N
otes
to
C
onsolidated
Financial
S
tatements (Unaudited)
(A
mounts in thousands, except share and per share data)
1. Summary of Significant Accounting Policies
Business Overview
Aratana Therapeutics, Inc., including its subsidiaries (the “Company” or “Aratana”)
was incorporated on December 1, 2010 under the laws of the State of Delaware. T
he Company is a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. The Company has
one
operating segment: pet therapeutics.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U
nited
S
tates
generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended
December 31, 2016
and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2017. In the opinion of management, all adjustments, consisting of a normal and recurring nature, considered necessary for a fair presentation, have been included.
The Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of
$217,718
as of
September 30, 2017
. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash, cash equivalents and short-term investments
will be sufficient to fund operations and debt obligations f
or at least one year from the issuance of the
se
consolidated financial statements.
The Company expects to continue
to incur operating losses for the next several years as it works to develop and commercialize its therapeutics and therapeutic candida
tes. If the Company cannot generate sufficient cash from operations in the future, it may
seek to fund
its operations through collaborations and licensing arrangements, as well as public or private equity offerings or further debt (re)financings. If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, it may be required to curtail its operations
which could include delaying the commercial launch of its therapeutics, discontinuing therapeutic development programs, or granting rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market itself. As
disclosed in Note 7 to t
he consolidated financial statements, the Company has a term loan and a revolving credit facility with an aggregate principa
l
balance of
$36,500
as
of
September 30, 2017
. The loan agreement requires that the Company maintain certain minimum liquidity at all times
(the greater of cash equal to fifty percent (
50%
) of outstanding balance or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater)
, which as of
September 30, 2017
, was
approximately $18,250.
If the minimum
liquidity covenant is not met, the Company may be required to repay the loans prior to their scheduled maturity dates. At
September 30, 2017
, the Company was in compliance with all financial covenants.
Consolidation
The Company’s consolidated financial statements include its financial statements and those of its wholly-owned subsidiaries
and a consolidated variable interest entity (“VIE”)
through the deconsolidation date in December 2016.
Intercompany balances and transactions are eliminated in consolidation.
To determine if the Company holds a controlling financial interest in an entity, the Company first evaluates if it is required to apply the
VIE
model to the entity. Where the Company holds current or potential rights that give it the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives it the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, the Company is the primary beneficiary of that VIE. When changes occur to the design of an entity, the Company reconsiders whether it is subject to the VIE model. The Company continuously evaluates whether it is the primary beneficiary of a consolidated VIE and upon determination that the Company no longer remains the primary beneficiary, the Company deconsolidates the entity and a gain or loss is recognized upon deconsolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates.
Property and Equipment, net
Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of
$1,615
and
$920
as of
September 30, 2017
and
December 31, 2016
, respectively.
New Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance will supersede the revenue recognition requirements in topic,
Revenue Recognition
, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In July 2015, the FASB approved a one-year delay in the effective date of the new revenue standard. These changes become effective for the Company on January 1, 2018. Early adoption is permitted but not before the original effective date of January 1, 2017. The standard permits the use of either the retrospective or
modified retrospective
adoption
method. The Company is currently assessing the method of adoption and the impact this new guidance will have on its consolidated financial statements.
The Company expects to adopt these standards using the modified retrospective method.
The timing of revenue recognition for variable consideration under the Company’s licensing and collaboration agreements may be different as a result of this new guidance. The Company is reviewing its licensing and collaboration agreements for variable consideration, and if any such consideration exists, whether it should be estimated and recognized earlier than under the current revenue guidance.
The Company is also assessing its product revenues under the revised guidance. To date, no material differences have been identified with respect to product revenues, however the Company’s assessment is ongoing, and the impact of adoption, if any, will depend on arrangements in place at the adoption date
.
Inventory
In July 2015, the FASB issued guidance that requires entities to measure most inventory “at lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. This guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted and is to be applied using a prospective basis. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Leases
In February 2016, the FASB issued guidance that requires, for operating leases, a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and is to be applied using a modified retrospective method. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.
Compensation – Stock Compensation
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for employee share-based payment transactions including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted.
The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Intangibles—Goodwill and Other
In January 2017, the FASB issued guidance on simplifying the subsequent measurement of goodwill by eliminating Step 2 (measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill) from the goodwill impairment test. Under the amendments in this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The guidance requires application using a prospective method. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Compensation – Stock Compensation
In May 2017, the FASB issued guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is
permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.
2. Fair Value of Financial Assets and Liabilities
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following financial assets are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
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Fair Value Measurements as of
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Carrying
|
|
September 30, 2017 Using:
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Value
|
|
Level 1
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Level 2
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Level 3
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Total
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Assets:
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Cash equivalents:
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|
|
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|
Certificates of deposit
|
|
$
|
7,470
|
|
$
|
—
|
|
$
|
7,470
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|
$
|
—
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|
$
|
7,470
|
Short-term investments:
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Short-term marketable securities - certificates of deposit
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1,494
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|
|
—
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|
|
1,494
|
|
|
—
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|
|
1,494
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|
|
$
|
8,964
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|
$
|
—
|
|
$
|
8,964
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|
$
|
—
|
|
$
|
8,964
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Fair Value Measurements as of
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Carrying
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|
December 31, 2016 Using:
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Value
|
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Level 1
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Level 2
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Level 3
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Total
|
Assets:
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Cash equivalents:
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Certificates of deposit
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$
|
7,719
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|
$
|
—
|
|
$
|
7,719
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|
$
|
—
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$
|
7,719
|
Short-term investments:
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Short-term marketable securities - certificates of deposit
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|
996
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|
|
—
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|
|
996
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|
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—
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|
996
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$
|
8,715
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|
$
|
—
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$
|
8,715
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|
$
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—
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$
|
8,715
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Certain estimates and judgments are required to develop the fair value amounts shown above. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
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Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost
given the short duration of the securities.
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Marketable securities (short-term) – the fair value of marketable securities has been determined to be amortized cost given the short duration of the securities.
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Financial Assets and Liabilities that are not Measured at Fair Value on a Recurring Basis
The carrying amounts and estimated fair value of the Company’s financial liabilities which are not measured at fair value on a recurring basis was as follows:
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September 30, 2017
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Carrying Value
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Fair Value
|
Liabilities:
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Loans payable (Level 2)
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$
|
36,847
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|
$
|
36,847
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December 31, 2016
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Carrying Value
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Fair Value
|
Liabilities:
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Loans payable (Level 2)
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$
|
40,188
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$
|
40,709
|
Loans payable values above include both
the current
and the long-term
loans
balances as of
September 30, 2017
and December 31, 2016.
Certain estimates and judgments were required to develop the fair value amounts. The fair value amount shown above is not necessarily indicative of the amounts that the Company would realize upon disposition, nor does it indicate the Company’s intent or ability to dispose of the financial instrument.
The fair value of loans payable was estimated using discounted cash flow analysis discounted at current
rates.
3. Investments
Marketable Securities
Marketable securities consisted of the following:
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September 30, 2017
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
|
|
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Cost
|
|
Losses
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Losses
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Value
|
Short-term marketable securities:
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|
|
Certificates of deposit
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$
|
1,494
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|
$
|
—
|
|
$
|
—
|
|
$
|
1,494
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Total
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$
|
1,494
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|
$
|
—
|
|
$
|
—
|
|
$
|
1,494
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December 31, 2016
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
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Cost
|
|
Losses
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Losses
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Value
|
Short-term marketable securities:
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|
Certificates of deposit
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$
|
996
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|
$
|
—
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|
$
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—
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|
$
|
996
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Total
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$
|
996
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$
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—
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$
|
—
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$
|
996
|
At
September 30, 2017
and
December 31, 2016
, short-term marketable securities consisted of investments that mature within one year. Short-term marketable securities are recorded as short-term investments in the consolidated balance sheets.
4
. Inventories
Inventories are stated at the lower of cost or
net realizable value
and
consisted
of the following:
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September 30, 2017
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December 31, 2016
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Raw materials
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$
|
1,485
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$
|
1,441
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Work-in-process
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2,114
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8,153
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Finished goods
|
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5,442
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1,536
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$
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9,041
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$
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11,130
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As of
September 30, 2017
and December 31, 2016,
the Company had non-cancellable open orders for the purchase of inventories of
approximately $10,333 and $17,800, respectively.
As of September 30, 2017, raw materials included
$1,124
of GALLIPRANT
®
inventories. As part of the manufacturing transfer of GALLIPRANT (Note 9), the Company is working to determine if these raw materials will be assumed by Eli Lilly and Company, acting on behalf of its Elanco Animal Health Division (“Elanco”). The Company anticipates to be reimbursed for any raw materials assumed by Elanco. Any raw materials not assumed by Elanco will be expensed
as research and development expenses
.
As of September 30, 2017, finished goods included
$5,343
of GALLIPRANT inventories. These inventories were subsequently sold to Elanco in October 2017 as part of the manufacturing transfer of GALLIPRANT.
During the three and nine months ended September 30, 201
7
, the Company recognized inventory valuation adjustment losses in the
amount of
$342
and
$394
, respectively
, from application of lower of cost or market, in cost of product sales. The losses related to
GALLIPRANT
inventories that were written
off.
During the three and nine months ended September 30, 2016, the Company recognized inventory valuation adjustment losses in the
amount of
$111
and
$1,664
, respectively, from application of lower of cost or market, in cost of product sales. The losses related to
TACTRESS
®
inventories that were written off and pre-launch GALLIPRANT inventories marked to market due to terms agreed upon in the
Elanco collaboration agreement (Note
9
).
5
. Goodwill
Goodwill is recorded as an indefinite-lived asset and is not amortized for financial reporting purposes but is tested for impairment on an
annual basis or when indications of impairment exist.
No
goodwill impairment losses have been recognized
to date
. Goodwill is not expected to be
deductible for income tax purposes.
The Company completed its annual goodwill impairment testing during the third quarter of 201
7
. The Company elected to bypass the
qualitative assessment. The Company determined as of the testing date that it consisted of one operating segment, which is comprised of
one reporting unit. In performing step one of the assessment, the Company determined that its fair value, determined to be its market
capitalization, was greater than its carrying value, determined to be stockholders’ equity. Based on this result, the Company determined there was no impairment of goodwill during the third quarter of 201
7
.
Goodwill as of
September 30, 2017
, was as follows:
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Gross
|
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Impairment
|
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Net
|
|
|
Carrying Value
|
|
Losses
|
|
Carrying Value
|
Goodwill
|
|
$
|
41,023
|
|
$
|
—
|
|
$
|
41,023
|
The change in the net book value of goodwill for the
nine
months ended
September 30, 2017
, was as follows:
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2017
|
As of January 1,
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$
|
39,382
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Effect of foreign currency exchange
|
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|
1,641
|
As of the end of the period,
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$
|
41,023
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6
. Intangible Assets, Net
The change in the net book value of intangible assets for the
nine
months ended
September 30, 2017
, was as follows:
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2017
|
As of January 1,
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$
|
7,639
|
Additions (Note 9)
|
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3,000
|
Amortization expense
|
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|
(235)
|
Effect of foreign currency exchange
|
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|
798
|
As of the end of the period,
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$
|
11,202
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The Company recognized
amortization expense of
$85
and
$235
for the three
and
nine
months
ended
September 30, 2017
,
respectively
, and
$9
1
and
$
281
for the three and
nine
months ended
September 30, 2016
, respectively
.
Unamortized Intangible Assets
Unamortized intangible assets as of
September 30, 2017
, were as follows:
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Net
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Carrying
|
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|
Value
|
Intellectual property rights acquired for in-process research and development
|
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$
|
7,472
|
The net carrying value above includes asset impairment charges to date of
$16,765
.
Amortized Intangible Assets
Amortized intangible assets as of
September 30, 2017
, were as follows:
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Gross
|
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Net
|
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Weighted
|
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Carrying
|
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Accumulated
|
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Carrying
|
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Average
|
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Value
|
|
Amortization
|
|
Value
|
|
Useful Life
|
Intellectual property rights for currently marketed products
|
|
$
|
42,652
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|
$
|
38,922
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|
$
|
3,730
|
|
11.7
|
Years
|
Accumulated amortization
above
includes both amortization expense and asset impairment charges
. Asset impairment charges to date are
$34,575
.
Unfavorable outcomes of the Company’s developm
ent activities or the Company’s estimates of the market opportunities for the
therapeutic
candidates could result in
additional
impairment charges in future periods.
7. Debt
Loan and Security Agreements
Effective as of October 16, 2015, the Company and Vet Therapeutics, Inc., (the “Borrowers”), entered into a Loan and Security Agreement, as amended on February 24, 2017 (“Loan Agreement”), with Pacific Western Bank, or Pacific Western, as a collateral agent and Oxford Finance, LLC (the “Lenders”). The loan is secured by substantially all of the Borrowers’ personal property other than intellectual property
and certain other customary exclusions. Subject to customary exceptions, the Company is not permitted to encumber its intellectual property
. The outstanding principal balance under the Loan
Agreement was
$31,500
under the term
loan facility and
$5,000
under the revolving credit facility at
September 30, 2017
.
Under the Loan Agreement,
t
he Company
was
required to make interest-only payments on the term loan for
18
months, and beginning on May 1, 2017,
began
to make payments of principal and accrued interest on the term loan in equal monthly installments over a term of
30
months. The Company
was
required to make interest-only payments on the revolving credit facility until October 16, 2017, when all principal and accrued interest
were
due. The term loan
and revolving credit facility bear interest per annum at the greater of (i)
6.91%
or (ii)
3.66%
plus the prime rate, which is customarily defined. As of
September 30, 2017
, the interest rate for the term loan and the revolving credit facility was
7.91%
. D
uring the three and
nine
months ended
September 30, 2017
, the Company recognized interest expense of
$870
and
$2,601
, respectively, and during the three and
nine
months e
nded
September 30, 2016
, the Company recognized interest expense of
$
851
and
$
2,538
, respectively
.
Effective as of
July 31, 2017
, the Borrowers and Lenders entered into a second am
endment to the Loan Agreement (
the
“
Second Amendment”). The terms of the Second Amendment, among other things, extend the maturity date of the existing revolving credit facility to
October 16, 2019
(the “Revolving Line Maturity
Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provide a
six
-month interest only period for the term loans, starting on the date of the Second Amendment. The Company is not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second
Amendment, the Company paid the Lenders an amendment fee of
$150
and a facility fee of
$60
. The Company is also obligated to pay a new termination fee equal to
$165
upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of
$165
was
due
upon the original revolving maturity date
,
October 16, 2017
, and was paid on
October 17, 2017
.
T
he Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to
4%
per annum will apply to all obligations owed under the Loan Agreement.
The Loan Agreement requires that the Company maintain certain minimum liquidity at all times
(the greater of cash equal to fifty percent (
50%
) of outstanding credit extensions or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater)
, which as of
September 30, 2017
, was approximately $
18,250
. If the minimum liquidity covenant is not met, the Company may be required to repay the term loan and the revolving credit facility prior to their scheduled maturity dates. At
September 30, 2017
, the Company was in compliance with all financial covenants.
The Company’s
loans payable balance as of
September 30, 2017
, was as follows:
|
|
|
|
Principal amounts
|
|
|
|
Term loan,
7.91%
, principal payments from
February 1, 2018
through
October 16, 2019
|
|
$
|
31,500
|
Revolving credit facility,
7.91%
, principal payments from
November 1, 2018
through October 16, 2019
|
|
|
5,000
|
Add: accretion of final payment and termination fees
|
|
|
724
|
Less: unamortized debt issuance costs
|
|
|
(377)
|
As of the end of the period
|
|
$
|
36,847
|
As of
September 30, 2017
,
$
12,000
and
$156
related to the term loan and the revolving credit facility, respectively, were classified as current portion – loans payable.
8
. Accrued Expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Accrued expenses:
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
1,933
|
|
$
|
2,321
|
Professional fees
|
|
|
244
|
|
|
219
|
Royalty expense
|
|
|
475
|
|
|
71
|
Interest expense
|
|
|
241
|
|
|
247
|
Research and development costs
|
|
|
429
|
|
|
364
|
Unbilled inventories
|
|
|
—
|
|
|
465
|
Accrued loss on a firm purchase commitment
|
|
|
—
|
|
|
1,983
|
Milestone
|
|
|
480
|
|
|
17
|
Other
|
|
|
153
|
|
|
140
|
Total
|
|
$
|
3,955
|
|
$
|
5,827
|
9
. Agreements
RaQualia Pharma Inc. (“RaQualia”)
On December 27, 2010, the Company entered into
two
Exclusive License Agreements with RaQualia (
as amended,
the “RaQualia Agreements”) that granted the Company global rights, subject to certain exceptions for injectables in Japan, Korea, China and Taiwan for development and commercialization of licensed animal health products for compounds RQ-00000005 (ENTYCE
®
, also known as AT-002) and RQ-00000007 (GALLIPRANT
®
, also known as AT-001). The Company will be required to pay RaQualia
remaining
milestone payments associated with GALLIPRANT and ENTYCE of up t
o
$4,000
and
$6,000
, respectivel
y, upon the Company’s achievement of certain development, regulatory and commercial milestones, as well as mid-single digit royalties on the Company’s or the Company’s sublicensee’s product sales.
T
he Company
achieved a
$3,000
milestone during the
nine
m
onths ended
September 30, 2017
,
which
was
paid and
capitalized as an intangible asset
in the first quarter of 2017
.
As of
September 30, 2017
, the
Company had p
aid
$
8
,
5
00
in
m
ilestone payments
since execution of the RaQualia Agreements
.
During the fourth quarter of 2017, the Company achieved an additional $3,000 milestone related to the RaQualia Agreements, which the Company anticipates will be paid in the fourth quarter of 2017. The Company does not anticipate that any additional milestones will be achieved in the next 12 months.
Elanco
GALLIPRANT
On April 22, 2016, the Company entered into a Collaboration, License, Development and Commercialization Agreement (
as amended,
the “Collaboration Agreement”)
with
Elanco
pursuant to which the Company granted Elanco rights to develop, manufacture, market and commercialize the Company’s products based on licensed grapiprant rights an
d technology
, including GALLIPRANT (collectively, “Grapiprant Products”)
. Pursuant to the Collaboration Agreement, Elanco will have exclusive rights globally outside the United States and co-exclusive rights with the Company in the United States during the term of the Collaboration Agreement.
Under the terms of the Collaboration Agreement,
the Company received a non-refundable, non-creditable
upfront payment of
$45,000
.
The Company is entitled to
a
$4,000
milestone payment
upon
European approval of
a
Grapiprant Product
for the treatment of pain and inflammation
,
a
nother
$4,000
payment
u
pon achievement of a development milestone related to the manufacturing
of
a Grapiprant Product,
and
payments
up to
$75,000
upon the achievement of certain sales milestones. The sales milestone payments are subject to a
one
-third reduction for each year the occurrence of the milestone is not achieved beyond December 31, 2021, with any non-occurrence beyond December 31, 2023
,
cancelling out the applicable milestone payment obligation entirely.
The Collaboration Agreement also provides that Elanco will pay the Company royalty payments on a percentage of net sales in the mid-single to low-double digits.
The Company is responsible f
or all development activities required to obtain the first registration or regulatory approval
for
a Grapiprant
Product for use in dogs in each of the European Union (“the EU Product Regist
ration”) and the United States,
and Elanco is responsible for all
other development activities.
First
r
egistration for
a Grapiprant
Product in the
United States
was achieved before the completion of the Collaboration Agreement.
In addition, the Company and Elanco have agreed to pay
25%
and
75%
, respectively, of all third-party development fees and expenses through December 31, 2018
,
in connection with preclinical and clinical trials necessary for any
additional
registration or regulatory approval of the
Grapiprant
Products, provided that the Company’s contribution to such development fees and expenses is capped at
$7,000
(“R&D Cap”),
which was recorded as licensing and collaboration commitment liability in the consolidated b
alance sh
eet
s
at
September 30, 2017
and December 31, 2016.
Th
e Company classified the licensing and collaboration commitment liability as a current liability due to the Company having no control over when R&D Cap expenses will be incurred and the expected timing of R&D Cap expenses being unknown as of
September 30, 2017
.
The licensing and collaboration commitment liability will be reduced in future periods as the related expenses are incurred by Elanco and paid for by the Company. Any remaining balance not paid to Elanco will be recognized as licensing and collaboration revenue on December 31, 2018
,
when the Company’s obligation to fund 25% of Elanco’s development efforts expires.
Commencing on the effective date of the Collaboration Agreement, the Company is responsible for the manufacture and supply of all of Elanco’s reasonable requirements of
active pharmaceutical ingredient
(“API”)
and/or finished
Grapiprant Products
under the supply terms agreed upon pursuant to the Collaboration Agreement
. However, Elanco retains the ability to assume all or a portion of the manufacturing responsibility during the term of the Collaboration Agreement.
On April 28, 2017, the Company and Elanco entered into an amendment (the “Amendment”) to the Collaboration Agreement. Under the Amendment, Elanco has agreed to submit binding purchase orders to the Company, within
15
days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API the Company has agreed to purchase from its third
-
party manufacturer (the “API Batches”). In addition, Elanco has agreed to pay the Company for the API Batches within
30
days after the Company provides Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco provides notice of its intent to assume responsibility for manufacturing, Elanco would assume all responsibilities of the Company with respect to any undelivered API, including paying the third
-
party manufacturer for such undelivered API.
In July 2017, pursuant to Sections 8.2.2 and 10.1(c) of the Collaboration Agreement, as amended, Elanco provided the Company notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the
applicable regulatory approvals
.
In September 2017, the
Company
and Elanco
finalized the transfer of the applicable regulatory approvals in the U
nited States
and the responsibility for manufacturing of Grapipran
t P
roducts to Elanco. In connection with this assumption of manufacturing responsibility,
Elanco agreed to compensate the Company
$
10,832
for certain Grapiprant Product inventories and manufacturing considerations. During the three months ended September 30, 2017, the Company recognized $
1,000
of licen
sing and collaboration revenues and
$67 of product sales
, as well as
$
3,733
in
reimbursement of previously incurred inventory cost
s,
which is
included in accounts receivable
, net
as of September 30, 2017,
related to the assumption of manufacturing responsibility by Elanco
. In addition,
the Company believes all residual matters related to the assumption of manufacturing responsibility by Elanco
and the sale of remaining GALLIPRANT inventories
will be concluded
in the fourth quarter of 2017
. T
he Company
anticipates it will recognize approximately
$
6
,000
of
remaining
product sales related to
the assumption of manufacturing responsibility by Elanco
in the fourth quarter of 2017
.
On April 22, 2016, in connection with the Collaboration Agreement, the Company entered into a Co-Promotion Agreement (the “Co-Promotion Agreement”) with Elanco to co-promote
Grapiprant Products
in the United States.
Under the terms of the Co-Promotion Agreement, Elanco has agreed to pay the Company, as a fee for
promotional
services performed and expenses incurred by the Company under the Co-Promotion Agreement, (i)
25%
of the gross margin on net sales of
Grapiprant
Product sold in the United States under the Collaboration Agreement prior to December 31, 2018 (unless extended by mutual agreement), and (ii) a mid-single digit percentage of net sales of the
Grapiprant
Product in the United States after December 31, 2018 through 2028 (unless
extended by mutual agreement).
10. Common Stock
As of
September 30, 2017
, there were
42,461,335
shares of the Company’s common stock outstanding, net of
540,464
shares of unvested restricted common stock.
At-the-Market Offering
On October 16, 2015, the Company entered into a Sales Agreement (“Sales Agreement”) with Barclays Capital
,
Inc. (“Barclays”) pursuant to which the Company could sell from time to time, at its option, up to an aggregate of
$52,000
of shares of its common stock (the “Shares”) through Barclays, as sales agent (“ATM Program”). Sales of the Shares were made under the Company’s previously filed and
then
effective
r
egistration
s
tatement on Form S-3 (Reg. No. 333-197414), by means of ordinary brokers’ transactions on the NASDAQ Global Market or otherwise. Additionally, under the terms of the Sales Agreement, the Shares could be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company paid Barclays a commission of
2.75%
of the gross proceeds from the sale of the Shares.
On April 28, 2017, the Company terminated its Sales Agreement. Prior to termination, the Company sold approximately
$18,000
of the
$52,000
available to be sold under the Sales Agreement. The Company terminated the Sales Agreement because it
did
not intend to raise additional capital through the ATM Program, and no additional shares of the Company’s common stock
were
sold pursuant to the Sales Agreement. The Company did not incur any termination penalties as a result of its termination of the Sales Agreement.
Prior to the termination of the Sales Agreement
, the Company sold
546,926
Shares
for aggregate net proceeds of
$2,788
in 2017
.
Registered Direct Offering
On May 3, 2017, the Company entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering of shares of common stock. In conjunction with the PAA, on May 3, 2017, the Company also entered into a Securities Purchase Agreement with certain investors for the sale by the Company of
5,000,000
shares of common stock at a purchase price of
$5.25
per share (the “Offering”). The shares of common stock were offered and sold pursuant to
the Company’s
previously filed and then
effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. The Company agreed to pay Barclays an aggregate fee equal to
6.0%
of the gross proceeds received by the Company from the Offering. The Offering closed on
May 9, 2017
,
and
t
he Company receive
d aggregate net
proceeds from the Offering of
approximately
$24,400
, after deducting placement agent fees of
$1,575
and offering expenses of
$273
.
Shelf Registration Statement
On August 4, 2017, the Company filed a shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the Securities and Exchange Commission (“SEC”). The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.
The Shelf Registration Statement allows the Company to offer and sell, from time to time, up to
$100,000
of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by the Company.
1
1
. Stock-Based Awards
2010 Equity Incentive Plan
Activity related to stock options under the 2010 Equity Incentive Plan (the “2010 Plan”) for the
nine
months ended
September 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Shares
|
|
Weighted
|
|
Average
|
|
|
|
|
Issuable
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
(In Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
65,931
|
|
$
|
3.73
|
|
6.09
|
|
$
|
228
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(8,537)
|
|
|
0.40
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of September 30, 2017
|
|
57,394
|
|
$
|
4.22
|
|
5.36
|
|
$
|
110
|
No
stock options have been granted under the 2010 Plan since
the effective date of
the
2013 Incentive Award Plan (the “2013 Plan”)
.
For
the
nine
months ended
September 30, 2017
, the total intrinsic value of options exercised was
$53
and the total received from stock option exercises was
$3
.
2013 Incentive Award Plan
On January 1, 2017, the
annual increase
in
the
number of shares available for issuance under the
2013 Plan
was determined to be
1,203,369
shares
in accordance with the automatic annual increase provisions of the 2013 Plan
. As of
September 30, 2017
, there were
1,598,005
shares available for future grant under the
2013 Plan
.
Activity related to stock options under the 2013 Plan for the
nine
months ended
September 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Issuable
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
2,251,518
|
|
$
|
12.43
|
|
7.78
|
|
$
|
2,261
|
Granted
|
|
530,900
|
|
|
7.80
|
|
|
|
|
|
Exercised
|
|
(48,947)
|
|
|
3.14
|
|
|
|
|
|
Forfeited
|
|
(29,508)
|
|
|
11.23
|
|
|
|
|
|
Expired
|
|
(112,023)
|
|
|
18.96
|
|
|
|
|
|
Outstanding as of September 30, 2017
|
|
2,591,940
|
|
$
|
14.03
|
|
7.69
|
|
$
|
1,235
|
For the
nine
mo
nths
ended
September 30, 2017
, the weighted average grant date fair value of stock options granted was
$5.15
. For the
nine
months ended
September 30, 2017
, the total intrinsic value of options exercised was
$120
and the total received from stock option exercises was
$154
.
Activity related to restricted stock under the 2013 Plan for the
nine
months ended
September 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average Grant
|
|
|
Shares
|
|
Date Fair Value
|
Unvested restricted common stock as of December 31, 2016
|
|
461,463
|
|
$
|
8.30
|
Issued
|
|
339,700
|
|
|
7.85
|
Vested
|
|
(249,907)
|
|
|
9.44
|
Forfeited
|
|
(10,792)
|
|
|
7.32
|
Unvested restricted common stock as of September 30, 2017
|
|
540,464
|
|
$
|
7.51
|
For the
nine
months ended
September 30, 2017
, the total fair value of restricted common stock vested was
$
1,810
. The Company did
not
receive cash proceeds for any of the restricted common stock issued during the
nine
months ended
September 30, 2017
.
Stock-Based Compensation
Upon adoption of ASU 2016-09 (
Compensation – Stock Compensation
)
on January
1
, 2017
, the Company elected to change its accounting policy to account for forfeitures as they occur.
The change was applied on a modified retrospective basis with a cumulative-effect adjustment to
accumulated deficit
o
f
$213
(which
increased
the accumulated deficit) as of January 1, 201
7
. Prior to adoption of this guidance the Company estimated forfeitures
.
The Company recorded stock-based compensation expense related to stock options and restricted stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of product sales and inventories
|
|
$
|
42
|
|
$
|
30
|
|
$
|
126
|
|
$
|
79
|
Research and development
|
|
|
229
|
|
|
227
|
|
|
717
|
|
|
856
|
Selling, general and administrative
|
|
|
1,528
|
|
|
1,831
|
|
|
4,614
|
|
|
5,601
|
|
|
$
|
1,799
|
|
$
|
2,088
|
|
$
|
5,457
|
|
$
|
6,536
|
A
s o
f
September 30, 2017
,
t
he Company had an aggre
gate of
$
5,595
and
$
3,021
of unrecognized stock-based compensation expense for options outstandin
g and restricted stock awards, respectively, which is expected to be recognized over a weighted average period of
2.29
years and
1.85
yea
rs, respectively.
1
2
. Net
Loss
Per Share
Basic and diluted
net loss
per share was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,920)
|
|
$
|
(13,371)
|
|
$
|
(31,912)
|
|
$
|
(10,242)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
42,445,553
|
|
|
35,092,686
|
|
|
39,820,573
|
|
|
34,837,169
|
Net loss per share, basic and diluted
|
|
$
|
(0.21)
|
|
$
|
(0.38)
|
|
$
|
(0.80)
|
|
$
|
(0.29)
|
S
tock options for the
purchase of
2,649,334
and 2,412,238
shares
of common stock were excluded from the computation of diluted net loss per share
attributable to common stockholders
for the three
and
nine
months ended
September 30, 2017
and
2016, respectively,
b
ecause
those options had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the period.
1
3
. Income Taxes
The Company recorded
no
income tax expense or benefit during the three
and
nine
months
ended
September 30, 2017
and 2016,
due to a full valuation allowance recognized against its deferred tax assets.
1
4
. Accumulated Other Comprehensive
Loss
The changes in accumulated other comprehensive
loss
,
net of their related tax effects,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Accumulated
|
|
|
Currency
|
|
Other
|
|
|
Translation
|
|
Comprehensive
|
|
|
Adjustment
|
|
Loss
|
As of December 31, 2016
|
|
$
|
(9,862)
|
|
$
|
(9,862)
|
Foreign currency translation adjustment
|
|
|
2,522
|
|
|
2,522
|
As of September 30, 2017
|
|
$
|
(7,340)
|
|
$
|
(7,340)
|
1
5
.
Legal Contingencies
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business, including those related to patents, product liability and government investigations. Except as described below, the Company is not presently a party to any litigation which it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a material effect on its financial statements. The Company accrues contingent
liabilities when it is probable that a future liability has been incurred and such liability can be reasonably estimated.
In February 2017, two purported class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company and two of its current officers. Those cases have been consolidated into one purported class action lawsuit under the caption, In re Aratana Therapeutics, Inc. Securities Litigation, Case No. 1:17-cv-00880. The consolidated lawsuit, which was amended in August 2017, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of March 16, 2015 to March 13, 2017. The Company intends to vigorously defend all claims asserted
, including by filing a motion to dismiss
. Given the early stage of the litigation, at this time a loss is not probable or reasonably estimable.
Item 2. Manage
ment’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. The forward-looking statements herein include without limitation, statements with respect to our plans and strategy for our business, anticipated timing of regulatory submissions and approvals, anticipated timing of availability and announcement of study results, anticipated timing of launch and commercialization of therapeutic candidates, ongoing efforts in preparation for commercialization of therapeutic candidates, beliefs regarding market opportunities for our products and potential success of our therapeutic candidates; the transfer of manufacturing responsibility for GALLIPRANT under the Collaboration Agreement with Elanco; and anticipated milestone payments. These and other forward-looking statements included in this Quarterly Report on Form 10-Q involve risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: our history of operating losses and our expectation that we will continue to incur losses for the foreseeable future; failure to obtain sufficient capital to fund our operations; risks relating to the impairment of intangible assets; risks relating to the anticipated discontinuation of BLONTRESS and TACTRESS;
effects of
stockholder class action lawsuits; unstable market and economic conditions; restrictions on our financial flexibility due to the terms of our credit facility; our substantial dependence upon the commercial success of our therapeutics GALLIPRANT, ENTYCE and NOCITA; development of our biologic therapeutic candidates is dependent upon relatively novel technologies and uncertain regulatory pathways, and biologics may not be commercially viable; denial or delay of regulatory approval for our existing or future therapeutic candidates; failure of our therapeutics, and our current or future therapeutic candidates that may obtain regulatory approval to achieve market acceptance or commercial success; effects of product liability lawsuits; failure to realize anticipated benefits of our acquisitions and difficulties associated with integrating the acquired businesses; development of pet therapeutics is a lengthy and expensive process with an uncertain outcome; competition in the pet therapeutics market, including from generic alternatives to our therapeutic candidates, and failure to compete effectively; failure to identify, license or acquire, develop and commercialize additional therapeutic candidates; failure to attract and retain senior management and key scientific personnel; our reliance on third-party manufacturers, suppliers and collaborators; regulatory restrictions on the marketing of our approved therapeutics and therapeutic candidates; our small commercial sales organization, and any failure to create a sales force or collaborate with third-parties to commercialize our approved therapeutics and therapeutic candidates; difficulties in managing the growth of our company; significant costs of being a public company; risks related to the restatement of our financial statements for the year ended December 31, 2013, and the identification of a material weakness in our internal control over financial reporting; changes in distribution channels for pet therapeutics; consolidation of our veterinarian customers; limitations on our ability to use our net operating loss carryforwards; impacts of generic products; safety or efficacy concerns with respect to our therapeutics; effects of system failures or security breaches; failure to perform under our agreements with Elanco Animal Health, or termination thereof; failure to obtain ownership of issued patents covering our therapeutic candidates or failure to prosecute or enforce licensed patents; failure to comply with our obligations under our license agreements; effects of patent or other intellectual property lawsuits; failure to protect our intellectual property; changing patent laws and regulations; non-compliance with any legal or regulatory requirements; litigation resulting from the misuse of our confidential information; the uncertainty of the regulatory approval process and the costs associated with government regulation of our therapeutic candidates; failure to obtain regulatory approvals in foreign jurisdictions; effects of legislative or regulatory reform with respect to pet therapeutics; the volatility of the price of our common stock; our status as an emerging growth company, which could make our common stock less attractive to investors; dilution of our common stock as a result of future financings; the influence of certain significant stockholders over our business; and provisions in our charter documents and under Delaware law could delay or prevent a change in control. These and other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2017, and the “Risk Factors” section of this Quarterly Report on Form 10-Q, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10-Q.
Overview
We are a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. We operate in one business segment: pet therapeutics. Our current portfolio includes multiple therapeutics and therapeutic candidates in development consisting of both small molecule pharmaceuticals and biologics. We intend for our portfolio to capture opportunities in unmet or underserved medical conditions in dogs and cats.
We have three United States Food and Drug Administration (“FDA”) approved therapeutics including, GALLIPRANT
®
(grapiprant tablets) for the control of pain and inflammation associated with osteoarthritis in dogs; ENTYCE
®
(capromorelin oral solution) for appetite stimulation in dogs; and NOCITA
®
(bupivacaine liposome injectable suspension) as a local post-operative analgesia for cranial cruciate ligament surgery in dogs. BLONTRESS
®
and TACTRESS
®
are our two canine-
specific monoclonal antibody (MAb) therapies that are fully licensed
by the United States Department of Agriculture (“USDA
”) to aid in the treatment of dogs with B-cell
and T-cell lymphoma, respectively
,
which we plan to discontinue in November 2017 pursuant to our previously communicated rationale
(see “Manufacturing and Supply Chain” below for additional information). Our pipeline has multiple therapeutic candidates in development for the potential treatment of pain, management of weight loss, viral diseases, allergy and cancer for dogs and cats.
We have incurred significant net losses since our
inception. These losses have resulted principally from costs incurred in connection with in-licensing ou
r therapeutic ca
ndidates, research and development activities
,
and selling, general and administrative costs associated with our operations. As of
September 30, 2017
, we had a deficit accumulated since inception
of $217.7 million
and
cash, cash equivalents
, restricted cash
and short-term investments
of
$70.7
million
.
Business Updates
Durin
g the three months ended September 30, 2017, we continued to grow our account base for GALLIPRANT with a majority of accounts reordering. The third quarter of 2017 included sequential increases for both GALLIPRANT product revenues, which we are selling in the United States in collaboration with Eli Lilly and Company, operating on behalf of its Elanco Animal Health division (“Elanco”), and GALLIPRANT licensing and collaboration revenue. Additionally, as of September 22, 2017, pursuant to the Collaboration, License, Development and Commercialization Agreement (the “Collaboration Agreement”), Elanco assumed ownership of regulatory filings and manufacturing responsibility for the applicable products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, the “Grapiprant Products”). We believe all residual matters related to the assumption by Elanco of manufacturing responsibility for Grapiprant Products will be concluded during the fourth quarter of 2017.
In the third quarter of 2017, for NOCITA, we continued to increase the number of accounts and the penetration within those accounts, with re-order rates continuing to increase compared to the second quarter of 2017.
As of late-October 2017,
our third FDA-approved therapeutic, ENTYCE,
is
commercially available to veterinarians in the United States. ENTYCE is the only FDA-approved therapeutic for appetite stimulation in dogs.
We continued to advance our late-stage pipeline of therapeutic candidates for dogs and cats. Specifically, in October 2017, the AT-003 pivotal field effectiveness study in cats was submitted as part of the effectiveness technical section to the FDA’s Center for Veterinary Medicine (“CVM”) to support the intended NOCITA
label expansion. Additionally, VetStem BioPharma Inc., our exclusive license partner responsible for development of AT-016, submitted the chemistry, manufacturing and controls (“CMC”) technical section to CVM in
late-
October 2017.
Research and Development
The following table identifies the most advanced therapeutic candidates being developed under CVM or the USDA’s Center for Veterinary Biologics (“CVB”) regulations and
their current regulatory status:
ENTYCE (capromorelin oral solution) for dogs
ENTYCE was approved by the FDA for appetite stimulation in dogs in 2016. On October 13, 2017, we announced that we received
CVM
approval of the prior-approval supplement (“PAS”) submission for the transfer and scale-up of manufacturing of ENTYCE, and
as of late-October 2017,
the therapeutic
is
commercially available to veterinarians in the United States.
AT-003 (bupivacaine liposome injectable suspension) for cats
In July 2017, we completed an FDA-concurred pivotal field effectiveness study evaluating bupivacaine liposome injectable suspension for post-operative pain management in cats. The multi-center, placebo-controlled, randomized and masked pivotal field effectiveness study evaluated approximately 200 client-owned cats undergoing an elective onychectomy. Results from the study showed bupivacaine liposome injectable suspension met protocol-defined efficacy success criteria, which were statistically significant (p<0.05). The therapeutic candidate was well-tolerated. In October 2017, data from the study was submitted as part of the effectiveness technical section to CVM. We have
now submitted all major technical sections
to
CVM, which if approved, would support the filing of a supplemental New Animal Drug Application (“NADA”) with CVM to expand the NOCITA label to include cats in 2018
.
AT-016 (allogeneic adipose-derived stem cells) for dogs
VetStem BioPharma Inc., our exclusive license partner responsible for development of AT-016, an adipose-derived allogeneic stem cell therapeutic candidate for osteoarthritis pain in dogs, submitted the CMC technical section to CVM in
late-
October 2017.
In addition to United States regulatory and development activities, we also have regulatory and development efforts outside the United States:
AT-001 (grapiprant) for dogs in Europe
Under the Collaboration Agreement, Elanco has exclusive rights to our Grapiprant Products globally outside the United States. We are responsible under the Collaboration Agreement for all development activities required to obtain the first regulatory approval for grapiprant for use in dogs in the European Union (“EU”) and Elanco is responsible for all other development activities. In February 2016, we filed a marketing authorization application with the European Medicines Agency (“EMA”) for grapiprant in dogs in the EU. In cooperation with Elanco, in October 2017, we submitted additional information to the EMA.
We
continue to anticipate that the EMA will issue a positive opinion for GALLIPRANT in dogs in the EU in late-2017 and marketing authorization in the first half of 2018. We anticipate Elanco and Aratana will make additional EMA regulatory filings in 2018, which if successful, could result in achieving a $4.0 million milestone payment in 2019.
Manufacturing and Supply Chain
We manage third-party manufacturers to supply active pharmaceutical ingredient (“API”), drug product and packaged product for the development and commercialization of our small molecule product candidates. We have chosen to rely on third-party contract manufacturer organizations (“CMOs”) rather than devote resources toward developing or acquiring internal manufacturing facilities.
ENTYCE
On October 13, 2017, we received approval of our PAS from
CVM
for the transfer and commercial scale-up of the API of ENTYCE, and we made ENTYCE commercially available in late-October 2017. We continue to manufacture additional commercial inventory of ENTYCE and we expect that we will be able to maintain continuous supply of ENTYCE to
meet anticipated demand.
GALLIPRANT
GALLIPRANT has been available to customers since January 2017, and as part of the Collaboration Agreement, we agreed to provide the initial commercial supply of GALLIPRANT. In July 2017, Elanco provided us with notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the regulatory approvals. As of September 22, 2017, Elanco assumed ownership of the NADA and manufacturing responsibility for GALLIPRANT. GALLIPRANT is currently available in 20 mg and 60 mg tablets in a variety of packaging configurations. The 100 mg tablets of GALLIPRANT remain on backorder and with the transfer of manufacturing responsibility, Elanco is responsible for determining when the 100 mg tablets will become commercially available.
BLONTRESS and TACTRESS
As previously disclosed, we believe customer demand does not justify manufacturing additional BLONTRESS or TACTRESS and
therefore,
we intend to discontinue BLONTRESS and TACTRESS in November 2017. We intend to close our USDA-licensed facility in San Diego by the end of the year, which will result in us no longer holding a USDA establishment license nor the USDA product licenses for BLONTRESS and TACTRESS. We intend to focus our oncology research and development efforts on other therapeutic candidates in our pipeline, including the Live Listeria Vector platform. Notwithstanding the shift in the focus of our research and development efforts, we plan to remain opportunistic with respect to potential development and commercial collaboration opportunities for monoclonal antibodies.
Recent Developments
Shelf Registration Statement
On August 4, 2017, we filed a shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the Securities and Exchange Commission (“SEC”). The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.
The Shelf Registration Statement allows us to offer and sell, from time to time, up to $100.0 million of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by us.
Amendment to Loan Agreement
Effective as of July 31, 2017, we amended our Loan Agreement. See
“Financial Condition, Liquidity and Capital Resources
- Indebtedness”
below for additional information.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
T
here have been no material changes to our critical accounting policies through
September 30, 2017
,
from those discussed in our Annual Report on Form 10-K for the fiscal year ended December
31, 201
6
, filed with the SEC on March
14
, 201
7
.
Results of Operations
Comparison of the Three
and Nine
Months
Ended
September 30, 2017
and 201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and collaboration revenue
|
|
$
|
2,192
|
|
$
|
—
|
|
NA
|
|
|
$
|
3,899
|
|
$
|
38,151
|
|
(89.8)
|
%
|
Product sales
|
|
|
3,971
|
|
|
40
|
|
>100.0
|
%
|
|
|
11,217
|
|
|
108
|
|
>100.0
|
%
|
Total revenues
|
|
|
6,163
|
|
|
40
|
|
>100.0
|
%
|
|
|
15,116
|
|
|
38,259
|
|
(60.5)
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
3,690
|
|
|
286
|
|
>100.0
|
%
|
|
|
10,475
|
|
|
2,046
|
|
>100.0
|
%
|
Royalty expense
|
|
|
441
|
|
|
19
|
|
>100.0
|
%
|
|
|
1,117
|
|
|
57
|
|
>100.0
|
%
|
Research and development
|
|
|
3,220
|
|
|
5,334
|
|
(39.6)
|
%
|
|
|
11,574
|
|
|
21,386
|
|
(45.9)
|
%
|
Selling, general and administrative
|
|
|
6,910
|
|
|
6,924
|
|
(0.2)
|
%
|
|
|
21,323
|
|
|
19,623
|
|
8.7
|
%
|
Amortization of intangible assets
|
|
|
85
|
|
|
91
|
|
(6.6)
|
%
|
|
|
235
|
|
|
281
|
|
(16.4)
|
%
|
Impairment of intangible assets
|
|
|
—
|
|
|
—
|
|
NA
|
|
|
|
—
|
|
|
2,780
|
|
(100.0)
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
138
|
|
|
116
|
|
19.0
|
%
|
|
|
311
|
|
|
276
|
|
12.7
|
%
|
Interest expense
|
|
|
(870)
|
|
|
(859)
|
|
1.3
|
%
|
|
|
(2,601)
|
|
|
(2,554)
|
|
1.8
|
%
|
Other expense, net
|
|
|
(5)
|
|
|
(14)
|
|
(64.3)
|
%
|
|
|
(14)
|
|
|
(50)
|
|
(72.0)
|
%
|
Revenue
s
During the three
and
nine
months ended
September 30, 2017
, total revenues
increased
and
decreased
by
$6.1
million and
$23.1
million,
respectively, as
compared to the corresponding
2016
period
s
. The
increase
in total revenues during the three months ended
September 30, 2017
, was due to an
increase
in net product sales of NOCITA and GALLIPRANT inventory sales to Elanco of
$3.9
million and an
increase
of
$2.2
million in licensing collaboration revenue from
the Collaboration Agreement and the Co-Promotion Agreement with Elanco (collectively, the “Elanco GALLIPRANT Agreements”)
. The
decrease
in total revenues
during the
nine
months ended
September 30, 2017
,
was
due to
a
decrease
of
$34.3
million
in
licensing and collaboration revenue from the Elanco GALLIPRANT Agreements, partially offset by
an
increase
of
$11.1
million in
net product sales primarily due to net sales of GALLIPRANT and
NOCITA.
Total revenues for the
nine
months ended
September 30, 2016
, included $38.0 million of licensing and collaboration revenue recognized from the Elanco GALLIPRANT
Agreements. During the three and
nine
months ended
September 30, 2017
, product sales consisted of net sales of GALLIPRANT, NOCITA, BLONTRESS and TACTRESS.
G
ALLIPRANT
product sales during the three and
nine
months ended
September 30, 2017
, consisted of net sales of finished goods to Elanco under the supply terms
of
the
Collaboration Agreement
. NOCITA net
sales were
$0.7 million
and
$1.7
million during the three and
nine
months ended
September 30, 2017
, respectively, as compared to $0 for
each of
the corresponding 2016 periods.
Since the third quarter of 2016, we believe growth in NOCITA product sales is primarily a result of strong re-order rates, which accounted for more than 85% of NOCITA revenues since the launch in October 2016.
We believe that product sales for the remainder of 2017 will be composed primarily of product sales of NOCITA, GALLIPRANT, and ENTYCE, for which sales began in late-October 2017. We believe NO
CITA and ENTYCE product sales in the remainder of 2017 will be dependent on our continuing efforts to commercialize the products. With respect to GALLIPRANT, in September 2017, Elanco assumed all manufacturing responsibilities for GALLIPRANT under the Collaboration Agreement, and we believe the transition of such responsibilities will be completed by December 31, 2017. See “
Manufacturing and Supply Chain”
above for additional information. Future product sales of GALLIPRANT under the supply terms of the Collaboration Agreement will be limited to the agreed residual inventories sold to Elanco. At this time, we believe customer demand does not justify manufacturing additional BLONTRESS or TACTRESS. Therefore, both therapeutics will no longer be commercially available after mid-November 2017. We believe any future licensing and collaboration revenue in the remainder of 2017 will be substantially dependent on Elanco’s ability to successfully commercialize GALLIPRANT in accordance with the Elanco GALLIPRANT Agreements
.
Cost of product sales
During the three
and
nine
months ended
September 30, 2017
, cost of product sales
increased
by
$3.4
million
and
$8.4
million
,
respectively,
as compared to the corresponding
2016
period
s
. The
se
increase
s were
primarily due to cost of product sales of
GALLIPRANT and NOCITA
.
During the three and nine months ended September 30, 201
7
,
we
recognized inventory valuation adjustment losses in the
amount of $
0.3 million
and $
0.4 million
, respectively
, from application of lower of cost or market, in cost of product sales. The losses related to
GALLIPRANT
inventories that were written
off.
During the three and nine months ended September 30, 2016, we recognized inventory valuation adjustment losses in the amount of
$0.1 million and $1.7 million, respectively, from the write-off of TACTRESS inventories and pre-launch GALLIPRANT inventories marked to market due to terms agreed upon in the Collaboration Agreement.
For the remainder
of 2017, we
anticipate improvement in cost of product sales as a percentage of product revenues as process validation batches of ENTYCE, which were previously written down, are being sold.
After all m
anufacturing responsibilities for
GALLIPRANT are transferred and current inventories are sold to Elanco, we believe the cost of product sales as a percentage of overall product revenues will improve
as compared to 2017
.
Royalty expense
During the three and
nine
months ended
September 30, 2017
, royalty expense
increased
by
$0.4
million and
$1.1
million, respectively,
as compared to
the
corresponding
201
6 periods. The
increase
s were
primarily a result
of sales of GALLIPRANT and NOCITA
.
We believe any future
royalty expense
in the remainder of 2017
will be substantially dependent on Elanco’s ability to successfully commercialize GALLIPRANT in accordance with the Elanco GALLIPRANT Agreements
, and our
continuing efforts to commercialize
NOCITA and ENTYCE.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracted development costs
|
|
$
|
2,229
|
|
$
|
4,014
|
|
(44.5)
|
%
|
|
$
|
8,669
|
|
$
|
10,802
|
|
(19.7)
|
%
|
Milestones
|
|
|
—
|
|
|
250
|
|
(100.0)
|
%
|
|
|
—
|
|
|
6,450
|
|
(100.0)
|
%
|
Personnel costs
|
|
|
835
|
|
|
900
|
|
(7.2)
|
%
|
|
|
2,527
|
|
|
3,577
|
|
(29.4)
|
%
|
Other costs
|
|
|
156
|
|
|
170
|
|
(8.2)
|
%
|
|
|
378
|
|
|
557
|
|
(32.1)
|
%
|
Total research and development
|
|
$
|
3,220
|
|
$
|
5,334
|
|
(39.6)
|
%
|
|
$
|
11,574
|
|
$
|
21,386
|
|
(45.9)
|
%
|
During the three
and
nine
m
onths ended
September 30, 2017
, research and development
expense
decreased
by
$2.1
million and
$9.8
m
illion, respectively
, as compared to the corresponding 2016 periods.
The decrease during the three months ended September 30, 2017, was due primarily to a decrease of $1.8 million in contracted development costs, specifically fewer ongoing pivotal programs, and due to the prioritization of spending for ongoing programs, a decrease of $0.3 million in milestone payments and
a decrease of $0.1
million in personnel and other costs.
The decrease during the nine months
ended
September 30, 2017
, was due primarily to a
decrease
of
$6.5
million in
milestone
payments, a
decrease
of
$2.1
million in contracted development costs due to the prioritization of spending for ongoing programs,
a $1.1
million
decrease
in personnel costs due to lower headcount in 2017, and
a $0.2
million
decrease
in other costs.
We expect that in
the remainder of
2017 our research and development expenses will be primarily related to expanding the label of our approved therapeutics for additional indications and/or species and advancing our AT-016 and AT-018 programs.
Selling, general and administrative
During the three
and
nine
months e
nded
September 30, 2017
, selling, general and
administrative expense
decreased
by
$14,000
and
increased by
$1.7
million, respectively, as compared to the corresponding
2016
periods.
The
increase
during th
e
nine
months ended
September 30, 2017
, was due to an
increase
of
$2.9
million in personnel expenses primarily as a result of higher sales and marketing headcount, partially offset by a
decrease
of
$1.2
million
in other
expenses
due to the
substantial completion of the build
out
of
our
corporate infrastructure
and market preparation
. We expect that in
the remainder
of 2017 our selling, general and administrative expense will remain
relatively
constant as we have substantially completed the build out of our sales organization and corporate infrastructure in the support of the continued commercialization of NOCITA and ENTYCE.
Impairment of intangible assets
During the nine months ended
September 30, 2017
, impairment of intangible assets
decreased
by $2.8 million
, as compared to the corresponding 2016 period as there were no intangible asset impairment charges recognized during the
nine
months ended
September 30, 2017
. The impairment of intangible assets during the nine months ended September 30, 2016, was related to impairment charges of TACTRESS ($0.6 million) and AT-007 ($2.2 million).
Financial Condition, Liquidity
and Capital Resources
Our financial condition is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Change %
|
|
|
(Dollars in thousands)
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
68,849
|
|
$
|
87,307
|
|
(21.1)
|
%
|
Marketable securities - short-term
|
|
|
1,494
|
|
|
996
|
|
50.0
|
%
|
Total cash, cash equivalents and marketable securities
|
|
$
|
70,343
|
|
$
|
88,303
|
|
(20.3)
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
Loans payable, net
|
|
$
|
36,847
|
|
$
|
40,188
|
|
(8.3)
|
%
|
Working capital:
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
90,659
|
|
$
|
101,542
|
|
(10.7)
|
%
|
Current liabilities
|
|
|
26,515
|
|
|
34,688
|
|
(23.6)
|
%
|
Total working capital
|
|
$
|
64,144
|
|
$
|
66,854
|
|
(4.1)
|
%
|
We have incurred significant net losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing
of
our
therapeutic
candidates, research and development act
ivities and selling, general
and administrative costs associated with our operations. As of
September 30, 2017
, we had an accumulated def
icit of $
217.7
million
and cash, cash equivalents and short-term investments o
f $
70.3
mill
ion.
We expect to continue to incur operating losses for the next several years as we work to develop and commercialize our
therapeutics and therapeutic
candidates
. If we cannot generate sufficient cash from operations in the future, we may seek to fund our operations through collaborations and licensing arrangements, as well as public or private equity offerings or further debt (re)financings. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations
which could include delaying the commercial launch of our therapeutics, discontinuing therapeutic development programs, or granting rights to develop and market therapeutics or therapeutic candidates that we would otherwise prefer to develop and market ourselves.
As
disclosed in Note 7 to our consolidated
financial statements, we have a term loan and a revolving credit facility with an aggregate principal balance of
$36.5
million
as of
September 30, 2017
. The terms of the loan agreement require us to maintain certain minimum liquidity at all times
(the greater of cash equal to fifty percent (50%) of outstanding balance or remaining months’ liquidity, which is calculated on an
average trailing three (3) month basis, equal to six (6) months or greater)
, which as of
September 30, 2017
, was
approximately
$18.3
million.
If the minimum liquidity is not met, we may be required to repay the loans prior to their scheduled maturity dates. At
September 30, 2017
, we were in compliance with all financial covenants. As of the date of the filing of this Quarterly Report on Form 10-Q, we believe that our existing cash, cash equivalents and short-term investments of
$70.3
million as of
September 30, 2017
,
will allow us to fund our operations and our debt obligations for at least one year from the issuance of our consolidated financial statements.
Based on our current
operating plan, we believe
that our cash, cash equivalents and short-term investments will be sufficient to fund our operations and debt obligations
through at
least 2018. Our current operating plan contemplates continued growth in sales of GALLIPRANT and market adoption of ENTYCE.
Cash, Cash Equivalents and Investments
Until required for another use in our business, we typically invest our cash reserves in bank deposits, certificates of deposit, and other interest bearing debt instruments in accordance with our investment policy. It is our policy to mitigate credit risk in our cash reserves and investments by maintaining a well-diversified portfolio that limits the amount of exposure as to institution, maturity, and investment type. The value of our investments, however, may be adversely affected by increases in interest rates, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, and by other factors which may result in declines in the value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio if the declines are other-than-temporary or sell investments for less than our acquisition cost which could adversely impact our financial position and our overall liquidity.
At-the-Market Offering
On October 16, 2015,
we
entered into
the
Sales Agreement with Barclays
Capital, Inc. (“Barclays”), pursuant to which we
could
sell from time to time, at
our
option, up to an aggregate of
$52
.0 million
of shares of its common stock (the “Shares”) through Barclays, as sales agent
(“ATM Program”)
. Sales of the Shares
were
made under
our
previously filed and
then
effective
r
egistration
s
tatement on Form S-3 (Reg. No. 333-197414
), by means of ordinary brokers’ transactions on the NASDAQ Global Market or otherwise. Additionally, under the terms of the Sales Agreement, the Shares could be sold at market prices, at negotiated prices or at prices related to the prevailing market price. We paid Barclays a commission of 2.75% of the gross proceeds from the sale of the Shares.
On April 28, 2017, we terminated our Sales Agreement. Prior to termination, we sold approximately $18.0 million of the $52.0 million available to be sold under the Sales Agreement. We terminated the Sales Agreement because we did not intend to raise additional ca
pital through the ATM Program, and no additional shares of our common stock
were
sold pursuant to the Sales Agreement. We
did
not
incur any termination penalties as a result of our termination of the Sales Agreement.
Prior to the termination of the Sales Agreement,
we sold
546,926
Shares for aggregate net proceeds of
approximately
$
2
.
8
million
in 2017
.
Registered Direct Offering
On May 3, 2017, we entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering of shares of common stock. In conjunction with the PAA, on May 3, 2017, we also entered into a Securities Purchase Agreement with certain investors for the sale by us of 5,000,000 shares of common stock at a purchase price of $5.25 per share (the “Offering”). The shares of common stock were offered and sold pursuant to our previously filed and then effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. We agreed to pay Barclays an aggregate fee equal to 6.0% of the gross proceeds received by us from the Offering. The Offering closed on May 9, 2017. We
received
aggregate
net proceeds
from the Offering of
approximately
$24.4
million, after deducting placement agent fees of $1.6 million and
offering expenses of
$0.3
million.
Shelf Registration Statement
On August 4, 2017, we filed a shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the Securities and Exchange Commission (“SEC”). The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.
The Shelf Registration Statement allows us to offer and sell, from time to time, up to $100.0 million of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by us.
Indebtedness
On October 16, 2015, we and Vet Therapeutics (together the “Borrowers”) entered into a Loan and Security Agreement, as amended on February 24, 2017 (the “Loan Agreement”) with Pacific Western Bank (“Pacific Western”) as collateral agent (“Collateral Agent”) and a lender and Oxford Finance LLC as a lender (“Oxford” and together with Pacific Western, the “Lenders”), pursuant to which the Lenders agreed to make available to the Borrowers, a term loan in an aggregate principal amount up to $35.0 million (the “
Term Loan”), and a revolving credit facility in an aggregate principal amount up to $5.0 million (the “Revolving Line”), subject to certain conditions to funding.
The Borrowers were required to make interest-only payments on the Term Loan for 18 months, and beginning on May 1, 2017, began to make payments of principal and accrued interest on the Term Loan in equal monthly installments over a term of 30 months.
The Term Loan and the Revolving Line bear interest per annum at the greater of (i) 6.91% or (ii) 3.66% plus the prime rate, which is customarily defined. Under the Loan Agreement,
all principal and accrued interest on the Term Loan
were
due on October 16, 2019 (the “Term Loan Maturity Date”), and all principal and accrued interest on the Revolving Line
were
due on October 16, 2017 (the “Revolving Maturity Date”).
As security for their obligations under
the Loan Agreement, the Borrowers granted a security interest in substantially all of their existing and after-acquired assets except for their intellectual property and certain other customary exclusions. Subject to customary exceptions, the Borrowers are not permitted to encumber their intellectual property.
Upon execution of the Loan Agreement, the Borrowers were obligated to pay a facility fee to the Lenders of $0.2 million and an agency fee to the Collateral Agent of $0.1 million. In addition, the Borrowers are or will be obligated to pay a final payment fee equal to 3.30% of such Term Loan being prepaid or repaid with respect to the Term Loan upon the earliest to occur of the Term Loan Maturity Date, the acceleration of any Term Loan or the prepayment of a Term Loan. The Borrowers were obligated to pay a termination fee equal to 3.30% of the highest outstanding amount of the Revolving Line with respect to the Revolving Line upon the earliest to occur of the Prior Revolving Maturity Date, the acceleration of the Revolving Line or the termination of the Revolving Line. The Borrowers will also be obligated to pay an unused-line fee equal to 0.25% per annum of the average unused portion of the Revolving Line.
Effective as
of
July 31, 2017
, we amended
the Loan Agreement (the “Second Amendment”). The terms of the Second Amendment, among other things, extend the maturity of the Revolving Line to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the Revolving Line beginning November 1, 2018, and provide a six (6) month interest only period for the Term Loan, starting on the date of the Second Amendment.
We are not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, we paid the Lenders an amendment fee of $0.2 million and a facility fee of $0.1 million. We are obligated to pay a new termination fee equal to $0.2 million upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the Revolving Line or the termination of the Revolving
Line. The existing termination fee of $0.2 million was due on the original revolving maturity date, October 16, 2017
, and was paid on October 17, 2017
.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4% per annum will apply to all obligations owed under the Loan Agreement.
The Loan Agreement requires that we maintain certain minimum liquidity at all times, which as of
September 30, 2017
, was approximat
ely
$18.3
m
illio
n.
If the minimum liquidity requirement is not met, the Borrowers may be required to repay the loans prior to their scheduled maturity dates.
At
September 30, 2017
, the Borrowers were in compliance with all financial covena
nts, including the minimum liquidity covenant.
Working Capital
We define working capital as current assets less current liabilities. The
decrease
in working capital
at
September 30, 2017
,
from December 31, 2016, reflects a
decrease
in total current assets of
$10.9
million and a
decrease
in total current liabilities of
$8.2
million. The
decrease
in total current assets was
primarily driven by a
decrease
in cash and cash equivalents due to payments for
our research and development activities related to our programs, payments for inventories, milestones and selling, general and administrative expenses
. The
decrease
in total current liabilities was primarily a result of payments for
GALLIPRANT inventories and a decrease in the current portion of loans payable due to amending payment terms under our Loan Agreement on July 31, 2017
.
Cash Flows
A s
ummary of our cash flows for the
nine
months ended
September 30, 2017
and
2016
, is as follows
:
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Net cash provided by (used in) operating activities
|
|
$
|
(38,528)
|
|
$
|
5,248
|
Net cash provided by (used in) investing activities
|
|
$
|
(3,514)
|
|
$
|
56,928
|
Net cash provided by financing activities
|
|
$
|
23,554
|
|
$
|
11,864
|
Net cash
provided by (used in) operating
activities
During the
nine
months
ended
September 30, 2017
, net cash
used in
operating activities was
$38.5
million. We had a
net loss of
$31.9
million wh
ich includes a
non-cash expense for stock-based compensation of
$5.5
million, a non-cash depreciation and amo
rtization expense of
$0.9
million
,
a non-cash interest expense of
$0.4
million
, and market value adjustments to inventories of
$0.4
million.
Our net loss was primarily attributed to our research and development activities related to our programs and our selling, general and administrative expenses, partially offset by licensing and collaboration revenues
of
$3.9
million
from the
Elanco GALLIPRANT
Agreement
s
and product sales of
$11.2
million. Net
cash used in operating assets and liabilities
was
primarily
due to
a
decrease
in accounts payable of
$4.0
million, a
decrease
in
accrued expenses and other liabilities of
$2.4
million,
and
an
increase
in accounts receivable of
$9.3
million, partially offset by a
decrease
in inventories of
$1.7
million
,
a
decrease
in prepaid expenses
and other current assets
of
$0.2
million
and a
decrease
in other assets of $
0.1
million
. The
decrease
in accounts payable
was primarily
related to payments for GALLIPRANT inventories and trade payables. The
increase
in accounts receivable
and
the
decrease
in inventories were primarily related to GALLIPRANT sales. Also,
accounts receivable
increase
d due to receivables
under
the Elanco GALLIPRANT Agreements.
During the nine months ended September 30, 2016, net cash provided by operating activities was $5.2 million. We had a net loss of $10.2 million which includes an adjustment of a non-cash expense for stock-based compensation of $6.5 million, a non-cash depreciation and amortization expense of $0.7 million, a non-cash impairment of intangible assets of $2.8 million, a non-cash interest expense of $0.4 million, and market value adjustments to inventories of $1.6 million. Our net loss was primarily attributed to our research and development activities related to our programs and our selling, general and administrative expenses, partially offset by licensing and collaboration revenues of $38.0 million from the Collaboration Agreement. Net cash provided by operating assets and liabilities consisted primarily of an increase in accounts payable of $3.7 million, an increase of $7.0 million in licensing and collaboration commitment under the Collaboration Agreement, partially offset by a decrease in accrued expenses and other liabilities of $0.5 million, an increase in prepaid expenses and other current assets of $0.9 million, and an increase in inventories of $5.8 million.
The increase in inventories was primarily related to GALLIPRANT and ENTYCE pre-launch inventories. The increase in accounts payable was primarily related to ENTYCE inventories and trade payables. The increase in prepaid expenses and other current assets was primarily due to advance payments made for our outsourced research and development activities.
Net cash
provided by (used in)
investing activities
During the
nine
months ended
September 30, 2017
, net cash
used in
investing activities was
$3.5
million,
which primarily consisted of a $3.0 million milestone payment for intangible assets for currently marketed products and the purchases of investments of
$3.0
million, partially offset by proceeds from the maturities and sales of investments of
$2.5
million
.
During the nine months ended September 30, 2016, net cash provided by investing activities was $56.9 million, which primarily consisted of the proceeds from the maturities and sales of investments of $286.8 million, partially offset by the purchases of investments of $228.8 million and $1.0 million milestone payments for intangible assets for currently marketed products.
Net cash
provided by
financing activities
During the
nine
months ended
September 30, 2017
,
net cash provided by financing activities
was
$23.6
million. Net cash provided by financing activities consisted
of
the net
proceeds from
the issuance of common stock of
$27.5
million and proceeds from stock option exercises of
$0.
2 million, partially offset by
$3.5
million of payments on loans payable,
$0.3
million of payments for common stock issuance costs and $0.2 million of payments for debt issuance costs
.
During the nine months ended September 30, 2016, net cash provided by financing activities was $11.9 million. Net cash provided by financing activities consisted of the net proceeds from issuance of common stock of $12.1 million, partially offset by $0.3 million of payments for common stock issuance costs, and the proceeds of stock option exercises of $0.1 million
.
Contractual Obligations and
Off-Balance Sheet Arrangements
Contractual Obligations
Our contractual obligations primarily consist of our obligations under our loan
s
payable, non-cancellable operating leases, minimum royalties and other purchase obligations, excluding amounts related to other funding commitments, contingent development, regulatory and commercial milestone payments,
contract manufacturer commitments
and off-balance sheet arrangements as described below.
As of
September 30, 2017
, t
here
were no material changes in our contractual obligations since December 31, 2016
, e
xcept for the contract manufacturer commitments described below.
Other Funding Commitments
As of
September 30, 2017
, we have several ongoing development programs in various stages
of
the regulatory process. Our most significant expenditures are
to clinical research and contract manufacturing organizations
. The contracts are generally cancellable, with notice, at our option.
Contingent Development, Regulatory an
d Commercial Milestone Payments
Based on our development p
lans as of
September 30, 2017
, we have committed to make potential future milestone payments to third parties of up to
approximately $108.6 million, of which $77.4 million are for commercial milestones, as part of our various collaborations, including licensing and development programs. Approximately $68.9 million of the commercial milestones relate to the achievement of various sales thresholds. Payments under these agreements generally become due and payable only upon achievement of certain development, regulatory or commercial milestones. Because the achievement of these milestones had not occurred or was not considered probable as of
September 30, 2017
, such contingencies have not been recorded in our consolidated financial statements, except for $0.5 million due to our former commercial licensee of BLONTRESS.
We anticipate that we may pay approximately $
3
.6 million and $
5
.0
million of milestone payments during the remainder of 2017, and the next 12 months, respectively, provided various development, regulatory or commercial milestones are achieved. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certai
n development, regulatory approval and commercial milestones that may not be achieved.
Contract Manufacturer Commitments
Our independent
CMOs manufacture
our products
and product components
based on our
forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on
available
historical
trends and an analysis from
sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that ar
e non-cancelable. As of
September 30, 2017
and
December 31, 2016
, we had non-cancellable open o
rders for the purchase of
inventories
of
$10.3
million
and
$
17.8 million
, respectively.
Off-Balance Sheet Arrangements
We have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities
or
special purpose entities
.
Recently Issued and Adopted Accounting Pronouncements
For a discussion of new accounting standards please read Note 1,
“
Summary of Significant Accounting Policies
–
New Accounting Standards”
to our consolidated financial statements included within this report
.