the development, manufacture and commercialization of product candidates by MyoKardia for the potential treatment of certain genetically defined cardiomyopathies.

Under the terms of the MyoKardia collaboration agreement, we received a $10.0 million upfront payment and a $2.5 million payment as prepaid research funding in July 2020. MyoKardia will also reimburse us for the costs of the research activities not covered by the prepaid research funding, up to a maximum amount of total research funding (including the prepaid research funding). Upon the achievement of specified preclinical, development and sales milestones, we will be entitled to preclinical milestone payments, development milestone payments and sales milestone payments of up to $298.5 million in the aggregate per target for certain potential cardiomyopathy gene targets, and of up to $150.0 million in the aggregate per target for certain other potential cardiomyopathy gene targets. To date, we have achieved a $2.5 million specified preclinical milestone. MyoKardia will also pay us tiered royalties ranging from a mid single-digit percentage to a low double-digit percentage based on MyoKardia’s, and any of its affiliates’ and sublicensees’, annual worldwide net sales of products under the MyoKardia collaboration agreement directed against any identified target. The royalties are payable on a product-by-product basis during a specified royalty term, and may be reduced in specified circumstances.

For the years ended December 31, 2023 and 2022 we recognized $2.8 million and $5.3 million, respectively, of collaboration revenue under the MyoKardia collaboration agreement. As of December 31, 2023, we have recorded no deferred revenue associated with the MyoKardia collaboration agreement. As of December 31, 2022 we have recorded $0.9 million of deferred revenue associated with the MyoKardia collaboration agreement, which is classified as either current or noncurrent, net of current portion in our consolidated balance sheets based on the period over which the revenue is expected to be recognized. As of December 31, 2023, we had received $7.2 million of cost reimbursement payments and $2.5 million of milestone payments under the MyoKardia collaboration agreement. As of December 31, 2023, we recorded unbilled accounts receivable of $0.5 million related to reimbursable research and development costs under the MyoKardia collaboration agreement for activities performed during the three months ended December 31, 2023.

In the future, we may generate revenue from milestones and royalty payments under the MyoKardia collaboration agreement. We expect that our revenue may fluctuate from quarter-to-quarter and year-to-year as a result of the timing, amount, and achievement of milestones under the MyoKardia collaboration agreement.

We may also in the future enter into additional license or collaboration agreements for our product candidates or intellectual property, and we may generate revenue in the future from payments as a result of such license or collaboration agreements.

Operating Expenses

Research and Development Expenses

Research and development expenses represent costs incurred by us for the discovery, development, and manufacture of our product candidates and include:

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external research and development expenses incurred under agreements with contract research organizations, contract manufacturing organizations, and consultants;

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salaries, payroll taxes, employee benefits and stock-based compensation expenses for individuals involved in research and development efforts;

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laboratory supplies;

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costs related to compliance with regulatory requirements;

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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance and other operating costs; and

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milestone expenses associated with our right of reference and license agreement with GSK.

We expense research and development costs as incurred. We recognize expenses for certain development activities, such as clinical trials and manufacturing, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or other information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of expenses incurred. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. These amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

External costs represent a significant portion of our research and development expenses, which we track on a program-by-program basis following the nomination of a development candidate. Our internal research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expense. We do not track our internal research and development expenses on a program-by-program basis as the resources are deployed across multiple projects.

The following table summarizes our external research and development expenses by program following nomination as a development candidate for the years ended December 31, 2023 and 2022. Pre-development candidate expenses, unallocated expenses and internal research and development expenses are classified separately. Losmapimod external expenses during the year ended December 31, 2022 includes a $5.0 million milestone achieved under our right of reference and license agreement with GSK upon initiation of the REACH trial during the second quarter of 2022.

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

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the timing and progress of preclinical and clinical development activities;

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the number and scope of preclinical and clinical programs we decide to pursue;

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our ability to raise additional funds necessary to complete clinical development of and commercialize our product candidates;

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our ability to maintain our current research and development programs and to establish new ones;

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our ability to establish new licensing or collaboration arrangements;

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the progress of the development efforts of parties with whom we may enter into collaboration arrangements;

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the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

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the receipt and related terms of regulatory approvals from applicable regulatory authorities;

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the availability of raw materials and active pharmaceutical ingredient, or API, for use in production of our product candidates;

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our ability to establish and operate a manufacturing facility, or secure manufacturing supply through relationships with third parties;

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our ability to consistently manufacture our product candidates in quantities sufficient for use in clinical trials;

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our ability to obtain and maintain intellectual property protection and regulatory exclusivity, both in the United States and internationally;

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our ability to maintain, enforce, defend and protect our rights in our intellectual property portfolio;

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the commercialization of our product candidates, if and when approved;

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our ability to obtain and maintain third-party coverage and adequate reimbursement for our product candidates, if approved;

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the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;

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competition with other products; and

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a continued acceptable safety profile of our products following receipt of any regulatory approvals.

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

Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase significantly in future periods as we continue to implement our business strategy, which includes advancing losmapimod for the treatment of FSHD, advancing pociredir for the treatment of SCD, expanding our research and development efforts, including hiring additional personnel to support our research and development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development.

General and Administrative Expenses

General and administrative expenses consist of personnel-related costs, including salaries, benefits and stock-based compensation expense, for our personnel in executive, finance and accounting, human resources, business operations and other administrative functions, legal fees related to patent, intellectual property and corporate matters, fees paid for accounting and tax services, consulting fees and facility-related costs not otherwise included in research and development expenses.

We expect that our general and administrative expenses will increase in the future to support continued research and development activities and planned commercialization activities, including establishing a sales, marketing and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval. These increases will likely include increased costs related to the hiring of additional personnel, legal, audit, filing fees, and general compliance and consulting expenses, among other expenses.

Other Income, Net

Other income, net consists primarily of interest income related to our investments in cash equivalents and marketable securities.

Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following summarizes our results of operations for the years ended December 31, 2023 and 2022, along with the changes in those items in dollars:

Collaboration Revenue

Collaboration revenue decreased by $3.5 million from $6.3 million for the year ended December 31, 2022 to $2.8 million for the year ended December 31, 2023. We recognize revenue under collaboration agreements based on our pattern of performance related to the respective identified performance obligation, which is the period over which we will perform research services under the respective agreement. For the years ended December 31, 2023 and 2022, we recognized zero and $1.0 million, respectively, of collaboration revenue under the Acceleron collaboration agreement, which terminated in October 2022, and $2.8 million and $5.3 million of collaboration revenue, respectively, under the MyoKardia collaboration agreement.

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022:

Research and development expense decreased by $5.0 million from $76.8 million for the year ended December 31, 2022 to $71.8 million for the year ended December 31, 2023. The decrease in research and development expense was primarily attributable to the following:

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$3.8 million of decreased external research and development costs, primarily associated with decreased costs for pociredir as a result of the clinical hold from February 2023 to August 2023, and achievement of a $5.0 million

milestone due to GSK upon initiation of REACH in the second quarter of 2022, partially offset by increased costs associated with the advancement of REACH as we completed enrollment in September 2023;

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$0.8 million of decreased facilities costs;

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$0.7 million of decreased laboratory costs;

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partially offset by $0.3 million of increased employee compensation costs.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2023 and 2022:

General and administrative expenses decreased by less than $0.1 million from $41.7 million for the year ended December 31, 2022 to $41.7 million for the year ended December 31, 2023. The decrease in general and administrative expenses was primarily attributable to the following:

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$2.3 million in decreased professional services costs, primarily due to decreased consulting and insurance costs;

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partially offset by $1.3 million of increased employee compensation costs, including a $1.4 million increase in stock-based compensation expense;

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$0.3 million in increased facility-related costs, including increased costs associated with our leases as well as depreciation and other utility and maintenance costs; and

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$0.6 million in increased other costs.

Other Income, Net

Other income, net increased by $10.6 million from $2.7 million for the year ended December 31, 2022 to $13.3 million for the year ended December 31, 2023. The increase in other income, net was primarily attributable to an increased rate of return on our cash, cash equivalents, and marketable securities and an increase in our average cash, cash equivalents, and marketable securities balance.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. As of December 31, 2023, we have funded our operations primarily with aggregate gross proceeds of $712.5 million from the sale of shares of our capital stock and from upfront payments received under our collaboration and license agreements. As of December 31, 2023, we had cash, cash equivalents, and marketable securities of $236.2 million.

In January 2023, we completed a public offering of our common stock and issued and sold 9,615,384 shares of common stock at a public offering price of $13.00 per share, resulting in net proceeds of $117.3 million after deducting underwriting discounts and commissions and offering expenses.

Cash Flows

The following table provides information regarding our cash flows for the years ended December 31, 2023 and 2022:

Net Cash Used in Operating Activities

Net cash used in operating activities was $91.0 million during the year ended December 31, 2023 compared to net cash used in operating activities of $97.1 million during the year ended December 31, 2022. The decrease in net cash used in operating activities of $6.1 million was primarily due to a decrease in net loss, including as a result of decreased external research and development costs as a result of the clinical hold for pociredir, which was lifted in August 2023, and increased interest income.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities was $36.7 million during the year ended December 31, 2023 compared to net cash provided by investing activities of $12.4 million during the year ended December 31, 2022. The increase in net cash used in investing activities of $49.1 million was primarily due to net purchases of marketable securities during the year ended December 31, 2023, as compared to net maturities of marketable securities during the year ended December 31, 2022.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $118.1 million during the year ended December 31, 2023 compared to net cash provided by financing activities of $84.3 million during the year ended December 31, 2022. Net cash provided by financing activities during the year ended December 31, 2023 primarily consisted of net proceeds of $117.3 million from the January 2023 public offering of our common stock. Net cash provided by financing activities during the year ended December 31, 2022 primarily consisted of net proceeds of $80.8 million from the August 2022 completion of the public offering of our common stock.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we continue the research and development of, initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, we expect to incur additional costs to support the growth of our organization. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.

Based on our current operating plan, we believe that our existing cash, cash equivalents, and marketable securities as of December 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements into 2026. However, we have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect.

Our funding requirements and timing and amount of our operating expenditures will depend largely on:

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the progress, costs and results of our clinical trials of losmapimod and pociredir;

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the scope, progress, costs and results of discovery research, preclinical development, laboratory testing and clinical trials for our current product candidates in additional indications or for any future product candidates that we may pursue, including under our recent license agreement with CAMP4;

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the number of and development requirements for other product candidates that we pursue;

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the costs, timing and outcome of regulatory review of our product candidates;

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our ability to enter into contract manufacturing arrangements for supply of API and manufacture of our product candidates and the terms of such arrangements;

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the success of our collaboration with MyoKardia;

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our ability to establish and maintain additional strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;

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the payment or receipt of milestones, royalties and other collaboration-based revenues, if any;

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the costs and timing of future commercialization activities, including product manufacturing, sales, marketing and distribution, for any of our product candidates for which we may receive marketing approval;

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the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims; and

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the extent to which we acquire or in-license other products, product candidates, technologies or data referencing rights.

A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We will need to continue to rely on additional financing to achieve our business objectives.

In addition to the variables described above, if and when any of our product candidates successfully complete development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property rights, and regulatory protection, in addition to other commercial costs. We cannot reasonably estimate these costs at this time.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration arrangements, strategic alliances and marketing, distribution or licensing arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the future sale of equity securities, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts, and additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements, strategic alliances or marketing, distribution or licensing arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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 generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting periods. Our estimates are based on our historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and amount of expense recognized that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates and assumptions on an ongoing basis. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the most significant areas involving management’s judgments and estimates. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies.

Revenue Recognition

We account for revenue recognition under the Financial Accounting Standards Board Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers. We recognize revenue pursuant to ASC 606 when our customer obtains control of promised goods or services in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract and determine those that are performance obligations. We then determine the transaction price and allocate it to the identified performance obligations. As part of the accounting for these arrangements, we must use significant judgment to determine the number of performance obligations and the transaction price, including the determination of whether milestones or other variable consideration should be included in the transaction price.

We use judgment to determine whether milestones or other variable consideration should be included in the transaction price. As part of management’s evaluation of the transaction price, we consider numerous factors, including whether the achievement of the milestones is outside of our control, contingent upon the efforts of others or subject to the risks of success. If we conclude it is probable that a significant revenue reversal would not occur, the associated milestone payment is included in the transaction price. Milestone payments that are based on the occurrence of events not within our control, such as regulatory approvals, are generally not considered probable of being achieved until the underlying events occur or the associated approvals are received. At the end of each reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. Changes to the constraint of variable consideration can have a material effect on the amount of revenue recognized in the period.

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis, except for any variable consideration that meets the criteria to be allocated entirely to a single performance obligation or to a distinct service that forms part of a single performance obligation.

We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of either an output or input method. The estimation of measure of progress is complex, involves significant judgment, and is affected by our estimates of the total costs required to complete the performance obligations, including the total internal personnel costs and external costs to be incurred. Changes in these estimates can have a material effect on our revenue recognition. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer.

For further description of our revenue recognition policy, see Note 2 “Summary of Significant Accounting Policies—Revenue Recognition” to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. See also Note 10, “Collaboration and License Agreements” to our audited consolidated financial statements included

elsewhere in this Annual Report on Form 10-K for further information on the application of ASC 606 to the Acceleron and MyoKardia collaboration agreements.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced.

We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock-Based Compensation

We measure stock-based compensation expense related to all restricted stock awards, restricted stock units, and stock options based on the fair value of the award on the date of grant. We recognize compensation expense for these awards over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We have also granted certain stock-based awards with performance-based vesting conditions.We recognize compensation expense for awards with performance-based vesting conditions over the remaining service period using an accelerated attribution method when management determines that achievement of the performance condition is probable. At each reporting date, we evaluate if the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions.

We determine the fair value of restricted stock awards and restricted stock units based on the estimated fair value of our common stock on the date of grant, less any applicable purchase price. We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. The determination of the grant date fair value of stock options using an option pricing model is affected principally by our estimated fair value of our common stock and requires management to make a number of other assumptions, including the expected term of the option, the estimated volatility of the underlying shares, the risk-free interest rate, and expected dividends. The assumptions used in the determination of the grant date fair value of stock options represent management’s best estimates at the time of measurement. Given the lack of public market for our common stock prior to the closing of our IPO and a lack of company-specific historical and implied volatility data, we based the estimate of expected volatility on the historical volatility of a representative group of publicly traded companies for which historical information is available. The historical volatility is calculated based on a period of time commensurate with the assumption used for the expected term. We use the simplified method to calculate the expected term for all stock options. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on common stock.

In future periods, we expect stock-based compensation expense to increase, due in part to our existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain our employees.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by considering several factors, including estimating the future taxable profits expected, estimating future reversals of existing taxable temporary differences, considering taxable profits in carryback periods, and considering prudent and feasible tax planning strategies.

We account for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. As of each balance sheet date, we did not have any uncertain tax positions.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.