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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2020.

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from            to           .

Commission file number: 001-35347

Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

90-0475355

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

5500 Flatiron Parkway, Suite 100

Boulder, Colorado

80301

(Address of principal executive offices)

(Zip Code)

(303625-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock par Value $0.001 per share

CLVS

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of October 30, 2020 was 88,318,959.

CLOVIS ONCOLOGY, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. Financial Information

3

ITEM 1.

Financial Statements (unaudited)

3

Consolidated Statements of Operations and Comprehensive Loss — for the three and nine months ended September 30, 2020 and September 30, 2019

3

Consolidated Balance Sheets — as of September 30, 2020 and December 31, 2019

4

Consolidated Statements of Stockholders’ Equity (Deficit) – for the nine months ended September 30, 2020

5

Consolidated Statements of Stockholders’ Equity (Deficit) – for the nine months ended September 30, 2019

6

Consolidated Statements of Cash Flows — for the nine months ended September 30, 2020 and 2019

7

Notes to Unaudited Consolidated Financial Statements

8

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

47

ITEM 4.

Controls and Procedures

47

PART II. Other Information

49

ITEM 1.

Legal Proceedings

49

ITEM 1A.

Risk Factors

50

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

ITEM 3.

Defaults Upon Senior Securities

52

ITEM 4.

Mine Safety Disclosures

52

ITEM 5.

Other Information

52

ITEM 6.

Exhibits

52

SIGNATURES

57

2

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

Three months ended September 30, 

Nine months ended September 30, 

 

    

2020

    

2019

    

2020

    

2019

 

(in thousands, except per share amounts)

(in thousands, except per share amounts)

Revenues:

  

  

Product revenue

$

38,772

$

37,603

$

121,223

$

103,699

Operating expenses:

 

  

 

  

 

  

 

  

Cost of sales - product

8,438

8,134

26,654

21,984

Cost of sales - intangible asset amortization

1,343

1,212

3,834

3,549

Research and development

 

62,902

 

77,896

 

201,000

 

210,674

Selling, general and administrative

 

38,636

 

41,811

 

123,136

 

137,601

Acquired in-process research and development

9,440

9,440

Other operating expenses

5,539

3,805

5,539

Total expenses

 

111,319

 

144,032

 

358,429

 

388,787

Operating loss

 

(72,547)

 

(106,429)

 

(237,206)

 

(285,088)

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(6,859)

 

(5,278)

 

(23,160)

 

(12,684)

Foreign currency gain (loss)

 

633

 

(229)

 

(102)

 

(648)

Gain on extinguishment of debt

18,480

18,480

Loss on convertible senior notes conversion

(7,791)

Loss on extinguishment of debt

(3,277)

Legal settlement loss

(1,750)

(26,750)

Other income

 

79

 

781

 

1,160

 

5,081

Other income (expense), net

 

(6,147)

 

12,004

 

(33,170)

 

(16,521)

Loss before income taxes

 

(78,694)

 

(94,425)

 

(270,376)

 

(301,609)

Income tax benefit

 

18

 

350

 

122

 

686

Net loss

(78,676)

(94,075)

(270,254)

(300,923)

Other comprehensive income (loss):

 

  

  

 

  

 

  

  

 

  

  

Foreign currency translation adjustments, net of tax

 

254

  

 

(143)

 

212

  

 

(149)

  

Net unrealized (loss) gain on available-for-sale securities, net of tax

 

  

 

(68)

 

(6)

  

 

84

  

Other comprehensive income (loss):

 

254

  

 

(211)

 

206

  

 

(65)

  

Comprehensive loss

$

(78,422)

$

(94,286)

$

(270,048)

$

(300,988)

Loss per basic and diluted common share:

Basic and diluted net loss per common share

$

(0.89)

$

(1.72)

$

(3.37)

$

(5.62)

Basic and diluted weighted average common shares outstanding

 

88,255

 

54,707

80,153

 

53,549

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

CLOVIS ONCOLOGY, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except for share amounts)

September 30, 

December 31, 

    

2020

    

2019

 

ASSETS

 

  

  

Current assets:

 

  

  

Cash and cash equivalents

$

224,702

$

161,833

Accounts receivable, net

20,265

20,562

Inventories, net

24,626

26,519

Available-for-sale securities

 

 

134,826

Prepaid research and development expenses

 

3,418

 

3,881

Other current assets

 

16,268

 

18,847

Total current assets

 

289,279

 

366,468

Inventories

109,448

98,053

Deposit on inventory

 

 

12,350

Property and equipment, net

 

12,808

 

15,287

Right-of-use assets, net

31,262

28,141

Intangible assets, net

 

67,086

 

62,920

Goodwill

 

63,074

 

63,074

Other assets

 

20,100

 

23,311

Total assets

$

593,057

$

669,604

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

35,495

$

32,237

Accrued research and development expenses

 

43,084

 

53,214

Lease liabilities

4,975

5,405

Other accrued expenses

 

40,404

 

42,228

Total current liabilities

 

123,958

 

133,084

Long-term lease liabilities - less current portion

32,652

29,479

Convertible senior notes

 

505,278

 

644,751

Borrowings under financing agreement

92,108

34,991

Other long-term liabilities

 

2,427

 

1,556

Total liabilities

 

756,423

 

843,861

Commitments and contingencies (Note 15)

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2020 and December 31, 2019

 

 

Common stock, $0.001 par value per share, 200,000,000 shares authorized at September 30, 2020 and December 31, 2019, respectively; 88,309,067 and 54,956,341 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

88

 

55

Additional paid-in capital

 

2,394,975

 

2,114,068

Accumulated other comprehensive loss

 

(44,659)

 

(44,865)

Accumulated deficit

 

(2,513,770)

 

(2,243,515)

Total stockholders' deficit

 

(163,366)

 

(174,257)

Total liabilities and stockholders' equity (deficit)

$

593,057

$

669,604

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Common Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(in thousands, except for share amounts)

January 1, 2020

54,956,341

$

55

$

2,114,068

$

(44,865)

$

(2,243,515)

$

(174,257)

Exercise of stock options

759

 

 

2

 

 

 

2

Issuance of common stock from vesting of restricted stock units

662,323

Share-based compensation expense

 

 

12,961

 

 

 

12,961

Net unrealized gain on available-for-sale securities

 

 

 

78

 

 

78

Foreign currency translation adjustments

 

 

 

(103)

 

 

(103)

Convertible senior notes conversion

17,877,164

18

133,640

133,658

Net loss

 

 

 

 

(99,332)

 

(99,332)

March 31, 2020

73,496,587

73

2,260,671

(44,890)

(2,342,847)

(126,993)

Exercise of stock options

6,661

 

 

(41)

 

 

 

(41)

Issuance of common stock from vesting of restricted stock units

113,461

Issuance of common stock under employee stock purchase plan

158,126

907

907

Share-based compensation expense

 

 

13,313

 

 

 

13,313

Net unrealized loss on available-for-sale securities

 

 

 

(84)

 

 

(84)

Foreign currency translation adjustments

 

 

 

61

 

 

61

Issuance of common stock, net of issuance costs

11,090,000

11

83,416

83,427

Convertible senior notes conversion

3,331,870

4

24,278

24,282

Net loss

 

 

 

 

(92,247)

 

(92,247)

June 30, 2020

88,196,705

88

2,382,544

(44,913)

(2,435,094)

(97,375)

Exercise of stock options

 

 

 

 

 

Issuance of common stock from vesting of restricted stock units

112,362

Share-based compensation expense

 

 

12,491

 

 

 

12,491

Net unrealized gain (loss)on available-for-sale securities

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

254

 

 

254

Other financing costs

(60)

(60)

Net loss

 

 

 

 

(78,676)

 

(78,676)

September 30, 2020

88,309,067

$

88

$

2,394,975

$

(44,659)

$

(2,513,770)

$

(163,366)

5

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Common Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(in thousands, except for share amounts)

January 1, 2019

52,797,516

$

53

$

2,034,142

$

(44,634)

$

(1,843,092)

$

146,469

Exercise of stock options

83,132

 

 

1,093

 

 

 

1,093

Issuance of common stock from vesting of restricted stock units

113,402

Share-based compensation expense

 

 

13,639

 

 

 

13,639

Net unrealized gain on available-for-sale securities

 

 

 

75

 

 

75

Foreign currency translation adjustments

 

 

 

(5)

 

 

(5)

Net loss

 

 

 

 

(86,420)

 

(86,420)

March 31, 2019

52,994,050

53

2,048,874

(44,564)

(1,929,512)

74,851

Exercise of stock options

20,741

 

 

223

 

 

 

223

Issuance of common stock from vesting of restricted stock units

63,413

Issuance of common stock under employee stock purchase plan

92,275

1,166

1,166

Share-based compensation expense

 

 

14,130

 

 

 

14,130

Net unrealized gain on available-for-sale securities

 

 

 

77

 

 

77

Foreign currency translation adjustments

 

 

 

(1)

 

 

(1)

Net loss

 

 

 

 

(120,426)

 

(120,426)

June 30, 2019

53,170,479

$

53

$

2,064,393

$

(44,488)

$

(2,049,938)

$

(29,980)

Exercise of stock options

84,482

 

 

45

 

 

 

45

Issuance of common stock from vesting of restricted stock units

68,506

Share-based compensation expense

 

 

13,979

 

 

 

13,979

Net unrealized loss on available-for-sale securities

 

 

 

(68)

 

 

(68)

Foreign currency translation adjustments

 

 

 

(143)

 

 

(143)

Litigation settlement

1,482,058

2

22,745

22,747

Net loss

 

 

 

 

(94,075)

 

(94,075)

September 30, 2019

54,805,525

$

55

$

2,101,162

$

(44,699)

$

(2,144,013)

$

(87,495)

See accompanying Notes to Unaudited Consolidated Financial Statements

6

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine months ended September 30, 

 

    

2020

    

2019

 

 

 

Operating activities

  

 

  

Net loss

$

(270,254)

$

(300,923)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

Share-based compensation expense

 

38,765

 

41,748

Depreciation and amortization

 

6,147

 

5,727

Amortization of premiums and discounts on available-for-sale securities

 

(174)

 

(1,269)

Amortization of debt issuance costs

 

2,068

 

2,070

Write-off of debt issuance costs related to convertible senior notes transactions

4,344

Gain on extinguishment of debt

(18,480)

Loss on convertible senior notes conversion

7,791

Loss on extinguishment of debt

3,277

Legal settlement loss

22,747

Acquired in-process research and development

9,440

Loss on sale of property and equipment

783

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

315

(3,952)

Inventory

8,694

(22,952)

Prepaid and accrued research and development expenses

 

(8,270)

 

13,293

Other operating assets and liabilities

 

4,655

 

(5,979)

Accounts payable

 

(2,247)

 

2,384

Other accrued expenses

 

8,214

 

1,895

Net cash used in operating activities

 

(196,675)

 

(253,468)

Investing activities

 

  

 

  

Purchases of property and equipment

 

(94)

 

(2,887)

Proceeds from sale of property and equipment

275

Purchases of available-for-sale securities

 

(9,962)

 

(335,104)

Sales of available-for-sale securities

144,644

480,097

Acquired in-process research and development - milestone payment

 

(8,000)

 

(15,750)

Net cash provided by investing activities

 

126,588

 

126,631

Financing activities

 

  

 

  

Proceeds from sale of common stock, net of issuance costs

246,668

Proceeds from issuance of convertible senior notes, net of issuance costs

254,965

Payment of convertible senior notes

(164,443)

Extinguishment of convertible senior notes

(169,853)

Proceeds from borrowings under ATHENA financing agreement

49,963

19,044

Proceeds from the exercise of stock options and employee stock purchases

 

868

 

2,526

Payments on finance leases

(1,092)

Payments on other long-term liabilities

(156)

Net cash provided by financing activities

 

131,808

 

106,682

Effect of exchange rate changes on cash and cash equivalents

 

1,148

 

(240)

Increase (decrease) in cash and cash equivalents

 

62,869

 

(20,395)

Cash and cash equivalents at beginning of period

 

161,833

 

221,876

Cash and cash equivalents at end of period

$

224,702

$

201,481

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

10,200

$

8,640

Non-cash investing and financing activities:

 

  

 

  

Vesting of restricted stock units

$

6,885

$

4,735

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

CLOVIS ONCOLOGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Clovis Oncology, Inc. (together with its consolidated subsidiaries, the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use. 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 and since 2016 we have also marketed and sold products.

Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is marketed in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer and also an indication specific to metastatic castration-resistant prostate cancer (“mCRPC”). The initial indication received approval from the United States Food and Drug Administration (“FDA”) in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.

In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, we have launched Rubraca in each of Germany, United Kingdom, Italy, France and Spain.

In May 2020, the FDA approved Rubraca tablets for the treatment of adult patients with a deleterious BRCA mutation (germline and/or somatic)-associated mCRPC who have been treated with androgen receptor-directed therapy and a taxane-based chemotherapy. The FDA approved this indication under accelerated approval based on objective response rate and duration of response data from the multi-center, single arm TRITON2 clinical trial. We have launched Rubraca for prostate cancer in the U.S. Continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. The TRITON3 clinical trial is expected to serve as the confirmatory study for the Rubraca accelerated approval in mCRPC. In August 2020, the FDA approved the use of Foundation Medicine’s plasma diagnostic detection of deleterious BRCA mutation (germline and/or somatic) to select mCRPC patients for treatment with Rubraca.

Beyond our labeled indications, we have a clinical development program underway to further evaluate Rubraca in a variety of solid tumor types, either as monotherapy or in combination with other agents, including several studies as part of our ongoing clinical collaboration with Bristol Myers Squibb Company (“Bristol Myers Squibb”) to evaluate its immunotherapy OPDIVO® (nivolumab) in combination with Rubraca. We initiated the Phase 2 LODESTAR study in December 2019 to evaluate Rubraca in homologous recombination repair genes across tumor types. The study is

8

evaluating rucaparib as monotherapy treatment in patients with recurrent solid tumors associated with a deleterious mutation in homologous recombination repair genes. Based on our interactions with the FDA, we believe that this study may be registration-enabling for a targeted gene- and tumor-agnostic label, if data from the trial support the potential for an accelerated approval. Assuming enrollment in this study continues as planned, we may potentially file a supplemental New Drug Application with the FDA for this indication in the second half of 2021. We hold worldwide rights to Rubraca.

In addition to Rubraca, we have a second product candidate currently in clinical development. Lucitanib is an investigational, oral, potent angiogenesis inhibitor which inhibits vascular endothelial growth factor receptors 1 through 3 (“VEGFR1-3”), platelet-derived growth factor receptors alpha and beta (“PDGFR α/β”) and fibroblast growth factor receptors 1 through 3 (“FGFR1-3”). We believe that data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol Myers Squibb. Encouraging data of VEGF and PARP inhibitors in combination also supports the evaluation of lucitanib combined with Rubraca. Thus, we have two Phase 1b/2 combination studies involving lucitanib underway, which consist of the following: the Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in advanced solid tumors and gynecologic cancers, which is currently enrolling patients in the Phase 2 part of the study; and an arm of the Clovis-sponsored SEASTAR study evaluating lucitanib in combination with Rubraca in advanced solid tumors and ovarian cancer. We expect to present interim data from the Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab at medical meetings in 2021. We hold the global (excluding China) development and commercialization rights for lucitanib.

In September 2019, we entered into a license and collaboration agreement with 3B Pharmaceuticals GmbH (“3BP”) to develop a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast-activating protein alpha (“FAP”).

Following completion of preclinical work to support an investigational new drug application (“IND”) for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286, we plan to conduct a broad clinical development program. We anticipate submitting two INDs for FAP-2286 for use as imaging and treatment agents, respectively, in Q4 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent with expansion cohorts planned in multiple tumor types as part of a global development program. The FAP-targeting imaging agent will be utilized to identify tumors that contain FAP for treatment in the Phase 1 clinical study, which we anticipate initiating in 2021. In addition to our own planned studies, an academic institution in the U.S. is sponsoring a separate imaging-only study with FAP-2286 to evaluate FAP expression in multiple tumor types; their IND has been authorized and they expect to initiate their study in the near term. We hold U.S. and global rights to FAP-2286, excluding Europe (defined to include Russia, Turkey and Israel), where 3BP retains rights. We also have agreed with 3BP to collaborate on a discovery program directed to up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

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 that, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the periods presented herein. 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, 2019 (“2019 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.

9

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 revenue deductions, 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 achieving a level of revenue from Rubraca 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.

Based on current estimates, we believe that our cash, cash equivalents, available-for-sale securities and liquidity available under our financing agreement related to our ATHENA trial will allow us to fund our operating plan through at least the next 12 months.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through the issuance of an Accounting Standards Update (“ASU”).

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2016-13 as of January 1, 2020. Upon the adoption of ASU 2016-13 on January 1, 2020, we are required to determine whether a decline in the fair value below the amortized cost basis (i.e., impairment) of an available-for-sale debt is security is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in accumulated other comprehensive loss, net of applicable taxes. When evaluating an impairment, entities may not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist. We applied this impairment model for available-for-sale debt securities as of January 1, 2020 and no impairment was recognized upon adoption. In addition, no impairment was recognized for the three and nine months ended September 30, 2020. We recognized a minimal allowance for credit losses related to our accounts receivable at September 30, 2020. The adoption of ASU 2016-13 did not materially impact our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted ASU 2018-02 as of January 1, 2020 and there was no material impact on our consolidated financial statements and related disclosures.

Recently Adopted Accounting Standards

In August 2020, the FASB issued guidance that simplifies an issuer’s accounting for debt and equity instruments. The guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early application is permitted. We plan to adopt this guidance on January 1, 2022. We will evaluate the impact this guidance may have on our consolidated financial statements and related disclosures as the adoption date approaches.

10

Revenue Recognition

We are currently approved to sell Rubraca in the United States and Europe markets. We distribute our product 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 have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. 

Product Revenue

Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.

Reserves for Variable Consideration

 

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the 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 our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. 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.

Government Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, the Tricare health program and various European National Health Service, Sick Fund and Clawback programs. 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 reserves are recorded in the same period the related 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 Sheets. Our rebate estimates are based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on the expected utilization from historical data we have accumulated since the Rubraca product launch.

GPO and Payor Rebates. We contract with various private payor organizations and group purchasing organizations (“GPO”), primarily insurance companies, pharmacy benefit managers and hospitals, for the payment of rebates with respect to utilization of our products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service (“PHS”) organizations and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the healthcare provider. These reserves are established in the same period that the related 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 and known sales to specialty distributors adjusted for the estimated utilization by healthcare providers.

11

Discounts and Fees. Our payment terms are generally 30 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.

Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation provided by third-party administrators at month end.

     

Returns. Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or product that is six months beyond the expiration date. To date, we have had minimal product returns and we currently do not have an accrual for product returns. We will continue to assess our estimate for product returns based on additional historical experience.

Cost of Sales – Product

Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.

Cost of Sales – Intangible Asset Amortization

Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.

Accounts Receivable

We provide an allowance for credit losses based on experience and specifically identified risks. Accounts receivable are charged off against the allowance when we determine that recovery is unlikely and we cease collection efforts. At September 30, 2020, we recognized a minimal allowance for credit losses related to our accounts receivable.

Inventory

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. Inventories include active pharmaceutical ingredient (“API”), contract manufacturing costs and overhead allocations. We began capitalizing incurred inventory related costs upon the regulatory approval of Rubraca. Prior to the regulatory approval of Rubraca, we incurred costs for the manufacture of the drug that could potentially be available to support the commercial launch of Rubraca and all such costs were recognized as research and development expense.

We regularly analyze our inventory levels for excess quantities and obsolescence (expiration), taking into account factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf-life of Rubraca. Rubraca finished goods have a shelf-life of four years from the date of manufacture. We expect to sell the finished goods prior to expiration. The API currently has a shelf-life of four years from the date of manufacture but can be retested at an immaterial cost with no expected reduction in potency, thereby extending its shelf-life as needed. We expect to consume substantially all of the API over a period of approximately seven years based on our long-range sales projections of Rubraca.

We write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements. Expired inventory would be disposed of and the related costs would be written off as cost of product revenue. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories. Long-term inventories primarily consist of API.

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API is currently produced by Lonza. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory. In addition, we currently manufacture Rubraca finished goods with a single third-party manufacturer. The disruption or termination of the supply of API or the disruption or termination of the manufacturing of our commercial products could have a material adverse effect on our business, financial position and results of operations. API that is written off due to damage and certain costs related to our dedicated production train at Lonza are included in Other Operating Expenses in the Consolidated Statements of Operations and Comprehensive Loss.

Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.

Our other significant accounting policies are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our 2019 Form 10-K.

3. Financial Instruments and 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 and U.S. treasury securities. We do not have Level 1 liabilities.

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 or liabilities that are measured at fair value on a recurring basis.

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, 2020

Assets:

Money market

$

147,918

$

147,918

$

$

U.S. treasury securities

 

 

 

 

Total assets at fair value

$

147,918

$

147,918

$

$

December 31, 2019

Assets:

Money market

$

61,882

$

61,882

$

$

U.S. treasury securities

 

189,736

 

54,910

 

134,826

 

Total assets at fair value

$

251,618

$

116,792

$

134,826

$

There were no liabilities that were measured at fair value on a recurring basis as of September 30, 2020. There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during three and nine months ended September 30, 2020.

Financial instruments not recorded at fair value include our convertible senior notes. At September 30, 2020, the carrying amount of the 2021 Notes was $64.1 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $59.4 million. At September 30, 2020, the carrying amount of the 2024 Notes was $147.2 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $145.9 million. At September 30, 2020, the carrying amount of the 2025 Notes was $293.9 million, which

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represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $204.2 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 10, Long-term Debt for discussion of the convertible senior notes. The carrying amounts of accounts payable and accrued expenses approximate their fair value due to their short-term maturities.

4. Available-for-Sale Securities

We did not have available-for-sale securities as of September 30, 2020.

As of December 31, 2019, 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

$

134,826

$

$

$

134,826

5. Inventories

The following table presents current and long-term inventories as of September 30, 2020 and December 31, 2019:

September 30, 

December 31,

    

2020

    

2019

Work-in-process

 

$

101,711

 

$

104,139

Finished goods, net

 

32,363

 

20,433

Total inventories

 

$

134,074

 

$

124,572

At September 30, 2020, we had $24.6 million of current inventory and $109.4 million of long-term inventory.

6. Other Current Assets

Other current assets were comprised of the following (in thousands):

September 30, 

December 31, 

    

2020

    

2019

 

Prepaid insurance

$

1,338

$

505

Prepaid IT

1,210

698

Prepaid variable considerations

1,526

550

Prepaid expenses - other

 

2,692

 

2,821

Value-added tax ("VAT") receivable

8,054

11,920

Receivable - other

 

1,342

 

2,176

Other

 

106

 

177

Total

$

16,268

$

18,847

7. Intangible Assets and Goodwill

Intangible assets related to capitalized milestones under license agreements consisted of the following (in thousands):

September 30, 

December 31,

2020

    

2019

Intangible asset - milestones

$

79,850

$

71,850

Accumulated amortization

 

(12,764)

 

(8,930)

Total intangible asset, net

$

67,086

$

62,920

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The increase in our intangible asset – milestones since December 31, 2019 is due to an $8.0 million milestone payment to Pfizer related to the May 2020 FDA approval. See Note 13, License Agreements for further discussion of this approval.

The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031 in Europe and 2035 in the U.S.

We recorded amortization expense of $1.3 million and $3.8 million related to capitalized milestone payments during the three and nine months ended September 30, 2020, respectively. We recorded amortization expense of $1.2 million and $3.5 million related to capitalized milestone payments during the three and nine months ended September 30, 2019, respectively. Amortization expense is included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.

Estimated future amortization expense associated with intangibles is expected to be as follows (in thousands):

2020 (remaining three months)

$

1,343

2021

5,371

2022

5,371

2023

5,371

2024

5,371

Thereafter

44,259

$

67,086

8. Other Accrued Expenses

Other accrued expenses were comprised of the following (in thousands):

September 30, 

December 31, 

    

2020

    

2019

 

Accrued personnel costs

$

15,090

$

16,915

Accrued interest payable for convertible senior notes

 

2,730

 

5,903

Income tax payable

1,063

3,505

Accrued corporate legal fees and professional services

441

310

Accrued royalties

5,907

6,038

Accrued variable considerations

8,969

5,748

Purchase of API received not yet invoiced

41

Accrued expenses - other

 

6,163

 

3,809

Total

$

40,404

$

42,228

9. Lease

At t