Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 1 – OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Array BioPharma Inc. ("Array", "we", "us", "our" or "the Company") is a fully integrated biopharmaceutical company focused on the discovery, development and commercialization of transformative and well-tolerated targeted small molecule drugs to treat patients afflicted with cancer and other high-burden diseases. We were incorporated in the State of Delaware in 1998. Since our founding, we have progressed two drugs through clinical development and received regulatory approval. BRAFTOVI
®
+ MEKTOVI
®
were approved by the Food and Drug Administration ("FDA") for commercial sales in the United States ("U.S.") in June 2018 and by the European Commission for commercial sales in the European Union through our partner, Pierre Fabre Medicamente SAS ("Pierre Fabre"), in September 2018.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim reporting and, as permitted under those rules, do not include all of the disclosures required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. Operating results for an interim period are not necessarily indicative of the results that may be expected for a full year. Our management performed an evaluation of our activities through the date of filing of this Quarterly Report on Form 10-Q.
These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements and the notes thereto for the
fiscal year ended June 30, 2018
included in our Annual Report on Form 10-K from which we derived our balance sheet data as of
June 30, 2018
.
We operate in
one
reportable segment and, accordingly, no segment disclosures have been presented herein. All of our equipment, leasehold improvements and other fixed assets are physically located within the U.S., and the vast majority of our agreements with partners are denominated in U.S. dollars.
Reclassifications
Certain prior period amounts in our unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation. Inventory in the amount of
$0.1 million
was previously presented within prepaid expenses and other current assets on our consolidated balance sheet dated June 30, 2018.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on our historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions or conditions.
On an ongoing basis, we evaluate our estimates, including our most significant estimates related to revenue recognition, gross-to-net product sales adjustments, and estimating accrued outsourcing costs for clinical trials and preclinical testing.
Liquidity
As of
March 31, 2019
and
June 30, 2018
, we held cash, cash equivalents and marketable securities totaling
$479.1 million
and
$413.4 million
, respectively. With the exception of fiscal year 2015, we have incurred operating losses and have generated an accumulated deficit as a result of ongoing research and development spending since inception. As of
March 31, 2019
, we had an accumulated deficit of
$1.1 billion
. Our results of operations were net losses of
$37.5 million
and
$73.7 million
for the three and
nine months ended
March 31, 2019
, respectively, and
$147.3 million
,
$116.8 million
and
$92.8 million
for the fiscal years ended June 30,
2018
,
2017
and
2016
, respectively.
We have historically funded our operations from upfront fees, proceeds from research and development reimbursement arrangements, license and milestone payments received under our drug collaborations and license agreements, and proceeds from the sale of equity securities and debt provided by convertible debt and other credit facilities. Beginning in fiscal year 2019, we also receive cash payments for commercial sales of our marketed drugs. We believe that our cash, cash equivalents and marketable securities as of
March 31, 2019
will enable us to continue to fund operations in the normal course of business for more than a twelve-month period from the date of filing this Quarterly Report on Form 10-Q. Until we can generate sufficient levels of cash from operations, which we do not expect to achieve in at least the next two years, and because sufficient funds may not be available to us when needed from existing collaborations, we expect that we will be required to continue to fund our operations in part through the sale of debt or equity securities, or through licensing select programs or partial economic rights that include upfront, royalty and/or milestone payments.
Our assessment of our future need for funding and our ability to continue to fund our operations are forward-looking statements that are based on assumptions that may prove to be wrong and that involve substantial risks and uncertainties. Our actual future capital requirements could vary as a result of a number of factors.
Concentration of Business Risks
The following counterparties contributed greater than
10%
of our total revenue during at least one of the periods set forth below. The revenue from these counterparties as a percentage of total revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Loxo Oncology
|
—
|
%
|
|
3.6
|
%
|
|
22.7
|
%
|
|
5.9
|
%
|
Pierre Fabre
|
19.0
|
%
|
|
9.2
|
%
|
|
19.9
|
%
|
|
10.6
|
%
|
Novartis Pharmaceutical
|
14.2
|
%
|
|
37.3
|
%
|
|
14.7
|
%
|
|
47.2
|
%
|
ASLAN
|
—
|
%
|
|
34.7
|
%
|
|
—
|
%
|
|
16.6
|
%
|
Total
|
33.2
|
%
|
|
84.8
|
%
|
|
57.3
|
%
|
|
80.3
|
%
|
The loss of one or more of our significant partners or collaborators could have a material adverse effect on our business, operating results or financial condition. Although we are impacted by economic conditions in the biotechnology and pharmaceutical sectors, management does not believe significant credit risk exists as of
March 31, 2019
.
Geographic Information
The following table details revenue by geographic area based on the country in which our partners, Customers or license holders are located (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
North America
|
$
|
37,877
|
|
|
$
|
4,682
|
|
|
$
|
126,102
|
|
|
$
|
14,845
|
|
Europe
|
21,461
|
|
|
33,744
|
|
|
70,596
|
|
|
82,892
|
|
Asia Pacific and Other
|
5,339
|
|
|
27,941
|
|
|
7,438
|
|
|
40,594
|
|
Total
|
$
|
64,677
|
|
|
$
|
66,367
|
|
|
$
|
204,136
|
|
|
$
|
138,331
|
|
Accounts Receivable
Novartis Pharmaceutical Ltd. and Novartis Pharma AG (collectively, "Novartis") accounted for
30%
and
52%
of our total accounts receivable balance as of
March 31, 2019
and
June 30, 2018
, respectively. Pierre Fabre accounted for
14%
and
13%
of our total accounts receivable balance as of
March 31, 2019
and
June 30, 2018
, respectively. McKesson Corporation accounted for
11%
and
0%
of our total accounts receivable balance as of March 31, 2019. Loxo Oncology ("Loxo") accounted for
0%
and
14%
of our total accounts receivable balance as of
March 31, 2019
and
June 30, 2018
, respectively.
Summary of Significant Accounting Policies
Our significant accounting policies are described in Note 1 to our audited financial statements for the
fiscal year ended June 30, 2018
, included in our Annual Report on Form 10-K. Our significant accounting policies for the three and
nine months ended
March 31, 2019
also included the policies discussed below related to revenue and cost of goods sold for commercial product sales. With the exception of those noted below, there have been no material changes in our significant accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
.
Product Sales, Net
We received approval from the FDA on June 27, 2018 to market BRAFTOVI + MEKTOVI in the U.S. for the treatment of patients with unresectable or metastatic melanoma with a BRAFV
600E
or BRAF
V600K
mutation. We began selling BRAFTOVI + MEKTOVI in the U.S. in July 2018. We distribute our products principally through a limited number of specialty distributor and specialty pharmacy providers (collectively, our "Customers"). Our Customers subsequently sell our products to patients and health care providers. Separately, we enter into arrangements with third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. Revenue from product sales is recognized when our performance obligations are satisfied, which is when Customers obtain control of our product and occurs upon delivery.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration, including rebates, chargebacks, discounts, patient assistance programs, estimated product returns and other allowances that are offered within contracts between us and our Customers. These estimates are based on the amounts earned or to be claimed for related sales and are classified as reductions of accounts receivable if the amount is payable to our Customers or a current liability if the amount is payable to a party other than a Customer. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as industry data and forecasted customer buying and payment patterns, our historical experience, current contractual and statutory requirements, specific known market events and trends. Overall, these reductions to gross sales reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known.
Rebates
: Rebates include mandated discounts under the Medicaid Drug Rebate Program ("Medicaid") and the Medicare Coverage Gap Program ("Medicare"). Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public-sector benefit providers. These estimates for rebates are recorded in the same period the related gross revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on statutory discount rates and known sales to specialty pharmacy patients or expected utilization for specialty distributor sales to healthcare providers. As we gain more historical experience, estimates will be based on the expected utilization from historical data we have accumulated since the BRAFTOVI + MEKTOVI product launch. Rebates are generally invoiced and paid quarterly in arrears.
Chargebacks
: Chargebacks are discounts that occur when contracted purchasers purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid to us by the specialty distributor and the discounted price paid to the specialty distributor by the contracted purchaser. Amounts for estimated chargebacks are established in the same period that the related gross revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for specialty distributor chargebacks is estimated based on known chargeback rates, known sales to specialty distributors, and estimated utilization by types of contracted purchasers.
Discounts and Fees
: Our payment terms are generally 45 days. Specialty distributors and specialty pharmacies are offered various forms of consideration, including service fees and prompt pay discounts for payment within a specified period. We expect these Customers will earn prompt pay discounts and therefore, we deduct the full amount of these discounts and service fees from product sales when revenue is recognized, resulting in a reduction of product revenue and accounts receivable.
Other Reserves
: Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. We estimate the amount of co-pay assistance provided to eligible patients based on the terms of the program when product is dispensed by specialty pharmacies to patients. These estimates are based on redemption information provided by third-party claims processing organizations and are recorded in accounts payable, accrued expenses and other liabilities on the unaudited condensed consolidated balance sheet.
We are offering a quick start program in the form of vouchers to eligible patients. We record amounts for estimated voucher redemptions in the same period that the related gross revenue is recognized, resulting in a reduction of product revenue, and these amounts are recorded in accounts payable, accrued expenses and other liabilities on the unaudited condensed consolidated balance sheet. Our accrual for voucher redemptions is estimated based on observed voucher redemption rates.
Cost of Goods Sold
Cost of goods sold consists of the cost of goods sold to Customers, international partners under product supply agreements, and royalty expense based on net sales of BRAFTOVI. We capitalize inventory costs associated with the production of our products after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. A portion of the costs of BRAFTOVI and MEKTOVI units recognized as revenue during the
three and nine
months ended
March 31, 2019
were expensed prior to FDA approval on June 27, 2018. We believe our cost of goods sold for the
three and nine
months ended
March 31, 2019
would have been
$3.9 million
and
$4.6 million
higher, respectively, if we had not previously expensed certain material and production costs with respect to the units sold. As of
March 31, 2019
, we had approximately
$11.3 million
of inventory on hand that was previously expensed as research and development expense and will not be reported as cost of goods sold in future periods when sales of BRAFTOVI and MEKTOVI are recognized as revenue.
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)"
("ASU 2014-09") and has subsequently issued a number of amendments to ASU 2014-09 (collectively, "ASC 606"). The new standard, as amended, requires entities to recognize revenue from the transfer of promised goods or services to customers based on the amount of the consideration to which the entity expects to be entitled to receive in exchange for those goods or services.
The new standard was effective for us on July 1, 2018, prior to our first commercial product sale, and we elected to adopt it using a modified retrospective transition method applied only to contracts that were not completed as of July 1, 2018. Our adoption of ASU 2014-09 did not require any cumulative effect adjustment to opening accumulated deficit as of July 1, 2018 and did not have a material impact on our unaudited condensed consolidated financial statements.
We have examined our revenue recognition policies and contracts related to our collaboration, co-development and product revenue streams to determine the impact of the new standard using the five-step process prescribed by ASC 606 and recognize revenue for our categories of revenue as follows:
Product sales:
Revenue from product sales is recognized when our performance obligations are satisfied, which is when customers obtain control of our product and occurs at a point in time, typically upon delivery.
Licenses of intellectual property
: If the license granted to our intellectual property is determined to be a discrete performance obligation from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the recipient of the license is able to use and benefit from the license. For licenses that are determined to not be distinct from other performance obligations, such as development activities, we recognize revenue over time, using an input method as the related performance obligations are satisfied. Upfront payments are recorded as deferred revenue upon receipt and are recognized as revenue during subsequent periods as our performance obligations are met.
Milestone payments:
Developmental and regulatory milestone payments generally relate to performance obligations that have been completed in the past and are recognized as revenue in the period in which the milestone is achieved and material risk of reversal of revenue has passed. Due to the uncertainty of drug development and the high historical failure rates generally associated with drug development, we may not receive any additional milestone payments under our agreements. We reevaluate the likelihood of achieving future milestones at the end of each reporting period. If the risk of significant reversal is resolved, future milestone revenue from an arrangement will be recognized as revenue in the period the risk is relieved. Adoption of ASC 606 has the effect of accelerating recognition of revenue for certain commercial milestone payments as compared to the legacy accounting guidance.
Product royalty and commercial milestone revenue
: We have entered into arrangements that include sales-based royalties or commercial milestone payments for which the license is deemed to be the predominant item to which the royalties or milestones relate. We recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty was allocated has been satisfied (or partially satisfied).
In August 2016, the FASB issued ASU No. 2016-15, "
Statement of Cash Flows (Topic 230)"
("ASU 2016-15"). This amendment provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We adopted the new standard on July 1, 2018 and did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, "
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
"
("ASU 2017-09"), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-19 is effective prospectively for the annual period ending June 30, 2019 and interim periods within that annual period. Early adoption is permitted. We adopted the new standard on July 1, 2018 and did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, "
Leases (Topic 842)"
("ASU 2016-02")
which supersedes FASB ASC Topic 840,
Leases (Topic 840) and
provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” and ASU 2018-10, “Codification Improvements to Topic 842, Leases.” ASU 2016-02 and the subsequent modifications are identified as “ASC 842.” The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted upon issuance. We are currently evaluating the impact that ASU 2016-02 will have on our unaudited condensed consolidated financial statements and related disclosures and plan to adopt the new standard on July 1, 2019. We expect to record new right of use assets and lease liabilities, but do not expect the new standard to have a material impact on our consolidated financial statements.
In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-18, “
Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
” (“ASU 2018-18”). The standard provides guidance on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) by aligning the unit of account guidance between the two topics and clarifying whether certain transactions between collaborative participants should be accounted for as revenue under Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We are currently evaluating the impact ASU 2018-18 will have on our unaudited condensed consolidated financial statements and related disclosures, but do not expect it to have a material impact on our consolidated financial statements.
NOTE 2 – MARKETABLE SECURITIES
Marketable securities consisted of the following as of
March 31, 2019
and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Short-term available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. treasury securities
|
$
|
123,149
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
123,146
|
|
Commercial paper
|
110,478
|
|
|
—
|
|
|
—
|
|
|
110,478
|
|
Corporate bonds
|
61,713
|
|
|
60
|
|
|
—
|
|
|
61,773
|
|
Asset-backed securities
|
30,727
|
|
|
32
|
|
|
—
|
|
|
30,759
|
|
Mutual fund securities
|
296
|
|
|
—
|
|
|
—
|
|
|
296
|
|
|
326,363
|
|
|
92
|
|
|
(3
|
)
|
|
326,452
|
|
Long-term available-for-sale securities:
|
|
|
|
|
|
|
|
Corporate bonds
|
32,421
|
|
|
44
|
|
|
—
|
|
|
32,465
|
|
Asset-backed securities
|
22,721
|
|
|
32
|
|
|
—
|
|
|
22,753
|
|
Mutual fund securities
|
790
|
|
|
—
|
|
|
—
|
|
|
790
|
|
|
55,932
|
|
|
76
|
|
|
—
|
|
|
56,008
|
|
Total
|
$
|
382,295
|
|
|
$
|
168
|
|
|
$
|
(3
|
)
|
|
$
|
382,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Short-term available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. treasury securities
|
$
|
297,965
|
|
|
$
|
—
|
|
|
$
|
(461
|
)
|
|
$
|
297,504
|
|
Mutual fund securities
|
235
|
|
|
—
|
|
|
—
|
|
|
235
|
|
|
298,200
|
|
|
—
|
|
|
(461
|
)
|
|
297,739
|
|
Long-term available-for-sale securities:
|
|
|
|
|
|
|
|
Mutual fund securities
|
919
|
|
|
—
|
|
|
—
|
|
|
919
|
|
|
919
|
|
|
—
|
|
|
—
|
|
|
919
|
|
Total
|
$
|
299,119
|
|
|
$
|
—
|
|
|
$
|
(461
|
)
|
|
$
|
298,658
|
|
The mutual fund securities shown in the above tables are securities held under the Array BioPharma Inc. Deferred Compensation Plan.
As of
March 31, 2019
, the amortized cost and estimated fair value of available-for-sale debt securities by contractual maturity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
Cost
|
|
Value
|
Due in one year or less
|
$
|
326,067
|
|
|
$
|
326,156
|
|
Due in one to three years
|
55,142
|
|
|
55,218
|
|
Total
|
$
|
381,209
|
|
|
$
|
381,374
|
|
NOTE 3 – PRODUCT REVENUE
Our commercial stage products include BRAFTOVI + MEKTOVI, which received FDA approval on June 27, 2018 as a combination therapy for the treatment of patients with unresectable or metastatic melanoma with BRAF
V600E
or BRAF
V600K
mutation, as detected by an FDA-approved test.
We record gross-to-net sales accruals for rebates, chargebacks, discounts, estimated product returns and other allowances that are offered within contracts between us and our Customers and other indirect customers relating to the sales of our products.
Our provisions for discounts, early payments, rebates, sales returns, distributor service fees and chargebacks, and other incentives are under terms that are customary in the industry and are provided for in the same period in which the related sales are recorded.
Net product revenue by product for the three and
nine months ended
March 31, 2019
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Nine Months Ended
March 31, 2019
|
BRAFTOVI
|
|
$
|
17,351
|
|
|
$
|
35,737
|
|
MEKTOVI
|
|
17,727
|
|
|
36,047
|
|
Total net product sales
|
|
$
|
35,078
|
|
|
$
|
71,784
|
|
Gross-to-net sales accruals and the balance in the related allowance accounts for the
nine months ended
March 31, 2019
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
|
Other
|
Total
|
Balance as of June 30, 2018
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Allowances for sales during prior periods
|
|
—
|
|
—
|
|
—
|
|
Allowances for sales during the current period
|
|
129
|
|
14,592
|
|
14,721
|
|
Credits/deductions issued for prior year sales
|
|
—
|
|
—
|
|
—
|
|
Credits/deductions issued for sales during the current period
|
|
(26
|
)
|
(9,507
|
)
|
(9,533
|
)
|
Balance as of March 31, 2019
|
|
$
|
103
|
|
$
|
5,085
|
|
$
|
5,188
|
|
There were
no
product sales or gross-to-net accruals during the three and
nine months ended
March 31, 2018
.
NOTE 4 – COLLABORATION AND OTHER AGREEMENTS
The following table summarizes total revenue recognized for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Product royalties
|
|
|
|
|
|
|
|
Pierre Fabre
|
|
$
|
835
|
|
|
$
|
—
|
|
|
$
|
1,159
|
|
|
$
|
—
|
|
Ono
|
|
102
|
|
|
—
|
|
|
102
|
|
|
—
|
|
Total product royalties
|
|
$
|
937
|
|
|
$
|
—
|
|
|
$
|
1,261
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Collaboration and other revenue
|
|
|
|
|
|
|
|
Pierre Fabre
|
|
$
|
10,704
|
|
|
$
|
5,347
|
|
|
$
|
22,160
|
|
|
$
|
12,370
|
|
Mirati
|
|
1,500
|
|
|
1,376
|
|
|
3,710
|
|
|
4,187
|
|
Loxo
|
|
—
|
|
|
2,416
|
|
|
2,403
|
|
|
7,069
|
|
Other partners
|
|
561
|
|
|
974
|
|
|
3,050
|
|
|
3,003
|
|
Total collaboration and other revenue
|
|
12,765
|
|
|
10,113
|
|
|
31,323
|
|
|
26,629
|
|
|
|
|
|
|
|
|
|
|
License and milestone revenue
|
|
|
|
|
|
|
|
|
Loxo
|
|
—
|
|
|
—
|
|
|
44,000
|
|
|
1,107
|
|
Pierre Fabre
|
|
750
|
|
|
750
|
|
|
17,250
|
|
|
2,250
|
|
Ono
|
|
4,596
|
|
|
4,665
|
|
|
6,433
|
|
|
6,502
|
|
ASLAN
|
|
—
|
|
|
23,000
|
|
|
—
|
|
|
23,000
|
|
Asahi Kasei
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,000
|
|
Other partners
|
|
1,382
|
|
|
3,088
|
|
|
2,115
|
|
|
3,505
|
|
Total license and milestone revenue
|
|
6,728
|
|
|
31,503
|
|
|
69,798
|
|
|
46,364
|
|
Total collaboration and license revenue
|
|
$
|
19,493
|
|
|
$
|
41,616
|
|
|
$
|
101,121
|
|
|
$
|
72,993
|
|
|
|
|
|
|
|
|
|
|
Reimbursement revenue
|
|
|
|
|
|
|
|
|
Novartis
|
|
$
|
9,169
|
|
|
$
|
24,751
|
|
|
$
|
29,970
|
|
|
$
|
65,338
|
|
Product royalties
Product royalties consists of royalty revenue based on international sales of BRAFTOVI and MEKTOVI, which are marketed by Array in the U.S. We have granted Pierre Fabre and Ono Pharmaceutical Co. Ltd. (“Ono”) exclusive rights to commercialize both products in their respective territories outside of the United States and we receive royalty payments based on those sales. The Pierre Fabre and Ono agreements, including our royalty rights are described below.
Collaboration and License Revenue
Collaboration and license revenue consists of revenue related to our drug discovery and development activities in collaboration with partners, which includes reimbursement for research and development of drug candidates that we out-license, up-front and milestone fees and ongoing royalty revenue based on sales by license holders of products which we have wholly out-licensed and are not marketed by Array. Currently approved and marketed products that we have out-licensed and have royalty rights to include Vitrakvi and Ganovo. To date, royalties earned based on sales of Vitrakvi and Ganovo have not been material.
The terms of our collaboration and license agreements include substantial ongoing collaboration and cost-sharing activities between the companies and may require us to perform future development and commercialization activities. In accordance with the revenue recognition criteria under ASC 606,
Revenue from Contracts with Customers
, we identified the following performance obligations in each of the following collaboration agreements, excluding Loxo: (1) the license rights and (2) clinical development and other services. For each agreement, we determined that the license rights are not distinct from the clinical development and other activities, and as such, are combined with certain other activities to form a performance obligation. Accordingly, any non-refundable upfront payments received under the agreements have been recorded as deferred revenue and are being recognized over the period during which management expects that substantial development activities will be performed.
We re-evaluate the likelihood of achieving future milestones at the end of each reporting period. Any remaining future milestone payments discussed in this Quarterly Report on Form 10-Q are related to performance obligations that have been not yet been satisfied. If the risk of significant reversal for a milestone becomes resolved in the future, then the revenue associated with the respective milestone will be recognized in the period the risk is removed.
Pierre Fabre
On November 10, 2015, we entered into an agreement with Pierre Fabre (the "PF Agreement") pursuant to which we granted Pierre Fabre rights to commercialize encorafenib and binimetinib in all countries except for the U.S., Canada, Japan, Korea and Israel, where we retain our ownership rights (subject to rights granted to Ono Pharmaceutical Co., Ltd. ("Ono") under the agreement with Ono and to Medison Pharma Ltd. The PF Agreement closed in December 2015.
In connection with the PF Agreement, we received a
$30.0 million
upfront payment during the year ended June 30, 2016 which has been recorded as deferred revenue and is being recognized through 2025, which is the period through which management expects that substantial development activities will be performed. In September 2018, we earned a
$15.0 million
milestone under the PF Agreement upon regulatory approval in the European Union, which was fully recognized as collaboration and license revenue during the period.
The PF Agreement contains additional substantive potential milestone payments of up to
$390.0 million
for achievement of
seven
commercialization milestones if certain net sales amounts are achieved for any licensed indications. We are further eligible for multiple tiered double-digit royalties on annual net sales of encorafenib and binimetinib in the PF territory, starting at
20%
for annual net sales under
€50.0 million
and increasing to
35%
for annual net sales in excess of
€100.0 million
subject to certain adjustments of up to
$15.0 million
cumulative for costs incurred to achieve or maintain the Marketing Authorization Application ("MAA") in Europe which can reduce royalties due to us by up to
50%
.
Ono Pharmaceutical Co., Ltd.
Effective May 31, 2017, we entered into a License, Development and Commercialization Agreement (the “Ono Agreement”) with Ono, pursuant to which we granted Ono exclusive rights to commercialize encorafenib and binimetinib in Japan and the Republic of Korea (the “Ono Territory”), along with the right to develop these products in the Ono Territory. We retain all rights outside the Ono Territory, as well as the right to conduct development and manufacturing activities in the Ono Territory, except rights we have granted to Pierre Fabre under the PF Agreement and to Medison Pharma Ltd.
Under the terms of the Ono Agreement, we received a non-refundable upfront cash payment of
¥3.5 billion
, or
$31.2 million
, and we retain all rights to conduct, either on our own or through third parties, all clinical studies and file related regulatory filings with respect to encorafenib and binimetinib and to develop, manufacture and commercialize encorafenib and binimetinib outside the Ono Territory (subject to rights we have granted to Pierre Fabre in certain
countries). The upfront payment has been recorded as deferred revenue and is being recognized through 2025 which is the period through which management expects that substantial development activities will be performed. We are entitled to receive potential milestone payments of up to
¥500.0 million
for the achievement of
one
remaining development milestone,
¥5.0 billion
for the achievement of
eight
regulatory milestones relating to certain Marketing Authorization Application filings and approval in Japan for
two
specified indications, and
¥10.5 billion
for the achievement of
five
commercialization milestones if certain annual net sales targets are achieved. A portion of these milestones is related to the advancement of the Phase 3 BEACON CRC trial in the Ono Territory. We are further eligible for tiered double-digit royalties on annual net sales of encorafenib and binimetinib in the Ono Territory, starting at
22%
for annual net sales under
¥10.0 billion
and increasing to
25%
for annual net sales in excess of
¥10.0 billion
subject to certain adjustments. As of
March 31, 2019
, ¥1.0 billion was the equivalent of approximately
$9.0 million
.
Loxo
We are party to a Drug Discovery Collaboration Agreement, as amended, with Loxo (the “Loxo Agreement”). Under the terms of the Loxo Agreement, Loxo funded discovery and preclinical programs conducted by us, including LOXO-101, which is currently marketed as Vitrakvi, LOXO-195, a next generation selective TRK inhibitor, LOXO-292, a RET inhibitor, and FGFR programs (the "Loxo Programs"). The research phase concluded in September 2018. Loxo is responsible for all additional preclinical and clinical development and commercialization. In connection with Eli Lilly's February 2019 acquisition of Loxo, Bayer secured exclusive licensing rights for the global development and commercialization of Vitrakvi and LOXO-195. The licensing agreement between Array and Loxo remains in effect, and Array remains entitled to royalties on sales of Vitrakvi.
We identified the following performance obligations: (1) the conduct of the research activities under the discovery program, including related technology transfer (the "research services deliverable"), (2) an exclusive worldwide license granted to Loxo to certain of our technology and our interest in collaboration technology, as well as exclusive worldwide marketing rights (the "license deliverable") and (3) participation on the Joint Research Committee ("JRC"). The Loxo Agreement provides for no general right of return for any non-contingent performance obligation. All the identified non-contingent performance obligations were considered distinct; therefore they are treated as separate performance obligations. Delivery of the research services and JRC participation obligations were completed throughout the research discovery program term. The license deliverable was complete as of September 30, 2013.
In August 2018, we earned a
$4.0 million
milestone under the Loxo Agreement for the initiation of a registration enabling study for LOXO-292, which was fully recognized as collaboration and license revenue during the period. In December 2018, we recognized milestone revenue of
$40.0 million
related to the first commercial sale of Vitrakvi by Loxo. We received a
$20.0 million
cash payment in December 2018 and will receive
two
additional payments of
$10.0 million
on each of the one year and two year anniversaries of the first commercial sale. In accordance with ASC 606, we recognized the entire
$40.0 million
in December 2018 as our performance obligations have been satisfied, payment is contingent upon only the passage of time, and we determined that it is not probable that a significant reversal of revenue would occur. The
$20.0 million
of additional payments are reflected as
$10.0 million
in other current assets and
$10.0 million
in other non-current assets in our unaudited condensed consolidated balance sheets as of
March 31, 2019
.
The Drug Discovery Collaboration Agreement with Loxo contains substantive potential milestone payments of up to
$7.0 million
for
two
remaining development milestones and up to
$595.0 million
for the achievement of
twenty
commercialization milestones if certain net sales amounts are achieved for any licensed drug candidates in the U.S., the European Union and Japan plus mid-to-high single digit royalties on sales of any resulting drugs subject to certain adjustments.
Mirati
We are party to agreements with Mirati Therapeutics, Inc. ("Mirati" and the "Mirati Agreements").
Mirati is developing MRTX849, a small molecule inhibitor of
KRAS
G12C, invented by Array and Mirati Therapeutics. Mirati is evaluating MRTX849 in a Phase 1/2 clinical trial in patients with advanced solid tumors that harbor
KRAS
G12C mutations. Array and Mirati are also collaborating on a
KRAS
G12D inhibitor preclinical program. Array has freedom to operate on all other forms of Ras proteins.
In April 2018, Mirati elected to exercise an option to take an exclusive, worldwide license to an active compound under one such agreement for which we received
$2.0 million
and we continue to receive additional fees as reimbursement for research and development services. The option exercise fee, received in the three months ended
June 30, 2018, was recorded as deferred revenue and is being recognized as revenue over
two years
, the period during which we expect that substantial development activities will be performed.
The Mirati Agreements contain substantive potential milestone payments of up to
$17.3 million
for
six
remaining developmental milestones and up to
$674.0 million
for the achievement of
fourteen
commercialization milestones if certain net sales amounts are achieved in the U.S., the European Union and Japan, plus royalties in the high single digits to mid-teens on sales.
Dr. Charles Baum, a current member of our Board of Directors, is the President and Chief Executive Officer of Mirati.
Other Collaboration Arrangements
In addition to the collaboration arrangements described above, we have entered into a number of other collaborative arrangements that include the potential for us to receive future milestone payments of up to
$48.5 million
for development milestones, up to
$73.0 million
for regulatory milestones, up to
$159.5 million
for sales milestones over a period of several years in addition to royalties on potential future product sales. Our ability to receive payments under these collaborations is contingent upon our collaboration partners' continued involvement in the programs and the lack of any adverse events which could cause the discontinuance of the programs.
Deferred Revenue
Deferred revenue balances were as follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
2019
|
|
2018
|
Ono
|
$
|
24,799
|
|
|
$
|
27,555
|
|
Pierre Fabre (1)
|
26,098
|
|
|
22,394
|
|
Mirati
|
1,042
|
|
|
2,468
|
|
Loxo
|
—
|
|
|
2,403
|
|
Other
|
—
|
|
|
2,000
|
|
Total deferred revenue
|
51,939
|
|
|
56,820
|
|
Less: Current portion
|
(13,627
|
)
|
|
(12,350
|
)
|
Deferred revenue, non-current portion
|
$
|
38,312
|
|
|
$
|
44,470
|
|
(1) Balance as of
March 31, 2019
includes a
$6.0 million
prepayment for commercial drug supply of BRAFTOVI + MEKTOVI
Reimbursement Revenue
On March 2, 2015, we regained development and commercialization rights to binimetinib under the Termination and Asset Transfer Agreement with Novartis and to encorafenib under the Asset Transfer Agreement with Novartis (which we collectively refer to as the “Novartis Agreements”). Along with global ownership of both assets, the Novartis Agreements transferred to us a
2%
royalty obligation offset by certain expenses, which is payable based on net sales of encorafenib and is expensed as costs of goods sold as incurred.
Amounts provided by Novartis related to the development and commercialization of binimetinib and encorafenib are reported as reimbursement revenue on our unaudited condensed consolidated statements of operations. See Note 3 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2018
for additional details related to our agreements with Novartis related to encorafenib and binimetinib.
NOTE 5 – DEBT
Outstanding debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
2019
|
|
2018
|
Notes payable at fair value
|
$
|
—
|
|
|
$
|
15,899
|
|
|
|
|
|
2024 convertible senior notes
|
$
|
126,060
|
|
|
$
|
126,060
|
|
Silicon Valley Bank term loan (1)
|
53,500
|
|
|
16,200
|
|
Long-term debt, gross
|
179,560
|
|
|
142,260
|
|
Less: Unamortized debt discount and fees
|
(45,315
|
)
|
|
(46,384
|
)
|
Long-term debt, net
|
134,245
|
|
|
95,876
|
|
Less: Current portion
|
—
|
|
|
(2,500
|
)
|
Long-term debt, non-current portion
|
$
|
134,245
|
|
|
$
|
93,376
|
|
(1) Outstanding debt owed to Silicon Valley Bank includes a final payment fee of
$3.5 million
and
$1.2 million
as of
March 31, 2019
and
June 30, 2018
, respectively.
Redmile Notes Payable
On August 6, 2018, the Subordinated Convertible Promissory Notes (the "Redmile Notes Payable") held by Redmile Capital Offshore Fund II, Ltd. and Redmile Biopharma Investments I, L.P. (collectively, “Redmile”) matured and became payable pursuant to the Note Purchase Agreement dated September 2, 2016, as amended. On that date, we repaid
$16.0 million
to the Note holders, which included the
$10.0 million
principal, a
$5.0 million
exit fee and approximately
$1.0 million
accrued interest. Following the repayment of the Redmile Notes Payable, we had no notes payable recorded at fair value.
Silicon Valley Bank Term Loan
On August 10, 2018 (the “Amended Effective Date”), we entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Silicon Valley Bank ("SVB") providing for a term loan in the original principal amount of
$50.0 million
and maintaining our existing letters of credit with SVB. The Amended Loan Agreement amends and restates our prior Loan and Security Agreement (the "Loan Agreement") with SVB. We utilized the proceeds from the term loan for repayment in full of all outstanding obligations under the Loan Agreement with SVB, repayment in full of our obligations under the Redmile Notes Payable, and as working capital to fund general business requirements. The entire term loan amount was borrowed on the Amended Effective Date.
The outstanding principal amount under the term loan bears interest at a floating per annum rate equal to the Prime Rate minus
2.0%
(but not less than
0.0%
) and was
3.5%
as of
March 31, 2019
. A final payment of principal, accrued interest on the term loan and on any outstanding advances, as well as the final payment fee associated with the Amended Loan Agreement of
$3.5 million
are due on the maturity date of August 1, 2023. The resulting debt discount is being recognized using the effective interest method over the term of the loan. In accordance with ASC 470-50, we accounted for the exchange as a debt modification and the issuance costs paid to SVB associated with the Amended Loan Agreement were recorded as debt discount and were added to the remaining unamortized debt discount associated with prior Loan Agreement.
We granted SVB a first priority security interest in all of our assets other than our intellectual property, provided that accounts and proceeds of our intellectual property constitutes collateral and we have agreed not to encumber our intellectual property without SVB’s consent. The Amended Loan Agreement contains customary covenants, including restrictions on changes in control of Array, the incurrence of additional indebtedness, future encumbrances on our assets, the payment of dividends or distributions on our common stock and the sale, lease, transfer or disposition of encorafenib and binimetinib outside of certain markets if our cash and cash equivalents maintained with SVB fall below certain levels. In addition, we must maintain a liquidity ratio, defined as (i) our unrestricted cash and cash equivalents divided by (ii) all of our outstanding obligations owed to SVB, of at least
2.00
to
1.00
, measured monthly.
2.625%
Convertible Senior Notes Due 2024
On December 1, 2017, we issued and sold
$126.1 million
aggregate principal amount of
2.625%
convertible senior notes due 2024 (the "2024 Notes") in exchange for our now-retired 2020 Notes. The 2024 Notes are our direct unsecured obligations and rank equal in right of payment with all of our other existing and future unsecured and unsubordinated indebtedness. The 2024 Notes are effectively subordinated to any of our existing and future secured indebtedness, including our indebtedness under the Amended Loan Agreement with SVB, to the extent of the value of our assets that secure such indebtedness.
The 2024 Notes will mature on December 1, 2024 and bear interest at a rate of
2.625%
, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2018.
In accordance with ASC 470-20, we used an effective interest rate of
9.75%
to determine the liability component of the 2024 Notes. This resulted in the recognition of
$80.4 million
as the liability component of the 2024 Notes and the recognition of the residual
$45.7 million
as the debt discount with a corresponding increase to additional paid-in capital for the equity component of the 2024 Notes. The underwriting discount and estimated offering expenses of
$4.3 million
were allocated between the debt and equity issuance costs in proportion to the allocation of the liability and equity components of the 2024 Notes. Equity issuance costs of
$1.6 million
were recorded as an offset to additional paid-in capital. Total debt issuance costs of
$2.7 million
were recorded on the issuance date and are reflected in our unaudited condensed consolidated balance sheets for all periods presented on a consistent basis with the debt discount, or as a direct deduction from the carrying value of the associated debt liability. The debt discount and debt issuance costs will be amortized as non-cash interest expense through December 1, 2024. The balance of unamortized debt issuance costs was
$2.4 million
and
$2.6 million
as of
March 31, 2019
and
June 30, 2018
, respectively.
The fair value of the 2024 Notes was approximately
$216.6 million
and
$169.0 million
at
March 31, 2019
and
June 30, 2018
, respectively, and was determined using Level 2 inputs based on their quoted market values.
Summary of Interest Expense
The following table shows the details of our interest expense for all of our debt arrangements outstanding during the periods presented, including contractual interest, and amortization of debt discount, debt issuance costs and loan transaction fees that were charged to interest expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Silicon Valley Bank Term Loan
|
|
|
|
|
|
|
|
Simple interest
|
431
|
|
|
100
|
|
|
$
|
1,115
|
|
|
$
|
280
|
|
Amortization of prepaid fees for line of credit
|
—
|
|
|
14
|
|
|
29
|
|
|
99
|
|
Amortization of debt discount
|
257
|
|
|
80
|
|
|
688
|
|
|
242
|
|
Total interest expense on Silicon Valley Bank term loan
|
688
|
|
|
194
|
|
|
1,832
|
|
|
621
|
|
Convertible Senior Notes (1)
|
|
|
|
|
|
|
|
Contractual interest
|
835
|
|
|
835
|
|
|
2,505
|
|
|
2,723
|
|
Amortization of debt discount
|
1,257
|
|
|
1,141
|
|
|
3,682
|
|
|
4,432
|
|
Amortization of debt issuance costs
|
76
|
|
|
69
|
|
|
223
|
|
|
257
|
|
Total interest expense on convertible senior notes
|
2,168
|
|
|
2,045
|
|
|
6,410
|
|
|
7,412
|
|
Other Debt
|
|
|
|
|
|
|
|
Simple interest
|
7
|
|
|
122
|
|
|
19
|
|
|
374
|
|
Total interest expense on other debt
|
7
|
|
|
122
|
|
|
19
|
|
|
374
|
|
Total interest expense
|
$
|
2,863
|
|
|
$
|
2,361
|
|
|
$
|
8,261
|
|
|
$
|
8,407
|
|
(1) Includes the 2024 Notes and 2020 Notes (retired)
NOTE 6 – FAIR VALUE MEASUREMENTS
We use the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value our financial instruments:
|
|
•
|
Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.
|
|
|
•
|
Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace.
|
|
|
•
|
Level 3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
|
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires us to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that we or holders of the instruments could realize in a current market exchange.
The following tables show the fair value of our financial instruments classified into the fair value hierarchy and measured on a recurring basis on the unaudited condensed consolidated balance sheets as of
March 31, 2019
and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of March 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
—
|
|
|
$
|
123,146
|
|
|
$
|
—
|
|
|
$
|
123,146
|
|
Commercial paper
|
|
—
|
|
|
110,478
|
|
|
—
|
|
|
110,478
|
|
Corporate bonds
|
|
—
|
|
|
61,773
|
|
|
—
|
|
|
61,773
|
|
Asset-backed securities
|
|
—
|
|
|
30,759
|
|
|
—
|
|
|
30,759
|
|
Mutual fund securities
|
|
296
|
|
|
—
|
|
|
—
|
|
|
296
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
—
|
|
|
32,465
|
|
|
—
|
|
|
32,465
|
|
Asset-back securities
|
|
—
|
|
|
22,753
|
|
|
—
|
|
|
22,753
|
|
Mutual fund securities
|
|
790
|
|
|
—
|
|
|
—
|
|
|
790
|
|
Total assets
|
|
$
|
1,086
|
|
|
$
|
381,374
|
|
|
$
|
—
|
|
|
$
|
382,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of June 30, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
297,504
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
297,504
|
|
Mutual fund securities
|
|
235
|
|
|
|
|
|
—
|
|
|
235
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
Mutual fund securities
|
|
919
|
|
|
—
|
|
|
—
|
|
|
919
|
|
Total assets
|
|
$
|
298,658
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
298,658
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,899
|
|
|
$
|
15,899
|
|
Our debt-based marketable securities are classified as level 2 within the valuation hierarchy. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. During the three months ended December 31, 2018, we diversified our investment portfolio and are classifying our investments in debt securities, including U.S. treasury securities, as Level 2 securities.
The table below provides a rollforward of the changes in fair value of Level 3 financial instruments for the three and
nine months ended
March 31, 2019
, comprised of the Redmile Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Nine Months Ended March 31, 2019
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
12,700
|
|
|
$
|
15,899
|
|
|
$
|
12,600
|
|
Change in fair value
|
|
—
|
|
|
100
|
|
|
65
|
|
|
200
|
|
Settlement upon maturity
|
|
—
|
|
|
|
|
(15,964
|
)
|
|
—
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
12,800
|
|
NOTE 7 – STOCKHOLDERS’ EQUITY
Common Stock Offering
On September 19, 2017, the Company closed an underwritten public offering of
24.1 million
shares of its common stock, which included
3.1 million
shares of common stock issued upon the exercise in full of the option to purchase additional shares granted to the underwriters in the offering. The shares were sold to the public at an offering price of
$10.75
per share. The total net proceeds from the offering were
$243.0 million
, after underwriting discounts and commissions and offering expenses of approximately
$15.7 million
. The Company expects to continue to use the net proceeds from this offering to fund research and development efforts, including clinical trials for our proprietary candidates, build and scale its commercial capabilities, and for general working capital and corporate purposes.
At-the-Market Equity Offering
We entered into a sales agreement with Cantor Fitzgerald & Co. ("Cantor") dated March 27, 2013, which has been subsequently amended to permit Cantor, acting as our sales agent, to sell shares of our common stock from time to time in an at-the-market offering ("ATM Offering"). All sales of shares have been made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC.
On May 9, 2018, we entered into a subsequent sales agreement with Cantor (the "Sales Agreement"), pursuant to which we may, from time to time, sell up to
$125.0 million
in shares of our common stock through Cantor, acting as our sales agent and/or principal, in an ATM Offering. We were not required to sell shares under the Sales Agreement. We paid Cantor a commission of up to
3%
of the aggregate gross proceeds we received from all sales of our common stock under the Sales Agreement. We received net proceeds on sales under the Sales Agreement of approximately
$122.5 million
at a weighted average price of
$17.24
(excluding commissions) during the
nine months ended
March 31, 2019
, which resulted in the full utilization of the
$125.0 million
available sales under the Sales Agreement. We received net proceeds on sales under our prior sales agreement with Cantor of approximately
$40.3 million
at a weighted average price of
$16.14
during the
nine months ended
March 31, 2018
.
Effective May 7, 2019, we entered into a sales agreement with Jefferies LLC (the “Jefferies Sales Agreement”), pursuant to which we may, from time to time, sell up to
$150.0 million
in shares of our common stock through Jefferies LLC, acting as our sales agent and/or principal, in an at-the-market offering. We are not required to sell shares under the Jefferies Sales Agreement. We will pay Jefferies LLC a commission of up to
3%
of the aggregate gross proceeds we receive from all sales of our common stock under the Jefferies Sales Agreement. Unless otherwise terminated, the Sales Agreement continues until the earlier of selling all shares available under the Jefferies Sales Agreement or May 7, 2022.
No
sales have been made under the Jefferies Sales Agreement.
NOTE 8 – SHARE-BASED COMPENSATION
Share-based compensation expense for all equity awards issued pursuant to the Array BioPharma Amended and Restated Stock Option and Incentive Plan (the "Option and Incentive Plan") and for estimated shares to be issued under the Employee Stock Purchase Plan ("ESPP") for the current purchase period was approximately
$8.3 million
and
$4.7 million
for the
three months ended
March 31, 2019
and
2018
, respectively, and
$18.7 million
and
$13.5 million
for the
nine months ended
March 31, 2019
and
2018
, respectively.
We use the Black-Scholes option pricing model to estimate the fair value of our share-based awards. In applying this model, we use the following assumptions:
|
|
•
|
Risk-free interest rate - We determine the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate.
|
|
|
•
|
Expected term - We estimate the expected term of our options based upon historical exercises and post-vesting termination behavior.
|
|
|
•
|
Expected volatility - We estimate expected volatility using daily historical trading data of our common stock.
|
|
|
•
|
Dividend yield - We have never paid dividends and currently have no plans to do so; therefore, no dividend yield is applied.
|
Option Awards
The fair values of our employee option awards were estimated using the assumptions below, which yielded the following weighted average grant date fair values for the periods presented:
|
|
|
|
|
|
Nine Months Ended March 31, 2019
|
|
2019
|
|
2018
|
Risk-free interest rate
|
2.5% - 3.0%
|
|
1.6% - 2.4%
|
Expected option term in years
|
3.8 - 5.1
|
|
3.8 - 4.1
|
Expected volatility
|
63.5% - 67.0%
|
|
66.1% - 67.3%
|
Dividend yield
|
0%
|
|
0%
|
Weighted average grant date fair value
|
$9.07
|
|
$5.81
|
The following table summarizes our stock option activity under the Option and Incentive Plan for the
nine months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding balance at June 30, 2018
|
15,326,350
|
|
|
$
|
7.68
|
|
|
|
|
|
Granted
|
4,576,163
|
|
|
$
|
16.15
|
|
|
|
|
|
Exercised
|
(2,717,053
|
)
|
|
$
|
5.28
|
|
|
|
|
|
Forfeited
|
(885,692
|
)
|
|
$
|
10.88
|
|
|
|
|
|
Expired
|
(6,000
|
)
|
|
$
|
6.22
|
|
|
|
|
|
Outstanding balance at March 31, 2019
|
16,293,768
|
|
|
$
|
10.29
|
|
|
7.8
|
|
$
|
229,659
|
|
Exercisable at March 31, 2019
|
5,686,232
|
|
|
$
|
6.87
|
|
|
6.1
|
|
$
|
99,541
|
|
The aggregate intrinsic value in the above table is calculated as the difference between the closing price of our common stock at
March 31, 2019
of
$24.38
per share and the exercise price of the stock options that had strike prices below the closing price. The total intrinsic value of all options exercised was
$38.5 million
during the
nine months ended
March 31, 2019
. The total intrinsic value of all options exercised during the
nine months ended
March 31, 2018
was
$24.4 million
. The grant date fair value of options that vested during the
nine months ended
March 31, 2019
and
2018
was
$12.7 million
and
$7.0 million
, respectively.
As of
March 31, 2019
, we had approximately
$60.7 million
of total unrecognized compensation expense related to the unvested stock options shown in the table above, which is expected to be recognized over a weighted average period of
3.1 years
.
Restricted Stock Units
The Option and Incentive Plan provides for the issuance of restricted stock units ("RSUs") that each represent the right to receive one share of our common stock, cash or a combination of cash and stock, typically following achievement of time- or performance-based vesting conditions. Our RSU grants that vest subject to continued service over a defined period of time will typically vest between
one
to
four
years, with a percentage vesting on each anniversary date of the grant, or they may be vested in full on the date of grant. Vested RSUs will be settled in shares of common stock upon the vesting date, upon a predetermined delivery date, upon a change in control of Array, or upon the employee leaving Array. All outstanding RSUs may only be settled through the issuance of common stock to recipients, and we intend to continue to grant RSUs that may only be settled in stock. RSUs are assigned the value of our common stock at date of grant, and the grant date fair value is amortized over the applicable vesting period.
The following table summarizes the status of our unvested RSUs under the Option and Incentive Plan as of
March 31, 2019
and changes during the
nine months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted
Average
Grant Date Fair Value
|
Unvested at June 30, 2018
|
959,730
|
|
|
$
|
9.28
|
|
Granted
|
617,518
|
|
|
15.87
|
|
Vested
|
(252,108
|
)
|
|
10.46
|
|
Forfeited
|
(64,845
|
)
|
|
12.20
|
|
Unvested at March 31, 2019
|
1,260,295
|
|
|
$
|
12.12
|
|
As of
March 31, 2019
, we had
$13.1 million
of total unrecognized compensation cost related to unvested RSUs granted under the Option and Incentive Plan. The cost is expected to be recognized over a weighted-average period of approximately
3.1 years
. The fair market value for RSUs that vested during the
nine months ended
March 31, 2019
and
2018
was
$2.6 million
and
$1.8 million
, respectively. RSUs granted during the
nine months ended
March 31, 2019
and
2018
had a fair value of
$9.8 million
and
$5.8 million
, respectively.
Employee Stock Purchase Plan
The ESPP allows qualified employees (as defined in the ESPP) to purchase shares of our common stock at a price equal to
85%
of the lower of (i) the closing price at the beginning of the offering period or (ii) the closing price at the end of the offering period. Effective each January 1, a new
12
-month offering period begins that will end on December 31 of that year. However, if the closing stock price on July 1 is lower than the closing stock price on the preceding January 1, then the original
12
-month offering period terminates, and the purchase rights under the original offering period roll forward into a new
six
-month offering period that begins July 1 and ends on December 31. As of
March 31, 2019
, we had
0.7 million
shares available for issuance under the ESPP. The Company issued
0.2 million
shares under the ESPP during each of fiscal 2019 and 2018.
NOTE 9 - RELATED PARTY TRANSACTIONS
We are party to Drug Discovery Collaboration Option Agreements, as amended, with Mirati pursuant to which we provide certain drug discovery and research activities to Mirati pursuant to which we have received upfront payments, license fees, milestone payments and reimbursement for research and development services and under which we are entitled to receive additional milestone payments based on achievement of certain milestones, as described in
Note 4 - Collaboration and Other Agreements
. Dr. Charles Baum, a current member of our Board of Directors, is the President and Chief Executive Officer of Mirati.
NOTE 10 - NET LOSS PER SHARE
Basic and diluted loss per common share are computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock, unless they are anti-dilutive.
The following table summarizes the net loss per share calculation (in thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net loss - basic and diluted
|
$
|
(37,494
|
)
|
|
$
|
(22,851
|
)
|
|
$
|
(73,667
|
)
|
|
$
|
(94,898
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
219,913
|
|
|
208,994
|
|
|
215,964
|
|
|
194,434
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.17
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.49
|
)
|
For the periods presented, all common stock equivalents are excluded from the computation of diluted loss per share, as the result would be anti-dilutive, which include the following (in thousands):
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
2.625% convertible senior notes
|
8,156
|
|
|
8,156
|
|
Stock options
|
16,294
|
|
|
15,722
|
|
Unvested RSUs
|
1,260
|
|
|
1,275
|
|
Total anti-dilutive common stock equivalents excluded from diluted loss per share calculation
|
25,710
|
|
|
25,153
|
|