AVROBIO(AVRO) - 2023 Q4 - Annual Report

Merger and Ownership Structure - AVROBIO securityholders are expected to own approximately 22.3% of the combined company, while former Tectonic securityholders are expected to own approximately 39.8%[61]. - The merger agreement includes an exchange ratio based on AVROBIO's net cash at closing, anticipated to be between $65.0 million and$75.0 million[61]. - If AVROBIO's net cash is below $65.0 million, the exchange ratio will be adjusted, resulting in a smaller ownership percentage for AVROBIO stockholders[61]. - The merger cannot be consummated without the approval of certain proposals by AVROBIO stockholders[63]. - Following the merger, AVROBIO stockholders are expected to own approximately 22.3$65.0 million and $75.0 million, with ownership percentages based on an assumption of$65.0 million[67]. - If the merger is not completed, AVROBIO may be required to pay Tectonic a termination fee of $2,712,500, or Tectonic may owe AVROBIO$4,900,000[67]. - The completion of the merger is subject to various conditions, including approval from both AVROBIO and Tectonic stockholders[75]. Financial Performance and Capital Requirements - AVROBIO incurred a net loss of $105.9 million for the year ended December 31, 2022, and a net income (loss) of$12.2 million for the year ended December 31, 2023[78]. - AVROBIO has received a cash payment of $87.5 million from Novartis for the sale of its cystinosis gene therapy program, which has allowed the company to pay off all outstanding amounts under its Term Loan Agreement[78]. - The combined company may need to raise additional capital, potentially causing significant dilution to existing shareholders[64]. - AVROBIO's future capital requirements will depend on various factors, including the costs associated with drug discovery, clinical trials, and potential regulatory reviews[82]. - The company may need additional funding to resume development of its product candidates, which may not be available on acceptable terms[82]. - AVROBIO's exploration of strategic alternatives may involve entering into acquisitions or mergers, which could result in dilution for existing stockholders[83]. Strategic Alternatives and Operational Focus - In July 2023, AVROBIO announced a comprehensive exploration of strategic alternatives to maximize stockholder value, including a proposed merger with Tectonic announced in January 2024[79]. - AVROBIO's management and employees are currently focused on the merger, which may divert attention from day-to-day operations[74]. - The company has halted further development of its programs and conducted reductions in force while evaluating strategic alternatives[82]. - AVROBIO's cash conservation activities may lead to unintended consequences, including employee attrition and reduced morale[78]. - The company has implemented workforce reductions to conserve capital expenditures, but may not realize the anticipated savings or operational efficiencies from these restructuring efforts[87]. Clinical Development and Regulatory Challenges - AVROBIO's clinical development has been halted, and the commercially-scalable plato platform has been used in only two clinical trials[96]. - The company has limited experience in preparing and submitting regulatory filings, having never completed a pivotal or registrational clinical trial[92]. - The regulatory approval process for AVROBIO's novel product candidates may be more expensive and time-consuming compared to other therapies, with limited prior approvals in the HSC gene therapy space[90]. - AVROBIO's ability to conduct clinical trials may be impacted by changes in hospital policies, government regulations, and disruptions in third-party services[89]. - The company may face significant delays in resuming clinical trials due to challenges in patient enrollment, particularly for rare diseases[94]. Intellectual Property and Competitive Landscape - AVROBIO's ability to compete effectively depends on maintaining proprietary technology and manufacturing processes[129]. - The company may face substantial litigation expenses and resource diversion if claims of patent infringement arise[128]. - AVROBIO's reliance on trade secrets and confidentiality agreements poses risks, as these can be difficult to enforce[129]. - Changes in U.S. patent law, particularly the Leahy-Smith America Invents Act, could increase uncertainties and costs related to patent applications and enforcement, potentially adversely affecting AVROBIO's business[130]. - AVROBIO's ability to protect its intellectual property may be compromised if it cannot secure patent term extensions or data exclusivity for its product candidates, which could lead to reduced revenue[132]. Market and Economic Conditions - The market price of AVROBIO common stock is subject to significant fluctuations, particularly in the context of the merger's completion[66]. - AVROBIO's stock price may decline if the market assumes the merger will not be completed[73]. - The company is subject to provisions in its charter and bylaws that could delay or prevent a change in control, including the authorization of "blank check" preferred stock and a classified board of directors[138]. - AVROBIO's financial condition could be adversely affected by unfavorable global economic conditions, including the impacts of the COVID-19 pandemic and geopolitical events[141]. - The company has faced cybersecurity threats in the past, including a cyberattack in 2017 that led to the theft of funds, which could disrupt operations if similar incidents occur in the future[141]. Compliance and Regulatory Risks - AVROBIO is subject to various U.S. and foreign healthcare laws, and non-compliance could result in substantial penalties and reputational harm[120]. - Compliance with data protection laws, including GDPR, is critical, as violations could result in fines up to 4% of global revenues or €20 million[122]. - The company may need to enhance its business processes and systems to support future growth and ensure compliance with regulatory requirements[120]. - AVROBIO's suppliers have not undergone FDA approval processes, which poses risks for the company's ability to meet regulatory requirements[109]. Employee and Management Issues - AVROBIO has implemented workforce reductions, including a 50% reduction in July 2023 and further cuts in October, November, and December 2023, impacting employee morale and retention[118]. - The company is currently led by an interim CEO following the resignation of the former President and CEO on May 1, 2023, with no timeline for hiring a permanent replacement[118]. - AVROBIO's ability to retain key personnel is critical for its future success, with a competitive landscape for skilled employees in the biotechnology sector[118].