ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related disclosures included in Part IV, Item 15 of this Annual Report are incorporated by reference into this Item 8.
PORTOLA PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Portola Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Portola Pharmaceuticals, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
|
|
|
|
Reserves for returns on product revenue
|
Description of the Matter
|
As described in Note 3 to the consolidated financial statements, the Company had product revenue of $111.6 million for the year ended December 31, 2019, which was net of $20.6 million recorded as a reduction in revenue, which includes estimates of variable consideration for which reserves are established, including reserves for product returns.
Auditing the Company’s measurement of reserves for product returns under its contracts with customers was especially challenging because (1) the calculation involves subjective management assumptions about inventory remaining in the distribution channel as of the balance sheet date (i.e., units held by hospitals) that could be subject to return in future periods under the Company’s returns policy, and (2) the Company has limited commercial sales history on which to base its assumptions.
|
How We Addressed the Matter in Our Audit
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the identified risks related to the Company's process used to determine reserves for returns on product revenue. For example, we tested controls over management’s review of the completeness and accuracy of the data used in the process, the assumptions about customer reorder patterns and units in the channel as of the balance sheet date.
To test the Company's reserves for returns on product revenue, our audit procedures included, among other procedures, testing the accuracy and completeness of the underlying data used in the calculations and evaluating the significant assumptions used by management to estimate its reserves. To test management’s significant assumptions, we inspected agreements with significant customers to evaluate whether such contracts allow for extended rights of return beyond the Company’s standard policy, obtained written representations from members of executive management to assess whether all contract provisions were subject to accounting analyses, including oral or side agreements (if any), examined credit memos issued during and after year end for unusual items or trends not consistent with the Company’s analysis of product returns, performed revenue cutoff testing at period end to assess whether there were unusual trends that should have been considered in the Company’s analysis of product returns, compared the Company’s product shipment reports to distributor sell through information to assess the extent of inventory in the distribution channel and examined hospital reorder information. We also performed sensitivity analyses to assess the effect of changes in assumptions.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2004.
Redwood City, California
February 28, 2020
PORTOLA PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
215,229
|
|
|
$
|
138,951
|
|
Short-term investments
|
214,054
|
|
|
178,013
|
|
Restricted cash
|
3,421
|
|
|
1,062
|
|
Trade and other receivables, net
|
13,547
|
|
|
5,849
|
|
Unbilled - collaboration and license revenue
|
3,783
|
|
|
9,880
|
|
Inventories
|
4,101
|
|
|
7,873
|
|
Prepaid and other current assets
|
7,998
|
|
|
11,699
|
|
Total current assets
|
462,133
|
|
|
353,327
|
|
Property and equipment, net
|
4,264
|
|
|
5,236
|
|
Intangible assets
|
—
|
|
|
7,279
|
|
Operating lease right-of-use assets
|
12,064
|
|
|
—
|
|
Inventories, noncurrent portion
|
56,096
|
|
|
9,645
|
|
Long-term investments
|
36,961
|
|
|
—
|
|
Prepaid and other long-term assets
|
6,965
|
|
|
10,932
|
|
Total assets
|
$
|
578,483
|
|
|
$
|
386,419
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
12,739
|
|
|
$
|
13,215
|
|
Accrued research and development
|
19,249
|
|
|
19,831
|
|
Accrued and other liabilities
|
49,773
|
|
|
22,310
|
|
Deferred revenue, current portion
|
1,623
|
|
|
1,847
|
|
Current portion of notes payable and long-term royalty-based debt
|
19,034
|
|
|
11,802
|
|
Total current liabilities
|
102,418
|
|
|
69,005
|
|
Notes payable, less current portion
|
43,100
|
|
|
48,298
|
|
Long term royalty-based debt, less current portion
|
162,897
|
|
|
155,256
|
|
Long term debt
|
118,096
|
|
|
—
|
|
Long term obligation to collaborator, less current portion
|
5,060
|
|
|
6,881
|
|
Deferred revenue, long-term
|
4,352
|
|
|
4,488
|
|
Long-term portion of lease liabilities
|
8,850
|
|
|
—
|
|
Other long-term liabilities
|
3,885
|
|
|
11,924
|
|
Total liabilities
|
448,658
|
|
|
295,852
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.001 par value, 150,000 shares authorized at December 31, 2019 and 2018; 77,925 and 66,618 shares issued and outstanding at December 31, 2019 and 2018, respectively
|
80
|
|
|
68
|
|
Additional paid-in capital
|
1,946,077
|
|
|
1,614,320
|
|
Accumulated deficit
|
(1,816,367
|
)
|
|
(1,525,704
|
)
|
Accumulated other comprehensive income (loss)
|
35
|
|
|
(283
|
)
|
Total Portola stockholders’ equity
|
129,825
|
|
|
88,401
|
|
Noncontrolling interest
|
—
|
|
|
2,166
|
|
Total stockholders’ equity
|
129,825
|
|
|
90,567
|
|
Total liabilities and stockholders’ equity
|
$
|
578,483
|
|
|
$
|
386,419
|
|
See accompanying notes
PORTOLA PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
Product revenue, net
|
$
|
111,644
|
|
|
$
|
24,117
|
|
|
$
|
—
|
|
Collaboration and license revenue
|
4,996
|
|
|
16,013
|
|
|
22,546
|
|
Total revenues
|
116,640
|
|
|
40,130
|
|
|
22,546
|
|
Operating expenses:
|
|
|
|
|
|
Cost of sales
|
44,378
|
|
|
18,081
|
|
|
415
|
|
Research and development
|
124,627
|
|
|
216,205
|
|
|
203,701
|
|
Selling, general and administrative
|
218,919
|
|
|
151,164
|
|
|
91,109
|
|
Total operating expenses
|
387,924
|
|
|
385,450
|
|
|
295,225
|
|
Loss from operations
|
(271,284
|
)
|
|
(345,320
|
)
|
|
(272,679
|
)
|
Interest and other income (expense), net
|
9,698
|
|
|
13,516
|
|
|
(1,338
|
)
|
Interest expense
|
(31,290
|
)
|
|
(18,740
|
)
|
|
(11,603
|
)
|
Net loss
|
(292,876
|
)
|
|
(350,544
|
)
|
|
(285,620
|
)
|
Net loss (income) attributable to noncontrolling interest
|
2,213
|
|
|
321
|
|
|
(470
|
)
|
Net loss attributable to Portola
|
$
|
(290,663
|
)
|
|
$
|
(350,223
|
)
|
|
$
|
(286,090
|
)
|
Net loss per share attributable to Portola common stockholders:
|
|
|
|
|
|
Basic and diluted
|
$
|
(4.06
|
)
|
|
$
|
(5.31
|
)
|
|
$
|
(4.81
|
)
|
Shares used to compute net loss per share attributable to Portola common stockholders:
|
|
|
|
|
|
Basic and diluted
|
71,555,220
|
|
|
66,017,330
|
|
|
59,508,156
|
|
See accompanying notes
PORTOLA PHARMACEUTICALS, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net loss
|
$
|
(292,876
|
)
|
|
$
|
(350,544
|
)
|
|
$
|
(285,620
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities
|
318
|
|
|
126
|
|
|
(397
|
)
|
Comprehensive loss
|
(292,558
|
)
|
|
(350,418
|
)
|
|
(286,017
|
)
|
Comprehensive loss (income) attributable to noncontrolling interest
|
2,213
|
|
|
321
|
|
|
(470
|
)
|
Total comprehensive loss attributable to Portola
|
$
|
(290,345
|
)
|
|
$
|
(350,097
|
)
|
|
$
|
(286,487
|
)
|
See accompanying notes
PORTOLA PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Non-controlling
Interest
(SRX Cardio)
|
|
Total
Stockholders’
Equity
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance at December 31, 2016
|
56,544
|
|
|
$
|
57
|
|
|
$
|
1,108,832
|
|
|
$
|
(918,345
|
)
|
|
$
|
(12
|
)
|
|
$
|
2,157
|
|
|
$
|
192,689
|
|
Cumulative effect of a change in accounting principal
|
—
|
|
|
—
|
|
|
84
|
|
|
(84
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of common stock pursuant to equity award plans
|
1,450
|
|
|
2
|
|
|
19,641
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,643
|
|
Issuance of common stock in connection with public offering, net
|
7,303
|
|
|
7
|
|
|
379,887
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
379,894
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
43,284
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,284
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(397
|
)
|
|
—
|
|
|
(397
|
)
|
Net (loss) gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(286,090
|
)
|
|
—
|
|
|
470
|
|
|
(285,620
|
)
|
Balance at December 31, 2017
|
65,297
|
|
|
$
|
66
|
|
|
$
|
1,551,728
|
|
|
$
|
(1,204,519
|
)
|
|
$
|
(409
|
)
|
|
$
|
2,627
|
|
|
$
|
349,493
|
|
Adjustment to accumulated deficit due to adoption of ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
29,038
|
|
|
—
|
|
|
—
|
|
|
29,038
|
|
Issuance of common stock pursuant to equity award plans
|
1,321
|
|
|
2
|
|
|
15,387
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,389
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
47,205
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,205
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
126
|
|
|
—
|
|
|
126
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(350,223
|
)
|
|
—
|
|
|
(321
|
)
|
|
(350,544
|
)
|
Change in noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(140
|
)
|
|
(140
|
)
|
Balance at December 31, 2018
|
66,618
|
|
|
$
|
68
|
|
|
$
|
1,614,320
|
|
|
$
|
(1,525,704
|
)
|
|
$
|
(283
|
)
|
|
$
|
2,166
|
|
|
$
|
90,567
|
|
Issuance of common stock pursuant to equity award plans
|
2,066
|
|
|
3
|
|
|
39,918
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,921
|
|
Issuance of common stock pursuant to public offering, net
|
9,241
|
|
|
9
|
|
|
243,931
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
243,940
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
47,908
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,908
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
318
|
|
|
—
|
|
|
318
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(290,663
|
)
|
|
—
|
|
|
(2,213
|
)
|
|
(292,876
|
)
|
Change in noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
47
|
|
Balance at December 31, 2019
|
77,925
|
|
|
$
|
80
|
|
|
$
|
1,946,077
|
|
|
$
|
(1,816,367
|
)
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
129,825
|
|
See accompanying notes
PORTOLA PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Operating activities
|
|
|
|
|
|
Net loss
|
$
|
(292,876
|
)
|
|
$
|
(350,544
|
)
|
|
$
|
(285,620
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
3,000
|
|
|
3,102
|
|
|
2,410
|
|
Amortization of operating lease right-of-use assets
|
3,224
|
|
|
—
|
|
|
—
|
|
Accretion of discount on investment securities
|
(1,225
|
)
|
|
(1,864
|
)
|
|
(235
|
)
|
Non-cash interest expense
|
25,371
|
|
|
18,740
|
|
|
11,603
|
|
Stock-based compensation expense, net of capitalized labor
|
52,075
|
|
|
55,360
|
|
|
43,284
|
|
Charge associated with our Gen 1 manufacturing process transition
|
—
|
|
|
10,311
|
|
|
—
|
|
Remeasurement (gain) loss on embedded derivatives liabilities
|
(2,931
|
)
|
|
(6,357
|
)
|
|
4,562
|
|
Provision for excess and obsolete inventories
|
4,152
|
|
|
2,246
|
|
|
—
|
|
Loss on impairment and provision for excess and obsolete inventories of Bevyxxa asset group
|
27,451
|
|
|
—
|
|
|
—
|
|
Loss on impairment of SRX intangible asset
|
3,151
|
|
|
—
|
|
|
—
|
|
Others
|
195
|
|
|
15
|
|
|
52
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Inventories
|
(58,830
|
)
|
|
(12,612
|
)
|
|
(1,099
|
)
|
Trade and other receivables, net
|
(7,698
|
)
|
|
607
|
|
|
(3,750
|
)
|
Unbilled - collaboration and license revenue
|
6,097
|
|
|
(3,186
|
)
|
|
—
|
|
Prepaid and other current assets
|
3,812
|
|
|
(7,496
|
)
|
|
235
|
|
Prepaid and other long-term assets
|
(3,813
|
)
|
|
(10,968
|
)
|
|
(4,395
|
)
|
Accounts payable
|
(2,652
|
)
|
|
1,881
|
|
|
(5,242
|
)
|
Accrued research and development
|
(582
|
)
|
|
(25,142
|
)
|
|
21,155
|
|
Accrued and other liabilities
|
17,668
|
|
|
3,514
|
|
|
8,576
|
|
Deferred revenue
|
(360
|
)
|
|
(1,288
|
)
|
|
(15,796
|
)
|
Notes payable and long term royalty-based debt
|
(13,152
|
)
|
|
(1,412
|
)
|
|
—
|
|
Other long-term liabilities
|
—
|
|
|
(965
|
)
|
|
(865
|
)
|
Net cash used in operating activities
|
(237,923
|
)
|
|
(326,058
|
)
|
|
(225,125
|
)
|
Investing activities
|
|
|
|
|
|
Capital expenditures, net
|
(1,544
|
)
|
|
(2,559
|
)
|
|
(1,236
|
)
|
Purchase of intangible assets
|
—
|
|
|
—
|
|
|
(5,000
|
)
|
Purchases of investments
|
(368,747
|
)
|
|
(259,083
|
)
|
|
(575,624
|
)
|
Proceeds from maturities of investments
|
297,289
|
|
|
435,723
|
|
|
353,088
|
|
Net cash (used in) provided by investing activities
|
(73,002
|
)
|
|
174,081
|
|
|
(228,772
|
)
|
Financing activities
|
|
|
|
|
|
Proceeds from debt issuance, net
|
121,703
|
|
|
95,000
|
|
|
47,444
|
|
Proceeds from issuance of common stock from public offering, net
|
243,941
|
|
|
—
|
|
|
379,894
|
|
Proceeds from issuance of common stock pursuant to equity award plans
|
24,896
|
|
|
15,389
|
|
|
19,642
|
|
Payments of long-term obligation to collaborator
|
(976
|
)
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
(140
|
)
|
|
—
|
|
Net cash provided by financing activities
|
389,564
|
|
|
110,249
|
|
|
446,980
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(2
|
)
|
|
—
|
|
|
—
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
78,637
|
|
|
(41,728
|
)
|
|
(6,917
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
140,013
|
|
|
181,741
|
|
|
188,658
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
218,650
|
|
|
$
|
140,013
|
|
|
$
|
181,741
|
|
See accompanying notes
PORTOLA PHARMACEUTICALS, INC.
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 is located in South San Francisco, California. We have operations in the United States and in Europe, and we operate in one segment.
Our lead product, Andexxa [coagulation factor Xa (recombinant), inactivated-zhzo], which we are marketing under the brand name of Ondexxya in Europe, is the first and only antidote approved by the U.S. Food and Drug Administration (“FDA”) and the European Commission (“EC”), respectively, for patients treated with rivaroxaban or apixaban, when reversal of anticoagulation is needed due to life-threatening or uncontrolled bleeding. Bevyxxa (betrixaban) is an oral, once-daily Factor Xa inhibitor approved by the FDA for the prevention of venous thromboembolism (“VTE”) in adult patients hospitalized for an acute medical illness. We are conducting clinical trials on cerdulatinib, an investigational oral, dual spleen tyrosine kinase (“SYK”) and Janus kinase (“JAK”) inhibitor in development to treat hematologic cancers.
Public Offerings
In August 2019, we completed an underwritten public offering of 9,241,072 shares of our common stock, which included 1,205,357 shares of common stock issued pursuant to the over-allotment option granted to our underwriters, at a public offering price of $28.00 per share. The total proceeds from the offering and over-allotment, net of underwriting discounts and commissions of approximately $14.2 million, were approximately $244.5 million. After deducting offering expenses of approximately $0.6 million, net proceeds to us were approximately $243.9 million.
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, our wholly owned subsidiaries and SRX Cardio,LLC (“SRX Cardio”) that is a variable interest entity (a “VIE”) for which Portola was deemed, under applicable accounting guidance, to be the primary beneficiary. During the third quarter of 2019, we deconsolidated SRX Cardio, a VIE we had consolidated since 2015, and as such, we do not have any consolidated VIE as of December 31, 2019. All intercompany transactions and balances have been eliminated upon consolidation.
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. 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.
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.
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. As of December 31, 2019, restricted cash represents cash restricted for royalty payments to HealthCare Royalty Partners and its Affiliates (“HCR”) and cash held as a security deposit for our office lease in Europe.
Cash as reported in these consolidated statements of cash flows consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2017
|
Cash and cash equivalents
|
$
|
215,229
|
|
|
$
|
138,951
|
|
|
$
|
181,568
|
|
Restricted cash (SRX Cardio)
|
—
|
|
|
30
|
|
|
173
|
|
Restricted cash for royalty payments to HealthCare Royalty Partners and its affiliates ("HCR")
|
3,375
|
|
|
1,032
|
|
|
—
|
|
Restricted cash (Lease)
|
46
|
|
|
—
|
|
|
—
|
|
Total cash balance in consolidated statements of cash flows
|
$
|
218,650
|
|
|
$
|
140,013
|
|
|
$
|
181,741
|
|
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.
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, trade and other receivables, 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 us with the 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.
Trade Receivables
Trade receivables are recorded net of estimates of variable consideration for which reserves are established and which result from chargebacks for government and other programs, discounts that are offered within contracts between us and a limited number of specialty distributors and wholesalers in the United States and hospitals and clinics in the EU (“Customers”) and fees for distribution services. Estimates for chargebacks for government and other programs are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. Estimates for discounts and fees are based on contractual terms and our expectation regarding customers earning the discounts and fees. Estimates of our allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of our customers and individual customer circumstances. Historically, estimates for uncollectible accounts receivable has been insignificant and we have not recorded any reserves.
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 sold within twelve months of the balance sheet date, it is reported as inventories, noncurrent portion 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 after Bevyxxa received the FDA approval in June 2017. This inventory capitalization process began to be applied to Andexxa Gen 1 and Gen2 supply upon their approval dates of May 3, 2018 and December 31, 2018, respectively.
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 judgment in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. 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.
The bulk drug substance in Andexxa has undergone significant manufacturing specific to its intended purposes at the point it is are purchased by us, therefore, we classify BDS as work-in-process inventory.
Customer Concentration
During the year ended December 31, 2019, we had four Andexxa specialty distributor customers who each accounted for 10% or more of total net revenues, and no collaboration revenue customers who each accounted for more than 10% of total net revenues. As of December 31, 2019, we had four Andexxa specialty distributor customers who each accounted for 10% or more of total trade and other receivables, and two collaboration revenue customers who each accounted for more than 10% of total unbilled - collaboration and license revenue.
During the year ended December 31, 2018, we had three Andexxa specialty distributor customers who each accounted for 10% or more of total net revenues, and two collaboration revenue customers who each accounted for 10% or more of total net revenues. As of December 31, 2018, we had three Andexxa specialty distributor customers who each accounted for 10% or more of total trade and other receivables, and two collaboration revenue customers who each accounted for more than 10% of total unbilled - collaboration and license revenue.
During the year ended December 31, 2017, we had four collaboration revenue customers who each accounted for 10% or more of total net revenues.
Intangible Assets
Intangible assets as of December 31, 2018 include an in-process research and development asset related to our consolidated VIE and a milestone payment made to Takeda Pharmaceutical Company Ltd. ("Takeda") upon FDA approval of Bevyxxa. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We have a zero balance for intangible assets as of December 31, 2019. During 2019, SRX Cardio was deconsolidated and the related in-process research and development asset was derecognized. Also during 2019, the intangible asset related to the milestone payment to Takeda was fully impaired. Throughout 2019, we engaged with potential business collaborators for Bevyxxa. In the fourth quarter of 2019, we determined that it was unlikely that we will find a viable partner. Accordingly, we have begun to wind down Bevyxxa operations to eliminate future operational and financial obligations. We no longer expect to commercialize Bevyxxa or support any further development efforts.
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. See Note 14, "Costs from Wind Down of Bevyxxa Activities" for additional details of charges recorded in 2019 related to the wind down of the Bevyxxa-related activities.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”), Topic 606 (ASC 606), Revenue from Contracts with Customers, (created by Accounting Standards Update ("ASU") 2014-09) using the modified retrospective method to all contracts that were not completed as of January 1, 2018. 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 and Bevyxxa, which we began shipping to customers in May 2018 and January 2018, respectively, and the EU sales of Ondexxya, which we began shipping to customers in July 2019. 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, and Ondexxya primarily to hospitals and clinics, many of which are government-owned or supported in the EU (“Customers”). Our Customers in the United States subsequently resell our products to hospitals, pharmacies and long-term care centers. In addition to distribution agreements with Customers, we enter into arrangements with payors that provide for government-mandated and/or privately negotiated chargebacks, rebates, distribution costs and discounts with respect to the purchase of our products. Our payment terms are approximately 30 days for Andexxa in the United States and consistent with prevailing practice in the EU markets.
We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to the Customer. Upon recognition of revenue from product sales, reserves are made for various forms of variable consideration, which include expected product returns, government rebates such as Medicaid reimbursements, government and other chargebacks, distributor fees and customer incentives such as cash discounts for prompt payment and other distributor costs. Liabilities for expected product returns and government rebates are classified as “Accrued and other liabilities”in our Consolidated Balance Sheets. Government and other chargebacks, distributor fees and customer discounts are recorded as a reduction to “Trade and other receivables, net” in our Consolidated Balance Sheets.
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 historical data, specific known market events and trends, 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. For product revenue reserves established for the sales made in the prior period, please see Note 3, "Revenue Recognition".
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
Product Returns: We generally offer Customers a right of return based on the product’s expiration date and certain spoilage instances 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. Our estimates for expected returns are based primarily on an ongoing analysis of our historical return patterns, 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 Public Health Service institutions, Federal government entities purchasing via the Federal Supply Schedule, and group purchasing organizations, purchase directly from our specialty distributors and wholesalers at a discounted price. The specialty distributors and wholesalers, in turn, charge us back the difference between the price initially paid by them and the discounted price paid 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. 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.
Distributor Fees: Under our inventory management agreements with our Customers, we pay the specialty distributors and 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.
Discounts: We estimate cash discounts based on contractual terms, historical customer payment patterns and our expectations regarding future Customer payment patterns.
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.
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 milestones 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, amortization of an intangible asset associated with a capitalized milestone payment made to Takeda 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. See Note 14, "Costs from Wind Down of Bevyxxa Activities" for additional details of charges recorded in 2019 related to the wind down of the Bevyxxa related activities.
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.
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 RSU 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 ("ASU") No. 2016-9, 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. After our adoption of ASU No. 2018-7, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, as of January 1, 2019, compensation costs for nonemployee awards are fixed at the grant date.
BMS and Pfizer Promissory Notes, HCR Royalty-based Financing, and Interest Expense
Notes payable and long-term royalty-based debt are eligible to be repaid based on royalties from our Andexxa net sales. Interest expense is accrued using the effective interest rate method over the estimated period the related debts will be paid. This requires us to estimate the total amount of future royalty payments to be generated from product sales by jurisdiction over the life of the agreements. Consequently, we impute interest on the carrying value of the Notes payable and long-term royalty-based 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 Notes payable and royalty-based debt. 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 the debt carrying values, as well as the period over which debt issuance costs will be amortized.
Embedded Derivatives Related to Debt Instruments
Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the debt instrument. Under our Notes payable agreement with BMS and Pfizer and the credit agreement with HCR and Athyrium, upon the occurrence of a change in control, we are required to make accelerated payments of the borrowings to BMS and Pfizer, and we are required to make accelerated payments of the borrowings and a prepayment penalty to HCR and Athyrium. These prepayments and prepayment penalty are considered embedded derivatives, as the holder of the loans may exercise the option to require prepayment by us. The embedded derivatives are classified as "Other long-term liabilities" in our Consolidated Balance Sheets. We remeasure the embedded derivatives each reporting period and report changes in the estimated fair value as gains or losses in "Interest and other income (expense), net" in our Consolidated Statements of Operations.
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 our 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 and Translations
We have certain transactions denominated in currencies other than our functional currencies, and, as a result, are exposed to changes in foreign currency exchange rates. Foreign currency exchange gains (losses) generated from the settlement and remeasurement of these transactions are recognized in earnings and presented within interest and other income (expense), net in our consolidated statements of operations.
Non-U.S. entity operations are recorded in the functional currency of each entity. Results of operations for non-U.S. dollar functional currency entities are translated into U.S. dollars using average currency rates. Assets and liabilities are translated using currency rates at period end. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity.
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.
Net Loss (Income) Attributable to SRX
Net loss (income) attributable to SRX represents the results of operations of SRX during the periods in which we were deemed to be the primary beneficiary of SRX and consolidated the statements of operations and financial condition of SRX into our Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Adopted
In September 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU implements an impairment model, known as the current expected credit loss model that is based on expected losses rather than incurred losses, and applies to most financial assets measured at amortized cost, such as trade and other receivable, and certain other instruments, such as available-for-sale debt securities. Entities are required to estimate expected credit losses over the life of financial assets and record an allowance against the assets’ amortized cost basis to present them at the amount expected to be collected. Additionally, the guidance amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on such debt security is a credit loss. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2019. 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. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, this ASU requires a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU is effective for us for all interim and annual reporting periods beginning after December 15, 2019. 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. We do not expect the adoption of this standard to have an effect on our Consolidated Financial Statements.
Recent Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use ("ROU") asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). We adopted this new standard effective January 1, 2019, using 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. Our adoption of
the standard added approximately $2.1 million in ROU assets and $3.3 million in lease liabilities to our Consolidated Balance Sheet upon adoption and did not significantly impact financial results.
The new standard provides a number of optional practical expedients and we elected the following:
Transition Elections. We elected 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 elected the practical expedient to not separate lease and non-lease components 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 elected the short-term lease recognition exemption whereby ROU assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year.
In June 2018, the FASB issued ASU No. 2018-7, 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. We adopted this new standard effective January 1, 2019. Adoption of this standard did not result in an adjustment to our opening balance of accumulated deficit at the date of adoption, and did not significantly impact our Consolidated Financial Statements.
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 tables present our revenues disaggregated by timing of transfer of goods or services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Product Revenue, net
|
|
Collaboration and License Revenue
|
|
Total
|
|
Product Revenue, net
|
|
Collaboration and License Revenue
|
|
Total
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
Transferred at a point in time
|
$
|
111,644
|
|
|
$
|
—
|
|
|
$
|
111,644
|
|
|
$
|
24,117
|
|
|
$
|
—
|
|
|
$
|
24,117
|
|
Transferred over time
|
—
|
|
|
4,996
|
|
|
4,996
|
|
|
—
|
|
|
16,013
|
|
|
16,013
|
|
Total
|
$
|
111,644
|
|
|
$
|
4,996
|
|
|
$
|
116,640
|
|
|
$
|
24,117
|
|
|
$
|
16,013
|
|
|
$
|
40,130
|
|
The following table presents our net product revenues disaggregated by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
104,708
|
|
|
$
|
24,117
|
|
|
$
|
—
|
|
Europe
|
6,936
|
|
|
—
|
|
|
—
|
|
Total revenues
|
$
|
111,644
|
|
|
$
|
24,117
|
|
|
$
|
—
|
|
Net product revenues are attributed to geographic region based on the bill-to location. Collaboration and license revenues are all attributed to the United States based on the location of our collaboration partners’ headquarters.
Product Revenue, Net
To date, our sources of product revenue have been from the U.S. sales of Andexxa and Bevyxxa, which we began shipping to customers in May 2018 and January 2018, respectively, and from the EU sales of Ondexxya, which we began shipping to customers in July 2019. No costs to obtain or fulfill the contracts have been capitalized. For the year ended December 31, 2019 and 2018, we recorded a total of $20.6 million and $3.6 million, respectively, as a reduction to revenue consisting primarily of reserves for product returns, chargebacks and estimated distribution fees.
Product Revenue Reserves
The activities and ending reserve balances for each significant category of product revenue reserves (which constitute variable considerations) were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
|
|
Chargebacks
|
|
Others
|
|
Total
|
Balance at December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Provision related to sales made in:
|
|
|
|
|
|
|
|
Current period
|
2,611
|
|
|
289
|
|
|
633
|
|
|
3,533
|
|
Prior period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments and customer credits issued
|
(2,312
|
)
|
|
(113
|
)
|
|
(409
|
)
|
|
(2,834
|
)
|
Balance at December 31, 2018
|
$
|
299
|
|
|
$
|
176
|
|
|
$
|
224
|
|
|
$
|
699
|
|
Provision related to sales made in:
|
|
|
|
|
|
|
|
Current period
|
10,254
|
|
|
4,026
|
|
|
3,988
|
|
|
18,268
|
|
Prior period
|
2,373
|
|
|
—
|
|
|
—
|
|
|
2,373
|
|
Payments and customer credits issued
|
(5,366
|
)
|
|
(3,303
|
)
|
|
(1,550
|
)
|
|
(10,219
|
)
|
Balance at December 31, 2019
|
$
|
7,561
|
|
|
$
|
899
|
|
|
$
|
2,661
|
|
|
$
|
11,121
|
|
Collaboration and License Revenue
The following table presents changes in our contract assets and liabilities for the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Period
|
|
Addition
|
|
Deduction
|
|
Balance at End
of Period
|
Contract assets:
|
|
|
|
|
|
|
|
Unbilled - collaboration and license revenue
|
$
|
9,880
|
|
|
$
|
5,628
|
|
|
$
|
(11,725
|
)
|
|
$
|
3,783
|
|
Total contract assets
|
$
|
9,880
|
|
|
$
|
5,628
|
|
|
$
|
(11,725
|
)
|
|
$
|
3,783
|
|
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
Deferred revenue
|
$
|
6,335
|
|
|
$
|
2,628
|
|
|
$
|
(3,445
|
)
|
|
$
|
5,518
|
|
Total contract liabilities
|
$
|
6,335
|
|
|
$
|
2,628
|
|
|
$
|
(3,445
|
)
|
|
$
|
5,518
|
|
Significant changes in the contract liabilities balances during the period are as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Revenue recognized according to the current period performance that was included in the contract liability at the beginning of the period
|
$
|
884
|
|
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, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Collaborator
|
Transaction Price
Allocated to the
Remaining
Performance
Obligation as of
December 31, 2019
|
|
Expected Year
By Which Revenue
Recognition Will
Be Completed
|
|
Percentage of
Revenue
Recognized
|
BMS and Pfizer - 2016 agreement
|
$
|
451
|
|
|
2021
|
|
96
|
%
|
Daiichi Sankyo - 2014 agreement
|
673
|
|
|
2021
|
|
98
|
%
|
Daiichi Sankyo - 2016 agreement
|
2,355
|
|
|
2025
|
|
86
|
%
|
Bayer - 2016 agreement
|
1,697
|
|
|
2025
|
|
90
|
%
|
Total
|
$
|
5,176
|
|
|
|
|
|
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.
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, U.S. 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.
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.
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.
For the 2014 BMS and Pfizer Agreement, we determined that the duration of the contract began on the effective date in January 2014 and ends upon Andexxa approval in the United States and Europe, which was achieved in 2019. All the performance obligations under this agreement were delivered and we recognized all related revenues by the first quarter of 2019. For the years ended December 31, 2019, 2018, and 2017, we recognized less than $0.1 million, $1.5 million, and $1.8 million, respectively, as license and collaboration revenue under the 2014 BMS and Pfizer Agreement.
For the 2016 BMS and Pfizer Agreement, we 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.
We determined that the transaction price of the 2016 BMS and Pfizer Agreement was $10.6 million as of December 31, 2019 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, 2019, the transaction price included a $15.0 million 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, $4.3 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 $0.7 million for the cost of Andexxa clinical supply provided to BMS and Pfizer for Andexxa Phase 4 expansion clinical trial in Japan. Our transaction price is reduced by $14.4 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.
For the year ended ended December 31, 2019, we recognized a $1.1 million reversal of license and collaboration revenue under the 2016 BMS and Pfizer Agreement and recorded $4.8 million as deferred revenue under contract liabilities as of December 31, 2019 on our Consolidated Balance Sheets.
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 recorded $6.3 million as deferred revenue under contract liabilities as of December 31, 2018 on our Consolidated Balance Sheets.
For the year ended December 31, 2017, we recognized $3.1 million as license and collaboration revenue under the 2016 BMS and Pfizer Agreement.
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 the 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 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.
For the 2014 Daiichi Sankyo Agreement, 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 expect to be achieved in 2021. 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, 2019. 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, 2019, the transaction price included $22.0 million of upfront payments and $12.0 million in milestones already received upon achievement of specified events. As of December 31, 2019, we had $5.5 million of further milestone payments eligible to be included in the transaction price but have determined that achievement of these milestones is not probable 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.
For the year ended December 31, 2019, we recognized $0.9 million as license and collaboration revenue under the combined 2014 Daiichi Sankyo Agreement and October 2016 amendment and recorded $0.7 million as deferred revenue under contract liabilities as of December 31, 2019 on our Consolidated Balance Sheets. There were no costs incurred to obtain or fulfill the contract.
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 recorded $1.4 million as Unbilled - collaboration and license revenue as of December 31, 2018 on our Consolidated Balance Sheets. There were no costs incurred to obtain or fulfill the contract.
For the year ended December 31, 2017, we recognized $6.4 million as license and collaboration revenue under the combined 2014 Daiichi Sankyo Agreement and October 2016 amendment.
For the 2016 Daiichi Sankyo Agreement, we determined that the transaction price of the 2016 Daiichi Sankyo Agreement was $16.4 million as of December 31, 2019 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, 2019, the transaction price included $5.0 million of upfront payment and $4.5 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 $6.9 million of estimated variable consideration for cost-sharing payments from Daiichi Sankyo associated with the development of Andexxa in Japan. As of December 31, 2019, we had $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.
For the year ended December 31, 2019, we recognized $2.4 million as license and collaboration revenue under the 2016 Daiichi Sankyo Agreement and recorded $1.6 million as Unbilled - collaboration and license revenue as of December 31, 2019 on our Consolidated Balance Sheets. None of the costs to obtain or fulfill the contract were capitalized.
For the year ended December 31, 2018, we recognized $3.5 million as license and collaboration revenue under the 2016 Daiichi Sankyo Agreement and recorded $3.1 million as Unbilled - collaboration and license revenue as of December 31, 2018 on our Consolidated Balance Sheets. None of the costs to obtain or fulfill the contract were capitalized.
For the year ended December 31, 2017, we recognized $1.1 million as license and collaboration revenue under the 2016 Daiichi Sankyo Agreement.
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.
Revenue Recognition
We assessed the 2014 Bayer and Janssen Agreement in accordance with ASC 606 and concluded that Bayer and Janssen are customers.
For the 2014 Bayer and Janssen Agreement, 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, which was achieved in 2019. All the performance obligations under this agreement were delivered and we recognized all related revenues by the first quarter of 2019.
For the year ended December 31, 2019, we recognized less than $0.1 million as license and collaboration revenue under the 2014 Bayer and Janssen Agreement. None of the costs to obtain or fulfill the contract were capitalized.
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 recorded $2.0 million as Unbilled - collaboration and license revenue as of December 31, 2018 on our consolidated balance sheets. None of the costs to obtain or fulfill the contract were capitalized.
For the year ended December 31, 2017, we recognized $5.4 million as license and collaboration revenue under the 2014 Bayer and Janssen Agreement.
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 determined that the transaction price of the 2016 Bayer Agreement was $16.4 million as of December 31, 2019 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, 2019, the transaction price included a $5.0 million upfront payment, $4.5 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 $6.9 million of estimated variable consideration for cost-sharing payments from Bayer associated with the development of Andexxa in Japan. As of December 31, 2019, we had $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.
For the year ended December 31, 2019, we recognized $2.7 million as license and collaboration revenue under the 2016 Bayer Agreement and recorded $2.2 million as Unbilled - collaboration and license revenue as of December 31, 2019 on our Consolidated Balance Sheets. There were no costs incurred to obtain or fulfill the contract.
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 our Consolidated Balance Sheets. There were no costs incurred to obtain or fulfill the contract.
For the year ended December 31, 2017, we recognized $1.0 million as license and collaboration revenue under the 2016 Bayer and Janssen Agreement.
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. During the year ended December 31, 2017, we recognized $3.8 million in revenue under this agreement as we completed our obligations under these deliverables. There was no revenue recognized in 2019 and 2018.
Refer to Note 7 “Asset Acquisition and License Agreements” for discussion regarding sublicensing fees due to Astellas Pharma, Inc. (“Astellas”) resulting from this agreement.
4. Fair Value Measurements
Financial assets and liabilities are recorded at fair value. The carrying amounts of our trade and other receivables, receivables from collaborations, prepaid and other current assets, accounts payable, accrued research and development and accrued and other liabilities 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:
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Level 1 -Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
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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.
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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.
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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 or a discounted cash flow model and are included as a component of other long-term liabilities on our 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, and as remeasurement gain or loss on embedded derivatives liabilities in our consolidated statements of cash flows. The assumptions used in the Monte Carlo simulation model or the discounted cash flow model include: (1) our estimates of both the probability and timing of regulatory approval of Andexxa and other 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; and (6) the probability of a change in control occurring during the term of the note.
Our liability-classified Lonza AG (“Lonza”) award, consisting of their first purchase right of our common stock, was measured at fair value using a Black-Scholes model until the settlement date during the first quarter of 2019. Changes in the fair value of the liability-classified Lonza award were recognized as research and development expense in our consolidated statements of operations. The assumptions used in the Black-Scholes model include: (1) expected risk free rate; (2) expected volatility; and (3) expected dividend yield rate. See Note 6, "Contract Manufacturing Agreement" 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.
The following table sets forth the fair value of our financial assets and liabilities (excluding restricted cash) allocated into Level 1 and Level 2 that were measured on a recurring basis (in thousands):
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December 31, 2019
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December 31, 2018
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Fair Value
Hierarchy
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Amortized
Cost
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Unrealized
Gain
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Unrealized
(Loss)
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Estimated
Fair
Value
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Amortized
Cost
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Unrealized
Gain
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Unrealized
(Loss)
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Estimated
Fair
Value
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Money market funds
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Level 1
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$
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23,826
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$
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—
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$
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—
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$
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23,826
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$
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19,500
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$
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—
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$
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—
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$
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19,500
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Corporate notes and commercial paper
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Level 2
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284,410
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9
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(20
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)
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284,399
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166,363
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1
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(205
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)
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166,159
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U.S. Treasury bills and government agency securities
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Level 2
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96,196
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48
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(1
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96,243
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110,270
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1
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(81
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)
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110,190
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$
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404,432
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$
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57
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$
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(21
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)
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$
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404,468
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$
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296,133
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$
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2
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$
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(286
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)
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$
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295,849
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December 31, 2019
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December 31, 2018
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Classified as:
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Amortized
Cost
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Unrealized
Gain
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Unrealized
(Loss)
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Estimated
Fair
Value
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Amortized
Cost
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Unrealized
Gain
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Unrealized
(Loss)
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Estimated
Fair
Value
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Cash equivalents
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$
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153,453
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$
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—
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$
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—
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$
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153,453
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$
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117,837
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$
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1
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$
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(2
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$
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117,836
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Short-term investments
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214,029
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35
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(10
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214,054
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178,296
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1
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(284
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178,013
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Long-term investments
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36,950
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22
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(11
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36,961
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—
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—
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—
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—
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$
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404,432
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$
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57
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$
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(21
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$
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404,468
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$
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296,133
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$
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2
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$
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(286
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)
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$
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295,849
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At December 31, 2019, the remaining contractual maturities of available-for-sale securities classified as short-term investments were less than one year. At December 31, 2019, the remaining contractual maturities of available-for-sale securities classified as long-term investments were more than one year, but less than two years. 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, 2019, 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, 2019 and December 31, 2018.
Level 3 liabilities are comprised of embedded derivative liabilities as described in Note 8, “Long Term Obligations” and includes a liability-classified Lonza award that was settled in the first quarter of 2019. The estimated fair value of the Notes, long term royalty-based debt and long term debt are discussed in Note 8, "Long Term Obligations". The following table sets forth a summary of the changes in the estimated fair value of our embedded derivative liabilities and Lonza award during the year ended December 31, 2019 (in thousands):
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Embedded derivative liabilities
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Lonza award
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Total
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Balance as of December 31, 2018
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$
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2,497
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$
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9,201
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$
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11,698
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Net change in the fair value
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(2,931
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)
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5,824
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2,893
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Addition of derivative related to 2019 Secured Term Loan
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4,300
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—
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4,300
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Settlement of Lonza award
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—
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(15,025
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)
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(15,025
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)
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Balance as of December 31, 2019
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$
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3,866
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$
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—
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$
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3,866
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5. Balance Sheet Components
Inventories
Inventories consisted of the following (in thousands):
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December 31, 2019
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December 31, 2018
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Raw materials
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$
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9,504
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$
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279
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Work in process
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49,307
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14,395
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Finished goods
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1,386
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2,844
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Total inventories
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$
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60,197
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$
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17,518
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Balance Sheet Classification
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Inventories
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$
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4,101
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$
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7,873
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Inventories, noncurrent portion
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56,096
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9,645
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Total inventories
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$
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60,197
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$
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17,518
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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 2018 when it was determined that the inventory had a probable future economic benefit. As of December 31, 2019 and 2018, long-term inventories of $56.1 million and $9.6 million, 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, 2019 and 2018, we have made prepayments to manufacturers for the purchase of inventories. We classify prepayments to manufacturers as short or long-term assets based on whether the related inventories are expected to be utilized in the manufacturing process and/or sold within the next twelve months. As of December 31, 2019 and 2018, long-term prepaid manufacturing assets of $4.7 million and $10.9 million, respectively, are classified as prepaid and other long-term assets.
We recorded an excess and obsolescence inventory charge of $17.8 million and $12.6 million to cost of sales during 2019 and 2018, respectively. In developing our inventory reserve estimate, we consider forecasted demand, current inventory levels and our firm purchase commitments. If it is determined that inventory utilization will further diminish based on estimates of demand compared to product expiration, additional inventory write-downs may be required. See Note 14, "Costs from Wind Down of Bevyxxa Activities" for additional details of charges recorded in 2019 related to the planned wind down of the Bevyxxa project.
Property and Equipment
Property and equipment consists of the following (in thousands):
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December 31, 2019
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December 31, 2018
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Computer equipment
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$
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1,546
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$
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1,335
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Capitalized software
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1,940
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1,322
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Equipment
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8,600
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8,737
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Leasehold improvements and others
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8,304
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8,143
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Total acquisition costs
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20,390
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19,537
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Less accumulated depreciation and amortization
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(16,126
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)
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(14,301
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)
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Property and equipment, net
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$
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4,264
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$
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5,236
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Accrued and Other Liabilities
Accrued and other liabilities consist of the following (in thousands):
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December 31, 2019
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December 31, 2018
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Manufacturing related
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$
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11,485
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$
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5,465
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Compensation and employee benefits
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16,099
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10,794
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Product revenue reserves
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7,680
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329
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Current portion of lease liabilities
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4,715
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—
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Accruals for sponsorship
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4,433
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—
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Others
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5,361
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5,722
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Total accrued and other liabilities
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$
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49,773
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$
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22,310
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6. Contract Manufacturing 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 were contingent upon marketing approval by either the FDA or the EMA of Andexxa manufactured 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 was earned by Lonza upon the FDA approval of the Gen 2 process on December 31, 2018 and after Lonza commenced process transfer activities to an additional new facility in the first quarter of 2019. During the first quarter of 2019, Lonza exercised their right to purchase 500,000 shares of our common stock at $1.00 per share. We marked to market the liability-classified award up to the settlement date using the valuation assumptions described in Note 4, “Fair Value Measurements” and recognized $5.8 million of non-employee stock based compensation expense classified as research and development expense during the first quarter of 2019.
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 the second purchase rights is 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. As of December 31, 2019, we have not recognized any expense for the second purchase right because the related performance conditions include a regulatory approval condition and regulatory approvals are not considered probable until actually achieved.
7. 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.
During 2019, the exclusive license agreement signed in September 2016 was formally terminated, and SRX Cardio was deconsolidated from our consolidated financial statements as of September 30, 2019. As such, during 2019, we recorded (1) a full impairment charge of $3.2 million related to the in-process research and development intangible asset, which was recorded in research and development expense, and (2) a gain of $2.3 million for the de-recognition of the contingent milestone payable to SRX Cardio associated with the licensed hypercholesterolemia program, which was recorded in net loss attributable to noncontrolling interest in our consolidated financial statements. In addition, upon deconsolidation, we recorded a loss of $76 thousand which was measured as a difference between the carrying amount of noncontrolling interest in SRX and the carrying amount of SRX’s net assets. There was no fair value associated with consideration received or any retained noncontrolling
interest in SRX upon the deconsolidation. In addition, our discontinuance of the hypercholesterolemia program from SRX was not a development that represented a significant strategic shift that has a material impact on our operations and financial results. As such, the deconsolidation of SRX was not presented as a discontinued operation in our consolidated financial statements for 2019.
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.
In December 2017, 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, 2018 and 2017, respectively, associated with our payment obligation to Astellas. There was no research and development expense incurred during 2019 because we did not earn any associated milestone from Dermavant during 2019.
8. Long Term Obligations
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”). We may reduce the repayment amount to $62.5 million if such amount is paid by December 31, 2023. The use of funds is restricted to development activities needed for regulatory approval of Andexxa by the FDA and the 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 EU.
The upfront cash receipt of $50.0 million is recorded as Notes payable at issuance. We are accruing for interest over the term of the Notes. The carrying values of the Notes payable includes accrued interest of $10.7 million and $7.6 million at December 31, 2019 and 2018, respectively.
Our payment obligations for BMS and Pfizer Promissory Notes are as follows (in thousands):
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December 31, 2019
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December 31, 2018
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Total repayment obligations
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$
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62,500
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$
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62,500
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Less: interest to be accreted in future periods
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(5,565
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)
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(8,643
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)
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Less: payments made
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(5,374
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)
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(497
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)
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Carrying value of notes payable
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51,561
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|
53,360
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Less: current portion of royalties
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(8,461
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)
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(5,062
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)
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Non-current portion of notes payable
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$
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43,100
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$
|
48,298
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We evaluated the features of the Notes and determined that certain features require acceleration of payments such as pursuant to a change of control. 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 years ended December 31, 2019 and 2018, we recognized a gain of $1.6 million and a loss of $0.4 million, respectively, upon remeasurement of the embedded derivatives.
The estimated fair value of the Notes at December 31, 2019 and December 31, 2018 was $47.3 million and $53.2 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.
Royalty-based Financing
In February 2017, we entered into a purchase and sale agreement (the “Royalty Sales Agreement”) with 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 start when worldwide net annual sales levels are above $150.0 million. Total royalty payments are capped at 195% of the funding received less certain transaction expenses, or $290.6 million.
Upon the closing of the 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 included 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 and are being amortized over the estimated term of the debt using the effective interest method.
The effective interest rate for the HCR royalty-based debt as of December 31, 2019 was 11.4%. We are accruing for interest over the term of the royalty-based debt. The carrying value of the royalty-based debt includes accrued interest of $44.4 million and $22.9 million, net of unamortized debt discount of $5.9 million and $6.8 million, at December 31, 2019 and December 31, 2018, respectively.
Our payment obligations for HCR royalty-based debt are as follows (in thousands):
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|
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December 31, 2019
|
|
December 31, 2018
|
Total repayment obligations
|
$
|
290,550
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|
|
$
|
290,550
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Less: interest to be accreted in future periods
|
(104,268
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)
|
|
(125,851
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)
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Less: payments made
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(9,069
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)
|
|
(816
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)
|
Carrying value of long term royalty-based debt
|
177,213
|
|
|
163,883
|
|
Less: current portion of royalties
|
(14,316
|
)
|
|
(8,627
|
)
|
Non-current portion of long term royalty-based debt
|
$
|
162,897
|
|
|
$
|
155,256
|
|
We determined that certain features, such as the variability in the royalty payments based upon the timing of regulatory approval, were embedded derivatives that required bifurcation from the royalty-based debt instrument. Upon the Andexxa Gen 2 FDA approval on December 31, 2018, it was determined that there was no longer a derivative associated with the debt contract.
The estimated fair value of the royalty-based debt at December 31, 2019 and December 31, 2018 was $142.0 million and $154.2 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 as described in Note 4, “Fair Value Measurements”, to these Consolidated Financial Statements.
Secured Term Loans
In February 2019, we entered into a credit agreement (the “Credit Agreement”) with HCR and Athyrium Opportunities III Acquisition LP (“Athyrium”) whereby we received the first tranche of $62.5 million in March 2019 and the second tranche of $62.5 million in November 2019 (collectively, “Secured Term Loans”).
All obligations under the Credit Agreement are due on February 28, 2025 with certain scheduled payments of the principal starting from March 31, 2022. The outstanding principal balance of the loans bear interest at 9.75% per annum. The loans are secured by substantially all of our assets. The Credit Agreement contains certain covenants that, among others, 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 $50.0 million of cash. Violating covenants would put us in default and the lenders would then have the option to demand repayment plus certain penalties or allow us to continue to service the Secured Term Loans, but at the default interest rate of 12.75%. As of December 31, 2019, we were not in violation of any covenants.
For the year ended December 31, 2019, we accrued interest of $6.3 million and we paid in cash interest of $5.6 million under the Secured Term Loans. Upon the closing of the Credit Agreement, we incurred fees of $2.8 million to HCR and Athyrium and other debt issuance cost of $0.5 million. Loan origination fees and debt issuance costs are netted against the loan balance and are amortized over the contractual term of the loan using the effective interest method. The weighted average effective interest rate was 11.5% as of December 31, 2019.
The future principal maturities of our Secured Term Loans for each of the next five years are as follows (in thousands):
|
|
|
|
|
Year ended December 31,
|
|
2022
|
$
|
19,231
|
|
2023
|
19,231
|
|
2024
|
19,231
|
|
Thereafter
|
67,307
|
|
Total
|
$
|
125,000
|
|
We evaluated the terms of the loans and determined that one feature could require acceleration of payments and a prepayment penalty (make-whole provision) upon a change of control if it occurs prior to the 30-month anniversary period from the funding date in March 2019. We determined that this feature (embedded derivative) requires bifurcation from the debt instrument and fair value recognition. We determined the fair value of the derivative using a discounted cash flow model taking into account the probability of a change of control 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 will remeasure the embedded derivative to fair value each reporting period until the make-whole provision lapses 30 months after the funding date of March 2019. For the year ended December 31, 2019, we recognized a gain of $1.4 million upon remeasurement of the embedded derivatives.
The estimated fair value of long-term debt at December 31, 2019 was $123.7 million, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a discounted cash flow 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.
9. 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 $94.5 million, $101.7 million and $41.8 million, for services to be performed in 2020, 2021, and 2022, 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 2023. The facility lease agreement, as amended, contains scheduled rent increases over the lease term. Lease expense was $3.6 million, $2.1 million and $1.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our future minimum commitments under our non-cancelable operating leases are disclosed in Note 13, "Leases" to these consolidated financial statements.
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.
Contingencies
While there are no material legal proceedings we are aware of, there is one matter described below, and we may become party to various additional 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.
We recognize accruals for such actions to the extent that we conclude that a loss is both probable and reasonably estimable. We accrue for the best estimate of a loss within a range; however, if no estimate in the range is better than any other, then we accrue the minimum amount in the range. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss. Unless otherwise noted, it is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss. We did not recognize any accruals for the action described below in our Consolidated Balance Sheets as of December 31, 2019 and 2018, as we did not believe losses were probable.
Legal Proceedings
On January 16, 2020, a stockholder filed a putative class action against the Company and certain officers (the “Defendants”) in the U.S. District Court for the Northern District of California, captioned Hayden v. Portola Pharmaceuticals, Inc., et al., No. 3:20-cv-00367-VC (N.D. Cal.). On February 7, 2020, another stockholder filed a related putative class action against Defendants, captioned McCutcheon v. Portola Pharmaceuticals, Inc., et al., No. 3:20-cv-00949 (N.D. Cal.).
The stockholder plaintiffs allege that the Defendants violated the antifraud provisions of the Securities Exchange Act by making misrepresentations and omissions in public disclosures concerning the Company’s sales of andexanet alfa, marketed as Andexxa in the United States and Ondexxya in Europe, between May 8, 2019 and January 9, 2020. Specifically, plaintiffs allege that the Defendants made materially false and/or misleading statements about the demand for Andexxa, and usage of Andexxa by hospitals and healthcare organizations. Plaintiffs also allege that the Defendants made materially false and/or misleading statements about the Company’s accounting for its reserve for returns, and that the Defendants failed to disclose that the Company was shifting from a short-dated version of Andexxa to a longer-dated version, impacting the reserve for returns and impacting revenue for the Company. The Plaintiffs contend that the alleged fraud was revealed on January 9, 2020, when the Company announced its preliminary unaudited financial results for the fourth quarter of 2019. A lead plaintiff has not yet been appointed, and the Company has not yet responded to the complaints.
The plaintiffs seek to recover unspecified monetary relief, interest, and attorneys’ fees and costs. Given the early stage of these proceedings, we cannot presently predict the likelihood of obtaining dismissal of the case, nor can we estimate the possible loss or range of loss at this time.
10. 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, 2019, we are authorized to issue 21,628,351 shares of common stock under the 2013 Plan. The 2013 Plan had 6,640,145 shares of common stock available for future issuance as of December 31, 2019, 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). In December 2018, our Board of Directors authorized an additional 1,000,000 shares under the 2017 Plan, bringing the total to 2,500,000 shares, for issuance to new employees entering into employment with Portola in accordance with NASDAQ Listing Rule 5635(c)(5). The 2017 Plan had 1,132,267 shares of common stock available for future issuance as of December 31, 2019.
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, 2019:
|
|
|
|
|
|
|
|
|
Shares
Subject to
Outstanding
Options
|
|
Weighted-
Average Exercise
Price Per Share
|
Balance at December 31, 2018
|
7,507,690
|
|
|
$
|
33.25
|
|
Options granted
|
2,199,307
|
|
|
27.74
|
|
Options exercised
|
(916,157
|
)
|
|
21.32
|
|
Options canceled
|
(1,242,404
|
)
|
|
38.62
|
|
Balance at December 31, 2019
|
7,548,436
|
|
|
$
|
32.21
|
|
Additional information related to the status of stock options at December 31, 2019, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic Value
|
Outstanding
|
7,548,436
|
|
|
$
|
32.21
|
|
|
6.64
|
|
$
|
5,913
|
|
Vested
|
4,361,497
|
|
|
$
|
32.75
|
|
|
5.33
|
|
$
|
4,514
|
|
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, 2019. The aggregate intrinsic value of stock options exercised was $7.5 million, $11.6 million and $39.3 million for the years ended December 31, 2019, 2018 and 2017, respectively, and was calculated as the difference between the exercise price of the stock options and the fair value of our common stock on the date of exercise.
The weighted-average grant date fair value of employee stock options granted during the years ended December 31, 2019, 2018 and 2017 was $16.01, $21.01 and $24.08 per share, respectively. The total estimated grant date fair value of stock options vested during the years ended December 31, 2019, 2018 and 2017 was $29.8 million, $30.6 million and $23.0 million, respectively.
We recognized stock-based compensation expenses of $28.7 million, $29.7 million and $25.5 million in 2019, 2018 and 2017 respectively relating to the employee stock options. As of December 31, 2019, total unamortized employee stock-based compensation was $51.8 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 2018 when regulatory approval of Andexxa was achieved and when the manufacturing goal related to our lead programs was met in 2017. A portion of the PSOs granted in May 2016 were forfeited and cancelled when regulatory approval of Andexxa was not achieved by the fourth quarter of 2017. In March 2019, the Compensation Committee of our Board of Directors approved a program to award up to 490,986 PSOs to the management team based on the achievement of a net revenue goal for 2019.
We recognized stock-based compensation expense of $1.3 million, $0 million and $2.3 million in 2019, 2018 and 2017, respectively, relating to these PSOs. The aggregate intrinsic value of PSOs exercised for the years ended December 31, 2019, 2018 and 2017 was $0.2 million, $0.2 million and $0.4 million, respectively. The weighted-average grant date fair value of the
PSOs granted during 2019 was $19.27. As of December 31, 2019, total unamortized stock-based compensation related to PSOs was $1.8 million.
The following table summarizes PSO activities under our 2013 Plan and related information:
|
|
|
|
|
|
|
|
|
Shares
Subject to
Outstanding
PSOs
|
|
Weighted-
Average Exercise
Price Per Share
|
Balance at December 31, 2018
|
143,335
|
|
|
$
|
23.76
|
|
Options granted
|
490,986
|
|
|
33.29
|
|
Options exercised
|
(35,624
|
)
|
|
23.76
|
|
Options canceled
|
(46,687
|
)
|
|
33.29
|
|
Balance at December 31, 2019
|
552,010
|
|
|
$
|
31.43
|
|
Additional information related to the status of PSOs at December 31, 2019, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic Value
|
Outstanding
|
552,010
|
|
|
$
|
31.43
|
|
|
7.78
|
|
$
|
34
|
|
Vested
|
107,711
|
|
|
$
|
23.76
|
|
|
3.00
|
|
$
|
34
|
|
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
Outstanding
RSUs
|
|
Weighted-
Average Grant Date
Fair Value Per Share
|
Balance at December 31, 2018
|
979,278
|
|
|
$
|
34.00
|
|
RSUs granted
|
882,646
|
|
|
27.86
|
|
RSUs released
|
(401,393
|
)
|
|
33.62
|
|
RSUs canceled
|
(186,314
|
)
|
|
34.02
|
|
Balance at December 31, 2019
|
1,274,217
|
|
|
$
|
29.86
|
|
Additional information related to the status of RSUs at December 31, 2019, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic Value
|
Outstanding
|
1,274,217
|
|
|
1.16
|
|
$
|
30,428
|
|
The total grant date fair value of RSUs vested during the years ended December 31, 2019, 2018 and 2017 was $13.5 million, $8.0 million and $6.0 million, respectively. The weighted-average grant date fair value of RSUs granted during the years ended December 31, 2019, 2018 and 2017 was $27.86, $37.6 and $27.15 per share respectively.
We recognized stock-based compensation expenses of $13.8 million, $11.3 million and $8.1 million in the years ended December 31, 2019, 2018 and 2017, respectively, relating to these RSUs. As of December 31, 2019, there was $26.5 million of unrecognized compensation costs related to these RSUs, which is expected to be recognized over an estimated weighted-average period of 1.96 years.
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 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
Outstanding
PSUs
|
|
Weighted-
Average Grant Date
Fair Value Per Share
|
Balance at December 31, 2018
|
153,503
|
|
|
$
|
29.85
|
|
PSUs granted
|
—
|
|
|
—
|
|
PSUs released
|
(52,670
|
)
|
|
28.29
|
|
PSUs canceled
|
(88,908
|
)
|
|
30.4
|
|
Balance at December 31, 2019
|
11,925
|
|
|
32.66
|
|
Additional information related to the status of PSUs at December 31, 2019, is as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic Value
|
Outstanding
|
11,925
|
|
|
0.03
|
|
$
|
285
|
|
The total grant date fair value of PSUs vested in 2019, 2018 and 2017 was $1.5 million, $5.7 million and $2.1 million, respectively. The weighted-average grant date fair value of PSUs granted in 2019, 2018 and 2017 was zero, $32.66 and $25.54 per share, respectively.
We recognized stock-based compensation expenses of $0.2 million, $2.7 million and $2.4 million in the years ended December 31, 2019, 2018 and 2017, respectively, relating to these PSUs. As of December 31, 2019, there was less than $0.1 million of unrecognized compensation costs related to these PSUs, which is expected to be recognized over an estimated weighted-average period of 0.03 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, 2019, 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 31st of the preceding fiscal year unless the Board of Directors elects to forego or reduce such increases. Since 2015, the Board of Directors has annually elected to completely forego the automatic share increases available under the ESPP. The ESPP had 1,345,549 shares of common stock available for future issuance as of December 31, 2019. 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.
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 22,600, 37,000 and 50,000 shares with average exercise prices of $27.10, $45.16 and $38.14 per share, respectively, during the years ended December 31, 2019, 2018, and 2017, respectively. These options vest upon grant or various terms up to four years. We recognized non-employee stock compensation expense of $2.2 million, $2.9 million and 3.9 million during the years ended December 31, 2019, 2018 and 2017, respectively for these non-employee awards. 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.
Stock-Based Compensation
Stock-based compensation expense is reflected in our consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Research and development
|
$
|
19,340
|
|
|
$
|
27,694
|
|
|
$
|
19,779
|
|
Selling, general and administrative
|
32,735
|
|
|
28,712
|
|
|
23,505
|
|
Stock-based compensation expense included in total expenses
|
$
|
52,075
|
|
|
$
|
56,406
|
|
|
$
|
43,284
|
|
|
|
|
|
|
—
|
|
Capitalized stock-based compensation costs
|
$
|
(1,657
|
)
|
|
$
|
(1,046
|
)
|
|
$
|
—
|
|
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). 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.
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,
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
|
|
|
|
|
Stock options
|
1.39% - 2.56%
|
|
2.55% - 3.03%
|
|
1.70% - 2.27%
|
Performance stock options
|
2.43%
|
|
—
|
|
—
|
ESPP
|
1.89% - 2.52%
|
|
1.10% - 2.28%
|
|
0.47% - 1.10%
|
Expected term
|
|
|
|
|
|
Stock options
|
5.0 - 6.1 years
|
|
5.0 - 6.1 years
|
|
5.0 - 6.1 years
|
Performance stock options
|
6.0 years
|
|
—
|
|
—
|
ESPP
|
0.5 years
|
|
0.5 years
|
|
0.5 years
|
Expected volatility
|
|
|
|
|
|
Stock options
|
59% - 61%
|
|
59% - 62%
|
|
60% - 65%
|
Performance stock options
|
61%
|
|
—
|
|
—
|
ESPP
|
43% - 67%
|
|
49% - 65%
|
|
61% - 80%
|
Dividend yield
|
|
|
|
|
|
Stock options
|
—
|
|
—
|
|
—
|
Performance stock options
|
—
|
|
—
|
|
—
|
ESPP
|
—
|
|
—
|
|
—
|
Contingently issuable shares to Lonza are discussed in Note 6, "Contract Manufacturing Agreement" to these Consolidated Financial Statements.
11. 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,
|
|
2019
|
|
2018
|
|
2017
|
Stock options to purchase Common Stock
|
7,548,436
|
|
|
7,507,690
|
|
|
6,514,538
|
|
Performance stock options
|
552,010
|
|
|
143,335
|
|
|
164,783
|
|
Restricted stock units
|
1,274,217
|
|
|
979,278
|
|
|
600,334
|
|
Performance stock units
|
11,925
|
|
|
153,503
|
|
|
304,754
|
|
Employee stock purchase plan
|
76,036
|
|
|
96,219
|
|
|
32,325
|
|
Common stock warrants
|
1,500
|
|
|
1,500
|
|
|
1,500
|
|
12. 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 matched employee contributions up to a maximum of 3% of employee salary for the years ended December 31, 2019, 2018 and 2017. During the years ended December 31, 2019, 2018 and 2017, we recognized total expense of $1.7 million, $1.3 million and $0.9 million, respectively, relating to these contributions.
13. Leases
We have operating leases for our office facilities. We renewed one operating lease for our office facilities in June 2019. Upon adoption of ASC 842, we did not elect to apply the hindsight expedient in evaluating our renewal option, and as such, we did not include the renewal period in our lease term because at the inception we were not reasonably certain that we would exercise the renewal option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Our operating lease right-of-use asset and liability were recognized at the adoption date of ASC 842 based on the present value of lease payments over the remaining lease term at the adoption date. In determining the net present value of lease payments, we used our incremental borrowing rate based on the information available, including remaining lease term, at the adoption date of ASC 842.
Upon the renewal of the operating lease in June 2019, we remeasured the lease liability to reflect the changes to the lease term and the lease payments using a discount rate at the date of remeasurement on the basis of the remaining lease term and the remaining lease payments. We recognized the remeasurement amount of the lease liability as an adjustment to the lease right-of-use asset. This resulted in an $11.1 million increase to the lease liability and the lease right-of-use asset at the remeasurement date in June 2019.
The components of lease expense are as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Operating lease costs
|
$
|
3,224
|
|
Short-term lease cost
|
356
|
|
Total
|
$
|
3,580
|
|
Cash flow information related to leases are as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
3,003
|
|
Supplemental non-cash information:
|
|
Right-of-use asset obtained in exchange for lease obligation due to remeasurement
|
$
|
11,103
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
1,432
|
|
Supplemental balance sheet information related to leases are as follows (in thousands):
|
|
|
|
|
|
|
|
Classification
|
|
As of December 31, 2019
|
Operating leases
|
|
|
|
Lease right-of-use assets
|
|
|
|
Non-current
|
Operating lease right-of-use assets
|
|
$
|
12,064
|
|
Lease liabilities
|
|
|
|
Current
|
Accrued and other liabilities
|
|
$
|
4,715
|
|
Non-current
|
Long-term portion of lease liabilities
|
|
$
|
8,850
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
Operating leases
|
|
|
3.1 years
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
|
|
6.55
|
%
|
As of December 31, 2019, the maturity of our lease liabilities were as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
Operating Leases
|
2020
|
4,908
|
|
2021
|
4,937
|
|
2022
|
4,713
|
|
2023
|
1,188
|
|
Total lease payments
|
15,746
|
|
Less imputed interests
|
(2,181
|
)
|
Total lease liabilities
|
$
|
13,565
|
|
14. Costs from Wind Down of Bevyxxa Activities
Following the approval of Andexxa in May 2018, we made the business decision to focus our resources on the launch of Andexxa and significantly scaled back our commercial efforts on Bevyxxa. Throughout 2019, we engaged with potential business collaborators for Bevyxxa, and in the fourth quarter of 2019, we determined that it was unlikely that we will find a viable partner. Accordingly, we have begun to wind down Bevyxxa operations to eliminate future operational and financial obligations. Accordingly, we recorded a charge of $27.5 million as cost of sales which is comprised of an excess and obsolescence inventory charge of $13.7 million, a write-off of a long-term prepaid manufacturing asset of $7.8 million, an impairment charge for an intangible asset related to a payment made to Takeda of $3.7 million, and an accrual of firm purchase commitments of $2.3 million which we expect to settle in the next twelve months.
15. Income Taxes
The income tax provision consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Current:
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
Foreign
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred:
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
Foreign
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total provision for income taxes
|
$
|
—
|
|
|
$
|
—
|
|
We did not record an income tax expense for 2019, 2018 and 2017. The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
34.0
|
%
|
Federal and state credits
|
3.2
|
%
|
|
7.4
|
%
|
|
8.9
|
%
|
Excess tax benefit
|
0.3
|
%
|
|
0.4
|
%
|
|
8.6
|
%
|
Stock based compensation
|
(2.5
|
)%
|
|
(0.8
|
)%
|
|
0.1
|
%
|
U.S. tax on foreign earnings
|
(0.2
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
(0.5
|
)%
|
|
(0.6
|
)%
|
|
(0.1
|
)%
|
Tax impact due to tax rate reduction
|
—
|
%
|
|
—
|
%
|
|
(47.7
|
)%
|
Change in valuation allowance
|
(19.8
|
)%
|
|
(24.1
|
)%
|
|
2.6
|
%
|
Foreign rate differential
|
(1.5
|
)%
|
|
(3.3
|
)%
|
|
(6.4
|
)%
|
Total tax provision
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
The components of U.S. deferred tax assets and (liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Federal and state net operating loss carryforwards
|
$
|
285,685
|
|
|
$
|
241,881
|
|
Federal and state research tax credit carryforwards
|
24,782
|
|
|
23,917
|
|
Federal Orphan Drug Credit
|
112,802
|
|
|
120,273
|
|
Deferred revenue
|
44,588
|
|
|
29,530
|
|
Stock options
|
20,893
|
|
|
19,992
|
|
Inventories
|
10,617
|
|
|
4,350
|
|
Operating lease liabilities
|
3,146
|
|
|
—
|
|
Other
|
7,861
|
|
|
5,098
|
|
Total deferred tax assets
|
510,374
|
|
|
445,041
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Operating lease right-of-use assets
|
(2,793
|
)
|
|
—
|
|
Total deferred tax liabilities
|
(2,793
|
)
|
|
—
|
|
|
|
|
|
Net deferred tax assets before valuation allowance
|
507,581
|
|
|
445,041
|
|
Valuation allowance
|
(507,581
|
)
|
|
(445,041
|
)
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
We received orphan drug designation and were eligible to claim a federal orphan drug credit starting in 2015 and reported the credit in 2019, 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.
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 $62.5 million for the year ended December 31, 2019. The valuation allowance decreased by approximately $82.1 million for the year ended December 31, 2018.
As of December 31, 2019, we had net operating loss carryforwards for federal income tax purposes of approximately $1,225.5 million. Of the federal net operating loss carryforwards, $868.1 million will expire in the period from 2027 to 2037, and $357.4 million will carryforward indefinitely. We also have federal research tax credits of approximately $19.3 million and orphan drug credit of $132.7 million, which expire at various dates in the period from 2024 to 2039. Lastly, we have California net operating loss carry forwards of approximately $208.0 million which expire at various dates in the period from 2020 to 2039 and California research tax credits of approximately $12.0 million, which can be carried forward indefinitely. Our federal and state net operating loss carryforwards as of December 31, 2019 include amounts resulting from exercises and sales of stock option awards to employees and non-employees.
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 with the exception of State of Washington. We are no longer subject to audit by the Internal Revenue Service for income tax returns filed before 2017, and by the material state and local tax authorities for tax returns filed before 2016. 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,
|
|
2019
|
|
2018
|
|
2017
|
Unrecognized tax benefits, beginning of period
|
$
|
25,421
|
|
|
$
|
20,730
|
|
|
$
|
13,865
|
|
Increases due to current period positions
|
1,875
|
|
|
4,879
|
|
|
7,046
|
|
Increase due to prior period positions
|
22
|
|
|
26
|
|
|
—
|
|
Decreases due to prior period positions
|
(3,017
|
)
|
|
(214
|
)
|
|
(181
|
)
|
Unrecognized tax benefits, end of period
|
$
|
24,301
|
|
|
$
|
25,421
|
|
|
$
|
20,730
|
|
The amount of unrecognized income tax benefits that, if recognized, would affect our effective tax rate was $0 as of December 31, 2019 and December 31, 2018. If the $24.3 million and $25.4 million of unrecognized income tax benefits as of December 31, 2019 and 2018, 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, 2019 and 2018.
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 and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018.
The Tax Act also includes a provision referred to as Global Intangible Low-Taxed Income ("GILTI") which generally imposes a tax on foreign income in excess of a deemed return on tangible assets. The FASB guidance issued in January, 2018 allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the "period cost method"), or (ii) account for GILTI in the measurement of deferred taxes (the "deferred method"). We elect to account for the tax effects of this provision using the period cost method.
Our foreign entities started to have earnings in 2019 and our accumulated undistributed foreign earnings as of December 31, 2019 have been subject to the current year income inclusion under subpart F or GILTI regime for U.S. tax purposes. If we were to make actual distributions of some or all of these earnings, we would generally incur no additional U.S. income tax but could incur U.S. state income tax and foreign withholding taxes. We are evaluating whether future undistributed foreign earnings would be permanently re-invested or not and have not accrued for these potential U.S. state income tax and foreign withholding taxes. However, any additional tax associated with the distribution of these earnings would be immaterial.
16. 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 necessary to present fairly the unaudited quarterly results of operations set forth herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Product revenue, net
|
$
|
20,362
|
|
|
$
|
27,164
|
|
|
$
|
35,743
|
|
|
$
|
28,375
|
|
|
$
|
606
|
|
|
$
|
2,265
|
|
|
$
|
7,176
|
|
|
$
|
14,070
|
|
Collaboration and license revenue
|
1,807
|
|
|
1,260
|
|
|
1,056
|
|
|
873
|
|
|
6,038
|
|
|
1,746
|
|
|
7,001
|
|
|
1,228
|
|
Operating expenses
|
(95,768
|
)
|
|
(92,384
|
)
|
|
(80,381
|
)
|
|
(119,391
|
)
|
|
(91,944
|
)
|
|
(107,706
|
)
|
|
(83,321
|
)
|
|
(102,479
|
)
|
Net loss
|
(78,096
|
)
|
|
(68,477
|
)
|
|
(49,627
|
)
|
|
(96,676
|
)
|
|
(84,510
|
)
|
|
(105,971
|
)
|
|
(71,177
|
)
|
|
(88,886
|
)
|
Net loss (income) attributable to noncontrolling interest (SRX Cardio)
|
(60
|
)
|
|
2,273
|
|
|
—
|
|
|
—
|
|
|
332
|
|
|
(223
|
)
|
|
(126
|
)
|
|
338
|
|
Net loss attributable to Portola
|
(78,156
|
)
|
|
(66,204
|
)
|
|
(49,627
|
)
|
|
(96,676
|
)
|
|
(84,178
|
)
|
|
(106,194
|
)
|
|
(71,303
|
)
|
|
(88,548
|
)
|
Net loss per share attributable to Portola common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(1.17
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(1.24
|
)
|
|
$
|
(1.28
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(1.34
|
)
|
17. Subsequent Event
Restructuring Plan
In February 2020, we undertook an organizational realignment to focus our resources on the maximizing the Andexxa/Ondexxya commercial opportunity which included a reduction in headcount in order to conserve resources.