NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Clovis Oncology, Inc. (the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing cancer treatments in the United States, Europe and other international markets. We have and intend to continue to license or acquire rights to oncology compounds in all stages of development. In exchange for the right to develop and commercialize these compounds, we generally expect to provide the licensor with a combination of upfront payments, milestone payments and royalties on future sales. In addition, we generally expect to assume the responsibility for future drug development and commercialization costs. We currently operate in one segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities.
Basis of Presentation
All financial information presented includes the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The unaudited financial statements of Clovis Oncology, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments, except for those discussed in the following footnotes, which in the opinion of management are necessary to fairly state our financial position, results of operations and cash flows for the periods presented. Interim results may not be indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a broader discussion of our business and the opportunities and risks inherent in such business.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These reclassifications had no effect on our previously reported results of operations, financial position or cash flows.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to contingent purchase consideration, the allocation of purchase consideration, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Liquidity
We have incurred significant net losses since inception and have relied on our ability to fund our operations through debt and equity financings. We expect operating losses and negative cash flows to continue for the foreseeable future. As we continue to incur losses, transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and achieving a level of revenues adequate to support our cost structure. We may never achieve profitability, and unless or until we do, we will continue to need to raise additional cash.
We intend to fund future operations through additional private or public debt or equity offerings and may seek additional capital through arrangements with strategic partners or from other sources. Based on our current estimates, we believe that our cash, cash equivalents and available-for-sale securities as of September 30, 2016 will allow us to fund activities through at least the next 12 months.
2. Summary of Significant Accounting Policies
Our significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).
7
Recently Issued Accounting Standard
s
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The guidance also requires the presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. This update is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted.
Amendments related to the timing of when excess tax benefits are recognized should be applied using a modified retrospective transition method.
An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating our planned method of adoption and the impact the standard may have on our consolidated financial statements and related disclosures.
3. EOS Acquisition
On November 19, 2013, we acquired all of the outstanding common and preferred stock of Ethical Oncology Science, S.p.A. (“EOS”) (now known as Clovis Oncology Italy S.r.l.). We paid $11.8 million in cash and issued $173.7 million of common stock at the acquisition date and are obligated to pay additional future cash payments if certain lucitanib regulatory and sales milestones are achieved. The potential contingent milestone payments range from a zero payment, which assumes lucitanib fails to achieve any of the regulatory milestones, to approximately $193.5 million ($65.0 million and €115.0 million) if all regulatory and sales milestones are met, utilizing the translation rate at September 30, 2016.
During the second quarter of 2016, we recorded a $25.5 million reduction in the fair value of the contingent purchase consideration liability due to our and our development partner’s decision to discontinue the development of lucitanib for breast cancer (see Note 4). At September 30, 2016, the contingent purchase consideration liability recorded on the Consolidated Balance Sheets was zero due to the uncertainty of achieving any of the lucitanib regulatory milestones. At December 31, 2015, the liability for the estimated fair value of the payments recorded on the Consolidated Balance Sheets was $24.7 million.
4. Financial Instruments and Fair Value Measurements
Cash, Cash Equivalents and Available-for-Sale Securities
We consider all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits and money market funds that invest primarily in certificate of deposits, commercial paper and U.S. government and U.S. government agency obligations.
Marketable securities are considered to be available-for-sale securities and consist of U.S. Treasury securities. Available-for-sale securities are reported at fair value on the Consolidated Balance Sheets and unrealized gains and losses are included in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. Realized gains and losses, amortization of premiums and discounts and interest and dividends earned are included in other income (expense) on the Consolidated Statements of Operations. The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method. Investments with maturities beyond one year are classified as short-term based on our intent to fund current operations with these securities or to make them available for current operations.
A decline in the market value of a security below its cost that is deemed to be other than temporary is charged to earnings and results in the establishment of a new cost basis for the security.
Factors evaluated to determine if an investment is other-than-temporarily impaired include significant deterioration in earnings performance, credit rating, asset quality or business prospects of the issuer; adverse changes in the general market conditions in which the issuer operates; and our intent and ability to hold the security until an anticipated recovery in value occurs.
Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The three levels of inputs that may be used to measure fair value include:
Level 1:
|
|
Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consist of money market investments. We do not have Level 1 liabilities.
|
8
|
|
|
Level 2:
|
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets consist of U.S. treasury securities. We do not have Level 2 liabilities.
|
|
|
|
Level 3:
|
|
Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets that are measured at fair value on a recurring basis. The contingent purchase consideration related to the undeveloped lucitanib product rights acquired with the purchase of EOS is a Level 3 liability. The fair value of this liability is based on unobservable inputs and includes valuations for which there is little, if any, market activity. See Note 3 of our 2015 Form 10-K for further discussion of the unobservable inputs and valuation techniques related to the contingent purchase consideration liability.
|
The following table identifies our assets and liabilities that were measured at fair value on a recurring basis (in thousands):
|
|
Balance
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
227,182
|
|
|
$
|
227,182
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. treasury securities
|
|
|
75,054
|
|
|
|
—
|
|
|
|
75,054
|
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
302,236
|
|
|
$
|
227,182
|
|
|
$
|
75,054
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
251,037
|
|
|
$
|
251,037
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. treasury securities
|
|
|
249,832
|
|
|
|
—
|
|
|
|
249,832
|
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
500,869
|
|
|
$
|
251,037
|
|
|
$
|
249,832
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase consideration
|
|
$
|
24,661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,661
|
|
Total liabilities at fair value
|
|
$
|
24,661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,661
|
|
There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the nine months ended September 30, 2016.
The following table rolls forward the fair value of Level 3 instruments (significant unobservable inputs) (in thousands):
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
|
September 30, 2016
|
|
Liabilities:
|
|
|
|
|
Balance at beginning of period
|
|
$
|
24,661
|
|
Change in fair value (a)
|
|
|
(24,936
|
)
|
Change in foreign currency gains and losses
|
|
|
275
|
|
Balance at end of period
|
|
$
|
—
|
|
|
(a)
|
During the second quarter of 2016, we recorded a $25.5 million reduction in the fair value of the contingent purchase consideration due to our and our development partner’s decision to discontinue the development of lucitanib for breast cancer. At September 30, 2016, the contingent purchase consideration liability recorded on the Consolidated Balance Sheets was zero due to the uncertainty of achieving any of the lucitanib regulatory milestones.
|
The change in the fair value of Level 3 instruments is included in change in fair value of contingent purchase consideration and foreign currency gains (losses) for changes in the foreign currency translation rate on the Consolidated Statements of Operations.
9
Assets measured at fair value on a nonrecurring basis include
our
in-process resear
ch and development
(
“
IPR&D
”
)
intangible assets, which were
recorded
as part of the acquisition of EOS
(see Note 3 and
Note 7
).
The fair value of the IPR&D intangible assets w
as
established
based upon
discounted cash flow models using assumptions related to
the timing of development, probability of development and regulatory success, sales and commercialization factors and estimated product life.
As the valu
ation
is based on significant unobservable inputs, the fair value measurement is classified as Lev
e
l 3
. IPR&D assets are evaluated for impairment at least annually or more frequently if impairment indicators exist.
During the second quarter of 2016, we recorded a $104.5 million impairment charge due to our and our development partner’s decision to discontinue the development of lucitanib for breast cancer. At September 30, 2016, the IPR&D intangible asset recorded on the Consolidated Balance Sheets was zero.
Financial instruments not recorded at fair value include our convertible senior notes. At September 30, 2016, the carrying amount of the convertible senior notes was $287.5 million, which represents the aggregate principal amount, and the fair value was $273.8 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 9 for discussion of the convertible senior notes.
5. Available-for-Sale Securities
As of September 30, 2016, available-for-sale securities consisted of the following (in thousands):
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. treasury securities
|
|
$
|
75,024
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
75,054
|
|
As of December 31, 2015, available-for-sale securities consisted of the following (in thousands):
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. treasury securities
|
|
$
|
250,215
|
|
|
$
|
—
|
|
|
$
|
(383
|
)
|
|
$
|
249,832
|
|
As of September 30, 2016, there were no available-for-sale securities that have been in a continuous unrealized loss position for less than 12 months.
As of December 31, 2015, the fair value and gross unrealized losses of available-for-sale securities that have been in a continuous unrealized loss position for less than 12 months were as follows (in thousands):
|
|
Aggregate
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
U.S. treasury securities
|
|
$
|
249,832
|
|
|
$
|
(383
|
)
|
As of September 30, 2016, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Due in one year or less
|
|
$
|
75,024
|
|
|
$
|
75,054
|
|
Total
|
|
$
|
75,024
|
|
|
$
|
75,054
|
|
10
6. Other Current Assets
Other current assets were comprised of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Receivable from partners
|
|
$
|
1,258
|
|
|
$
|
3,241
|
|
Prepaid expenses- other
|
|
|
2,613
|
|
|
|
1,023
|
|
Receivable - other
|
|
|
825
|
|
|
|
889
|
|
Prepaid insurance
|
|
|
406
|
|
|
|
1,231
|
|
Receivable from landlord
|
|
|
—
|
|
|
|
1,153
|
|
Other
|
|
|
92
|
|
|
|
199
|
|
Total
|
|
$
|
5,194
|
|
|
$
|
7,736
|
|
7. Intangible Assets and Goodwill
IPR&D intangible assets and goodwill were established as part of the purchase accounting of EOS (see Note 3) and consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
IPR&D intangible assets:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
101,500
|
|
|
$
|
212,900
|
|
Impairment of intangible asset (a)
|
|
|
(104,517
|
)
|
|
|
(89,557
|
)
|
Change in foreign currency gains (losses)
|
|
|
3,017
|
|
|
|
(21,843
|
)
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
101,500
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
59,327
|
|
|
$
|
66,055
|
|
Change in foreign currency gains (losses)
|
|
|
1,421
|
|
|
|
(6,728
|
)
|
Balance at end of period
|
|
$
|
60,748
|
|
|
$
|
59,327
|
|
|
(a)
|
During the second quarter of 2016, we recorded a $104.5 million impairment charge due to our and our development partner’s decision to discontinue the development of lucitanib for breast cancer. At September 30, 2016, the IPR&D intangible asset recorded on the Consolidated Balance Sheets was zero.
|
During the fourth quarter of 2015, we recorded an $89.6 million impairment charge due to our and our development partner’s decision to discontinue the development of lucitanib for lung cancer, as well as updates to the probability-weighted discounted cash flow assumptions for the breast cancer indication.
IPR&D intangible assets are evaluated for impairment at least annually in the fourth quarter or more frequently if impairment indicators exist and any reduction in fair value is recorded as impairment of intangible asset on the Consolidated Statements of Operations.
As part of the acquisition of EOS, we recorded a deferred tax liability to recognize the difference between the book and tax basis of the assets and liabilities acquired. During the first quarter of 2016, we updated the annual effective tax rate to reflect a reduction in the statutory rate of the foreign jurisdiction, resulting in the recognition of a $3.6 million income tax benefit.
During the second quarter of 2016, we recognized a $29.2 million deferred tax benefit associated with the impairment of the IPR&D intangible asset.
11
8. Other Accrued Expenses
Other accrued expenses were comprised of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued personnel costs
|
|
$
|
10,345
|
|
|
$
|
8,250
|
|
Accrued interest payable
|
|
|
299
|
|
|
|
2,096
|
|
Accrued expenses - other
|
|
|
1,262
|
|
|
|
959
|
|
Total
|
|
$
|
11,906
|
|
|
$
|
11,305
|
|
9. Convertible Senior Notes
On September 9, 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “Notes”) resulting in net proceeds of $278.3 million after deducting offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.
The Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on March 15 and September 15 of each year. The Notes will mature on September 15, 2021, unless earlier converted, redeemed or repurchased.
Holders may convert all or any portion of the Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 16.1616 shares per $1,000 in principal amount of Notes, equivalent to a conversion price of approximately $61.88 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
On or after September 15, 2018, we may redeem the Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the Notes, holders may require us to repurchase for cash all or any portion of the Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to all of our liabilities that are not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the Notes, we incurred $9.2 million of debt issuance costs. The debt issuance costs are presented as a deduction from convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the Notes. As of September 30, 2016 and December 31, 2015, the balance of unamortized debt issuance costs was $6.7 million and $7.6 million, respectively
.
12
The
following table sets forth total interest expense recognized related to the Notes during the three
and
nine
months ended
September
3
0
, 201
6
and 201
5
(in thousands):
|
|
Three
Months
Ended
September
30,
|
|
|
Nine
Months
Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Contractual interest expense
|
|
$
|
1,797
|
|
|
$
|
1,797
|
|
|
$
|
5,390
|
|
|
$
|
5,371
|
|
Amortization of debt issuance costs
|
|
|
311
|
|
|
|
302
|
|
|
|
928
|
|
|
|
900
|
|
Total interest expense
|
|
$
|
2,108
|
|
|
$
|
2,099
|
|
|
$
|
6,318
|
|
|
$
|
6,271
|
|
10. Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency, and unrealized gains and losses on available-for-sale securities.
The accumulated balances related to each component of other comprehensive income (loss) are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Foreign
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Currency
|
|
|
Unrealized
|
|
|
Other
|
|
|
|
Translation
|
|
|
Gains
|
|
|
Comprehensive
|
|
|
|
Adjustments
|
|
|
(Losses)
|
|
|
Income (Loss)
|
|
Balance December 31, 2014
|
|
$
|
(24,448
|
)
|
|
$
|
—
|
|
|
$
|
(24,448
|
)
|
Period change
|
|
|
(22,629
|
)
|
|
|
(383
|
)
|
|
|
(23,012
|
)
|
Balance December 31, 2015
|
|
|
(47,077
|
)
|
|
|
(383
|
)
|
|
|
(47,460
|
)
|
Period change
|
|
|
3,526
|
|
|
|
412
|
|
|
|
3,938
|
|
Income tax expense
|
|
|
(1,335
|
)
|
|
|
(153
|
)
|
|
|
(1,488
|
)
|
Balance September 30, 2016
|
|
$
|
(44,886
|
)
|
|
$
|
(124
|
)
|
|
$
|
(45,010
|
)
|
The period change between September 30, 2016 and December 31, 2015 was primarily due to the currency translation of the IPR&D intangible assets, goodwill and deferred income taxes associated with the acquisition of EOS (see Note 3 and Note 7).
11. Share-Based Compensation
Share-based compensation expense for all equity based programs, including stock options, restricted stock units and the employee stock purchase plan, for the three and nine months ended September 30, 2016 and 2015 was recognized in the accompanying Consolidated Statements of Operations as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
7,039
|
|
|
$
|
9,039
|
|
|
$
|
20,962
|
|
|
$
|
19,798
|
|
General and administrative
|
|
|
2,164
|
|
|
|
3,367
|
|
|
|
8,782
|
|
|
|
9,660
|
|
Total share-based compensation expense
|
|
$
|
9,203
|
|
|
$
|
12,406
|
|
|
$
|
29,744
|
|
|
$
|
29,458
|
|
We did not recognize a tax benefit related to share-based compensation expense during the three and nine months ended September 30, 2016 and 2015, respectively, as we maintain net operating loss carryforwards and have established a valuation allowance against the entire net deferred tax asset as of September 30, 2016.
13
The following table summarizes the activity relating to
our
options to purchase common stock
for the
nine
months ended
September
3
0
, 2016
:
|
|
Number of Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value (Thousands)
|
|
Outstanding at December 31, 2015
|
|
|
5,360,257
|
|
|
$
|
51.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,829,537
|
|
|
|
21.85
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(139,396
|
)
|
|
|
7.85
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,309,127
|
)
|
|
|
54.27
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016 (a)
|
|
|
5,741,271
|
|
|
$
|
42.51
|
|
|
|
7.4
|
|
|
$
|
52,392
|
|
Vested and expected to vest at September 30, 2016
|
|
|
5,351,476
|
|
|
$
|
42.80
|
|
|
|
7.2
|
|
|
$
|
48,604
|
|
Exercisable at September 30, 2016
|
|
|
2,954,077
|
|
|
$
|
43.14
|
|
|
|
5.8
|
|
|
$
|
27,713
|
|
|
(a)
|
Includes 42,500 performance-based stock options granted to our executives in the first quarter of 2015, which vest contingent on approval by the U.S. Food and Drug Administration (“FDA”) to commercially distribute, sell or market rucaparib. Stock compensation expense will be recognized when the condition for vesting is probable of being met.
|
The aggregate intrinsic value in the table above represents the pretax intrinsic value, based on our closing stock price of $36.05 as of September 30, 2016, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.
The following table summarizes information about our stock options as of and for the three and nine months ended September 30, 2016 and 2015:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted-average grant date fair value per share
|
|
$
|
17.09
|
|
|
$
|
56.22
|
|
|
$
|
16.07
|
|
|
$
|
52.98
|
|
Intrinsic value of options exercised
|
|
$
|
930,417
|
|
|
$
|
5,307,365
|
|
|
$
|
1,555,342
|
|
|
$
|
15,361,206
|
|
Cash received from stock option exercises
|
|
$
|
687,332
|
|
|
$
|
1,953,938
|
|
|
$
|
1,094,855
|
|
|
$
|
4,534,288
|
|
As of September 30, 2016, the unrecognized share-based compensation expense related to unvested options, adjusted for expected forfeitures, was $83.7 million and the estimated weighted-average remaining vesting period was 2.8 years.
During 2016, we issued restricted stock units (“RSUs”) to certain employees under the 2011 Stock Incentive Plan. The RSUs vest over either a two-year period or over a four-year period and are payable in shares of our common stock at the end of the vesting period. RSUs are measured based on the fair value of the underlying stock on the grant date. Shares issued on the vesting dates are net of the minimum statutory tax to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be lower than the actual number of RSUs vested.
The following table summarizes the activity relating to our unvested RSUs for the nine months ended September 30, 2016:
|
|
Number of Units
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Unvested as of December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
526,180
|
|
|
|
21.65
|
|
Vested (a)
|
|
|
(9,750
|
)
|
|
|
19.37
|
|
Forfeited
|
|
|
(33,245
|
)
|
|
|
19.24
|
|
Unvested as of September 30, 2016
|
|
|
483,185
|
|
|
$
|
21.86
|
|
Expected to vest after September 30, 2016
|
|
|
398,525
|
|
|
$
|
21.80
|
|
|
(a)
|
During the second quarter of 2016, we accelerated the vesting of RSUs for certain employees.
|
14
As of
September
3
0
, 2016, the unrecognized
share-based compensation expense related to
unvested RSUs, adjusted for expected forfeitures, was $
8.4
million and the estimated weighted-average remaining vesting period was
3
.
4
years
.
12. License Agreements
Rucaparib
In June 2011, we entered into a worldwide license agreement with Pfizer, Inc. to acquire exclusive development and commercialization rights to rucaparib. This drug candidate is a small molecule inhibitor of poly (ADP-ribose) polymerase (PARP), which we are developing for the treatment of selected solid tumors. Under the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer. In April 2014, we initiated a pivotal registration study for rucaparib, which resulted in a $0.4 million milestone payment to Pfizer as required by the license agreement. In September 2016, we made a milestone payment of $0.5 million to Pfizer upon acceptance of the NDA for rucaparib by the FDA. These payments were recognized as acquired in-process research and development expense.
We are responsible for all development and commercialization costs of rucaparib. When and if commercial sales of rucaparib begin, we will pay Pfizer tiered royalties on our net sales. In addition, Pfizer is eligible to receive up to $264.5 million of further payments, in aggregate, if certain development, regulatory and sales milestones are achieved, including $21.25 million associated with the first filing and approval of a New Drug Application (“NDA”) by the FDA. During the second quarter of 2016, we completed the submission of our NDA with the FDA for potential accelerated approval of rucaparib in the U.S. The FDA granted the rucaparib NDA priority review status with a Prescription Drug User Fee Act action date of February 23, 2017. During the fourth quarter of 2016, we submitted a Marketing Authorization Application (“MAA”) for rucaparib to the European Medicines Agency (“EMA”).
On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1
st
Indication in US and (ii) EMA approval of an MAA for 1
st
Indication in EU, to a date that is 18 months after the date of achievement of such milestones. In the event that we defer such milestone payments, we have agreed to certain higher payments related to the achievement of such milestones.
Lucitanib
In connection with its acquisition of EOS (see Note 3), we gained rights to develop and commercialize lucitanib, an oral, selective tyrosine kinase inhibitor. As further described below, EOS licensed the worldwide rights, excluding China, to develop and commercialize lucitanib from Advenchen Laboratories LLC (“Advenchen”). Subsequently, rights to develop and commercialize lucitanib in markets outside the U.S. and Japan were sublicensed by EOS to Les Laboratoires Servier (“Servier”) in exchange for upfront milestone fees, royalties on sales of lucitanib in the sublicensed territories and research and development funding commitments.
In October 2008, EOS entered into an exclusive license agreement with Advenchen to develop and commercialize lucitanib on a global basis, excluding China. We are obligated to pay Advenchen royalties on net sales of lucitanib based on the volume of annual net sales achieved. In addition, we are obligated to pay to Advenchen 25% of any consideration, excluding royalties, received pursuant to any sublicense agreements for lucitanib, including the agreement with Servier. In the first quarter of 2014, we recognized acquired in-process research and development expense of $3.4 million, which represents 25% of the sublicense agreement consideration of $13.6 million received from Servier upon the end of opposition and appeal of the lucitanib patent by the European Patent Office.
In September 2012, EOS entered into a collaboration and license agreement with Servier whereby EOS sublicensed to Servier exclusive rights to develop and commercialize lucitanib in all countries outside of the U.S., Japan and China. In exchange for these rights, EOS received an upfront payment of €45.0 million and is entitled to receive additional payments upon achievement of specified development, regulatory and commercial milestones up to €90.0 million in the aggregate. In addition, we are entitled to receive sales milestone payments if specified annual sales targets for lucitanib are met, which, in the aggregate, could total €250.0 million. We are also entitled to receive royalties on sales of lucitanib by Servier.
The development, regulatory and commercial milestones represent non-refundable amounts that would be paid by Servier to us if certain milestones are achieved in the future. These milestones, if achieved, are substantive as they relate solely to past performance, are commensurate with estimated enhancement of value associated with the achievement of each milestone as a result of our performance, which are reasonable relative to the other deliverables and terms of the arrangement, and are unrelated to the delivery of any further elements under the arrangement.
15
We
and Servier are developing lucitanib pursuant to a development plan agreed to between the parties
.
Servier is responsible for all of the initial global development costs under the agreed upon plan up to €80.0
million. Cumulative global development costs, if any, in excess of €80.0 million will be shared equally between
us
and Servier.
During the second quarter of 2016, we and Servier agreed to discontinue the development of lucitanib for breast cancer and are c
ontinuing to evaluate, what, if any, further development of lucitanib will be pursued. Based on current estimates, we expect to complete the committed on-going development activities in 2017 and expect full reimbursement of our development costs from Servi
er.
Reimbursements are recorded as a reduction to research and development expense
o
n the Consolidated Statements of Operations.
We recorded a $1.3 million and $3.2 million receivable at September 30, 2016 and December 31, 2015, respectively, for the reimbursable development costs incurred under the global development plan, which is included in other current assets on the Consolidated Balance Sheets. For the three months ending September 30, 2016 and 2015, we incurred $1.3 million and $3.8 million, respectively, in research and development costs and recorded reductions in research and development expense of $1.3 million and $3.8 million, respectively, for reimbursable development costs due from Servier. For the nine months ending September 30, 2016 and 2015, respectively, we incurred $7.4 million and $11.7 million, respectively, in research and development costs and recorded reductions in research and development expense of $7.7 million and $10.4 million, respectively, for reimbursable development costs due from Servier.
Rociletinib
In May 2010, we entered into an exclusive worldwide license agreement with Avila Therapeutics, Inc. (now Celgene Avilomics Research, Inc., part of Celgene Corporation (“Celgene”)) to discover, develop and commercialize a covalent inhibitor of mutant forms of the epidermal growth factor receptor gene product. Rociletinib was identified as the lead inhibitor candidate under the license agreement. We are responsible for all non-clinical, clinical, regulatory and other activities necessary to develop and commercialize rociletinib.
We made an upfront payment of $2.0 million upon execution of the license agreement, a $4.0 million milestone payment in the first quarter of 2012 upon acceptance by the FDA of our Investigational New Drug application for rociletinib and a $5.0 million milestone payment in the first quarter of 2014 upon initiation of the Phase II study for rociletinib. In the third quarter of 2015, we made milestone payments totaling $12.0 million upon acceptance of the NDA and MAA for rociletinib by the FDA and EMA, respectively. We recognized all payments as acquired in-process research and development expense.
During the second quarter of 2016, we received a Complete Response Letter (“CRL”) from the FDA for the rociletinib NDA. The FDA issues a CRL to indicate that their review of an application is complete and that the application is not ready for approval. In anticipation of receiving the CRL, we terminated enrollment in all ongoing sponsored clinical studies, although we continue to provide drug to patients whose clinicians recommend continuing rociletinib therapy. In addition, we withdrew our MAA for rociletinib on file with the EMA. We are continuing analyses of rociletinib data to determine whether certain populations of patients may represent an opportunity for a partner committed to investing in further clinical development.
We are obligated to pay royalties on net sales of rociletinib based on the volume of annual net sales achieved. We are required to pay up to an additional aggregate of $98.0 million in development and regulatory milestone payments if certain clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are required to pay up to an aggregate of $120.0 million in sales milestone payments if certain annual sales targets are achieved.
13. Net Loss Per Common Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding using the treasury-stock method for the stock options and RSUs and the if-converted method for the Notes. As a result of our net losses for the periods presented, all potentially dilutive common share equivalents were considered anti-dilutive and were excluded from the computation of diluted net loss per share.
The shares outstanding at the end of the respective periods presented in the table below were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands):
|
|
Three
and
Nine
Months
Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible senior notes
|
|
|
4,646
|
|
|
|
4,646
|
|
Common shares under options and awards
|
|
|
3,772
|
|
|
|
5,232
|
|
Total potential dilutive shares
|
|
|
8,418
|
|
|
|
9,878
|
|
16
14. Commitments and Contingencies
Royalty and License Fee Commitments
We have entered into certain license agreements, as identified in Note 12, with third parties that include the payment of development and regulatory milestones, as well as royalty payments, upon the achievement of pre-established development, regulatory and commercial targets. Our payment obligation related to these license agreements is contingent upon the successful development, regulatory approval and commercialization of the licensed products. Due to the nature of these arrangements, the future potential payments are inherently uncertain, and accordingly, no amounts have been recorded on our Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.
Development and Manufacturing Agreement Commitments
In February 2013, we entered into a development and manufacturing agreement with a third-party supplier for the production of the active ingredient for rucaparib. Under the Development and Manufacturing Agreement, we will provide the third-party supplier a rolling 24-month forecast that will be updated by us on a quarterly basis. We are obligated to order the quantity specified in the first 12 months of any forecast. Currently, $48.5 million of purchase commitments exist under this agreement.
Legal Proceedings
The Company and certain of its officers and directors were named as defendants in several lawsuits, as described below. We cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss or range of loss, if any, that may result. An adverse outcome in these proceedings could have a material adverse effect on our results of operations, cash flows or financial condition.
On November 19, 2015, Steve Kimbro, a purported shareholder of Clovis, filed a purported class action complaint (the “Kimbro Complaint”) against Clovis and certain of its officers in the United States District Court for the District of Colorado. The Kimbro Complaint purports to be asserted on behalf of a class of persons who purchased Clovis stock between October 31, 2013 and November 15, 2015. The Kimbro Complaint generally alleges that Clovis and certain of its officers violated federal securities laws by making allegedly false and misleading statements regarding the progress toward FDA approval and the potential for market success of rociletinib. The Kimbro Complaint seeks unspecified damages.
Also on November 19, 2015, a second purported shareholder class action complaint was filed by Sonny P. Medina, another purported Clovis shareholder, containing similar allegations to those set forth in the Kimbro Complaint, also in the United States District Court for the District of Colorado (the “Medina Complaint”). The Medina Complaint purports to be asserted on behalf of a class of persons who purchased Clovis stock between May 20, 2014 and November 13, 2015. On November 20, 2015, a third complaint was filed by John Moran in the United States District Court for the Northern District of California (the “Moran Complaint”). The Moran Complaint contains similar allegations to those asserted in the Kimbro and Medina Complaints and purports to be asserted on behalf of a plaintiff class who purchased Clovis stock between October 31, 2013 and November 13, 2015.
On December 14, 2015, Ralph P. Rocco, a fourth purported shareholder of Clovis, filed a complaint in the United States District Court for the District of Colorado (the “Rocco Complaint”). The Rocco Complaint contains similar allegations to those set forth in the previous complaints and purports to be asserted on behalf of a plaintiff class who purchased Clovis stock between October 31, 2013 and November 15, 2015.
On January 19, 2016, a number of motions were filed in both the District of Colorado and the Northern District of California seeking to consolidate the shareholder class actions into one matter and for appointment of a lead plaintiff. All lead plaintiff movants other than M. Arkin (1999) LTD and Arkin Communications LTD (the “Arkin Plaintiffs”) subsequently filed notices of non-opposition to the Arkin Plaintiffs’ application.
On February 2, 2016, the Arkin Plaintiffs filed a motion to transfer the Moran Complaint to the District of Colorado (the “Motion to Transfer”). Also on February 2, 2016, the defendants filed a statement in the Northern District of California supporting the consolidation of all actions in a single court, the District of Colorado. On February 3, 2016, the Northern District of California court denied without prejudice the lead plaintiff motions filed in that court pending a decision on the Motion to Transfer.
On February 16, 2016, the defendants filed a memorandum in support of the Motion to Transfer, and plaintiff Moran filed a notice of non-opposition to the Motion to Transfer. On February 17, 2016, the Northern District of California court granted the Motion to Transfer.
17
On February 18, 2016, the Medina court issued an opinion and order addressing the various motions for consolidation and appointment of lead plaintiff and lead counsel in the District of Colorado actions. By this ruling, the court c
onsolidated the Medina, Kimbro and Rocco actions into a single proceeding. The court also appointed the Arkin Plaintiffs as the lead plaintiffs and Bernstein Litowitz Berger & Grossman as lead counsel for the putative class.
On April 1, 2016, the Arkin Plaintiffs and the defendants filed a stipulated motion to set the schedule for the filing of a consolidated complaint in the Medina, Kimbro and Rocco actions (the “Consolidated Complaint”) and the responses thereto, including the defendants’ motion to dismiss the Consolidated Complaint (the “Motion to Dismiss”), and to stay discovery and related proceedings until the District of Colorado issues a decision on the Motion to Dismiss. The stipulated motion was entered by the District of Colorado on April 4, 2016. Subject to further agreed-upon extensions by the parties, the Arkin Plaintiffs filed a Consolidated Complaint on May 6, 2016.
The Consolidated Complaint names as defendants the Company and certain of its current and former officers (the “Clovis Defendants”), certain underwriters (the “Underwriter Defendants”) for a Company follow-on offering conducted in July 2015 (the “July 2015 Offering”) and certain Company venture capital investors (the “Venture Capital Defendants”). The Consolidated Complaint alleges that defendants violated particular sections of the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities Act”). The purported misrepresentations and omissions concern allegedly misleading statements about rociletinib. The putative class action is purportedly brought on behalf of investors who purchased the Company’s securities between May 31, 2014 and April 7, 2016 (with respect to the Exchange Act claims) and investors who purchased the Company’s securities pursuant or traceable to the July 2015 Offering (with respect to the Securities Act claims). The Consolidated Complaint seeks unspecified compensatory and recessionary damages.
On May 23, 2016, the Medina, Kimbro, Rocco and Moran actions were consolidated for all purposes in a single proceeding in the District of Colorado.
The Clovis Defendants, along with the Underwriter Defendants and the Venture Capital Defendants, filed a Motion to Dismiss on July 27, 2016, the Arkin Plaintiffs filed their opposition on September 23, 2016, and the defendants filed their replies on October 14, 2016.
The Clovis Defendants intend to vigorously defend against the allegations contained in the Kimbro, Medina, Moran and Rocco Complaints, but there can be no assurance that the defense will be successful.
On December 30, 2015, Jamie McCall, a purported shareholder of Clovis, filed a shareholder derivative complaint (the “McCall Complaint”) against certain officers and directors of Clovis in the Colorado District Court, County of Boulder. The McCall Complaint generally alleged that the defendants breached their fiduciary duties owed to Clovis by participating in misrepresentation of the Company’s business operations and prospects. The McCall Complaint also alleged claims for abuse of control, gross mismanagement and unjust enrichment. The McCall Complaint sought, among other things, an award of money damages, declaratory and injunctive relief concerning the alleged fiduciary breaches and other forms of equitable relief. On March 17, 2016, the plaintiff filed a notice of voluntary dismissal of the McCall Complaint and the action was terminated by the Court.
On January 22, 2016, the Electrical Workers Local #357 Pension and Health & Welfare Trusts, a purported shareholder of Clovis, filed a purported class action complaint (the “Electrical Workers Complaint”) against Clovis and certain of its officers, directors, investors and underwriters in the Superior Court of the State of California, County of San Mateo. The Electrical Workers Complaint purports to be asserted on behalf of a class of persons who purchased stock in Clovis’ July 8, 2015 follow-on offering. The Electrical Workers Complaint generally alleges that the defendants violated the Securities Act because the offering documents for the July 8, 2015 follow-on offering contained allegedly false and misleading statements regarding the progress toward FDA approval and the potential for market success of rociletinib. The Electrical Workers Complaint seeks unspecified damages.
On February 25, 2016, the defendants removed the case to the United States District Court for the Northern District of California and thereafter moved to transfer the case to the District of Colorado (“Motion to Transfer”). On March 2, 2016, the plaintiff filed a motion to remand the case to San Mateo County Superior Court (“Motion to Remand”). Following briefing on the Motion to Transfer and the Motion to Remand, the Northern District of California held a hearing on April 18, 2016 concerning the Motion to Remand, at the conclusion of which the court granted to the Motion to Remand. On May 5, 2016, the Northern District of California issued a written decision and order granting the Motion to Remand the case to the Superior Court, County of San Mateo and denying the Motion to Transfer as moot.
18
While the case was pending in the United States District Court for the Northern District of Califo
rnia, the parties entered into a stipulation extending the defendants’ time to respond to the Electrical Workers Complaint for
30
days following the filing of an amended complaint by plaintiff or the designation by plaintiff of the Electrical Workers Complaint as the operative complaint. Following remand, Superior Court of the State of California, County of San Mateo so-ordered the
stipulation on June 22, 2016.
On June 30, 2016, the Electrical Workers Plaintiffs filed an amended Complaint (the “Amended Complaint”). The Amended Complaint names as defendants the Company and certain of its current and former officers and directors, certain underwriters for the July 2015 Offering and certain Company venture capital investors. The Amended Complaint purports to assert claims under the Securities Act based upon alleged misstatements in Clovis’ offering documents for the July 2015 Offering. The Amended Complaint includes new allegations about the Company’s rociletinib disclosures. The Amended Complaint seeks unspecified damages.
Pursuant to a briefing schedule ordered by the court on July 28, 2016, defendants filed a motion to stay the Electrical Workers action pending resolution of the Medina, Kimbro, Moran, and Rocco actions in the District of Colorado (“Motion to Stay”), and a demurrer to the Amended Complaint, on August 15, 2016; plaintiffs filed their oppositions on August 31, 2016; and the defendants filed their reply briefs on September 15, 2016. On September 23, 2016, after hearing oral argument, the San Mateo Superior Court granted defendants’ motion to stay proceedings pending resolution of the related securities class action captioned
Medina v. Clovis Oncology, Inc., et. al.
, No. 1:15-cv-2546 (the “Colorado Action”). Per the order to stay proceedings, the San Mateo Superior Court will defer issuing a ruling on defendants’ pending demurrer, and the parties’ first status report as to the progress of the Colorado Action is due on March 23, 2017.
The Company intends to vigorously defend against the allegations contained in the Electrical Workers Amended Complaint, but there can be no assurance that the defense will be successful.
On February 19, 2016, Maris Sanchez, a purported shareholder of Clovis, filed a shareholder derivative complaint (the “Sanchez Complaint”) against certain officers and directors of Clovis in the United States District Court for the District of Colorado. The Sanchez Complaint generally alleged that the defendants breached their fiduciary duties owed to Clovis by participating in misrepresentation of the Company’s business operations and prospects. The Sanchez Complaint also alleged claims for abuse of control and gross mismanagement. The Sanchez Complaint sought, among other things, an award of money damages. On March 11, 2016, the plaintiff filed a notice of voluntary dismissal of the Sanchez Complaint without prejudice. On March 14, 2016, the Sanchez action was terminated by the District of Colorado.
We have received requests for information from governmental agencies relating to our regulatory update announcement in November 2015 that the FDA requested additional clinical data on the efficacy and safety of rociletinib. We are cooperating with the inquiries.
We received a letter dated May 31, 2016 from an alleged owner of our common stock, which purports to set forth a demand for inspection of certain of our books and records pursuant to
8 Del. C.
§ 220 (the “Demand Letter”). The Demand Letter was purportedly made for the purpose of investigating alleged misconduct at the Company relating to rociletinib. On June 24, 2016, we submitted a response to the Demand Letter. We believe that the Demand Letter fails to establish an entitlement to any of the requested documents, but there can be no assurance about the likelihood of an adverse outcome.
15. Subsequent Events
On October 3, 2016, we entered into a Manufacturing Services Agreement (the “
Agreement
”) with Lonza Ltd (“Lonza”) for the long term manufacture and supply of the active pharmaceutical ingredient (“
API
”) for rucaparib. The terms and conditions of the Agreement are contingent upon the approval by the FDA of the initial NDA for rucaparib, unless triggered earlier by us. Clovis and Lonza are parties to a Development and Manufacturing Agreement, dated February 8, 2013, as amended, under which Lonza has supplied rucaparib API for clinical development.
The Agreement provides that Lonza will be a non-exclusive manufacturer of the rucaparib API during the term of the Agreement, which expires on December 31, 2025, unless extended by mutual written consent of the parties. Under the Agreement, Lonza will construct, in an existing Lonza facility, a production train that will be exclusively dedicated to the manufacture of the rucaparib API. The dedicated production train will provide manufacturing capacity to meet our currently anticipated needs for commercial supply of rucaparib API.
We are obligated to make scheduled capital program fee payments towards capital equipment and other costs associated with the construction of the dedicated production train and, once the facility is operational, we are obligated to pay a fixed facility fee each quarter for the duration of the Agreement.
19
Pursuant to the terms of the Agreement, Lonza will manufacture and store an advanced
intermediate to be used in the subsequent production of the rucaparib API. We will pay fixed fees on a per kilogram basis for quantities of the advanced intermediate and the rucaparib API ordered by us under the Agreement, subject to certain adjustments.
Until the dedicated facility is completed and operationally qualified, Lonza will manufacture the rucaparib API in existing Lonza facilities at pricing established in the Agreement.
Either party may terminate the Agreement due to a material breach of the Agreement by the other party, subject to prior written notice and a cure period. We may terminate the Agreement, subject to 90 days’ prior written notice, in the event rucaparib is withdrawn from the market for certain reasons. In the event of such a termination by us, or termination by Lonza due to material breach by us, we are obligated to compensate Lonza for any services rendered, or for which costs have been incurred by Lonza in anticipation of services to be provided to us, and to pay to Lonza the remaining amount of any capital program fees and quarterly fixed facility fees for the remainder of the term of the Agreement. In the event the Agreement is terminated by us due to material breach by Lonza, Lonza is obligated to repay all or a portion of the capital program fees previously paid by us.
20