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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, 2021.

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 29, 2021 was 129,979,097.

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, 2021 and 2020

3

Consolidated Balance Sheets — as of September 30, 2021 and December 31, 2020

4

Consolidated Statements of Stockholders’ Equity (Deficit) – for the three and nine months ended September 30, 2021 and 2020

5

Consolidated Statements of Cash Flows — for the nine months ended September 30, 2021 and 2020

7

Notes to Unaudited Consolidated Financial Statements

8

ITEM 2.

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

28

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

45

ITEM 4.

Controls and Procedures

46

PART II. Other Information

47

ITEM 1.

Legal Proceedings

47

ITEM 1A.

Risk Factors

47

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

ITEM 3.

Defaults Upon Senior Securities

47

ITEM 4.

Mine Safety Disclosures

47

ITEM 5.

Other Information

47

ITEM 6.

Exhibits

47

SIGNATURES

52

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, 

 

    

2021

    

2020

    

2021

    

2020

 

(in thousands, except per share amounts)

(in thousands, except per share amounts)

Revenues:

  

  

Product revenue

$

37,916

$

38,772

$

112,789

$

121,223

Operating expenses:

 

  

 

  

 

  

 

  

Cost of sales - product

8,506

8,438

25,068

26,654

Cost of sales - intangible asset amortization

1,343

1,343

4,028

3,834

Research and development

 

46,222

 

62,902

 

144,786

 

201,000

Selling, general and administrative

 

32,196

 

38,636

 

95,055

 

123,136

Acquired in-process research and development

3,272

5,477

Other operating expenses

3,841

11,431

3,805

Total expenses

 

95,380

 

111,319

 

285,845

 

358,429

Operating loss

 

(57,464)

 

(72,547)

 

(173,056)

 

(237,206)

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(8,786)

 

(6,859)

 

(25,593)

 

(23,160)

Foreign currency (loss) gain

 

(1,248)

 

633

 

(2,001)

 

(102)

Loss on convertible senior notes conversion

(7,791)

Loss on extinguishment of debt

(3,277)

Other income

 

101

 

79

 

392

 

1,160

Other income (expense), net

 

(9,933)

 

(6,147)

 

(27,202)

 

(33,170)

Loss before income taxes

 

(67,397)

 

(78,694)

 

(200,258)

 

(270,376)

Income tax (expense) benefit

 

(13)

 

18

 

125

 

122

Net loss

(67,410)

(78,676)

(200,133)

(270,254)

Other comprehensive income (loss):

 

  

  

 

  

 

  

  

 

  

  

Foreign currency translation adjustments, net of tax

 

415

  

 

254

 

349

  

 

212

  

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

 

  

 

 

  

 

(6)

  

Other comprehensive income (loss):

 

415

  

 

254

 

349

  

 

206

  

Comprehensive loss

$

(66,995)

$

(78,422)

$

(199,784)

$

(270,048)

Loss per basic and diluted common share:

Basic and diluted net loss per common share

$

(0.56)

$

(0.89)

$

(1.80)

$

(3.37)

Basic and diluted weighted average common shares outstanding

 

121,217

 

88,255

111,377

 

80,153

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

CLOVIS ONCOLOGY, INC.

Consolidated Balance Sheets

(In thousands, except for share amounts)

September 30, 

2021

December 31, 

    

(Unaudited)

    

2020

 

ASSETS

 

  

  

Current assets:

 

  

  

Cash and cash equivalents

$

171,949

$

240,229

Accounts receivable, net

25,777

26,511

Inventories, net

17,277

30,714

Prepaid research and development expenses

 

2,491

 

4,245

Other current assets

 

13,172

 

9,130

Total current assets

 

230,666

 

310,829

Inventories

109,100

104,123

Property and equipment, net

 

7,161

 

12,085

Right-of-use assets, net

20,020

30,438

Intangible assets, net

 

61,714

 

65,743

Goodwill

 

63,074

 

63,074

Other assets

 

16,262

 

19,262

Total assets

$

507,997

$

605,554

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

23,825

$

26,692

Accrued research and development expenses

 

40,467

 

43,500

Lease liabilities

3,480

5,330

Convertible senior notes

 

 

64,198

Other accrued expenses

 

44,921

 

45,208

Total current liabilities

 

112,693

 

184,928

Long-term lease liabilities - less current portion

20,605

31,640

Convertible senior notes - less current portion

 

436,263

 

434,846

Borrowings under financing agreement

163,272

110,917

Other long-term liabilities

 

625

 

1,971

Total liabilities

 

733,458

 

764,302

Commitments and contingencies (Note 14)

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020

 

 

Common stock, $0.001 par value per share, 200,000,000 shares authorized at September 30, 2021 and December 31, 2020, respectively; 127,973,007 and 103,699,109 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

 

128

 

104

Additional paid-in capital

 

2,631,228

 

2,498,179

Accumulated other comprehensive loss

 

(43,955)

 

(44,304)

Accumulated deficit

 

(2,812,862)

 

(2,612,727)

Total stockholders' deficit

 

(225,461)

 

(158,748)

Total liabilities and stockholders' deficit

$

507,997

$

605,554

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, 2021

103,699,109

$

104

$

2,498,179

$

(44,304)

$

(2,612,727)

$

(158,748)

Exercise of stock options

5,609

 

 

27

 

 

 

27

Issuance of common stock from vesting of restricted stock units

853,239

1

(1)

Share-based compensation expense

 

 

4,039

 

 

 

4,039

Foreign currency translation adjustments

 

 

 

(80)

 

 

(80)

Net loss

 

 

 

 

(66,277)

 

(66,277)

March 31, 2021

104,557,957

105

2,502,244

(44,384)

(2,679,004)

(221,039)

Exercise of stock options

1,478

 

 

9

 

 

 

9

Issuance of common stock from vesting of restricted stock units

193,936

Issuance of common stock under employee stock purchase plan

158,382

647

647

Share-based compensation expense

 

 

7,362

 

 

 

7,362

Foreign currency translation adjustments

 

 

 

14

 

 

14

Issuance of common stock, net of issuance costs

13,492,231

13

72,459

72,472

Net loss

 

 

 

 

(66,448)

 

(66,448)

June 30, 2021

118,403,984

118

2,582,721

(44,370)

(2,745,452)

(206,983)

Exercise of stock options

 

 

 

 

 

Issuance of common stock from vesting of restricted stock units

189,047

1

1

Share-based compensation expense

 

 

7,001

 

 

 

7,001

Foreign currency translation adjustments

 

 

 

415

 

 

415

Issuance of common stock, net of issuance costs

9,379,976

9

41,506

41,515

Other financing costs

Net loss

 

 

 

 

(67,410)

 

(67,410)

September 30, 2021

127,973,007

$

128

$

2,631,228

$

(43,955)

$

(2,812,862)

$

(225,461)

5

    

    

    

    

    

    

    

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

Foreign currency translation adjustments

 

 

 

(103)

 

 

(103)

Net unrealized gain on available-for-sale securities

 

 

 

78

 

 

78

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

Foreign currency translation adjustments

 

 

 

61

 

 

61

Net unrealized loss on available-for-sale securities

 

 

 

(84)

 

 

(84)

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)

Issuance of common stock from vesting of restricted stock units

112,362

Share-based compensation expense

 

 

12,491

 

 

 

12,491

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)

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, 

 

    

2021

    

2020

 

 

 

Operating activities

  

 

  

Net loss

$

(200,133)

$

(270,254)

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

 

 

  

Share-based compensation expense

 

18,402

 

38,765

Depreciation and amortization

 

6,498

 

6,147

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

 

 

(174)

Amortization of debt issuance costs

 

1,876

 

2,068

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

4,344

Loss on convertible senior notes conversion

7,791

Loss on extinguishment of debt

3,277

Other

1,300

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

399

315

Inventory

8,988

8,694

Prepaid and accrued research and development expenses

 

164

 

(8,270)

Other operating assets and liabilities

 

(4,210)

 

4,655

Accounts payable

 

(2,828)

 

(2,247)

Other accrued expenses

 

14,830

 

8,214

Net cash used in operating activities

 

(154,714)

 

(196,675)

Investing activities

 

  

 

  

Purchases of property and equipment

 

(243)

 

(94)

Purchases of available-for-sale securities

 

 

(9,962)

Sales of available-for-sale securities

144,644

Acquired in-process research and development - milestone payment

(8,000)

Net cash (used in) provided by investing activities

 

(243)

 

126,588

Financing activities

 

  

 

  

Proceeds from sale of common stock, net of issuance costs

113,988

246,668

Payment of convertible senior notes

(64,418)

(164,443)

Proceeds from borrowings under financing agreement

37,730

49,963

Proceeds from the exercise of stock options and employee stock purchases

 

683

 

868

Payments on finance leases

(780)

(1,092)

Payments on other long-term liabilities

(213)

(156)

Net cash provided by financing activities

 

86,990

 

131,808

Effect of exchange rate changes on cash and cash equivalents

 

(313)

 

1,148

(Decrease) increase in cash and cash equivalents

 

(68,280)

 

62,869

Cash and cash equivalents at beginning of period

 

240,229

 

161,833

Cash and cash equivalents at end of period

$

171,949

$

224,702

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

9,196

$

10,200

Non-cash investing and financing activities:

 

  

 

  

Vesting of restricted stock units

$

9,193

$

6,885

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

CLOVIS ONCOLOGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business

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 two segments. 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 2020, the FDA approved Rubraca for the treatment of adult patients with mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who have been treated previously with androgen receptor-directed therapy and a taxane-based chemotherapy and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. The FDA approved this indication under accelerated approval based on objective response rate and duration of response data from the TRITON2 clinical trial. We launched Rubraca for this indication in the U.S. following receipt of the approval. As an accelerated approval, 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 Rubraca’s approval in mCRPC as well as a potential second-line label expansion. TRITON3 is a phase 3 study evaluating Rubraca versus physician’s choice of chemotherapy or second-line androgen deprivation therapy based on progression-free survival (“PFS”) in mCRPC patients with BRCA and ATM mutations. We anticipate the initial data readout from TRITON3 in the second quarter of 2022. The timing for the TRITON3 data readout is contingent upon the occurrence of the protocol-specified number of progression events.

In Europe, the European Commission granted a conditional marketing authorization in May 2018 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 Europe for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, Rubraca has been launched in each of Germany, United Kingdom, Italy, France, Spain, the Netherlands and Switzerland.

8

In December 2020, Rubraca met the primary study endpoint of significantly improving PFS versus chemotherapy in the ARIEL4 confirmatory study. An interim analysis of overall survival, a secondary endpoint in the study in which 51% of events had occurred in the intent-to-treat population, showed a trend toward an overall survival advantage in the chemotherapy arm, but was confounded by the high rate (64%) of per-protocol crossover to Rubraca following progression on chemotherapy. ARIEL4 study results were presented at a medical congress meeting in March 2021. ARIEL4 is a phase 3 multicenter, randomized study of Rubraca versus chemotherapy, which enrolled relapsed ovarian cancer patients with BRCA mutations (inclusive of germline and/or somatic) who had received two or more prior lines of chemotherapy. Completion of ARIEL4 is a post-marketing commitment in the U.S. and Europe.

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 anticipate initial data of Rubraca monotherapy versus placebo from our ATHENA study in the first quarter of 2022 based on event-based projections, with results of the separate analysis of Rubraca in combination with Opdivo anticipated in the second half of 2022 based on protocol-defined assumptions. However, the actual timing of ATHENA data readouts is dependent on the occurrence of the protocol-specified number of progression events. The three anticipated data readouts, ATHENA monotherapy, ATHENA combination and TRITON3 discussed above, provide the potential to obtain approvals that reach larger patient populations in earlier lines of therapy for ovarian and prostate cancers, in which Rubraca is currently approved in later-line indications. Following availability of top-line monotherapy results from ATHENA, we plan to file an sNDA and a variation to the European MAA, and we plan to file an sNDA soon after results from TRITON3 are available, assuming, in each case, that data support such steps.

We initiated the phase 2 LODESTAR study in December 2019 to evaluate Rubraca as monotherapy treatment in patients with recurrent solid tumors associated with a deleterious mutation in homologous recombination repair genes. Based on initial results from the ongoing study, we see encouraging evidence of activity in patients with a biallelic tumor mutation of BRCA or other target genes. Importantly, for BRCA-mutated breast and pancreatic and certain other tumors types, the majority of tumors have biallelic loss. Based on these early data, we continue to evaluate the potential development timeline and regulatory path.

We hold worldwide rights to Rubraca.

Pursuant to our license and collaboration agreement with 3B Pharmaceuticals GmbH (“3BP”), entered into in September 2019, we have initiated development of a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast-activating protein (“FAP”). PTRT uses cancer cell-targeting peptides to deliver radiation-emitting radionuclides specifically to tumors. We have completed sufficient 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. Accordingly, we submitted two INDs for FAP-2286 for use as imaging and treatment agents in December 2020 to support an initial phase 1 study to determine the dose, schedule 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 FDA cleared the two INDs and we initiated the phase 1 LuMIERE clinical study in June 2021.

We hold U.S. and global rights to FAP-2286, excluding Europe (defined to include Russia, Turkey and Israel), where 3BP retains rights. We are also collaborating with 3BP on a discovery program directed to up to three additional, undisclosed targets for targeted radionuclide therapy, to which we would have global rights for any resulting product candidates. We expect to file an IND for a second candidate from this discovery program in the second half of 2022.

Lucitanib, our product candidate currently in clinical development, 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”). Lucitanib inhibits the same three pathways as Lenvima® (lenvatinib), which has received an FDA approval for use in certain populations of patients with endometrial cancer in combination with Keytruda® (pembrolizumab), a PD-1 inhibitor. This, together with preclinical data for lucitanib in combination with a PD-1 inhibitor that demonstrated enhanced anti-tumor activity compared to that of single agents, 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.

9

We hold the global (excluding China) development and commercialization rights for lucitanib.

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, 2020 (“2020 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.

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 and liquidity available under our financing agreement related to our ATHENA trial, together with current estimates for revenues generated by sales of Rubraca, will allow us to fund our operating plan through at least the next 12 months.

2. Summary of Significant Accounting Policies

Recently Issued 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 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 or a current liability. 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 GPOs, 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.

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 begin capitalizing incurred inventory related costs upon regulatory approval. Prior to regulatory approval, incurred costs for the manufacture of the drugs that could potentially be available to support the commercial launch of our products are recognized as research and development expense.

We regularly analyze our inventory levels for excess quantities and obsolescence (expiration), considering 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.

12

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 production train at Lonza are included in Other Operating Expenses on 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.

Segment Information

We have two operating and reportable segments, U.S. and ex-U.S., based on product revenue by geographic areas. We designated our reporting segments based on the internal reporting used by the Chief Operating Decision Maker (“CODM”), which is our Chief Executive Officer, for making decisions and assessing performance as the source of our reportable segments. The CODM allocates resources and assesses the performance of each operating segment based on product revenue by geographic areas. Accordingly, we view our business as two reportable operating segments to evaluate performance, allocate resources, set operational targets and forecast our future period financial results.

We manage our assets on a company basis, not by segments, as many of our assets are shared or commingled. Our CODM does not regularly review asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.

Research and Development Expense

Research and development costs are charged to expense as incurred and include, but are not limited to, salary and benefits, share-based compensation, clinical trial activities, drug development and manufacturing, companion diagnostic development and third-party service fees, including contract research organizations and investigative sites.

Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred and are reflected on the Consolidated Balance Sheets as prepaid or accrued research and development expenses.

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 2020 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. 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. We do not have Level 2 assets or liabilities.

Level 3:

Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets or liabilities.

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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, 2021

Assets:

Money market

$

112,932

$

112,932

$

$

Total assets at fair value

$

112,932

$

112,932

$

$

December 31, 2020

Assets:

Money market

$

147,921

$

147,921

$

$

Total assets at fair value

$

147,921

$

147,921

$

$

There were no liabilities that were measured at fair value on a recurring basis as of September 30, 2021.

Financial instruments not recorded at fair value include our convertible senior notes. At September 30, 2021, the carrying amount of the 2024 Notes (2019 Issuance) was $84.3 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $77.0 million. At September 30, 2021, the carrying amount of the 2024 Notes (2020 Issuance) was $56.7 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $51.8 million. At September 30, 2021, the carrying amount of the 2025 Notes was $295.2 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $218.7 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the convertible senior notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 9, 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. Inventories

The following table presents inventories as of September 30, 2021 and December 31, 2020 (in thousands):

September 30, 

December 31,

    

2021

    

2020

Work-in-process

 

$

92,532

 

$

102,507

Finished goods, net

 

33,845

 

32,330

Total inventories

 

$

126,377

 

$

134,837

At September 30, 2021, we had $17.3 million of current inventory and $109.1 million of long-term inventory.

5. Other Current Assets

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

September 30, 

December 31, 

    

2021

    

2020

 

Prepaid insurance

$

1,919

$

782

Prepaid IT

1,090

753

Prepaid variable considerations

470

1,191

Prepaid expenses - other

 

4,148

 

2,193

Value-added tax ("VAT") receivable

3,185

2,202

Receivable - other

 

2,295

 

1,884

Other

 

65

 

125

Total

$

13,172

$

9,130

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6. Intangible Assets and Goodwill

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

September 30, 

December 31,

2021

    

2020

Intangible asset - milestones

$

79,850

$

79,850

Accumulated amortization

 

(18,136)

 

(14,107)

Total intangible asset, net

$

61,714

$

65,743

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 $4.0 million related to capitalized milestone payments during the three and nine months ended September 30, 2021, respectively. 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. 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):

2021 (remaining three months)

$

1,343

2022

5,371

2023

5,371

2024

5,371

2025

5,371

Thereafter

38,887

$

61,714

7. Other Accrued Expenses

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

September 30, 

December 31, 

    

2021

    

2020

 

Accrued personnel costs

$

15,718

$

18,334

Accrued interest payable for convertible senior notes

 

2,609

 

2,991

Income tax payable

1,359

907

Accrued corporate legal fees and professional services

182

459

Accrued royalties

5,732

6,617

Accrued variable considerations

14,904

11,701

Accrued expenses - other

 

4,417

 

4,199

Total

$

44,921

$

45,208

8. Leases

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a

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similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values assigned to the lease components and non-lease components.

Our facilities operating leases have lease components, non-lease components and non-components, which we have separated because the non-lease components and non-components have variable lease payments and are excluded from the measurement of the lease liabilities. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

We lease all of our office facilities in the U.S. and Europe. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Prior to June 30, 2021, we had a finance lease and operating lease for certain equipment at the production train at Lonza, our non-exclusive manufacturer of the Rubraca API. Pursuant to the terms of Amendment 2 discussed in Note 14, Commitments and Contingencies, we derecognized the lease components recognized under the original agreement with Lonza. This includes the operating lease liabilities and right-of-use (“ROU”) assets, finance lease liabilities and ROU assets and leasehold improvement assets and liability. The derecognition of the lease components, payment of $1.1 million to Lonza and derecognition of fixed assets related to our Lonza production train resulted in a loss of $0.3 million, which is included in other operating expenses on the Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2021. We also evaluated the prepaid manufacturing costs for impairment and determined that there was no impairment for the nine months ended September 30, 2021.

The components of lease expense and related cash flows were as follows (in thousands):

Three months ended September 30, 

Three months ended September 30, 

    

2021

    

2020

Lease cost

Finance lease cost:

Amortization of right-of-use assets

$

$

474

Interest on lease liabilities

 

 

201

Operating lease cost

 

1,342

 

1,275

Short-term lease cost

 

81

 

88

Variable lease cost

476

503

Total lease cost

$

1,899

$

2,541

Operating cash flows from finance leases

$

$

201

Operating cash flows from operating leases

$

1,342

$

1,275

Financing cash flows from finance leases

$

$

371

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Nine months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

Lease cost

Finance lease cost:

Amortization of right-of-use assets

$

947

$

1,421

Interest on lease liabilities

 

363

 

624

Operating lease cost

 

3,875

 

3,400

Short-term lease cost

 

241

 

310

Variable lease cost

1,640

1,573

Total lease cost

$

7,066

$

7,328

Operating cash flows from finance leases

$

363

$

624

Operating cash flows from operating leases

$

3,875

$

3,400

Financing cash flows from finance leases

$

780

$

1,092

The weighted-average remaining lease term and weighted-average discount rate were as follows: