Item 1. Financial Statements
See accompanying notes to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Business
La Jolla Pharmaceutical Company (collectively with its wholly owned subsidiaries, “La Jolla” or the “Company”) is dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZA® (angiotensin II) injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. XERAVA® (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older.
As of March 31, 2022, La Jolla had $44.6 million of cash, cash equivalents and short-term investments compared to $46.7 million as of December 31, 2021. The $2.1 million decrease in cash, cash equivalents and short-term investments is primarily due to $2.5 million of net cash provided by operating activities, offset by $5.2 million in purchases of the Company’s common stock under its stock repurchase plan. Based on the Company’s current operating plans and projections, the Company expects that its existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company expects to fund future operations with existing cash or cash generated from operations.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of SEC Regulation S-X. Accordingly, certain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 9, 2022 (the “Form 10-K”). The accompanying condensed consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from these estimates. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year or any future interim or annual periods. The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of December 31, 2021 contained in the Form 10-K.
Certain amounts previously reported in the financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income, stockholders’ deficit or cash flows.
Summary of Significant Accounting Policies
During the three months ended March 31, 2022, other than the short-term investments policy described below, there have been no changes to the Company’s significant accounting policies as described in Note 2 of the Form 10-K.
Short-term investments
Short-term investments are comprised of marketable equity securities and measured at fair value on a recurring basis in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 321, Investments—Equity Securities. Any unrealized gain (loss) is recorded in other income (expense), net. Marketable equity securities are classified as Level 1 in the ASC Topic 820-10, three-tier fair value hierarchy.
5
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. The Company maintains its cash in checking and savings accounts at federally insured financial institutions in excess of federally insured limits.
During the three months ended March 31, 2022, 287 hospitals in the U.S. purchased GIAPREZA, and 471 hospitals and other healthcare organizations in the U.S. purchased XERAVA. Hospitals and other healthcare organizations generally purchase our products through a network of specialty distributors. These specialty distributors are considered our customers for accounting purposes. The Company does not believe that the loss of one of these distributors would significantly impact the ability to distribute our products, as the Company expects that sales volume would be absorbed by the remaining distributors. The following table includes the percentage of U.S. net product sales and accounts receivable balances for the Company’s three major customers, each of which comprised 10% or more of its U.S. net product sales:
|
|
U.S. Net Product Sales |
|
Accounts
Receivable |
|
|
|
Three Months Ended
March 31, 2022 |
|
|
|
As of March 31, 2022 |
|
Customer A |
|
|
36 |
% |
|
|
|
44 |
% |
Customer B |
|
|
28 |
% |
|
|
|
29 |
% |
Customer C |
|
|
29 |
% |
|
|
|
24 |
% |
Total |
|
|
93 |
% |
|
|
|
97 |
% |
Revenue Recognition
Pursuant to FASB ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when its customers obtain control of the Company’s product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations.
Product Sales
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns, rebates and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:
|
• |
Chargebacks—Chargebacks are discounts the Company provides to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to the Company’s customers. |
|
• |
Discounts—The Company offers customers various forms of incentives and consideration, including prompt-pay and other discounts. The Company estimates discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to the Company’s customers. |
|
• |
Returns—The Company offers customers a limited right of return, generally for damaged or expired product. The Company estimates returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to the Company’s customers. |
6
|
• |
Rebates—We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which product was sold. Additionally, the Company may offer customers incentives and consideration in the form of volume-based or other rebates. The estimates for rebates are recorded as a reduction of revenue on delivery to the Company’s customers. |
|
• |
Administrative Fees—The Company pays administrative fees to GPOs for services and access to data. Additionally, the Company pays an Industrial Funding Fee as part of the U.S. General Services Administration’s Federal Supply Schedules program. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency. Administrative fees are recorded as a reduction of revenue on delivery to customers. |
The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.
License and Other Revenue
We enter into out-license agreements with counterparties to develop and/or commercialize our products in territories outside of the U.S. in exchange for: (i) nonrefundable, upfront license fees; (ii) development and regulatory milestone payments; and/or (iii) sales-based royalties and milestones.
If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of progress and related revenue recognition.
At the inception of each arrangement that includes milestone and other payments, other than sales-based milestone payments and nonrefundable, upfront license fees, we evaluate whether achieving each milestone payment or other payment is considered probable and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators or where attainment of the specified event is dependent on the development activities of a third party, are not considered probable of being achieved until those approvals are received or the specified event occurs.
For arrangements that include sales-based royalties and milestone payments, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of: (i) when the related sales occur; or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.
We enter into commercial supply agreements with our out-licensees to supply our products in territories outside the U.S. in exchange for: (i) nonrefundable, upfront fees; and/or (ii) the reimbursement of manufacturing costs, plus a margin in certain cases. The Company is considered the principal in these arrangements for accounting purposes as it controls the promised goods before transferring these goods to the out-licensee. The Company recognizes revenue when out-licensees obtain control of the Company’s product, which typically occurs on delivery.
Recent Accounting Pronouncements
The Company has considered all recently issued accounting pronouncements and has concluded that there are no recently issued accounting pronouncements that may have a material impact on its results of operations, financial condition or cash flows based on current information.
7
3. Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus potential common shares. Convertible preferred stock and stock options are considered potential common shares and are included in the calculation of diluted earnings per share using the if-converted method and treasury stock method, respectively, when their effect is dilutive. Potential common shares are excluded from the calculation of diluted earnings per share when their effect is anti-dilutive.
For the three months ended March 31, 2022, there were 6.8 million potential common shares that were included in the calculation of diluted earnings per share, which consists of: (i) 6.7 million shares of common stock issuable upon conversion of existing convertible preferred stock; and (ii) 18,000 stock options. For the three months ended March 31, 2022 and 2021, there were 6.4 million and 4.1 million, respectively, of potential common shares that were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
4. Balance Sheet Details
Restricted Cash
Restricted cash as of March 31, 2022 and December 31, 2021 consisted of a $40,000 security deposit for the Company’s corporate purchasing credit card.
Inventory, Net
Inventory, net consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Raw materials |
|
$ |
1,159 |
|
|
$ |
802 |
|
Work-in-process |
|
|
4,069 |
|
|
|
3,844 |
|
Finished goods |
|
|
1,885 |
|
|
|
1,635 |
|
Total inventory, net |
|
$ |
7,113 |
|
|
$ |
6,281 |
|
As of March 31, 2022 and December 31, 2021, total inventory is recorded net of inventory reserves of $1.0 million and $0.8 million, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Refundable withholding tax |
|
$ |
3,375 |
|
|
$ |
3,375 |
|
Prepaid insurance |
|
|
359 |
|
|
|
473 |
|
Prepaid clinical costs |
|
|
188 |
|
|
|
188 |
|
Prepaid manufacturing costs |
|
|
113 |
|
|
|
113 |
|
Other prepaid expenses and current assets |
|
|
1,483 |
|
|
|
1,607 |
|
Total prepaid expenses and other current assets |
|
$ |
5,518 |
|
|
$ |
5,756 |
|
8
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Computer hardware |
|
$ |
319 |
|
|
$ |
319 |
|
Furniture and fixtures |
|
|
309 |
|
|
|
309 |
|
Software |
|
|
203 |
|
|
|
203 |
|
Total property and equipment, gross |
|
|
831 |
|
|
|
831 |
|
Accumulated depreciation and amortization |
|
|
(743 |
) |
|
|
(718 |
) |
Total property and equipment, net |
|
$ |
88 |
|
|
$ |
113 |
|
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
|
|
Useful Life |
|
March 31, |
|
|
December 31, |
|
|
|
(years) |
|
2022 |
|
|
2021 |
|
Technology |
|
10 |
|
$ |
14,000 |
|
|
$ |
14,000 |
|
Trade name |
|
10 |
|
|
1,520 |
|
|
|
1,520 |
|
Total intangible assets, gross |
|
|
|
|
15,520 |
|
|
|
15,520 |
|
Accumulated amortization |
|
|
|
|
(2,587 |
) |
|
|
(2,199 |
) |
Total intangible assets, net |
|
|
|
$ |
12,933 |
|
|
$ |
13,321 |
|
The Company recorded amortization expense of $0.4 million for each of the three months ended March 31, 2022 and 2021. The estimated aggregate amortization expense for each of the 5 succeeding years is $1.6 million.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Accrued payroll and related expenses |
|
$ |
1,000 |
|
|
$ |
1,991 |
|
Accrued royalties and in-license fees |
|
|
1,204 |
|
|
|
1,299 |
|
Accrued professional fees |
|
|
599 |
|
|
|
410 |
|
Accrued manufacturing costs |
|
|
236 |
|
|
|
232 |
|
Accrued other |
|
|
1,258 |
|
|
|
934 |
|
Total accrued expenses |
|
$ |
4,297 |
|
|
$ |
4,866 |
|
5. Paycheck Protection Program loan
On April 22, 2020, the Company entered into a promissory note for $2.3 million under the Paycheck Protection Program (the “PPP Loan”). On March 22, 2022, the U.S. Small Business Administration notified the Company that 100% of the outstanding principal and accrued interest on the PPP Loan had been forgiven. As a result, the Company recorded a $2.3 million gain on forgiveness of the PPP Loan in other income (expense), net during the three months ended March 31, 2022.
9
6. Contingent Value Rights
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. and its subsidiaries (“Tetraphase”), a biopharmaceutical company focused on commercializing XERAVA, for $43 million in upfront cash plus potential future cash payments pursuant to contingent value rights (“CVRs”). As of March 31, 2022 and December 31, 2021, the holders of the CVRs are entitled to receive potential future cash payments of up to $13.5 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (ii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024.
In connection with La Jolla’s purchase price allocation as of the acquisition date, La Jolla recorded a liability equal to the estimated fair value of future cash payments pursuant to the CVRs based on a Monte Carlo simulation. The CVRs are measured at fair value on a recurring basis, and any gain (loss) resulting from the change in fair value of CVRs are recorded in other income (expense), net. The CVRs are classified as Level 3 in the ASC Topic 820-10 three-tier fair value hierarchy.
As of March 31, 2022 and December 31, 2021, the fair value of the CVRs was $0.9 million and $1.1 million, respectively. During the three months ended March 31, 2022 and 2021, the Company recorded a gain (loss) resulting from the change in fair value of CVRs of $0.2 million and $(0.5) million, respectively.
7. Deferred Royalty Obligation
In May 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the maximum royalty rate was 10%. Starting January 1, 2022, the maximum royalty rate increased by 4%, and starting January 1, 2024, the maximum royalty rate may increase by an additional 4%, if an agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.
On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three months ended March 31, 2022 and 2021, the Company recognized interest expense, including amortization of the obligation discount, of $2.4 million and $2.6 million, respectively. The carrying value of the deferred royalty obligation as of March 31, 2022 and December 31, 2021 was $124.5 million, net of unamortized obligation discount of $0.5 million, which was classified as a noncurrent liability. The related accrued interest expense as of March 31, 2022 and December 31, 2021 was $31.2 million and $29.8 million, respectively, of which $25.3 million and $24.6 million was classified as noncurrent liabilities, respectively. During each of the three months ended March 31, 2022 and 2021, the Company made royalty payments to HCR of $0.9 million. As of March 31, 2022 and December 31, 2021, the Company recorded royalty obligations payable of $1.1 million and $0.9 million, respectively, in accrued expenses. The deferred royalty obligation is classified as Level 3 in the FASB ASC Topic 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.
Under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. In the event that La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the
10
Company determined that the fair value of the embedded derivatives is immaterial as of March 31, 2022 and December 31, 2021. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any material change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the condensed consolidated statements of operations.
8. Commitments and Contingencies
Lease Commitments
In December 2020, the Company entered into a sublease agreement for office space in Waltham, Massachusetts (the “Waltham Sublease”). The Waltham Sublease commenced on December 21, 2020 and expires on November 30, 2023. In addition to rent of approximately $15,000 per month, the Waltham Sublease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises (collectively, “Lease Operating Costs”). The Waltham Sublease contains customary default provisions, representations, warranties and covenants. The Waltham Sublease is classified as an operating lease. The Company recognizes the Waltham Sublease expense in the condensed consolidated statements of operations and records a lease liability and right-of-use asset for this lease. The option to extend the Waltham Sublease was not recognized as part of the Company’s lease liabilities and right-of-use lease assets.
Future minimum lease payments, excluding Lease Operating Costs, as of March 31, 2022 are as follows (in thousands):
2022 |
|
$ |
136 |
|
2023 |
|
|
166 |
|
Thereafter |
|
|
- |
|
Total future minimum lease payments |
|
|
302 |
|
Less: discount |
|
|
(26 |
) |
Total lease liabilities |
|
$ |
276 |
|
Lease expense under current and former leases was approximately $45,000 and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. Cash paid for amounts included in the measurement of lease liabilities was $45,000 and $50,000 for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the weighted-average remaining lease term and the weighted-average discount rate for the Company’s only operating lease, the Waltham Sublease, was 1.7 years and 3.3%, respectively.
Legal Proceedings
On February 15, 2022, the Company received a paragraph IV notice of certification (the “Notice Letter”) from Gland Pharma Limited (“Gland”) advising that Gland had submitted an Abbreviated New Drug Application (“ANDA”) to the FDA seeking approval to manufacture, use or sell a generic version of GIAPREZA® in the U.S. prior to the expiration of U.S. Patent Nos.: 9,220,745; 9,572,856; 9,867,863; 10,028,995; 10,335,451; 10,493,124; 10,500,247; 10,548,943; 11,096,983; and 11,219,662 (the “GIAPREZA Patents”), which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”). The Notice Letter alleges that the GIAPREZA Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the generic product described in Gland’s ANDA.
On March 29, 2022, the Company filed a complaint for patent infringement of the GIAPREZA Patents against Gland and certain related entities in the United States District Court for the District of New Jersey in response to Gland’s ANDA filing. In accordance with the Hatch-Waxman Act, because GIAPREZA is a new chemical entity and the Company filed a complaint for patent infringement within 45 days of receipt of the Notice Letter, the FDA cannot approve Gland’s ANDA any earlier than 7.5 years from the approval of the GIAPREZA NDA unless the District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable and/or not infringed. The Company intends to vigorously enforce its intellectual property rights relating to GIAPREZA.
11
9. Stockholders’ Deficit
Preferred Stock
As of March 31, 2022 and December 31, 2021, 3,906 shares of Series C-12 Convertible Preferred Stock (“Series C-12 Preferred”) were issued and outstanding, and convertible into 6,735,378 shares of common stock. As of March 31, 2022 and December 31, 2021, the Series C-12 Preferred liquidation preference was approximately $3.9 million. The Series C-12 Preferred does not pay a dividend. The holders of the Series C-12 Preferred do not have voting rights, other than for general protective rights required by the Delaware General Corporation Law.
Stock Repurchase Plan
On November 17, 2021, the Company announced that it would commence a stock repurchase plan for up to $10 million of the Company’s common stock. On March 7, 2022, the Board approved a $5 million increase to the stock repurchase plan from up to $10 million to up to $15 million of the Company’s common stock. The plan has no time limit and can be discontinued at any time. For the three months ended March 31, 2022, the Company repurchased approximately 1.2 million shares of its common stock for $5.2 million, including commissions.
10. Equity Incentive Plans
2013 Equity Incentive Plan
A total of 9,600,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2013 Equity Incentive Plan (the “2013 Equity Plan”). As of March 31, 2022 and December 31, 2021, 3,167,189 and 5,503,796 shares of common stock, respectively, remained available for future grants under the 2013 Equity Plan.
2018 Employee Stock Purchase Plan
A total of 750,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2018 Employee Stock Purchase Plan (the “ESPP”). As of March 31, 2022 and December 31, 2021, 293,412 and 335,473 shares of common stock, respectively, remained available for future grants under the ESPP.
Equity Awards
The activity related to equity awards, which are comprised of stock options, during the three months ended March 31, 2022 is summarized as follows:
|
|
Equity
Awards |
|
|
Weighted-
average
Exercise Price
per Share |
|
|
Weighted-
average
Remaining
Contractual
Term(1)
(years) |
|
|
Aggregate
Intrinsic
Value(2)
(millions) |
|
Outstanding at December 31, 2021 |
|
|
4,096,204 |
|
|
$ |
7.22 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,427,605 |
|
|
$ |
4.78 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(90,998 |
) |
|
$ |
5.86 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2022 |
|
|
6,432,811 |
|
|
$ |
6.32 |
|
|
|
8.6 |
|
|
$ |
0.3 |
|
Exercisable at March 31, 2022 |
|
|
1,940,093 |
|
|
$ |
10.13 |
|
|
|
6.9 |
|
|
$ |
0.1 |
|
(1) Represents the weighted-average remaining contractual term of stock options.
(2) Aggregate intrinsic value represents the product of the number of equity awards outstanding or equity awards exercisable multiplied by the difference between the Company’s closing stock price per share on the last trading day of the period, which was $4.27 as of March 31, 2022, and the exercise price.
12
Share-based Compensation Expense
The classification of share-based compensation expense is summarized as follows (in thousands):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Selling, general and administrative |
|
$ |
1,245 |
|
|
$ |
840 |
|
Research and development |
|
|
17 |
|
|
|
276 |
|
Total share-based compensation expense |
|
$ |
1,262 |
|
|
$ |
1,116 |
|
As of March 31, 2022, total unrecognized share-based compensation expense related to unvested equity awards was $14.2 million, which is expected to be recognized over a weighted-average period of 3.2 years. As of March 31, 2022, there was no unrecognized share-based compensation expense related to shares of common stock issued under the ESPP.
11. Other Income—Related Party
The Company owns a non-voting interest in a related party, which provides the Company with the potential to receive a portion of the future distributions of free cash flow, if any. Investment funds affiliated with the Chairman of the Company’s board of directors have a controlling interest in the related party. During the three months ended March 31, 2022, the Company received distributions of $1.6 million in connection with this interest. During the three months ended March 31, 2021, the Company did not receive any distributions in connection with this interest.
12. License Agreements
In-license Agreements
George Washington University
In December 2014, the Company entered into a patent license agreement with George Washington University (“GW”), which was subsequently amended and restated (the “GW License”) and assigned to La Jolla Pharma, LLC. Pursuant to the GW License, GW exclusively licensed to the Company certain intellectual property rights relating to GIAPREZA, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA. Under the GW License, La Jolla Pharma, LLC is obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a one-time license initiation fee, annual maintenance fees, an amendment fee, additional payments following the achievement of certain development and regulatory milestones and royalties. The Company is obligated to pay a 6% royalty on net sales of GIAPREZA and 15% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA. During the three months ended March 31, 2022 and 2021, the Company made payments to GW of $0.6 million and $2.8 million, respectively.
Harvard University
In August 2006, the Company entered into a license agreement with Harvard University (“Harvard”), which was subsequently amended and restated (the “Harvard License”). Pursuant to the Harvard License, Harvard exclusively licensed to the Company certain intellectual property rights relating to tetracycline-based products, including XERAVA, including the exclusive rights to certain issued patents and patent applications covering such products. Under the Harvard License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell tetracycline-based products, including XERAVA. For each product covered by the Harvard License, the Company is obligated to make certain payments for the following: (i) up to approximately $15.1 million upon the achievement of certain clinical development and regulatory milestones; (ii) a 5% royalty on direct U.S. net sales of XERAVA; (iii) a single-digit tiered royalty on direct ex-U.S. net sales of XERAVA, starting at a minimum royalty rate of 4.5%, with step-ups to a maximum royalty of 7.5% based on the achievement of annual net product sales thresholds; and (iv) 20% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering tetracycline-based products, including XERAVA. During each of the three months ended March 31, 2022 and 2021, the Company made payments to Harvard of $0.1 million, none of which related to clinical development and regulatory milestones.
Paratek Pharmaceuticals, Inc.
In March 2019, the Company entered into a license agreement with Paratek Pharmaceuticals, Inc. (“Paratek”), which was subsequently amended and restated (the “Paratek License”). Pursuant to the Paratek License, Paratek
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non-exclusively licensed to the Company certain intellectual property rights relating to XERAVA, including non-exclusive rights to certain issued patents and patent applications covering XERAVA. The Company is obligated to pay Paratek a 2.25% royalty based on direct U.S. net sales of XERAVA. The Company’s obligation to pay royalties with respect to the licensed product is retroactive to the date of the first commercial sale of XERAVA and shall continue until there are no longer any valid claims of the Paratek patents, which will expire in October 2023. During each of the three months ended March 31, 2022 and 2021, the Company made royalty payments to Paratek of $0.1 million.
Out-license Agreements
PAION AG
In January 2021, La Jolla Pharmaceutical Company and certain of its wholly owned subsidiaries, including La Jolla Pharma, LLC and Tetraphase Pharmaceuticals, Inc., entered into an exclusive license agreement (the “PAION License”) with PAION AG and its wholly owned subsidiary (collectively, “PAION”). Pursuant to the PAION License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”). La Jolla has received an upfront cash payment of $22.5 million, less a 15% refundable withholding tax, and is entitled to receive potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments. La Jolla recognized the upfront cash payment of $22.5 million as license and other revenue for the three months ended March 31, 2021, and the 15% refundable withholding tax of $3.4 million was recorded as an other current asset as of March 31, 2022 and December 31, 2021. In addition, royalties payable under the PAION License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction. Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA and XERAVA in the PAION Territory. PAION is required to use commercially reasonable efforts to commercialize GIAPREZA and XERAVA in the PAION Territory. The Company has not received any payments from PAION related to either royalties or commercial milestones.
In July 2021, the Company entered into a commercial supply agreement with PAION whereby the Company will supply PAION a minimum quantity of GIAPREZA and XERAVA through July 13, 2024. The supply agreement will automatically renew until the earlier of July 13, 2027, or until a new supply agreement is executed. During the initial 3-year term of the supply agreement, the Company will be reimbursed for direct and certain indirect manufacturing costs at cost.
Everest Medicines Limited
In February 2018, the Company entered into a license agreement with Everest, which was subsequently amended and restated (the “Everest License”). Pursuant to the Everest License, the Company granted Everest an exclusive license to develop and commercialize XERAVA for the treatment of cIAI and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Everest Territory”). The Company is eligible to receive an additional $8.0 million regulatory milestone payment and up to an aggregate of $20.0 million in sales milestone payments. The Company is also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Everest Territory of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Everest Territory until the latest to occur of: (i) the last-to-expire of specified patent rights in such jurisdiction in the Everest Territory; (ii) expiration of marketing or regulatory exclusivity in such jurisdiction in the Everest Territory; or (iii) 10 years after the first commercial sale of a product in such jurisdiction in the Everest Territory. In March 2021, the Company received a $3.0 million milestone payment associated with the submission of an NDA with the China National Medical Products Administration (“NMPA”) for XERAVA for the treatment of cIAI in patients in China. Amounts due under the Harvard License for this milestone payment were included as research and development expense on the condensed consolidated statements of operations. XERAVA was approved in Singapore by the Health Science Authority in April 2020.
In May 2021, the Company entered into a commercial supply agreement with Everest whereby the Company will supply Everest a minimum quantity of XERAVA through December 31, 2023 and will transfer to Everest certain XERAVA-related manufacturing know-how. Pursuant to the supply agreement: (i) the Company received $6.8 million of upfront payments during the year ended December 31, 2021 comprised of: (1) a $4.0 million upfront technology transfer payment; and (2) a $2.8 million partial prepayment for XERAVA that is expected to be delivered to Everest during 2022; (ii) the Company received an additional $1.0 million technology transfer payment in January, 2022; and (iii) the Company will be reimbursed for direct and certain indirect manufacturing costs at 110%
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of cost through December 31, 2023. The Company recognized the $5.0 million of technology transfer-related payments as license and other revenue during the year ended December 31, 2021 as Everest obtained control of the XERAVA-related manufacturing know-how prior to December 31, 2021. The Company recognized the $2.8 million partial prepayment for XERAVA that is expected to be delivered to Everest during 2022 as deferred revenue as of March 31, 2022 and December 31, 2021 as the performance obligation to deliver XERAVA had not yet been satisfied.
13. Short-term Investments
In January 2022, AcelRx Pharmaceuticals, Inc. (“AcelRx”) closed its acquisition of Lowell Therapeutics, Inc. (“Lowell”), a privately held company in which La Jolla held an approximately 15% non-controlling equity interest. Through the closing of the acquisition, La Jolla’s investment in Lowell was measured at its contributed cost of zero in the consolidated balance sheets in accordance with the measurement alternative pursuant to FASB ASC 321, Investments—Equity Securities. In connection with AcelRx’s acquisition of Lowell, La Jolla received: (i) approximately 1.4 million shares of AcelRx common stock; and (ii) contingent value rights (“AcelRx CVRs”) that entitle La Jolla to receive up to approximately $3.9 million on the achievement of certain regulatory and sales-based milestones. The AcelRx CVRs will be paid in AcelRx common stock or cash at the discretion of AcelRx. La Jolla is also entitled to receive up to approximately 0.2 million shares of AcelRx common stock, if such shares are not used to satisfy certain obligations of Lowell and its security holders made in connection with the acquisition.
The shares of AcelRx common stock received by La Jolla are considered marketable equity securities, which are measured at fair value on a recurring basis and classified as Level 1 in the ASC Topic 820-10 three-tier fair value hierarchy. Any unrealized gain (loss) is recorded in other income (expense), net. Any potential consideration received in connection with the AcelRx CVRs is contingent upon the achievement of certain regulatory and sales-based milestones. Accordingly, the AcelRx CVRs are deemed a “gain contingency” pursuant to FASB ASC 450, Contingencies, and the Company will record a gain in other income (expense), net upon the achievement of such milestones.
In connection with the closing of the acquisition, La Jolla recorded $0.7 million of short-term investments and a $0.7 million gain on sale of its non-controlling equity interest in Lowell in other income (expense), net, which is equal to the approximately 1.4 million shares of AcelRx common stock received, multiplied by the closing price of the common stock on the acquisition date. As of March 31, 2022, the fair value of short-term investments was $0.4 million. For the three months ended March 31, 2022, the Company recorded a $0.3 million loss on short-term investments in other income (expense), net.
14. Income Taxes
For the three months ended March 31, 2022 and 2021, the Company recorded a provision for income taxes of $1,000 and $18,000, respectively. As of March 31, 2022 and December 31, 2021, the Company established a full valuation allowance against its federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets. There were no unrecognized tax benefits as of March 31, 2022 and December 31, 2021. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months.
15. Subsequent Event
On April 5, 2022, the Company received distributions of $2.2 million in connection with its non-voting interest in a related party.
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