Amounts include the assets and liabilities of SRX Cardio, LLC, a consolidated variable interest entity (“VIE”). Portola's interests and obligations with respect to the VIE's assets and liabilities are limited to those accorded to Portola in its agreement with the VIE. See Note 8, “Asset Acquisition and License Agreements,” to these consolidated financial statements.
Notes to Consolidated Financial Statements
1. Organization
Portola Pharmaceuticals, Inc. (the “Company” or “we” or “our” or “us”) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics in the areas of thrombosis, other hematologic disorders and inflammation for patients who currently have limited or no approved treatment options. We were incorporated in September 2003 in Delaware. Our headquarters and operations are located in South San Francisco, California and we operate in one segment.
Our two medicines approved by the U.S. Food and Drug Administration (“FDA”) are Andexxa® [coagulation factor Xa (recombinant), inactivated-zhzo], the first and only antidote for patients treated with rivaroxaban and apixaban, when reversal of anticoagulation is needed due to life-threatening or uncontrolled bleeding, and Bevyxxa® (betrixaban), the first and only oral, once-daily Factor Xa inhibitor, for the prevention of venous thromboembolism (“VTE”) in adult patients hospitalized for an acute medical illness. We received approval for Andexxa and Bevyxxa in May 2018 and June 2017, respectively. On December 31, 2018, the FDA approved our Prior Approval Supplement (PAS) for our large-scale, second generation Andexxa® [coagulation factor Xa (recombinant), inactivated-zhzo], allowing for broad commercial launch in the United States. We have scaled back our commercial efforts for Bevyxxa to focus on the commercial launch of Andexxa. We are re-evaluating our marketing strategy for Bevyxxa and also exploring potential partnership and other strategic options for Bevyxxa. We are also advancing cerdulatinib, a dual spleen tyrosine kinase, or Syk, and Janus
kinases, or JAK, inhibitor in development to treat hematologic cancers. We have a partnered program, which is focused on developing selective Syk inhibitors for inflammatory conditions.
2. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of Portola and its wholly owned subsidiaries and SRX Cardio,LLC (“SRX Cardio”) that is a variable interest entity (a “VIE”) for which Portola is deemed, under applicable accounting guidance to be the primary
beneficiary as of December 31, 2018.
For the consolidated VIE, we record net income attributable to noncontrolling interests in our Consolidated Statements of Operations equal to the percentage of the economic or
ownership interest retained in such VIE by the respective noncontrolling parties. Unless otherwise specified, references to the Company are references to Portola and its consolidated subsidiaries and VIE. All intercompany transactions and balances have been eliminated upon consolidation.
F-8
Reclassification
Certain prior period amounts on the accompanying consolidated financial statements have been reclassified to conform to current period presentation. This reclassification did not have any material impact on our results of operations or financial condition or statement of cash flows as of December 31, 2018.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory, clinical trial accruals, fair value of assets and liabilities, income taxes, in-process research and development, carrying value of notes payable and long term debt less current royalty obligations, the consolidation of VIEs, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates
.
Variable Interest Entities
We review agreements we enter into with third-party entities, pursuant to which we may have a variable interest in the entity, in order to determine if the entity is a VIE. If the entity is a VIE, we assess whether or not we are the primary beneficiary of that entity. In determining whether we are the primary beneficiary of an entity, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If we determine we are the primary beneficiary of a VIE, we consolidate the statements of operations and financial condition of the VIE into our consolidated financial statements.
Our determination about whether we should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and other highly liquid investments with original maturities of three months or less from the date of purchase.
Restricted Cash
Restricted cash consists of cash restricted for royalty payments to HealthCare Royalty Partners and its Affiliates (“HCR”) and cash held by SRX Cardio, LLC (“SRX Cardio”).
Cash as Reported in Consolidated Statements of Cash Flows
Cash as reported in the consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash, and consists of the following (in thousands):
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Cash and cash equivalents
|
$
|
138,951
|
|
|
$
|
181,568
|
|
|
$
|
188,480
|
|
Restricted cash (SRX Cardio)
|
|
30
|
|
|
|
173
|
|
|
|
178
|
|
Restricted cash for royalty payments to HealthCare Royalty Partners and its affiliates ("HCR")
|
|
1,032
|
|
|
|
—
|
|
|
|
—
|
|
Total cash balance in consolidated statements of cash flows
|
$
|
140,013
|
|
|
$
|
181,741
|
|
|
$
|
188,658
|
|
F-9
Trade Receivables
Trade receivables are recorded net of estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, copay assistance and other allowances that are offered within contracts between us and a limited number of specialty distributors and wholesalers in the United States (“Customers”), group purchasing organizations, payors and other indirect customers related to our product sales. These reserves are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Please refer to our product revenue policy for further information.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We primarily use actual costs to determine our cost basis for inventories. To the extent inventories are not scheduled to be utilized in the manufacturing process and/or sold within twelve months of the balance sheet date, it is included as a component of prepaid and other long-term assets in our Consolidated Balance Sheets.
Prior to the regulatory approval of our product candidates, we incur expenses for the manufacture of drug product that could potentially be available to support the commercial launch of our products. Until the first reporting period when regulatory approval has been received, we record all such costs as research and development expense. Beginning in the fourth quarter of 2017, we began to capitalize inventory costs associated with Bevyxxa when it was determined that the inventory had a probable future economic benefit. This inventory capitalization process began to be applied to Andexxa Gen 1 supply upon FDA approval on May 3, 2018. Costs incurred for second generation Andexxa have been recorded as a research and development expense through the period-end as we obtained the FDA approval on December 31, 2018.
We assess our inventory levels each reporting period and write-down inventory that is expected to be at risk for expiration, that has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. In evaluating the sufficiency of our inventory reserves or liabilities for firm purchase commitments, we also take into consideration our firm purchase commitments for future inventory production. If we were to decide to cancel our manufacturing commitment, such cancellation would trigger the payment of a cancellation fee. If we project to have excess inventories and that it would be more cost-efficient to pay the cancellation fee, we may accrue the cancellation fee as a liability. Our assessment of excess inventories, including future firm purchase commitments, requires management to utilize judgement in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. As of December 31, 2018, we accrued a $2.8 million liability related to excess inventory purchase commitments. When we recognize a loss on such inventory or firm purchase commitments, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis. If inventory with a lower cost basis is subsequently sold, it will result in higher gross margin for those sales. The portion of our inventory that is most at risk for product dating issues is the finished goods inventory and the carrying value of our finished goods inventory was $2.8 million as of December 31, 2018.
The bulk drug substance (“BDS”) in Andexxa and the active pharmaceutical ingredient (“API”) in Bevyxxa have undergone significant manufacturing specific to their intended purposes at the point they are purchased by us, therefore, we classify them as work-in-process inventory.
Investments in Marketable Securities
All investments in marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of our investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Unrealized gains and losses are excluded from earnings and were reported as a component of accumulated comprehensive income (loss). Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income, net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income, net.
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Fair Value Measurements
Fair value accounting is applied for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, receivables from collaborations and investments. Our investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and investments and issuers of investments to the extent recorded on the consolidated balance sheets.
Trade receivables and receivables from collaborations are typically unsecured and are concentrated in the pharmaceutical industry. Accordingly, we may be exposed to credit risk generally associated with pharmaceutical companies or specific to our collaboration agreements. To date, we have not experienced any losses related to these receivables.
We are dependent on third-party manufacturers to manufacture our drugs and drug candidates. In particular, we rely and expect to continue to rely on a small number of manufacturers to supply it with its requirements for the bulk drug substance and active pharmaceutical ingredients related to our drugs and drug candidates. We could be adversely affected by a significant interruption in the supply of bulk drug substance and active pharmaceutical ingredients.
Customer Concentration
Customers who accounted for 10% or more of total net revenues were as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Bayer Pharma, AG and Janssen Pharmaceuticals, Inc.
|
|
19%
|
|
|
29%
|
|
|
27%
|
|
Daiichi Sankyo, Inc.
|
|
16%
|
|
|
33%
|
|
|
29%
|
|
Bristol-Myers Squibb Company and Pfizer Inc.
|
|
*
|
|
|
22%
|
|
|
19%
|
|
Dermavant Sciences GmbH
|
|
*
|
|
|
16%
|
|
|
25%
|
|
We have three Andexxa specialty distributor customers who each accounted for 10% or more of total net revenues during the year ended December 31, 2018
.
Intangible Assets
Intangible assets include an in-process research and development asset related to our consolidated VIE and a milestone payment made to Millennium Pharmaceuticals, Inc. (“Millennium”) upon FDA approval of Bevyxxa.
The in-process research and development asset is considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If the project is completed, which generally occurs if and when regulatory approval to market a product is obtained, the carrying value of the related intangible asset is amortized as a part of cost of sales over the remaining estimated life of the asset beginning in the period in which the project is completed. If the asset becomes impaired or is abandoned, the carrying value of the related intangible asset is written down to its fair value and an impairment charge is taken in the period in which the impairment occurs. The in-process research and development asset is tested for impairment on an annual basis, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. Please refer to Note 8, “Asset Acquisition and License Agreements,” for further information.
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A milestone payment made pursuant to the regulatory approval of Bevyxxa in the United States is considered to be finite-lived and will be amortized on a straight-line basis over the remaining estimated patent life. The intangible asset with finite useful life is reviewed for impairment when facts or circumstances suggest that the carrying value of the asset may not be recoverable.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term.
Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Specific potential indicators of impairment include a significant decrease in the fair value of an asset, a significant change in the extent or manner in which an asset is used or a significant physical change in an asset, a significant adverse change in legal factors or in the business climate that affects the value of an asset, an adverse action or assessment by the FDA or another regulator or a projection or forecast that demonstrates continuing losses associated with an income-producing asset. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value. Through December 31, 2018, there have been no such losses.
Deferred Rent
We recognize rent expense on a straight-line basis over the noncancelable term of our operating lease and, accordingly, record the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. We also record lessor-funded lease incentives, such as reimbursable leasehold improvements, as a deferred rent liability, which is amortized as a reduction of rent expense over the noncancelable term of our operating lease.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers,
Topic 606 (“ASC 606”), using the modified retrospective method to all contracts that were not completed as of January 1, 2018. We recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of accumulated deficit at the beginning of 2018. The results for our reporting periods beginning on and after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
Pursuant to ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five 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) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Revenue, Net
Our product revenue consists of the U.S. sales of Andexxa, which we began shipping to customers in May 2018, and the U.S. sales of Bevyxxa, which we began shipping to customers in January 2018. Prior to January 2018 we had no product revenues. We sell Andexxa and Bevyxxa to a limited number of specialty distributors and wholesalers in the United States (“Customers”). These Customers subsequently resell our products to hospitals, pharmacies and long-
F-12
term care centers. In addition to distribution agreements with Customers, we enter into arrangements with group purchasing organizations, indirect customers and payors that provide for privately negotiated rebates, chargebacks, distribution costs and discounts with respect to the purchase of our products.
We recognize revenue on product sales when the Customer obtains control of our product, which occurs at a point in time (upon delivery). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances. We expense incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that we would have recognized is one year or less. To date, we have not incurred any such costs.
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 discounts, returns, chargebacks, rebates, copay assistance and other allowances that are offered within contracts between us and our Customers, group purchasing organizations, payors and other indirect customers relating to our product sales. These reserves as detailed below are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted
in accordance with the expected value method under ASC 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or 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 respective underlying contracts.
The amount of variable consideration that 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 will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known
.
Trade Discounts and Allowances:
We generally provide Customers with discounts which include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we compensate our Customers and indirect customers for sales order management, data and administrative and distribution services. However, we have determined such services received to date are not distinct from our sale of products to the Customer and therefore a fair market value for these services may not be reasonably determined for accounting purposes. Therefore, these payments have been recorded as a reduction of revenue within the consolidated statement of operations for the year ended December 31, 2018.
Product Returns:
We generally offer Customers a right of return based on the product’s expiration date or other market-based factors for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using available industry data, our own sales information and our visibility into the inventory remaining in the distribution channel.
Chargebacks:
Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, purchase directly from our wholesalers at a discounted price. The wholesalers, in turn, charge us back the difference between the price initially paid by the wholesaler and the discounted price paid to the wholesaler by the healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and receivables. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and we generally issue credits for such amounts within a few weeks of the Customer’s notification to us of the resale. Reserves for chargebacks consist of (i) credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and (ii) chargebacks that Customers have claimed but for which we have not yet issued a credit.
F-13
Payor Rebates:
We contract with various private payor organizations, primarily insurance companies and pharmacy benefit managers, 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.
Distributor Fees
: Under our inventory management agreements with our significant U.S. wholesalers and specialty distributors, we pay the wholesalers a fee primarily for compliance with certain contractually determined covenants such as the maintenance of agreed upon inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales. We estimate these distributor fees and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and a reduction of accounts receivable.
Collaboration and License Revenue
We enter into collaboration and license agreements for the development and commercialization of our products that are within the scope of ASC 606. The terms of collaboration and license agreements typically include payments to us of one or more of the following: non-refundable or partially refundable upfront or license fees; development, regulatory and commercial milestone payments; manufacturing supply services; partial or complete reimbursement of research and development costs; and royalties on net sales of licensed products. Each of these payments results in collaboration and license revenue, except for royalties on net sales of licensed products, which are classified as royalty revenues. To date, we have not received any royalty revenues.
As part of the accounting for these arrangements, we must apply judgment to determine whether the performance obligations are distinct, and develop assumptions in determining the stand-alone selling price for each distinct performance obligation identified in the contract. To determine the stand-alone selling price, we rely on assumptions which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
Licenses of Intellectual Property:
If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize 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 non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
F-14
Milestone Payments:
At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached 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 associated milestone value is included in the transaction price. Milestone payments that are not within our control or that of the licensee, such as regulatory approvals, are constrained until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milest
ones and any related constraint
and
,
if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and license revenue in the period of adjustment.
Manufacturing Supply Services:
Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess whether these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the licensee exercises these options, any additional payments are recorded in collaboration and license revenue when the licensee obtains control of the goods, which is upon delivery.
Royalties:
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, 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). To date, we have not recognized any royalty revenue resulting from any of our out-licensing arrangements.
Research and Development Activities:
Amounts related to research and development and regulatory activities are recognized as the related services or activities are performed, in accordance with the contract terms. Payments may be made to or by us based on the number of full-time equivalent researchers assigned to the collaboration project and the related research and development expenses incurred.
We receive payments from our collaborators based on billing schedules established in each contract. Upfront payments and fees may be recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the collaborators and the transfer of the promised goods or services to the collaborators will be one year or less.
Cost of Sales
Cost of sales represents primarily the costs associated with manufacturing of Andexxa and Bevyxxa, Bevyxxa net sales-based royalties payable to Millennium, amortization of an intangible asset associated with a capitalized milestone payment made to Millennium upon FDA approval of Bevyxxa and fixed costs to our contract manufacturers, if any, for anticipated shortfall in product demand relative to committed volumes. We periodically analyze our inventory levels, and write-down inventory for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions.
Research and Development
Research and development costs are expensed as incurred and consist of salaries and benefits, lab supplies, materials and facility costs, as well as fees paid to nonemployees and entities that conduct certain research and development activities on our behalf. Amounts incurred in connection with collaboration and license agreements are also included in research and development expense. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods are received or services are rendered.
F-15
Clinical Trial Accruals
Clinical trial costs are a component of research and development expenses. We accrue and expense clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with clinical research organizations and clinical sites. We determine the actual costs through monitoring patient enrollment and discussions with internal personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. We have not experienced any material deviations between the accrued clinical trial expenses and actual clinical trial expenses. However, actual services performed, number of patients enrolled and the rate of patient enrollment may vary from our estimates, resulting in adjustments to clinical trial expense in futures periods.
Stock-Based Compensation
Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award. The compensation cost is recognized as expense on a straight-line basis over the vesting period for options and restricted stock units (“RSUs”) and on an accelerated basis for performance stock options (“PSOs”), market-based performance stock units (“M-PSUs”) and performance-based stock units (“PSUs”). For stock option grants including PSOs, we use the Black-Scholes option pricing model to determine the fair value of stock options. This model requires us to make assumptions such as expected term and volatility that determine the stock options fair value. We are also required to make estimates as to the probability of achieving the specific performance criteria underlying the PSOs and PSUs. For M-PSU awards, we use the Monte-Carlo option pricing model to determine the fair value of awards at the date of issue. The Monte-Carlo option-pricing model uses similar input assumptions as the Black-Scholes model; however, it further incorporates into the fair-value determination the possibility that the performance-based market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is ultimately satisfied. Compensation cost is not reversed if the achievement of the market condition does not occur. For RSUs and PSU awards, we base the fair value of awards on the closing market value of our common stock at the date of grant. Upon our adoption of Accounting Standards Update No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, on January 1, 2017, we made an accounting policy election to account for the forfeitures as they occur.
Equity instruments issued to nonemployees, consisting of stock options granted to consultants and restricted stock units and performance stock units granted to employees that have converted to nonemployees, are valued using the Black-Scholes option-pricing model for stock options and period-end market price for restricted stock units and performance stock units. Stock-based compensation expense for nonemployee services is subject to remeasurement as the underlying equity instruments vest and is recognized as an expense over the period during which services are performed.
Interest Expense
Notes payable and long-term debt are eligible to be repaid based on royalties from our Andexxa net sales. The recognition of interest expense requires us to estimate the total amount of future royalty payments to be generated from product sales by jurisdiction over the life of the agreement. Consequently, we impute interest on the carrying value of the notes payable and long-term debt and record interest expense using an imputed effective interest rate. We reassess the expected royalty payments each reporting period and account for any changes through an adjustment to the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our debt and note payable liabilities. The assumptions used in determining the expected repayment term of the debt and amortization period of the issuance costs requires that we make estimates that could impact the short and long term classification of these costs, as well as the period over which these costs will be amortized.
F-16
Income Taxes
We provide for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the consolidated financial statement reporting and tax basis of assets and liabilities and net operating loss and credit carryforwards, and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized. The recognition, derecognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the underpayment of income taxes.
Foreign Currency Transactions
We have transactions denominated in foreign currencies, primarily the Euro and British Pound, and, as a result, are exposed to changes in foreign currency exchange rates.
Net Loss per Share Attributable to Portola Common Stockholders
Basic net loss per share attributable to Portola Common Stockholders is calculated by dividing the net loss attributable to Portola Common Stockholders by the weighted-average number of shares of Common Stock outstanding for the period. Diluted net loss per share attributable to Portola Common Stockholders is the same as basic net loss per share attributable to Portola Common Stockholders, since the effects of potentially dilutive securities are antidilutive.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
, which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods, with early adoption permitted. We will adopt this new standard on January 1, 2019, and we expect to use the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit at the date of adoption and apply the new disclosure requirements beginning in the period of adoption.
The new standard provides a number of optional practical expedients and we expect to elect the following:
Transition Elections. We expect to elect the package of practical expedients that permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We also expect to elect the practical expedient to not separate lease and non-lease components for facility lease classes of underlying assets to new or modified leases beginning on or after the adoption date. That is, we will account for each separate lease component of a contract and its associated non-lease components as a single lease component.
Ongoing Accounting Policy Elections. We expect to elect the short-term lease recognition exemption whereby right-of-use (ROU) assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year.
F-17
We anticipate adoption of the standard will add approximately $2.1 million in right-of-use assets and $3.3 million in lease liabilities to our consolidated balance sheet upon adoption and will not significantly impact financial results. We are continuing to evaluate the effect that this guidance will have on our Consolidated Financial Statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting
, which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. Entities will apply this ASU by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption. We are currently evaluating the impact that ASU 2018-07 will have on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which provided amended guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Additionally, under the new guidance, an entity will be required to provide certain disclosures regarding stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18,
Collaborative arrangements (Topic 808): Clarifying the interaction between Topic 808 and Topic 606
. ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer and precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. For public business entities, these amendments are effective for fiscal years beginning after December 2019, and interim periods therein. Early adoption is permitted, including adoption in any interim period, for entities that have adopted ASC 606. We are currently evaluating the impact that ASU 2018-18 will have on our consolidated financial statements.
Recent Accounting Pronouncements Adopted
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
. This ASU
requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the balance sheet.
This guidance was effective for annual and interim periods of public entities beginning after December 15, 2017
. The amendments in this ASU are applied retrospectively to all periods presented.
We adopted this guidance on January 1, 2018.
The adoption of this ASU
increased
our beginning and ending cash balances within our consolidated statements of cash flows. The adoption had no other material impacts to our consolidated statements of cash flows and had no impact on our results of operations or financial position.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This ASU addresses the presentation of certain items on the statement of cash flows including among other things settlement of zero coupon debt instruments or other debt instruments with coupon
F-18
interest rates that are insignificant to the effective interest rate of the borrowing.
Pursuant to the new guidance, at the settlement of our promissory notes to Bristol-Myers Squibb Company (“BMS”) and Pfizer Inc. (“Pfizer”) and the fundings received from HealthCare Royalty Partners and its Affiliates, we should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows for operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities. Accretion of accrued interest will continue to be recorded as a non-cash item under operating activities.
This guidance was effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted
.
We adopted this guidance on January 1, 2018, and the adoption had no material impact on our consolidated financial statements for the year ended December 31, 2018.
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
. The guidance in ASU 2016-16 requires both the seller and the buyer in an intercompany asset transfer (excluding inventory transfers) to immediately recognize the current and deferred income tax consequences of the transaction. ASU 2016-16 retains the exception to current recognition of the tax effects for intercompany transfers of inventory. ASU 2016-16 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. We adopted this guidance on January 1, 2018, and the adoption had zero impact to our consolidated financial statements for the year ended December 31, 2018 because we did not have any deferred intercompany charges.
In March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. We have accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. As permitted by SAB 118, we recorded provisional estimates in 2017 and finalized our accounting for these provisional estimates based on guidance, interpretations and all of the available data in the year ended December 31, 2018. No adjustment to the previously recorded provisional amount was recorded in 2018.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606), which amended the existing accounting standards for revenue recognition. We adopted the new revenue standard effective January 1, 2018,
using the modified retrospective method to all contracts that were not completed as of January 1, 2018. The cumulative effect of applying the new guidance was recorded as an adjustment to accumulated deficit as of the adoption date. As a result, the following adjustments were made to the consolidated balance sheet as of January 1, 2018 (in thousands):
|
|
As of January 1, 2018
|
|
|
|
As Revised Under
ASC 606
|
|
|
Without the Adoption of ASC 606
|
|
|
Effect of Change
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled - collaboration and license revenue
|
|
$
|
6,694
|
|
|
$
|
—
|
|
|
$
|
6,694
|
|
Trade and other receivables, net
|
|
|
2,706
|
|
|
|
—
|
|
|
|
2,706
|
|
Prepaid expenses and other current assets
|
|
|
—
|
|
|
|
2,706
|
|
|
|
(2,706
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
6,354
|
|
|
|
11,169
|
|
|
|
(4,815
|
)
|
Deferred revenue, long-term
|
|
|
1,269
|
|
|
|
18,798
|
|
|
|
(17,529
|
)
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(1,175,481
|
)
|
|
$
|
(1,204,519
|
)
|
|
$
|
29,038
|
|
F-19
The following table compares the reported consolidated balance sheet and statement of operations information to the balances that do not reflect the adoption of ASC 606 as of and for the year ended December 31, 2018 (in thousands, except for per share data):
|
|
As of December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances Without the Adoption of ASC 606
|
|
|
Effect of Change
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled - collaboration and license revenue
|
|
$
|
9,880
|
|
|
$
|
—
|
|
|
$
|
9,880
|
|
Trade and other receivables, net
|
|
|
1,243
|
|
|
|
—
|
|
|
|
1,243
|
|
Prepaid expenses and other current assets
|
|
|
—
|
|
|
|
1,243
|
|
|
|
(1,243
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
1,847
|
|
|
|
4,589
|
|
|
|
(2,742
|
)
|
Deferred revenue, long-term
|
|
|
4,488
|
|
|
|
22,695
|
|
|
|
(18,207
|
)
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(1,525,704
|
)
|
|
$
|
(1,556,533
|
)
|
|
$
|
30,829
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances Without the Adoption of ASC 606
|
|
|
Effect of Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration and license revenue
|
|
$
|
16,013
|
|
|
$
|
11,682
|
|
|
$
|
4,331
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
216,205
|
|
|
|
213,657
|
|
|
|
2,548
|
|
Loss from operations
|
|
|
(345,320
|
)
|
|
|
(347,103
|
)
|
|
|
1,783
|
|
Net loss
|
|
|
(350,544
|
)
|
|
|
(352,327
|
)
|
|
|
1,783
|
|
Net loss attributable to Portola
|
|
|
(350,223
|
)
|
|
|
(352,006
|
)
|
|
|
1,783
|
|
Net loss per share attributable to Portola common stockholders:
Basic and diluted
|
|
$
|
(5.31
|
)
|
|
$
|
(5.33
|
)
|
|
$
|
0.03
|
|
Our financial position with respect to product revenues would not have been materially different without the adoption of ASC 606.
In addition, we adjusted our beginning balance of deferred tax assets and liabilities that we were previously tracking pursuant to the existing accounting standards for revenue recognition to reflect the impact from ASC 606 adoption on January 1, 2018. The adjustment to the beginning balance of deferred tax assets and liabilities recorded with the adoption of ASC 606 was completely offset by corresponding adjustment to valuation allowance and had no impact to our consolidated financial statements for the year ended December 31, 2018.
F-20
3. Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents our revenues, disaggregated by timing of transfer of goods or services (in thousands):
|
|
Year Ended December 31, 2018
|
|
|
|
Product Revenue, net
|
|
|
Collaboration and License Revenue
|
|
|
Total
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transferred at a point in time
|
|
$
|
24,117
|
|
|
$
|
—
|
|
|
$
|
24,117
|
|
Transferred over time
|
|
|
—
|
|
|
|
16,013
|
|
|
|
16,013
|
|
Total
|
|
$
|
24,117
|
|
|
$
|
16,013
|
|
|
$
|
40,130
|
|
The following table presents changes in our contract assets and liabilities for the year ended December 31, 2018 (in thousands):
|
|
Balance at
Beginning of
Period
|
|
|
Addition
|
|
|
Deduction
|
|
|
Balance at End
of Period
|
|
Contract assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled - collaboration and license revenue
|
|
$
|
6,694
|
|
|
$
|
11,467
|
|
|
$
|
(8,281
|
)
|
|
$
|
9,880
|
|
Total contract assets
|
|
$
|
6,694
|
|
|
$
|
11,467
|
|
|
$
|
(8,281
|
)
|
|
$
|
9,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
7,623
|
|
|
$
|
6,857
|
|
|
$
|
(8,145
|
)
|
|
$
|
6,335
|
|
Total contract liabilities
|
|
$
|
7,623
|
|
|
$
|
6,857
|
|
|
$
|
(8,145
|
)
|
|
$
|
6,335
|
|
Significant changes in the contract assets and contract liabilities balances during the year ended December 31, 2018 is as follows (in thousands):
|
|
|
|
|
|
Year Ended as of
December 31, 2018
|
|
Cumulative catch-up net increase (decrease) adjustment to revenue related to a change in an estimate of the transaction price
|
|
$
|
4,745
|
|
Revenue recognized according to the current period performance that was included in the contract liability at the beginning of the period
|
|
|
5,501
|
|
F-21
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of December 31, 2018 (in thousands):
Collaborator
|
|
Transaction Price
Allocated to the
Remaining
Performance
Obligation as of
December 31, 2018
|
|
|
Expected Year
By Which Revenue
Recognition Will
Be Completed
|
|
|
Percentage of
Revenue
Recognized
|
|
BMS and Pfizer - 2014 agreement
|
|
$
|
24
|
|
|
|
2019
|
|
|
|
99
|
%
|
BMS and Pfizer - 2016 agreement
|
|
|
1,832
|
|
|
|
2021
|
|
|
|
86
|
%
|
Daiichi Sankyo - 2014 agreement
|
|
|
1,626
|
|
|
|
2020
|
|
|
|
95
|
%
|
Daiichi Sankyo - 2016 agreement
|
|
|
3,681
|
|
|
|
2023
|
|
|
|
76
|
%
|
Bayer and Janssen - 2014 agreement
|
|
|
37
|
|
|
|
2019
|
|
|
|
99
|
%
|
Bayer - 2016 agreement
|
|
|
3,291
|
|
|
|
2023
|
|
|
|
79
|
%
|
Total
|
|
$
|
10,491
|
|
|
|
|
|
|
|
|
|
Milestone payments or refundable advance payments that are not considered probable of being achieved are excluded from the transaction price until they are probable.
Sales-based royalties, including milestone payments based on the level of sales, related to license arrangements are excluded from variable consideration and will be recognized at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.
Product Revenue, Net
To date, our source of product revenue has been from the U.S. sales of Andexxa and Bevyxxa, which we began shipping to customers in May 2018 and January 2018, respectively.
No costs to obtain or fulfill the contracts have been capitalized. For the year ended December 31, 2018, we recorded a total of $3.6 million as a reduction to revenue, consisting primarily of chargebacks and returns.
Collaboration and License Revenue
BMS and Pfizer
Agreement Terms
In January 2014, we entered into an agreement with BMS and Pfizer to further study Andexxa as a reversal agent for their jointly-owned, FDA-approved oral Factor Xa inhibitor, apixaban, through Phase 3 studies (the “2014 BMS and Pfizer Agreement”). We are responsible for the cost of conducting this clinical study. Pursuant to our agreement with BMS and Pfizer, we are obligated to provide research, development and regulatory approval services and participate in the Joint Collaboration Committee (“JCC”) in exchange for a partially refundable upfront fee of $13.0 million and up to $12.0 million of contingent milestone payments due upon achievement of certain development and regulatory events. All consideration received and to be earned under this agreement is subject to a 50% refund contingent upon achievement of certain regulatory and/or clinical events.
F-22
In February 2016, we entered into a collaboration and license agreement with BMS and Pfizer whereby BMS and Pfizer obtained exclusive rights to develop and commercialize
Andexxa
in Japan (the “2016 BMS and Pfizer Agreement”). BMS and Pfizer are responsible for all development, regulatory and commercial activities in Japan and we will reimburse BMS and Pfizer for expenses they incur for research and development activities specific to Factor Xa inhibitors other than apixaban. Pursuant to this agreement, we are obligated to provide certain research and development activities outside of Japan, provide clinical drug supply and related manufacturing services and to participate on various committees in exchange for a non-refundable upfront fee of $15.0 million. We are also eligible to receive, contingent payments totaling up to $20.0 million which may be earned upon achievement of certain regulatory events and up to $70.0 million which may be earned upon achievement of specified annual net sales volumes in Japan. We are also entitled to receive royalties ranging from 5% to 15% on net sales of
Andexxa
in Japan.
We have agreed to sell clinical and commercial supply of drug for clinical development and commercialization at cost
.
Revenue Recognition
We assessed the 2014 BMS and Pfizer Agreement and the 2016 BMS and Pfizer Agreement in accordance with ASC 606 and concluded that BMS and Pfizer are customers.
We identified the following performance obligations under the 2014 BMS and Pfizer Agreement: (1) to provide research, development and regulatory services, and (2) to provide manufacturing and supply services. We determined that the research, development and regulatory services can only provide benefit to BMS and Pfizer in combination with the manufacture and supply of Andexxa and because the manufacturing know-how is proprietary to us and cannot be provided by other vendors, the services do not qualify as distinct performance obligations. As the manufacturing and supply services are a required input to the research, development and regulatory services, we have combined all activities into a single performance obligation. The nature of the combined performance obligation is to provide research, development and regulatory services necessary to obtain approval of Andexxa as a reversal agent to apixaban in both the United States and Europe.
For revenue recognition purposes, we determined that the duration of the contract began on the effective date in January 2014 and ends upon Andexxa approval in United States and Europe, which we expected to be achieved in 2019. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. We analyzed the impact of BMS and Pfizer terminating the agreement prior to Andexxa approval and determined that there were substantive non-monetary penalties to BMS and Pfizer for doing so. We considered quantitative and qualitative factors to reach this conclusion.
We determined that the transaction price of the 2014 BMS and Pfizer Agreement was $16.5 million as of December 31, 2018. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract and whether the occurrence of the 50% refundable feature associated with such payments was probable. We have concluded that no portion of the cash receipts should be constrained related to the refund provision because the activities that would trigger a refund are under our control and considered to be remote. As of December 31, 2018, there are no additional payments eligible to be earned.
We are utilizing a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligation to our counterparty. In applying the cost-based input methods of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs and internal full-time equivalent effort. A cost-based input method of revenue recognition requires us to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
For the year ended December 31, 2018, we recognized $1.5 million, respectively, as license and collaboration revenue under the 2014 BMS and Pfizer Agreement and we recorded $0.02 million in deferred revenue under contract liabilities as of December 31, 2018 on the consolidated balance sheets.
F-23
There were no costs incurred to obtain or fulfill the contract.
We identified the following performance obligations under the 2016 BMS and Pfizer Agreement: (1) grant of an intellectual property license in Japan, (2) to provide research and development services, and (3) to provide manufacturing services and supply Andexxa for development and commercial purposes. Because the Andexxa program had already progressed into a late-phase of development at the inception of the 2016 BMS and Pfizer Agreement, we concluded that the Japan license has standalone functionality and is capable of being distinct. However, we determined that the license is not distinct from the other obligations within the context of the agreement because the research and development services and manufacturing and supply services are necessary to increase the utility of the intellectual property and the performance of such services requires our unique expertise and experience. Accordingly, we have concluded that research and development services and manufacturing and supply services are not distinct from the license within the context of the contract and therefore the license, research and development services, manufacturing and supply services are combined into a single performance obligation.
In addition, we have identified the following customer options that will create a manufacturing obligation for us upon exercise by BMS and Pfizer: (1) commercial supply of Andexxa for sale in Japan and (2) BMS and Pfizer’s participation in manufacturing capacity expansion. We considered the status of Andexxa approval in the United States and Europe and its impact on Japan, Andexxa’s manufacturing complexities, Andexxa’s expansion plan with our existing vendors and BMS and Pfizer’s manufacturing capabilities to determine if these options constituted options with material rights. These options are not options with material rights because the $15.0 million upfront payment received by us was not negotiated to provide incremental discount for the commercial supplies payments and BMS and Pfizer’s payment for capacity expansion to be received in the future.
For revenue recognition purposes, we have determined that the duration of the contract begins on the effective date in February 2016 and ends upon estimated completion of the Andexxa Phase 4 expansion clinical trial in Japan. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. We analyzed the impact of BMS and Pfizer terminating the agreement prior to the completion of Andexxa Phase 4 expansion clinical trial in Japan and determined that there were substantive non-monetary penalties to BMS and Pfizer for doing so. We considered quantitative and qualitative factors to reach this conclusion.
We determined that the transaction price of the 2016 BMS and Pfizer Agreement was $13.1 million as of December 31, 2018 which includes routine updates for estimated costs that BMS and Pfizer will incur in developing Andexxa in Japan. In determining the transaction price, we evaluated all the payments to be received during the duration of the contract. As of December 31, 2018, the transaction price includes, $15.0 million of upfront payment, $5.0 million for acceptance of the Japan New Drug Application (“JNDA”) in Japan, as management expects it to be probable of achievement, $4.4 million of estimated variable consideration for cost-sharing payments from BMS and Pfizer for agreed upon research and development services for clinical trials outside of Japan, and $0.6 million for the costs of Andexxa clinical supplies to BMS and Pfizer for Andexxa Phase 4 expansion clinical trial in Japan, which we achieved in the fourth quarter of 2018. Our transaction price is reduced by $11.9 million for estimated payments to be made to BMS and Pfizer for costs they will incur in developing Andexxa in Japan. Regulatory approval milestones were fully constrained and therefore are not included in the transaction price, as the receipts of such milestones are outside of our control. In determining whether to constrain other milestones, we considered numerous factors, including whether receipt of the milestones is within our control, contingent upon success in future clinical trials and/or the licensee’s efforts. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to BMS and Pfizer and therefore have also been excluded from the transaction price. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
F-24
We are responsible to perform certain clinical trials outside of Japan and BMS and Pfizer are responsible to perform research and development services in Japan. Outside of Japan, we are primarily responsible
for
perform
ing
an ethnic sensitivity study (“ESS-Study”) of Japanese ethnicity. BMS and Pfizer are responsible to expand our current Phase 3/4 clinical trial of
Andexxa
into Japan and to perform any further studies requested by the Japanese regulatory authorities. BMS and Pfizer will reimburse us for 33% of our costs and expenses incurred in conducting the ESS-Study and we will reimburse 66% of the costs and expenses incurred by BMS and Pfizer related to research and development services in Japan
including post-approval surveillance studies as may be required by the regulatory authority.
All parties to this agreement will make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the overall shared costs incurred. We account for cost-sharing payments received from BMS and Pfizer as increases to our transaction price while cost-sharing payments we make to BMS and Pfizer are accounted for as reductions to our transaction price. Costs incurred by us related to agreed-upon services under the agreement are recorded as research and development expenses in our consolidated statements of operations.
We are utilizing a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligation to our counterparty. In applying the cost-based input methods of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs and internal full-time equivalent effort. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
For the year ended December 31, 2018, we recognized $0.8 million as license and collaboration revenue under the 2016 BMS and Pfizer Agreement and have recorded $6.3 million as deferred revenue under contract liabilities as of December 31, 2018 on the consolidated balance sheets.
There were no costs incurred to obtain or fulfill the contract.
Daiichi Sankyo, Inc. (“Daiichi Sankyo”)
Agreement Terms
In July 2014, we entered into an agreement with Daiichi Sankyo to study the safety and efficacy of Andexxa as a reversal agent to edoxaban, in our Phase 3 and Phase 4 studies (the “2014 Daiichi Sankyo Agreement”). We are responsible for the cost of conducting these clinical studies. Pursuant to our agreement with Daiichi Sankyo we are obligated to provide research, development and regulatory services and to manufacture and supply Andexxa in exchange for an upfront nonrefundable fee of $15.0 million, up to two contingent payments totaling $5.0 million which are payable upon the initiation of our Phase 3 study and achievement of certain events associated with scaling up our manufacturing process to support a commercial launch, and up to four payments totaling $20.0 million which are payable upon acceptance of filing and regulatory approval of Andexxa as a reversal agent to edoxaban by the FDA and European Medicines Agency (“EMA”).
In October 2016, we amended this agreement to expedite the expansion of our Phase 4 trial in exchange for an upfront fee of $15.0 million, $8.0 million of which is payable back to Daiichi Sanko based solely on quarterly royalty payments of 1% of world-wide net sales of Andexxa. We are also eligible to receive up to three contingent payments totaling $10.0 million payable upon achieving specified clinical site activation and patient enrollment targets. Additionally, the $2.5 million contingent payment associated with scaling up our manufacturing process from the original agreement has been removed by this amendment.
In March 2016, we entered into an agreement with Daiichi Sankyo to perform an ESS-Study of Japanese ethnicity, perform any further studies requested by the Japanese regulatory authorities and to deliver services in connection
F-25
with our collaboration agreement to commercialize
Andexxa
in Japan with BMS and Pfizer (the “2016 Daiichi Sankyo Agreement”). Daiichi Sankyo will reimburse us for 33% of our costs and expenses incurred to conduct the ESS-Study and between 33% and 100% of costs and expenses we incur for other studies that involve edoxaban under the terms of the arrangement.
Revenue Recognition
We assessed the 2014 Daiichi Sankyo Agreement as amended in October 2016 and the 2016 Daiichi Sankyo Agreement in accordance with ASC 606 and concluded that Daiichi Sankyo is a customer.
We concluded that the 2014 Daiichi Sankyo Agreement and the October 2016 amendment of this agreement are linked and should be accounted for as a combined agreement. We identified the following performance obligations under the combined agreement: (1) to provide research, development and regulatory services, and (2) to provide manufacturing and supply services. We determined that the research, development and regulatory services can only provide benefit to Daiichi Sankyo in combination with the manufacture and supply of Andexxa and because the manufacturing know-how is proprietary to us and cannot be provided by other vendors, the services do not qualify as distinct performance obligations. As the manufacturing and supply services are a required input to the research, development and regulatory services, we have combined all activities into a single performance obligation. The nature of the combined performance obligation is to provide research, development and regulatory services necessary to obtain approval of Andexxa as a reversal agent to edoxaban in both the United States and Europe.
For revenue recognition purposes, we determined that the duration of the contract begins on the effective date in July 2014 and ends upon Andexxa approval as a reversal agent to edoxaban in the United States and Europe, which we estimate will be achieved in 2020 for purposes of determining the duration. We updated the expected duration of the contract in the second quarter of 2018 following an amendment to our development plan. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. We analyzed the impact of Daiichi Sankyo’s terminating the agreement prior to Andexxa approval and determined that there were substantive non-monetary penalties to Daiichi Sankyo for doing so. We considered quantitative and qualitative factors to reach this conclusion.
We determined that the transaction price of the 2014 Daiichi Sankyo Agreement and October 2016 amendment of this agreement was $34.0 million as of December 31, 2018. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of December 31, 2018, the transaction price included $22.0 million of upfront payments, $9.0 million in milestones already received upon achievement of specified events and a $3.0 million milestone related to clinical metrics we have determined is probable of achievement. As of December 31, 2018, we have $5.5 million of further milestone payments eligible to be included in the transaction price but have determined they are not probable of achievement and therefore constrained. As part of our evaluation of the constraint, we considered numerous factors, including whether receipt of the milestones is outside of our control and/or contingent upon success in a future clinical trial. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
We are utilizing a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligation to our counterparty. In applying the cost-based input method of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs and internal full-time equivalent effort. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
For the year ended December 31, 2018, we recognized $2.9 million, as license and collaboration revenue under the combined 2014 Daiichi Sankyo Agreement and October 2016 amendment and have recorded $1.4 million as Unbilled - collaboration and license revenue as of December 31, 2018 on the consolidated balance sheets.
F-26
There were no costs incurred to obtain or fulfill the contract.
We identified the following performance obligations under the 2016 Daiichi Sankyo Agreement: (1) to provide research and development services, (2) to provide regulatory approval services, and (3) to manufacture and provide clinical supply of Andexxa. We determined that our obligation to provide research and development and regulatory services can only provide benefit to Daiichi Sankyo in combination with our supply of clinical Andexxa for the Phase 4 expansion clinical study. The Andexxa manufacturing know-how is specialized and proprietary to us and cannot be provided by other vendors. Therefore, we have concluded that the research, development, regulatory and Andexxa supply services are not distinct within the context of the contract, and thus these obligations are combined into a single performance obligation.
We have exclusive rights to develop Andexxa outside of Japan and are solely responsible for performing such activities, including the ESS-Study, in support of the JNDA. Development activities occurring in Japan, including the expansion of our Phase 4 clinical trial, are the responsibility of BMS and Pfizer, however, the costs of such activities related to Factor Xa inhibitors other than apixaban are borne by us. Pursuant to this agreement, we are responsible to ensure edoxaban is included in all development activities related to Andexxa and Daiichi Sankyo will compensate us accordingly. We account for the expected cost-sharing payments from Daiichi Sankyo as an increase to the transaction price.
We determined that the transaction price of the 2016 Daiichi Sankyo Agreement was $15.3 million as of December 31, 2018 which includes routine updates for estimated reimbursable costs to be incurred in future periods. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of December 31, 2018, the transaction price includes $5.0 million of upfront payment and $4.4 million of estimated variable consideration for cost-sharing payments from Daiichi Sankyo for agreed upon research and development services incurred and to be incurred outside of Japan including the ESS-study, and $5.9 million of estimated variable consideration for cost-sharing payments from Daiichi Sankyo associated with the development of Andexxa in Japan. As of December 31, 2018, we have $10.0 million of further regulatory milestone payments eligible for achievement, however, regulatory milestones have been fully constrained and thus are not included in the transaction price. In determining whether to constrain these milestones, we considered numerous factors, including whether receipt of the milestones is within our control and/or contingent upon success in future clinical trials. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
We are utilizing a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligation to our counterparty. In applying the cost-based input methods of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs and internal full-time equivalent effort. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
For the year ended December 31, 2018, we recognized $3.5 million as license and collaboration revenue under the 2016 Daiichi Sankyo Agreement and have recorded $3.1 million as Unbilled - collaboration and license revenue as of December 31, 2018 on the consolidated balance sheets.
None of the costs to obtain or fulfill the contract were capitalized.
F-27
Bayer Pharma, AG (“Bayer”) and Janssen Pharmaceuticals, Inc. (“Janssen”)
Agreement Terms
In January 2014, we entered into an agreement with Bayer and Janssen to study Andexxa as a reversal agent to rivaroxaban in our Phase 3 studies and to seek regulatory approval in the United States and Europe (the “2014 Bayer and Janssen Agreement”). We are responsible for the costs associated with this agreement. We are obligated to provide research, development, manufacturing and regulatory services in exchange for an upfront nonrefundable fee of $10.0 million, up to three payments totaling $7.0 million which are payable upon achievement of certain events associated with scaling up our manufacturing process to support a commercial launch, and up to three payments totaling $8.0 million which are payable upon initiation of our Phase 3 study and regulatory approval of Andexxa as a reversal agent to rivaroxaban in the United States and Europe.
Revenue Recognition
We assessed the 2014 Bayer and Janssen Agreement in accordance with ASC 606 and concluded that Bayer and Janssen are customers.
We identified the following performance obligations under the 2014 Bayer and Janssen Agreement: (1) to provide research and development services, (2) to provide manufacturing services and to supply Andexxa, and (3) to provide regulatory approval services. We determined that the research, development and regulatory services can only provide benefit to Bayer and Janssen in combination with the manufacture and supply of Andexxa and because the manufacturing know-how is specialized and proprietary to us and cannot be provided by other vendors, the services do not qualify as distinct performance obligations. As the manufacturing and supply services are a required input to the research, development and regulatory services, we have combined all activities into a single performance obligation. The nature of the combined performance obligation is to provide research, development and regulatory services necessary to obtain approval of Andexxa as a reversal agent to rivaroxaban in both the United States and Europe.
For revenue recognition purposes, we determined that the duration of the contract begins on the effective date of the 2014 Bayer and Janssen Agreement and ends upon Andexxa approval in the United States and Europe for rivaroxaban, expected to be achieved in 2019. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. We analyzed the impact of Bayer and Janssen terminating the agreement prior to Andexxa approval and determined that there were substantive non-monetary penalties to Bayer and Janssen Pfizer for doing so. We considered quantitative and qualitative factors to reach this conclusion.
We determined that the transaction price of the 2014 Bayer and Janssen Agreement was $25.0 million as of December 31, 2018. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of December 31, 2018, the transaction price includes, $10.0 million of upfront payment, $13.0 million in milestones that have already been achieved and a $2.0 million milestone that we deem probable of achievement following the Committee for Medicinal Products for Human Use positive trend vote and subsequent discussions with the EMA during the year ended December 31, 2018. There is no further consideration eligible to be included in the transaction price.
We are utilizing a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligation to our counterparty. In applying the cost-based input method of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs and internal full-time equivalent effort. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
F-28
For the year ended December 31, 2018, we recognized $4.1 million as license and collaboration revenue
under the 2014 Bayer and Janssen Agreement
and
have recorded $2.0 million as Unbilled - collaboration and license revenue as of December 31, 2018 on the consolidated balance sheets.
None of the costs to obtain or fulfill the contract were capitalized.
Bayer Pharma, AG (“Bayer”)
Agreement Terms
In February 2016, we entered into an agreement with Bayer to perform an ESS-Study of Japanese ethnicity, perform any further studies requested by the Japanese regulatory authorities and to deliver services, in connection with our collaboration agreement to commercialize Andexxa in Japan with BMS and Pfizer (the “2016 Bayer Agreement”). Bayer will reimburse us 33% of our costs and expenses incurred to conduct the ESS-Study and between 33% and 100% of costs and expenses we incur for other studies that involve rivaroxaban under the terms of the arrangement.
We are obligated to provide research and development services, to provide clinical drug supply and related manufacturing services and to provide regulatory approval services in exchange for an upfront nonrefundable fee of $5.0 million. We are also eligible to receive, one payment of $10.0 million which is payable upon the initial regulatory approval for Andexxa for rivaroxaban in Japan. The $10.0 million payment will be reduced to $7.0 million if Japanese regulatory approval is attained based only upon the ESS Study results.
Revenue Recognition
We assessed the 2016 Bayer Agreement in accordance with ASC 606 and concluded that Bayer is a customer.
We identified the following performance obligations under the 2016 Bayer Agreement: (1) to provide research and development services, (2) to provide regulatory approval services, and (3) to manufacture and provide clinical supply of Andexxa. We determined that our obligation to provide research and development and regulatory services can only provide benefit to Bayer in combination with our supply of clinical Andexxa for the Phase 4 expansion clinical study. The Andexxa manufacturing know-how is specialized and proprietary to us and cannot be provided by other vendors. Therefore, we have concluded that the research, development, regulatory and Andexxa supply services are not distinct within the context of the contract, and thus these obligations are combined into a single performance obligation.
We have exclusive rights to develop Andexxa outside of Japan and are solely responsible for performing such activities, including the ESS-Study, in support of the JNDA. Development activities occurring in Japan, including the expansion of our Phase 4 clinical trial, are the responsibility of BMS and Pfizer, however, the costs of such activities related to Factor Xa inhibitors other than apixaban are borne by us. Pursuant to the 2016 Bayer agreement, we are responsible to ensure rivaroxaban is included in all development activities related to Andexxa and Bayer will compensate us accordingly. We account for the expected cost-sharing payments from Bayer as an increase to our transaction price.
We determined that the transaction price of the 2016 Bayer Agreement was $15.3 million as of December 31, 2018 which includes routine updates for estimated reimbursable costs to be incurred in future periods. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of December 31, 2018, the transaction price includes a $5.0 million upfront payment, $4.4 million of estimated variable consideration for cost-sharing payments from Bayer for agreed upon research and development services incurred and to be incurred outside of Japan including the ESS-study and $5.9 million of estimated variable consideration for cost-sharing payments from Bayer associated with the development of Andexxa in Japan. As of December 31, 2018, we have $10.0 million of further regulatory milestone payments eligible for achievement, however, regulatory milestones have been fully constrained and thus are not included in the transaction price. In determining whether to constrain these milestones, we considered numerous factors, including whether receipt of the milestones is within our control and/or contingent upon success in future clinical trials. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
F-29
We
are
utiliz
ing
a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. We believe this is the best measure of progress because other measures do not reflect how we transfer the performance obligati
on to our counter
party.
In applying the cost-
based input methods of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist primarily of third-party contract costs
and
internal full-time equivalent effort. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the performance obligations. The cumulative effect of revisions to estimated costs to complete the performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.
For the year ended December 31, 2018, we recognized $3.4 million as license and collaboration revenue under the 2016 Bayer Agreement and have recorded $3.5 million as Unbilled - collaboration and license revenue as of December 31, 2018 on the consolidated balance sheets.
There were no costs incurred to obtain or fulfill the contract.
Dermavant Sciences GmbH (“Dermavant”)
In December 2016, we granted an exclusive, worldwide license to Dermavant to develop and commercialize cerdulatinib in topical formulation for all indications, excluding oncology, in exchange for a non-refundable upfront payment of $8.8 million and contingent development and regulatory milestones of $36.3 million and up to $100.0 million in commercial milestone payments based on worldwide annual net sales. Additionally, Dermavant is required to pay us a 9% royalty on worldwide net sales of all products commercialized under the agreement throughout the license term, which continues on a country-by-country basis until the later of the 10th anniversary of the first commercial sale or the expiration of the last valid patent.
We identified the following non-contingent deliverables under the agreement, all of which had been satisfied as of December 31, 2016: 1) grant of an exclusive license to develop and commercialize cerdulatinib in topical formulation, excluding oncology; 2) obligation to transfer scientific knowledge and know-how; and 3) obligation to transfer manufacturing knowledge and know-how. Other deliverables referenced in the agreement were either contingent or deemed to be inconsequential and perfunctory. Dermavant has sole responsibility to develop, manufacture and commercialize the product. In the fourth quarter of 2017 we received notice that Dermavant achieved a specified regulatory milestone that requires a payment of $3.8 million to us.
During the years ended December 31, 2017 and 2016, we recognized $3.8 million and $8.8 million, respectively, in revenue under this agreement as we completed our obligations under these deliverables. There was no revenue recognized in 2018.
Refer to Note 8 “Asset Acquisition and License Agreements” for discussion regarding sublicensing fees due to Astellas Pharma, Inc. (“Astellas”) resulting from this agreement.
F-30
4. Fair Value Measurements
Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of our financial instruments, including cash and cash equivalents, restricted cash, short-term investments, receivables from collaborations, prepaid research and development, prepaid expenses and other current assets and accounts payable, accrued research and development, accrued compensation and employee benefits, accrued and other liabilities and approximate their fair value due to their short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 –
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 –
Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 –
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. Our embedded derivative liabilities are measured at fair value using a Monte Carlo simulation model and are included as a component of other long-term liabilities on the consolidated balance sheets. The embedded derivative liabilities are subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of interest and other income (expense), net, in our consolidated statements of operations. The assumptions used in the Monte Carlo simulation model include: (1) our estimates of the probability and timing of related events; (2) the probability-weighted net sales of Andexxa; (3) our risk-adjusted discount rate that includes a company specific risk premium; (4) our cost of debt; (5) volatility; (6) the probability of a change in control occurring during the term of the note; and (7) the probability of an event of default. Our noncontrolling interest in SRX Cardio includes the fair value of the contingent milestone and royalty payments, which is valued based on Level 3 inputs. See Note 8, "Asset Acquisition and License Agreements," to these consolidated financial statements for further information.
Our liability-classified Lonza award is measured at fair value using a Monte Carlo simulation model and is included as a component of other long-term liabilities on the consolidated balance sheets. The liability-classified Lonza award is subject to remeasurement at the end of each reporting period, with changes in fair value to be recognized as research and development expense in our consolidated statements of operations. The assumptions used in the Monte Carlo simulation model include: (1) our estimate of the date when the performance conditions will be met and when the number of shares to vest will be determined; (2) expected risk free rate; (3) expected volatility; (4) contractual term remaining; and (5) expected dividend yield rate. See Note 7, "Contract Manufacturing Agreements" to these consolidated financial statements for further information.
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.
In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Our noncontrolling interest in SRX Cardio includes the fair value of the contingent milestone and royalty payments, which is valued based on Level 3 inputs. See Note 8, “Asset Acquisition and License Agreements,” to these consolidated financial statements for further information.
F-31
The following table sets forth the fair value of our financial assets and liabilities (excluding consolidated SRX Cardio’s cash), allocated into Level 1, Level 2 and Level 3, that was measured on a recurring basis (in thousands):
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
19,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
19,500
|
|
Corporate notes and commercial paper
|
|
|
–
|
|
|
|
166,159
|
|
|
|
–
|
|
|
|
166,159
|
|
U.S. Treasury bills and government agency securities
|
|
|
–
|
|
|
|
110,190
|
|
|
|
–
|
|
|
|
110,190
|
|
Total financial assets
|
|
$
|
19,500
|
|
|
$
|
276,349
|
|
|
$
|
–
|
|
|
$
|
295,849
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,497
|
|
|
|
2,497
|
|
Liability-classified Lonza award
|
|
|
–
|
|
|
|
–
|
|
|
|
9,201
|
|
|
|
9,201
|
|
Total financial liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
11,698
|
|
|
$
|
11,698
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
31,836
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
31,836
|
|
Corporate notes and commercial paper
|
|
|
–
|
|
|
|
313,164
|
|
|
|
–
|
|
|
|
313,164
|
|
U.S. Treasury bills and government agency securities
|
|
|
–
|
|
|
|
170,458
|
|
|
|
–
|
|
|
|
170,458
|
|
Total financial assets
|
|
$
|
31,836
|
|
|
$
|
483,622
|
|
|
$
|
–
|
|
|
$
|
515,458
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
8,854
|
|
|
$
|
8,854
|
|
Level 3 liabilities are comprised of embedded derivative liabilities as described in Note 9 and liability-classified Lonza award as described in Note 7. The below schedule does not include liability-classified Lonza award as it was recorded on December 31, 2018, and there was no associated fair value movement during 2018. The initial fair value of the liability-classified Lonza award was measured at $9.2 million and was recorded as research and development expense in our consolidated statements of operations.
Balance as of December 31, 2017
|
|
$
|
8,854
|
|
Net decrease in fair value included in interest and other income, net
|
|
|
(6,357
|
)
|
Balance as of December 31, 2018
|
|
$
|
2,497
|
|
We estimate the fair value of our corporate notes, commercial paper and U.S. Treasury bills and government agency securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data, and other observable inputs. The estimated fair value of the Notes and long-term debt are discussed in Note 9.
There were no transfers between any of the levels of the fair value hierarchy during the periods presented.
F-32
5
. Financial Instruments
Cash equivalents and short-term and long-term investments, all of which are classified as available-for-sale securities, consisted of the following (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
Money market funds
|
|
$
|
19,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,500
|
|
|
$
|
31,836
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,836
|
|
Corporate notes and commercial paper
|
|
|
166,363
|
|
|
|
1
|
|
|
|
(205
|
)
|
|
|
166,159
|
|
|
|
313,307
|
|
|
|
2
|
|
|
|
(145
|
)
|
|
|
313,164
|
|
U.S. Treasury bills and government agency securities
|
|
|
110,270
|
|
|
|
1
|
|
|
|
(81
|
)
|
|
|
110,190
|
|
|
|
170,724
|
|
|
|
—
|
|
|
|
(266
|
)
|
|
|
170,458
|
|
|
|
$
|
296,133
|
|
|
$
|
2
|
|
|
$
|
(286
|
)
|
|
$
|
295,849
|
|
|
$
|
515,867
|
|
|
$
|
2
|
|
|
$
|
(411
|
)
|
|
$
|
515,458
|
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162,793
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,589
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,076
|
|
Total cash equivalents and investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
295,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
515,458
|
|
At December 31, 2018, the remaining contractual maturities of available-for-sale securities were less than one year. There have been no significant realized losses on available-for-sale securities for the periods presented. We do not intend to sell the investments with unrealized losses at December 31, 2018, and it is not more likely than not that we will be required to sell those investments with unrealized losses before recovery of their amortized cost bases, which may be maturity. Available-for-sale debt securities that were in a continuous loss position but were not deemed to be other than temporarily impaired were immaterial at both December 31, 2018 and 2017.
6. Balance Sheet Components
Inventories
Inventories consisted of the following (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
279
|
|
|
$
|
—
|
|
Work in process
|
|
|
14,395
|
|
|
|
1,032
|
|
Finished goods
|
|
|
2,844
|
|
|
|
67
|
|
Total inventories
|
|
$
|
17,518
|
|
|
$
|
1,099
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
7,873
|
|
|
$
|
1,099
|
|
Prepaid and other long-term assets
|
|
|
9,645
|
|
|
|
—
|
|
Total inventories
|
|
$
|
17,518
|
|
|
$
|
1,099
|
|
F-33
We began capitalizing inventory for costs associated with Andexxa Gen 1 and Gen 2 supply upon FDA approval on May 3, 2018 and December 31, 2018, respectively. We began capitalizing inventory for costs associated with Bevyxxa during the fourth quarter of 2017 when it was determined that the inventory had a probable future economic benefit. As of December 31, 2018 and 2017, long-term inventories of $9.6 million and zero, respectively are classified as prepaid and other long-term assets as these inventories are not expected to be sold within the next twelve months, and the amount is deemed recoverable.
As of December 31, 2018 and 2017, we have made prepayments to manufacturers for the purchase of inventories. These are classified as short and long-term assets based on when the inventories are expected to be utilized in the manufacturing process and/or sold within the next twelve months.
We established a reserve of $2.2 million for estimated obsolescence of inventories as of December 31, 2018, and we recorded a related charge to cost of sales for $2.2 million. In developing our inventory reserve estimate, we consider forecasted demand, current inventory levels and our firm purchase commitments. If it is determined that inventory utilization will further diminish based on estimates of demand compared to product expiration, additional inventory write-downs may be required.
In December 2018, we recorded a charge to cost of sales for $10.3 million associated with our Gen 1 manufacturing process as a result of our commercial plans and related timelines to transition our customer base to product manufactured on our Gen 2 manufacturing process, which was approved by the FDA on December 31, 2018. This $10.3 million charge comprised of approximately $4.6 million related to the write-down of the cost basis of inventory on hand, $2.9 million related to the prepaid manufacturing, and $2.8 million related to the accrual of a liability for the remaining minimum purchase commitment.
Prepaid and Other Long-Term Assets
Prepaid and other long-term assets consist of the following (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Long-term inventories
|
|
$
|
9,645
|
|
|
$
|
—
|
|
Prepaid manufacturing
|
|
|
10,894
|
|
|
|
9,600
|
|
Prepaid other long-term
|
|
|
38
|
|
|
|
9
|
|
Total prepaid and other long-term assets
|
|
$
|
20,577
|
|
|
$
|
9,609
|
|
As of December 31, 2018 and 2017, prepaid manufacturing on the Consolidated Balance Sheets represent prepayments of zero and $2.3 million, respectively, made to manufacturers for the purchase of inventories which we expect to be utilized in the manufacturing process and/or sold within the next twelve months. As of December 31, 2018 and 2017, long-term prepaid manufacturing of $10.9 million and $9.6 million, respectively, are classified as prepaid and other long-term assets as these inventories are not expected to be utilized in the manufacturing process and/or sold within the next twelve months.
Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Computer equipment
|
|
$
|
1,335
|
|
|
$
|
1,329
|
|
Capitalized software
|
|
|
1,322
|
|
|
|
1,518
|
|
Equipment
|
|
|
8,737
|
|
|
|
6,973
|
|
Leasehold improvements
|
|
|
8,143
|
|
|
|
8,000
|
|
|
|
|
19,537
|
|
|
|
17,820
|
|
Less accumulated depreciation and amortization
|
|
|
(14,301
|
)
|
|
|
(12,603
|
)
|
Property and equipment, net
|
|
$
|
5,236
|
|
|
$
|
5,217
|
|
F-34
Accrued and Other Liabilities
Accrued and other liabilities consist of the following (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Commercial related
|
|
$
|
7,203
|
|
|
$
|
1,694
|
|
Deferred rent
|
|
|
960
|
|
|
|
879
|
|
Current portion of long term obligation to collaborator
|
|
|
880
|
|
|
|
—
|
|
Others
|
|
|
2,473
|
|
|
|
979
|
|
Total accrued and other liabilities
|
|
$
|
11,516
|
|
|
$
|
3,552
|
|
7. Contract Manufacturing Agreements
Andexxa Manufacturing Agreements
AGC Biologics Commercial Supply Agreement (“CSA”)
In July 2014, we entered into a CSA with AGC Biologics, formerly CMC ICOS Biologics, Inc. (“AGC”), pursuant to which AGC manufactures clinical and commercial supply of andexanet alfa. The terms of the CSA required us to purchase an aggregate fixed number of batches from AGC through 2021. In December 2016, we entered into an Amended and Restated Commercial Supply Agreement (“aCSA”) with AGC that amended and restated the terms of the original CSA. Under the aCSA, AGC continues to manufacture bulk drug substance for Andexxa under our Gen 1 manufacturing process and supports other regulatory and manufacturing activities.
Under the consolidation guidance, we determined that AGC is a Variable Interest Entity (“VIE”) and we are not the primary beneficiary and therefore consolidation of AGC is not required. We came to this conclusion as we do not control those activities most significant to AGC, and therefore we are not considered to be the primary beneficiary of AGC. As of December 31, 2018, we have not provided financial or other support to AGC that was not previously contractually required. We have recorded $0.1 million of accounts payable, $2.3 million of accrued manufacturing and no accrued research and development in our consolidated balance sheet as of December 31, 2018. Neither the original CSA nor the aCSA require us to fund operations at AGC and therefore, historically we have quantified our maximum exposure to loss as the aggregate value of prepaid manufacturing services as of each reporting date. There is no prepaid manufacturing services outstanding in our consolidated balance sheet as of December 31, 2018. We believe that our total exposure to losses associated with the fixed pricing terms of this agreement is de minimis given the cost per batch, number of batches and time frame over which the batches will be manufactured, pursuant to the amended agreement.
Lonza Manufacturing Services Agreement
In August 2017, we executed a Manufacturing Services Agreement with Lonza AG (“Lonza”) to develop a second manufacturing site and to continue to develop our Gen 2 manufacturing process for Andexxa bulk drug substance and to manufacture commercial supply. The manufacturing commitments included therein are contingent upon marketing approval by either the FDA or the EMA of Andexxa manufactured at the current Porrino facility under the Gen 2 process and will remain in effect for a period of ten years. Additionally, the agreement provides Lonza with two separate rights to purchase shares of our common stock at a purchase price of $1.00 per share, contingent upon certain events. The first purchase right will be earned by Lonza upon the approval of the Gen 2 process and the commencement of process transfer activities to an additional, new facility. The second purchase right will be earned by Lonza upon the approval of the drug substance manufactured at the new facility and the number of shares will be determined based on the achievement of specified performance metrics at the new facility. The number of shares subject to each of the first and the second purchase rights will be capped at the lesser of either: (1) the number of shares with an aggregate market value of $15.0 million based on a 20-day trailing market value average from the date such purchase right is earned by Lonza, or (2) 500,000 shares. This agreement provides net cash settlement provision in the event a change of control or an assignment of this agreement occurs prior to Lonza earning entitlement to the first and/or second tranche purchase rights.
F-35
We measure the fair value of the equity instrument contingently issuable to Lonza by using the stock price and other measurement assumptions as of the earlier of the date at which either: (1) a commitment for performance by the counterparty has been reached; or (2) the counterparty’s performance is complete. We determined that Lonza does not have a performance commitment in this arrangement because there is no substantive disincentive for nonperformance. As such, our measurement date for the contingently issuable equity awards will be when the specified performance criteria have been achieved. Until such achievement, the contingently issuable equity awards will be measured at their then-current lowest aggregate fair value at each financial reporting date.
Upon the Gen2 approval on December 31, 2018, the only remaining performance condition for the first tranche award was the commencement of the technology transfer. As this is considered to be within Lonza’s control, recognition of the then-current fair value of the equity awards prior to the measurement date was assessed based on the probability that Lonza will perform. We expect that it is probable that Lonza will perform, and as such, we recorded the award at the fair value of $9.2 million using the valuation assumptions described in Note 4, “Fair Value Measurements” as of December 31, 2018.The $9.2 million non-cash charge was classified as research and development expense.
Bevyxxa Manufacturing Agreement
In 2016 we entered into a Manufacturing Agreement, as amended, with Hovione, Limited, (“Hovione”), pursuant to which Hovione agreed to manufacture active pharmaceutical ingredient (“API”) for Bevyxxa at commercial scale and perform process validation during the term of the agreement.
As of December 31, 2018, we have recorded $10.9 million in prepaid and other long-term assets and we expect to make up to $2.9 million of additional payments over the remaining term of the
Hovione
Agreement, ending in 2019.
8. Asset Acquisition and License Agreements
SRX Cardio, LLC (“SRX Cardio”)
In December 2015, we entered into an option agreement with SRX Cardio to explore a novel approach to develop a drug in the field of hypercholesterolemia. This agreement provided us an option to enter into an exclusive license agreement as well as responsibility to lead and fund the development effort during the option period. We made an upfront payment of $0.5 million.
In September 2016, we exercised our right to enter into an exclusive license agreement. Pursuant to the terms of the agreement, we made an upfront payment of $2.2 million to acquire the license and are obligated to pay up to $152.5 million in research and development milestones related to the advancement of the program and royalties in the range of 2% to 6% of worldwide net sales. We may terminate the license agreement upon 90 days’ notice for convenience and the agreement may also be terminated by either party for a material breach by the other party.
We determined that SRX Cardio is and continues to be a variable interest entity and that we hold a variable interest in SRX Cardio’s intellectual property assets and the related potential future product candidates these assets may produce. Due to the absence of other significant development programs at SRX Cardio, we concluded that the variable interest was in the entity as a whole. Given the stage of development, we concluded that SRX Cardio is not considered a business as they lack the processes required to generate outputs. Further, because we control those activities most significant to SRX Cardio, we are considered to be the primary beneficiary of SRX Cardio. Accordingly, SRX Cardio is subject to consolidation and we have consolidated the financial statements of SRX Cardio by (a) eliminating all intercompany balances and transactions; and (b) allocating income or loss attributable to the noncontrolling interest in SRX Cardio to net income or loss attributable to noncontrolling interest in our consolidated statement of operations and reflecting noncontrolling interest on our consolidated balance sheet. Our interest in SRX Cardio is limited to the development of the intellectual property asset. The upfront payments of $0.5 million and $2.2 million and the obligation to fund the development plan represent our maximum exposure to loss under the agreement. We did not acquire any equity interest in SRX Cardio, any interest in SRX Cardio's cash and cash equivalents or any control over their activities that do not relate to the exclusive license agreement. SRX Cardio does not have any right to our assets except as provided in the exclusive license agreement.
F-36
At the inception of the agreement, the identifiable assets, assumed liabilities and non-controlling interest of SRX Cardio were recorded at their estimated fair value upon the initial consolidation of SRX Cardio, including the in-process research and development intangible asset. We estimated the fair value of these indefinite-lived intangible assets to be $3.2 million and the noncontrolling interest to be $2.9 million. The fair value was estimated using present-value models on potential contingent milestones and royalty payments (“contingent future payments”), based on assumptions regarding the probability of achieving the development milestones, estimate of time to develop the drug candidate, estimates of future cash flows from potential product sales and assumptions regarding the appropriate discount rate
.
As of December 31, 2018, we have not provided financial or other support to SRX Cardio that was not previously contracted or required. We recorded SRX Cardio’s $30,000 and $173,000 of cash as restricted cash as of December 31, 2018 and 2017, respectively, because (a) we do not have any interest in or control over SRX Cardio's cash and (b) the agreement does not provide for these assets to be used for the development of the intellectual property assets developed pursuant to this agreement.
We recorded $321,000 as net loss attributable to noncontrolling interest (SRX Cardio) on our consolidated statements of operations, reflecting
a
change in fair value of our contingent future payments liability to SRX Cardio as of December 31, 2018.
Should the development program make substantive advancement, we expect to record increases in the fair value of the contingent milestone and royalty payments with a corresponding increase to net loss or decrease to net income attributable to Portola Shareholders.
Millennium Pharmaceuticals, Inc. (“Millennium”)
In August 2004, we entered into an agreement with Millennium to license certain exclusive rights to research, develop and commercialize certain compounds that inhibit Factor Xa, including Bevyxxa. The license agreement requires us to make license fee, milestone, royalty and sublicense sharing payments to Millennium as we develop, commercialize or sublicense Bevyxxa. The license agreement will continue in force, on a country-by-country basis, until the expiration of the relevant patents or ten years after the launch, whichever is later, or termination by either party pursuant to the agreement. This license agreement may be terminated by either party for the other party’s uncured material breach.
Under the agreement, milestone payments are determined based on the indication included in our filing and become payable upon acceptance of our new drug application, or NDA, and regulatory approval in the United States and Europe. In December 2016, the FDA accepted our NDA for Bevyxxa for extended-duration prophylaxis of venous thromboembolism, triggering a $2.0 million milestone payment to Millennium which was recorded as a research and development expense. In June 2017, Bevyxxa received regulatory approval in the United States, triggering a $5.0 million milestone payment to Millennium which is recorded as finite-lived intangible assets in
our
consolidated balance sheet and will be amortized on a straight-line basis over the remaining estimated patent life. Amortization expense was $0.6
million
for the year ended December 31, 2018. This amortization expense was recorded as cost of sales. Net product sales of Bevyxxa generated by us are subject to a tiered royalty ranging between 2% and 8%.
Estimated future amortization expense for Millennium related intangible assets as of December 31, 2018 is $0.6 million per year for 2019, 2020, 2021 and 2022, and $1.8 million thereafter.
Astellas Pharma, Inc. (“Astellas”)
In 2010, we amended and restated our original license agreement with Astellas which was executed in August 2005. The amended and restated license agreement provides us certain exclusive rights to research, develop and commercialize Syk inhibitors. Pursuant to the agreement, we may be required to pay Astellas up to $71.5 million in milestone payments upon the achievement of certain regulatory, approval and sales events for each Syk inhibitor we develop.
Additionally, in the event that we enter into an agreement with a third party to develop and commercialize Syk inhibitors, we would be required to pay Astellas 20% of any payments (excluding royalties) received under the collaboration. These payments would be creditable against the aforementioned milestone payments. In addition, we are required to pay Astellas royalties for worldwide sales for any commercial Syk inhibitor product.
F-37
In December 2016, we out-licensed exclusive rights to cerdulatinib in topical formulation, excluding oncology, to Dermavant Sciences GmbH (“Dermavant”). Twenty percent of the milestone payments received from Dermavant are payable to Astellas. We recognized research and development expense in our consolidated statement of operations of $0.8 million and $1.8 million for the periods ended December 31, 2017 and 2016, respectively, associated with our payment obligation to Astellas. There was no research and development expense incurred during 2018 because we did not earn associated milestone from Dermavant during 2018
.
9. Notes Payable
BMS and Pfizer Promissory Notes
In December 2016, we entered into a supplemental funding support agreement with BMS and Pfizer whereby we received $50.0 million in exchange for two promissory notes totaling $65.0 million that become due in December 2024 (“Notes”). The use of funds is restricted to development activities needed for regulatory approval of Andexxa by the FDA and EMA as provided in the agreement.
Pursuant to the terms of the agreement, we are required to pay down the Notes each quarter in an amount equal to 5% of net sales of Andexxa in the United States and the European Union (“EU”). If the approval of Andexxa in the United States and EU is not achieved by January 1, 2019, we are able to reduce the repayment amount to $60.0 million if such amount is paid by December 31, 2021 and regardless of the timing of regulatory approval, we may reduce the repayment amount to $62.5 million if such amount is paid by December 31, 2023. Any unpaid amounts shall become immediately due upon: (1) a change of control of the Company; (2) an event of default; or (3) termination of the agreement for breach. We have the right to prepay the repayment amount at any time without penalty.
The accounting for the Notes requires us to make certain estimates and assumptions, including timing of Andexxa approvals, timing of royalty payments due to BMS and Pfizer, the expected rate of return to BMS and Pfizer, the split between current and long-term portions of the obligation and accretion of related interest expense.
The upfront cash receipt of $50.0 million was recorded as Notes payable at issuance. We are accruing for interest over the term of the Notes. The carrying values of the Notes payable at December 31, 2018 and 2017 are $48.3 million and $50.6 million, respectively, including accrued interest of $7.6 million and $
4.2
million, respectively, net of current portion and accounts payable of $5.1 million and zero, respectively. Current portion of notes payable and long term debt and a portion of accounts payable on the consolidated balance sheet represents expected future payments to be made in the next 12 months from the balance sheet date based on the current quarter sales and the most current sales forecast. The royalty obligation relating to net sales recorded in the fourth quarter of 2018 is included in accounts payable on the balance sheet.
We evaluated the features of the Notes and determined that certain features require acceleration of payments such as pursuant to a change of control or an event of default. We determined that these features (embedded derivatives) require bifurcation and fair value recognition. We determined the fair value of each derivative using a Monte Carlo simulation model taking into account the probability of these events occurring and potential repayment amounts and timing of such payments that would result under various scenarios (see Note 4 “Fair Value Measurements” to these consolidated financial statements). We will remeasure the embedded derivatives to fair value each reporting period until the repayment, termination or maturity of the Notes. For the year ended December 31, 2018 and 2017, we recognized a loss of $0.4 million and a gain of $1.6 million, respectively, upon remeasurement of the embedded derivatives.
The estimated fair value of the Notes at December 31, 2018 and 2017 was $53.2 million and $55.5 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 4 “
Fair Value Measurements
” to these consolidated financial statements.
F-38
Royalty-based Financing
In February 2017, we entered into a purchase and sale agreement (the “Royalty Sales Agreement”) with HealthCare Royalty Partners and its affiliates (“HCR”) whereby HCR acquired a term royalty interest in future worldwide net sales of Andexxa. We received $50.0 million upon closing and received an additional $100.0 million following the U.S. regulatory approval of Andexxa in May 2018.
We are required to pay royalties to HCR based on tiered net worldwide sales of Andexxa in a range of 8.46% to 4.19%. The applicable rate decreases starting at worldwide net sales levels above $150.0 million. Total royalty payments are capped at 195% of the funding received less certain transaction expenses, or $290.6 million. We have evaluated the terms of the Royalty Sales Agreement and concluded that the features of the funded amount are similar to those of a debt instrument. Accordingly, we have accounted for the transaction as long-term debt.
As the repayment term of the
funded amount is contingent upon the sales volumes of Andexxa, the repayment term may be shortened or extended depending on the actual sales of Andexxa. The repayment period commences upon the first commercial sale of Andexxa in any country and expires on the date when HCR has received cash payments totaling $290.6 million.
We evaluated the terms of the debt and determined that certain features, such as the variability in the royalty payments based upon the timing of manufacturing approval from the FDA, is an embedded derivative that requires bifurcation from the debt instrument and fair value recognition. We determined the fair value of each derivative using a Monte Carlo simulation model taking into account the probability of these events occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 4 “Fair Value Measurements” to these consolidated financial statements.
We remeasured the embedded derivative to fair value each reporting period until when it was determined that this is no longer a derivative given the Andexxa Gen2 FDA approval on December 31, 2018.
For the year ended December 31, 2018 and 2017, we recognized a gain of $6.8 million and a loss of $6.2 million, respectively, upon remeasurement of the embedded derivative.
The effective interest rate as of December 31, 2018 was 13.9%. For the year ended December 31, 2018, accrued interest of $15.4 million was added to the principal balance of the debt. The total net royalties to be paid, less the net proceeds received will be recorded to interest expense using the effective interest method over the life of the Royalty Sales Agreement. We will estimate the payments to be made to HCR over the term of the Royalty Sales Agreement based on forecasted royalties and will calculate the interest rate required to discount such payments back to the liability balance. Over the course of the Royalty Sales Agreement, the actual interest rate will be affected by the amount and timing of net royalty revenue recognized and changes in forecasted revenue. On a quarterly basis, we will reassess the effective interest rate and adjust the rate prospectively as necessary.
Upon the closing of Royalty Sales Agreement in February 2017, we incurred a fee to HCR of $2.0 million and paid additional debt issuance costs totaling $0.6 million, which includes expenses that we paid on behalf of HCR and expenses incurred directly by us. Upon the subsequent funding of $100.0 million in May 2018, we incurred fees to HCR of $5.0 million. Fees and debt issuance costs have been netted against the debt as of December 31, 2018 and are being amortized over the estimated term of the debt using the effective interest method.
The assumptions used in determining the expected repayment term of the debt requires that we make estimates that could impact the short and long-term classification of the debt, as well as the period over which the fees and debt issuance costs will be amortized. The carrying value of the long term debt as of December 30, 2018 and 2017 was $155.3 million and $54.3 million, respectively, including accrued interest of $22.9 million and $7.4 million, respectively, net of unamortized debt discount of $6.8 million and $2.3 million, respectively, and net of current portion and accounts payable of $8.6 million and zero, respectively. Current portion of notes payable and long term debt and a portion of accounts payable on the consolidated balance sheet represents expected future payments to be made in the next 12 months from the balance sheet date based on the current quarter sales and the most current sales forecast. The royalty obligation relating to net sales recorded in the fourth quarter of 2018 is included in accounts payable on the balance sheet.
F-39
The estimated fair value of long-term debt at December 31, 2018 and 2017 was $154.2 million and $58.8 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 4 “Fair Value Measurements” to these consolidated financial statements.
10. Commitments and Contingencies
We conduct product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. We have contractual arrangements with these organizations; however, these contracts are cancelable on 30 days’ notice and our obligations under these contracts are largely based on services performed with the exception of our contract manufacturers. Non-cancelable purchase commitments with contract manufacturing organizations amount to $78.0 million, $93.9 million and $43.3 million, for services to be performed in 2019, 2020, and 2021, respectively.
Facility Leases
We lease our corporate, laboratory and other facilities under an operating lease, which has been subject to several amendments necessary to secure additional space and extend the lease term through March 2020. These amendments provided for aggregate tenant improvement allowances of $6.3 million, which are amortized as a reduction to rent expense on a straight-line basis over the lease term. The facility lease agreement, as amended, provides for an early termination right effective March 2018 with nine months advance notice and a termination fee of $1.0 million. The facility lease agreement, as amended, contains scheduled rent increases over the lease term. The related rent expense for this lease is calculated on a straight-line basis, with the difference recorded as deferred rent.
At December 31, 2018, our future minimum commitments under our non-cancelable operating leases were as follows (in thousands):
Year ending December 31:
|
|
|
|
|
2019
|
|
$
|
3,119
|
|
2020
|
|
|
696
|
|
Total
|
|
$
|
3,815
|
|
Rent expense was $2.1 million, $1.8 million and $1.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Guarantees and Indemnifications
We indemnify each of our officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at our request in such capacity, as permitted under Delaware law and in accordance with our certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.
The maximum amount of potential future indemnification is unlimited; however, we currently hold director and officer liability insurance. This insurance allows the transfer of risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations for any period presented.
F-40
Contingencies
While there are no material legal proceedings we are aware of, we may become party to various claims and complaints arising in the ordinary course of business. Management does not believe that any ultimate liability resulting from any of these claims will have a material adverse effect on its results of operations, financial position, or liquidity. However, management cannot give any assurance regarding the ultimate outcome of these claims, and their resolution could be material to operating results for any particular period, depending upon the level of income for the period.
11. Stock-Based Compensation
Equity Incentive Plan
In January 2013, our Board of Directors adopted our 2013 Equity Incentive Plan (“2013 Plan”), which became effective upon the closing of our IPO in May 2013. As of December 31, 2018, we are authorized to issue 18,297,465 shares of common stock under the 2013 Plan. The 2013 Plan had 5,203,731 shares of common stock available for future issuance as of December 31, 2018, subject to automatic annual increases each January 1st and will continue through January 1, 2023. The automatic annual share increase is equal to 5 % of the total number of outstanding shares of our common stock on December 31st of the preceding fiscal year, unless our Board of Directors elects to forego or reduce such increase. Further, all remaining shares available under the 2003 Equity Incentive Plan, or the 2003 Plan, were transferred to the 2013 Plan upon adoption. The 2013 Plan provides for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards to employees, officers, directors and consultants.
In July 2017, our Board of Directors adopted an Inducement Plan (“2017 Plan”) with 1,500,000 shares authorized for issuance to new employees entering into employment with Portola in accordance with Nasdaq Listing Rule 5635(c)(5). The 2017 Plan had 1,246,421 shares of common stock available for future issuance as of December 31, 2018. In December 2018, our Board of Directors authorized an additional 1,000,000 shares under the 2017 Plan for issuance to new employees entering into employment with Portola in accordance with NASDAQ Listing Rule 5635(c)(5).
Stock Options
Incentive stock options may be granted with exercise prices of not less than 100% of the estimated fair value of our common stock and nonstatutory stock options may be granted with an exercise price of not less than 85% of the estimated fair value of the common stock on the date of grant. Stock options granted to a stockholder owning more than 10% of our voting stock must have an exercise price of not less than 110% of the estimated fair value of the common stock on the date of grant. Stock options are generally granted with terms of up to ten years and vest over a period of four years.
The following table summarizes stock option activity under our 2013 Plan and 2017 Plan, and related information during the year ended December 31, 2018:
|
|
Shares
|
|
|
|
|
|
|
|
Subject to
|
|
|
Weighted-
|
|
|
|
Outstanding
|
|
|
Average Exercise
|
|
|
|
Options
|
|
|
Price Per Share
|
|
Balance at December 31, 2017
|
|
|
6,514,538
|
|
|
$
|
31.36
|
|
Options granted
|
|
|
2,452,738
|
|
|
|
36.36
|
|
Options exercised
|
|
|
(699,974
|
)
|
|
|
16.92
|
|
Options canceled
|
|
|
(759,612
|
)
|
|
|
42.12
|
|
Balance at December 31, 2018
|
|
|
7,507,690
|
|
|
$
|
33.25
|
|
F-41
Additional information related to the status of stock options at December 31, 2018, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Life
|
|
|
Intrinsic Value
|
|
Outstanding
|
|
|
7,507,690
|
|
|
$
|
33.25
|
|
|
|
6.5
|
|
|
$
|
4,833
|
|
Vested
|
|
|
4,149,238
|
|
|
$
|
31.05
|
|
|
|
5.0
|
|
|
$
|
4,819
|
|
The aggregate intrinsic values of stock options outstanding and vested were calculated as the difference between the exercise price of the stock options and the fair value of our common stock as of December 31, 2018. The aggregate intrinsic value of stock options exercised was $11.6 million, $39.3 million and $1.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The weighted-average grant date fair value of employee stock options granted during the years ended December 31, 2018, 2017 and 2016 was $21.01, $24.08 and $17.15 per share, respectively. The total estimated grant date fair value of stock options vested during the years ended December 31, 2018, 2017 and 2016 was $30.6 million, $23.0 million and $20.8 million, respectively.
We recognized stock-based compensation expenses of $29.7 million, $25.5 million and $21.2 million in 2018, 2017 and 2016 respectively relating to the employee stock options. As of December 31, 2018, total unamortized employee stock-based compensation was $60.5
million, which is expected to be recognized over the remaining estimated vesting period of 2.6
years.
Performance Stock Options (“PSOs”)
In May 2016, the Compensation Committee of our Board of Directors approved the commencement of granting performance stock option awards to our executive and senior officers. PSOs represent a contingent right to purchase our Common Stock upon achievement of specified conditions. The PSOs granted in May 2016 were fully vested by the fourth quarter of 2017 when regulatory approval of Andexxa was achieved and when the manufacturing goal related to our lead programs was met in 2017. A portion of PSOs granted in May 2016 were forfeited and cancelled when regulatory approval of Andexxa was not achieved by the fourth quarter of 2016.
We recognized stock-based compensation expense of $2.3 million, $0.5 million and $0.5 million in 2017, 2016 and 2015, respectively, relating to these PSOs. As of December 31, 2017, the stock-based compensation expense for these PSOs had been fully recognized. The aggregate intrinsic value of PSOs exercised for the years ended December 31, 2018, 2017 and 2016 was $0.2 million, $0.4 million and zero, respectively. The weighted-average grant date fair value of these PSOs granted during 2016 was $14.25. There was no grant of PSOs during 2017 and 2018. The following table summarizes PSO activities under our 2013 Plan and related information:
|
|
Shares
|
|
|
|
|
|
|
|
Subject to
|
|
|
Weighted-
|
|
|
|
Outstanding
|
|
|
Average Exercise
|
|
|
|
PSOs
|
|
|
Price Per Share
|
|
Balance at December 31, 2017
|
|
|
164,783
|
|
|
$
|
23.76
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
(17,448
|
)
|
|
|
23.76
|
|
Options canceled
|
|
|
(4,000
|
)
|
|
|
23.76
|
|
Balance at December 31, 2018
|
|
|
143,335
|
|
|
$
|
23.76
|
|
F-42
Additional information related to the status of PSOs at December 31, 201
8
, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Life
|
|
|
Intrinsic Value
|
|
Outstanding and Vested
|
|
|
143,335
|
|
|
$
|
23.76
|
|
|
|
4.0
|
|
|
$
|
-
|
|
Restricted stock units (“RSUs”)
In January 2015, the Compensation Committee of our Board of Directors approved the commencement of granting restricted stock units to our employees. RSUs are share awards that entitle the holder to receive freely tradable shares of our Common Stock upon vesting. The RSUs cannot be transferred, and until they vest, the awards are subject to forfeiture if employment terminates prior to the release of the vesting restrictions. The RSUs, generally vest in equal amounts on each of the first three year anniversaries of the grant date, provided the employee remains continuously employed with us. The fair value of the RSUs is equal to the closing price of our Common Stock on the grant date.
The following table summarizes RSU activities under our 2013 Plan and 2017 Plan and related information:
|
|
Shares
|
|
|
|
|
|
|
|
Subject to
|
|
|
Weighted-
|
|
|
|
Outstanding
|
|
|
Average Grant Date
|
|
|
|
RSUs
|
|
|
Fair Value Per Share
|
|
Balance at December 31, 2017
|
|
|
600,334
|
|
|
$
|
27.87
|
|
RSUs granted
|
|
|
758,156
|
|
|
|
37.62
|
|
RSUs released
|
|
|
(279,555
|
)
|
|
|
28.49
|
|
RSUs canceled
|
|
|
(99,657
|
)
|
|
|
40.13
|
|
Balance at December 31, 2018
|
|
|
979,278
|
|
|
$
|
34.00
|
|
Additional information related to the status of RSUs at December 31, 2018, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Life
|
|
|
Intrinsic Value
|
|
Outstanding
|
|
|
979,278
|
|
|
|
1.2
|
|
|
$
|
19,116
|
|
The total grant date fair value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was $8.0 million, $6.0 million and $1.7 million, respectively. The weighted-average grant date fair value of RSUs granted during the years ended December 31, 2018, 2017 and 2016 was $37.6, $27.15 and $28.01 per share respectively.
We recognized stock-based compensation expenses of $11.3 million, $8.1 million and $5.3 million in the years ended December 31, 2018, 2017 and 2016, respectively, relating to these RSUs. As of December 31, 2018, there was $21.6 million of unrecognized compensation costs related to these RSUs, which is expected to be recognized over an estimated weighted-average period of 2.0 years.
F-43
Performance stock units
(“PSUs”)
In January 2015, the Compensation Committee of our Board of Directors approved the commencement of granting performance stock units to our employees. PSUs are share awards that entitle the holder to receive freely tradable shares of our Common Stock upon achievement of specified market or performance conditions. In January 2016, the Compensation Committee of our Board of Directors approved a program to award up to 102,906 PSUs to the management team based on the achievement of certain commercial and regulatory goals related to andexanet alfa and betrixaban, respectively. In January 2017, the Compensation Committee of our Board of Directors approved a program to award up to 143,750 PSUs to the management team based on the achievement of certain regulatory goals related to andexanet alfa. In March 2018, the Compensation Committee of our Board of Directors approved a program to award up to 102,600 PSUs to the management team based on the achievement of certain regulatory and net revenue goals.
The following table summarizes PSU activities under our 2013 Plan and related information:
|
|
Shares
|
|
|
|
|
|
|
|
Subject to
|
|
|
Weighted-
|
|
|
|
Outstanding
|
|
|
Average Grant Date
|
|
|
|
PSUs
|
|
|
Fair Value Per Share
|
|
Balance at December 31, 2017
|
|
|
304,754
|
|
|
$
|
25.34
|
|
PSUs granted
|
|
|
102,600
|
|
|
|
32.66
|
|
PSUs released
|
|
|
(218,107
|
)
|
|
|
25.26
|
|
PSUs canceled
|
|
|
(35,744
|
)
|
|
|
27.48
|
|
Balance at December 31, 2018
|
|
|
153,503
|
|
|
$
|
29.85
|
|
Additional information related to the status of PSUs at December 31, 2018, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Life
|
|
|
Intrinsic Value
|
|
Outstanding
|
|
|
153,503
|
|
|
|
0.7
|
|
|
$
|
2,996
|
|
The total
grant date fair value of PSUs vested in 2018, 2017 and 2016 was $5.7 million, $2.1 million and $0.7 million, respectively. The weighted-average grant date fair value of PSUs granted in 2018, 2017 and 2016 was $32.66, $25.54 and $33.49 per share, respectively
.
We recognized stock-based compensation expenses of $2.7 million, $2.4 million and $2.5 million in the years ended December 31, 2018, 2017 and 2016, respectively, relating to these PSUs
. As of December 31, 2018, there was $0.5 million of unrecognized compensation costs related to these PSUs, which is expected to be recognized over an estimated weighted-average period of 0.7 years.
Employee Stock Purchase Plan (“ESPP”)
The Board of Directors adopted the 2013 ESPP, effective upon the completion of the initial public offering of our common stock. As of December 31, 2018, we reserved a total of 1,818,314 shares of common stock for issuance under the 2013 ESPP. The reserve for shares available under the ESPP automatically increases on January 1st each year, beginning in 2014, by an amount equal to 2% of the total number of outstanding shares of our common stock on December 31
st
of the preceding fiscal year unless the Board of Directors elects to forego or reduce such increases. Since 2015, the Board of Directors elected to completely forego the automatic share increases available under the ESPP. The ESPP had 1,505,810 shares of common stock available for future issuance as of December 31, 2018. Eligible employees may purchase common stock at 85% of the lesser of the fair market value of our Common Stock on the first or last day of the offering period.
F-44
Options Granted to Nonemployees
We have granted options to purchase shares of common stock to consultants in exchange for services performed. We granted options to purchase 37,000, 50,000 and 52,000 shares with average exercise prices of $45.16, 38.14 and $24.85 per share, respectively, during the years ended December 31, 2018, 2017, and 2016, respectively. These options vest upon grant or various terms up to four years. We recognized non-employee stock compensation expense of $12.1 million (including $9.2 million from the liability-classified Lonza award), $3.9 million and less than $0.1 million during the years ended December 31, 2018, 2017 and 2016, respectively. The fair value of non-employees’ options was measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported years, other than the expected life assumption, which is assumed to be the remaining contractual life of the option. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned.
Stock-Based Compensation
Stock-based compensation expense is reflected in the consolidated statements of operations as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
27,694
|
|
|
$
|
19,779
|
|
|
$
|
12,905
|
|
Selling, general and administrative
|
|
|
28,712
|
|
|
|
23,505
|
|
|
|
17,457
|
|
Subtotal
|
|
$
|
56,406
|
|
|
$
|
43,284
|
|
|
$
|
30,362
|
|
Capitalized stock-based compensation costs
|
|
|
(1,046
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense included in total expenses
|
|
$
|
55,360
|
|
|
$
|
43,284
|
|
|
$
|
30,362
|
|
Stock-based compensation capitalized into inventory is recognized as cost of sales when the related product is sold.
Valuation Assumptions
The fair value of our stock options including performance stock options and purchase rights under our ESPP were determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The risk-free rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected terms of the awards. The expected term of employee options granted is determined using the simplified method (based on the midpoint between the vesting date and the end of the contractual term). As sufficient trading history does not yet exist for our common stock, our estimate of expected volatility is based on the weighted average volatility of other companies with similar products under development, market, size and other factors and our volatility. To date, we have not declared or paid any cash dividends and do not have any plans to do so in the future. Therefore, we used an expected dividend yield of zero.
F-45
The following table illustrates the weighted-average assumptions for the Black-Scholes option-pricing model used in determining the fair value of these awards:
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Risk-free interest rate
|
|
|
|
|
|
|
Stock options
|
|
2.55% - 3.03%
|
|
1.70% - 2.27%
|
|
1.01% - 2.10%
|
Performance stock options
|
|
–
|
|
–
|
|
1.34% - 1.50%
|
ESPP
|
|
1.10% - 2.28%
|
|
0.47% - 1.10%
|
|
0.26% - 0.50%
|
Expected term
|
|
|
|
|
|
|
Stock options
|
|
5.0 - 6.1 years
|
|
5.0 - 6.1 years
|
|
5.0 - 6.1 years
|
Performance stock options
|
|
–
|
|
–
|
|
5.4 - 6.4 years
|
ESPP
|
|
0.5 years
|
|
0.5 years
|
|
0.5 years
|
Expected volatility
|
|
|
|
|
|
|
Stock options
|
|
59% - 62%
|
|
60% - 65%
|
|
62% - 66%
|
Performance stock options
|
|
–
|
|
–
|
|
65% - 66%
|
ESPP
|
|
49% - 65%
|
|
61% - 80%
|
|
54% - 99%
|
Dividend yield
|
|
|
|
|
|
|
Stock options
|
|
–
|
|
–
|
|
–
|
Performance stock options
|
|
–
|
|
–
|
|
–
|
ESPP
|
|
–
|
|
–
|
|
–
|
Contingently issuable shares to Lonza are discussed in Note 7.
12. Net Loss per Share Attributable to Portola Common Stockholders
The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to Portola common stockholders for the periods presented because including them would have been antidilutive:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Stock options to purchase Common Stock
|
|
|
7,507,690
|
|
|
|
6,514,538
|
|
|
|
5,817,116
|
|
Performance stock options
|
|
|
143,335
|
|
|
|
164,783
|
|
|
|
180,752
|
|
Restricted stock units
|
|
|
979,278
|
|
|
|
600,334
|
|
|
|
546,507
|
|
Performance stock units
|
|
|
153,503
|
|
|
|
304,754
|
|
|
|
285,866
|
|
Employee stock purchase plan
|
|
|
96,219
|
|
|
|
32,325
|
|
|
|
37,368
|
|
Common stock warrants
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1,500
|
|
13. Employee Benefit Plan
We sponsor a 401(k) Plan, which stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations of eligible compensation. We match employee contributions up to a maximum of 3% of employee salary for the years ended December 31, 2018, 2017 and 2016. During the years ended December 31, 2018, 2017 and 2016, we recognized total expense of $1.3 million, $0.9 million and $0.8 million, respectively, relating to these contributions.
F-46
14. Income Taxes
The income tax provision consists of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
–
|
|
|
$
|
–
|
|
State
|
|
|
–
|
|
|
|
–
|
|
Foreign
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
–
|
|
|
$
|
–
|
|
State
|
|
|
–
|
|
|
|
–
|
|
Foreign
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
–
|
|
Total provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
We did not record an income tax expense for the years ended December 31, 2018, 2017 and 2016. The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Federal and state credits
|
|
|
7.4
|
%
|
|
|
8.9
|
%
|
|
|
9.5
|
%
|
Excess tax benefit
|
|
|
0.4
|
%
|
|
|
8.6
|
%
|
|
|
0.0
|
%
|
Stock based compensation
|
|
|
-0.8
|
%
|
|
|
0.1
|
%
|
|
|
-0.1
|
%
|
Other
|
|
|
-0.6
|
%
|
|
|
-0.1
|
%
|
|
|
0.1
|
%
|
Tax impact due to tax rate reduction
|
|
|
0.0
|
%
|
|
|
-47.7
|
%
|
|
|
0.0
|
%
|
Change in valuation allowance
|
|
|
-24.1
|
%
|
|
|
2.6
|
%
|
|
|
-38.6
|
%
|
Foreign Rate Differential
|
|
|
-3.3
|
%
|
|
|
-6.4
|
%
|
|
|
-4.9
|
%
|
Total tax benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The components of U.S. deferred tax assets and (liabilities) are as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforwards
|
|
$
|
241,881
|
|
|
$
|
203,897
|
|
Federal and state research tax credit carryforwards
|
|
|
23,917
|
|
|
|
21,238
|
|
Federal Orphan Drug Credit
|
|
|
120,273
|
|
|
|
96,750
|
|
Deferred revenue
|
|
|
29,530
|
|
|
|
17,538
|
|
Stock options
|
|
|
19,992
|
|
|
|
15,995
|
|
Other
|
|
|
9,448
|
|
|
|
7,529
|
|
Net deferred tax assets before valuation allowance
|
|
|
445,041
|
|
|
|
362,947
|
|
Valuation allowance
|
|
|
(445,041
|
)
|
|
|
(362,947
|
)
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
We received orphan designation and were eligible to claim a federal orphan drug credit starting in 2015 and reported the credit in 2018, 2017 and 2016. On December 22, 2017, President Donald Trump signed into U.S. law the Tax Reform Act. The new law limits the orphan drug credit to 25% of qualified clinical testing expenses for the tax year effective for amounts paid or incurred in tax years beginning after 2017.
F-47
Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence, including the fact that we have incurred significant losses in almost every year since our inception, we believe it is more likely than not that our deferred tax assets are not recognizable. Accordingly, deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $82.1 million for the year ended December 31, 2018. The valuation allowance decreased by approximately $2.2 million for the year ended December 31, 2017.
As of December 31, 2018, we had net operating loss carryforwards for federal income tax purposes of approximately $1,040.8 million and federal research tax credits of approximately $19.4 million and orphan drug credit of $141.5 million, which expire at various dates in the period from 2024 to 2038. We also have California net operating loss carry forwards of approximately $216 million which expire at various dates in the period from 2018 to 2033 and California research tax credits of approximately $10.6 million, which can be carried forward indefinitely. Our federal and state net operating loss carryforwards as of December 31, 2018 include amounts resulting from exercises and sales of stock option awards to employees and non-employees. When we realize the tax benefit associated with these stock option exercises as a reduction to taxable income in our returns, we will account for the tax benefit as a reduction of our income tax provision in our consolidated financial statements.
Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event that we had a change of ownership, utilization of the net operating loss and tax credit carryforwards may be limited under section 382.
Uncertain Tax Positions
We are subject to taxation in the United States. We have not been audited by the Internal Revenue Service or any state tax authority. We are no longer subject to audit by the Internal Revenue Service for income tax returns filed before 2016, and by the material state and local tax authorities for tax returns filed before 2015. However, carryforward tax attributes that were generated prior to these years may still be adjusted upon examination by tax authorities.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
20,730
|
|
|
$
|
13,865
|
|
|
$
|
3,228
|
|
Increases due to current period positions
|
|
|
4,879
|
|
|
|
7,046
|
|
|
|
6,919
|
|
Increase due to prior period positions
|
|
|
26
|
|
|
|
–
|
|
|
|
4,266
|
|
Decreases due to prior period positions
|
|
|
(214
|
)
|
|
|
(181
|
)
|
|
|
(548
|
)
|
Unrecognized tax benefits, end of period
|
|
$
|
25,421
|
|
|
$
|
20,730
|
|
|
$
|
13,865
|
|
The amount of unrecognized income tax benefits that, if recognized, would affect our effective tax rate was $0 as of December 31, 2018 and December 31, 2017. If the $25.4 million and $20.7 million of unrecognized income tax benefits as of December 31, 2018 and 2017, respectively, is recognized, there would be no impact to the effective tax rate as any change will fully offset the valuation allowance. We do not expect that the unrecognized tax benefit will change within the next 12 months.
We recognize interest and penalties related to unrecognized tax benefits within income tax expense. Accrued interest and penalties are included within the related tax liability line in the accompanying consolidated balance sheets. Due to our net operating losses, we have not accrued any interest or penalty for any of our uncertain tax benefits as of December 31, 2018 and 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax ACT") was enacted into law, which significantly changes existing U.S. tax law and includes many provisions applicable to us, such as reducing the U.S. federal statutory tax rate. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018.
F-48
Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 ("SAB 118"), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. During 2017, we recorded the impact of the Tax Act effects using the current available information and technical guidance on the interpretations of the Tax Act.
Amounts recorded, where we consider accounting to be provisional for the year ended December 31, 2017, principally related to the impact of corporate income tax rate reduction on the deferred tax assets, on the corresponding change of deferred tax assets' valuation allowance and limitations on deductibility of compensation paid to certain highly paid employees. As permitted by SAB 118, we recorded provisional estimates in 2017 and finalized our accounting for these provisional estimates based on guidance, interpretations and all of the available data during the year ended December 31, 2018. During the year ended December 31, 2018, we finalized the provisional amounts recorded in 2017. No adjustment to the previously recorded provisional amount as such no impact to 2018.
15. Quarterly Financial Data (unaudited)
The following table presents certain unaudited quarterly financial information. This information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results of operations set forth herein.
|
|
2018
|
|
|
2017
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
Product revenue, net
|
|
$
|
606
|
|
|
$
|
2,265
|
|
|
$
|
7,176
|
|
|
$
|
14,070
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Collaboration and license revenue
|
|
$
|
6,038
|
|
|
$
|
1,746
|
|
|
$
|
7,001
|
|
|
$
|
1,228
|
|
|
$
|
5,128
|
|
|
$
|
3,787
|
|
|
$
|
3,828
|
|
|
$
|
9,803
|
|
Operating expenses
|
|
$
|
(91,944
|
)
|
|
$
|
(107,706
|
)
|
|
$
|
(83,321
|
)
|
|
$
|
(102,479
|
)
|
|
$
|
(45,666
|
)
|
|
$
|
(69,621
|
)
|
|
$
|
(84,284
|
)
|
|
$
|
(95,654
|
)
|
Net loss
|
|
$
|
(84,510
|
)
|
|
$
|
(105,971
|
)
|
|
$
|
(71,177
|
)
|
|
$
|
(88,886
|
)
|
|
$
|
(41,764
|
)
|
|
$
|
(69,414
|
)
|
|
$
|
(82,941
|
)
|
|
$
|
(91,501
|
)
|
Net loss (income) attributable to noncontrolling interest (SRX Cardio)
|
|
$
|
332
|
|
|
$
|
(223
|
)
|
|
$
|
(126
|
)
|
|
$
|
338
|
|
|
$
|
45
|
|
|
$
|
(240
|
)
|
|
$
|
5
|
|
|
$
|
(280
|
)
|
Net loss attributable to Portola
|
|
$
|
(84,178
|
)
|
|
$
|
(106,194
|
)
|
|
$
|
(71,303
|
)
|
|
$
|
(88,548
|
)
|
|
$
|
(41,719
|
)
|
|
$
|
(69,654
|
)
|
|
$
|
(82,936
|
)
|
|
$
|
(91,781
|
)
|
Net loss per share attributable to Portola common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.28
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(1.22
|
)
|
|
$
|
(1.41
|
)
|
|
$
|
(1.41
|
)
|
16. Subsequent Event
Credit Facility
On February 28, 2019, we entered into a credit agreement (the “Credit Agreement”) with the lenders from time to time party thereto and HCR Collateral Management, LLC, as administrative agent. The Credit Agreement provides for a term loan in an aggregate principal amount of up to $125.0 million to be advanced in two tranches subject to certain performance-based milestones related to Andexxa. The first tranche, in the amount of $62.5 million, will be available on the closing date of the Credit Agreement. A second tranche of $62.5 million will be available after the closing date of the Credit Agreement (i) at any time from the closing date until the earliest to occur of (x) November 15, 2019, (y) the date on which we have borrowed the full amount of the commitments or (z) the date on which the
F-49
commitments have been terminated as set forth in the Credit Agreement and (ii) so long as (x) we have received all regulatory approval from the European Medicines Agency or any successor entity thereto for Andexxa, (y) Andexxa consolidated net sales for the three fiscal quarter period ending September 30, 2019 are at least $50.0 million and (z) no material adverse effect has occurred since the closing date of the Credit Agreement.
All obligations under the Credit Agreement are due on February 28, 2025; however, we can prepay the term loan, in whole or in part, subject to the payment of prepayment premiums as more fully described in the Credit Agreement. The outstanding principal balance of the term loan bears interest at a rate per annum equal to 9.75%, while upon the occurrence of an event of default, all outstanding obligations under the Credit Agreement will bear interest at a rate per annum equal to the sum of 9.75% plus 3.00%. All interest will be made on the basis of a 360-day year and actual days elapsed with interest accruing on the day the term loan is made.
The term loan is secured by substantially all of our assets. The Credit Agreement contains customary representations and warranties, and we are also subject to certain customary covenants that require us to deliver financial reports at designated times of the year and limit or restrict our ability to incur additional indebtedness or liens, acquire, own or make any investments, pay cash dividends or enter into certain corporate transactions, including mergers and changes of control, and require us to maintain a specified level of cash. The Credit Agreement also contains customary events of default. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies, including, without limitation, declaring the unpaid principal amount of the outstanding term loan, all interest accrued and unpaid thereon and all other amounts owing or payable under the Credit Agreement and related loan documents to be immediately due and payable.
F-50