Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. The Company
Aerie Pharmaceuticals, Inc. (“Aerie”), with its wholly-owned subsidiaries, Aerie Distribution, Inc., Aerie Pharmaceuticals Limited and Aerie Pharmaceuticals Ireland Limited (“Aerie Distribution,” “Aerie Limited” and “Aerie Ireland Limited,” respectively, together with Aerie, the “Company”), is an ophthalmic pharmaceutical company focused on the discovery, development and commercialization of first-in-class therapies for the treatment of patients with open-angle glaucoma, retinal diseases and other diseases of the eye. The Company has its principal executive offices in Durham, North Carolina, and operates as
one
business segment.
The Company has two U.S. Food and Drug Administration (“FDA”) approved products, Rhopressa
®
(netarsudil ophthalmic solution)
0.02%
(“Rhopressa
®
”) and Rocklatan
®
(netarsudil and latanoprost ophthalmic solution)
0.02%
/
0.005%
(“Rocklatan
®
”), both designed to reduce elevated intraocular pressure (“IOP”) in patients with open-angle glaucoma or ocular hypertension. The Company is commercializing Rhopressa
®
and Rocklatan
®
on its own in North American markets. Rocklatan
®
was launched in the United States on
May 1, 2019
.
The Company’s strategy also includes pursuing regulatory approval for Rhopressa
®
and Rocklatan
®
in Europe and Japan on its own. If approved, Rhopressa
®
and Rocklatan
®
will be marketed under the names
Rhokiinsa
®
and
Roclanda
®
, respectively, in Europe.
Rhopressa
®
is a once-daily eye drop designed to reduce elevated IOP in patients with open-angle glaucoma or ocular hypertension that received FDA approval in December 2017. The Company launched Rhopressa
®
in the United States at the end of April 2018. In October 2018, the Company announced that the European Medicines Agency (“EMA”) accepted for review the marketing authorisation application (“MAA”) for Rhokiinsa
®
. Additionally, the Company has completed a Phase 1 clinical trial and a successful pilot Phase 2 clinical study in the United States on Japanese and Japanese-American subjects, which were designed to support meeting the requirements of Japan’s Pharmaceuticals and Medical Devices Agency (“PMDA”) for potential regulatory submission of Rhopressa
®
in Japan. In March 2019, the Company initiated a Phase 2 clinical trial designed in accordance with the requirements of the PMDA on Japanese patients in Japan to support subsequent Phase 3 registration trials that are also expected to be conducted in Japan under the Company’s direction.
Rocklatan
®
is a once-daily eye drop that is a fixed-dose combination of Rhopressa
®
and latanoprost, the most widely-prescribed prostaglandin analog (“PGA”). Rocklatan
®
received FDA approval on March 12, 2019 and was launched in the United States on
May 1, 2019
. In Europe, the Company is currently conducting a Phase 3 registration trial, named Mercury 3, comparing Roclanda
®
to Ganfort
®
, a fixed-dose combination product marketed in Europe of bimatoprost (a PGA) and timolol (a beta blocker). If successful, Mercury 3 is expected to improve the commercialization prospects of Roclanda
®
in Europe. The Company plans to submit an MAA with the EMA in early 2020 for Roclanda
®
if the EMA has approved Rhokiinsa
®
by such time.
The Company is also focused on furthering the development of its future product candidates focused on retinal diseases, particularly AR-1105 and AR-13503, described below. Through business development activities, the Company acquired worldwide ophthalmic rights to a bio-erodible polymer technology from DSM, a global science-based company headquartered in the Netherlands, and PRINT
®
implant manufacturing technology, which is a proprietary technology capable of creating precisely-engineered sustained-release products utilizing fully-scalable manufacturing processes, from Envisia Therapeutics Inc. (“Envisia”). Using these technologies, the Company has created a sustained-release ophthalmology platform and is currently developing two sustained-release implants focused on retinal diseases, AR-1105, an investigational dexamethasone intravitreal implant, and AR-13503, a Rho kinase/Protein kinase C inhibitor. In March 2019, the Company initiated a Phase 2 clinical trial of AR-1105 in patients with macular edema due to retinal vein occlusion. The Company also submitted its investigational new drug (“IND”) application for AR-13503 in March 2019, and in April 2019 the Company announced that the FDA had reviewed the IND for AR-13503 and as a result it is now in effect, allowing Aerie to initiate human studies in the treatment of neovascular age-related macular degeneration (“nAMD”) and diabetic macular edema (“DME”). The Company expects to initiate a first-in-human clinical study for AR-13503 later in the second quarter of 2019.
The Company commenced generating product revenues related to sales of Rhopressa
®
in the second quarter of 2018. The Company launched Rocklatan
®
in the United States in May 2019 following FDA approval in March 2019. The Company has incurred losses and experienced negative operating cash flows since inception. The Company had previously funded its operations primarily through the sale of equity securities and issuance of convertible notes prior to generating product revenues.
If the Company does not successfully commercialize Rhopressa
®
and Rocklatan
®
or any future product candidates, if approved, it may be unable to achieve profitability. Accordingly, the Company may be required to draw down on the
$100 million
senior secured delayed draw term loan facility (the “credit facility”) that was entered into in July 2018, or to obtain further funding through public or private debt or equity offerings, or other arrangements. Adequate additional funding may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on acceptable terms, it may be forced to delay, reduce or eliminate its research and development programs or commercialization and manufacturing efforts. In May 2019, the Company entered into a second
$100 million
senior secured delayed draw term loan. No funds were drawn at closing. See Note 12 for additional information.
2. Significant Accounting Policies
Basis of Presentation
The Company’s interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position and results of operations for the interim periods presented. Certain information and disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended
December 31, 2018
included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019 (“2018 Form 10-K”). The results for the
three months ended
March 31, 2019
are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.
Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Aerie and its wholly-owned subsidiaries. All intercompany accounts, transactions and profits have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of income and expenses during the reporting periods. Significant items subject to such estimates and assumptions include revenue recognition, inventories, lease accounting, accrued expenses, fair value measurements, acquisitions and stock-based compensation. Actual results could differ from the Company’s estimates.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and investments. The Company’s cash and cash equivalents, which include short-term highly liquid investments with original maturities of three months or less, are held at several financial institutions and at times may exceed insured limits. The Company has placed these funds in high quality institutions to minimize risk relating to exceeding insured limits. The Company’s investment policy permits investments in U.S. federal government and federal agency securities, corporate bonds or commercial paper, money market instruments, and certain qualifying money market mutual funds, and places restrictions on credit ratings, maturities, and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents to the extent recorded on the condensed consolidated balance sheet.
The Company relies on its third-party manufacturers to produce the active pharmaceutical ingredient (“API”) and final drug product for Rhopressa
®
and Rocklatan
®
and may rely on third-party manufacturers for its current and future product candidates. The Company has added an additional Rhopressa
®
drug product contract manufacturer in the first quarter of 2019, which is expected to begin to supply commercial materials in the second quarter of 2019. Further, the Company is in the process of adding an additional API contract manufacturer and an additional Rocklatan
®
drug product contract manufacturer, which are expected to begin to supply commercial materials in the first half of 2019 and in early 2020, respectively. In addition, the Company is in the process of establishing its own manufacturing plant in Athlone, Ireland, for future commercial production of
Rhopressa
®
, Rocklatan
®
, and if approved, Rhokiinsa
®
and Roclanda
®
. Commercial supply from the plant is expected to be available in early 2020.
Revenue Recognition
The Company accounts for its revenue transactions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC Topic 606”). In accordance with ASC Topic 606, the Company recognizes revenues when its customers obtain control of its product in an amount that reflects the consideration it expects to receive from its customers in exchange for that product. To determine revenue recognition for contracts that are determined to be in scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when such performance obligation is satisfied.
Net product revenue is typically recognized when Distributors obtain control of the Company’s product, which occurs at a point in time, typically upon delivery of product to the Distributors. The Company evaluates the creditworthiness of each of its Distributors to determine whether it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur. The Company does not assess whether a contract has a significant financing component if the expectation is such that the period between the transfer of the promised goods to the customer and the receipt of payment will be less than one year. Standard credit terms do not exceed
75
days. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. Shipping and handling costs related to the Company’s product sales are included in selling, general and administrative expenses.
The Company’s net product revenues through
March 31, 2019
were generated through sales of Rhopressa
®
, which was approved by the FDA in December 2017 and was commercially launched in the United States on April 30, 2018. Product revenue is recorded net of trade discounts, allowances, rebates, chargebacks, estimated returns and other incentives. These reserves are classified as either reductions of accounts receivable or as current liabilities. The estimates of reserves established for variable consideration reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer mix. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net product revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment. See Note 3 for additional information.
Inventories
Prior to the date the Company obtains regulatory approval for its product candidates, manufacturing costs related to commercial production are expensed as pre-approval commercial manufacturing expense. Once regulatory approval is obtained, the Company capitalizes such costs as inventory. Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out (“FIFO”) method. The Company analyzes its inventory levels at least quarterly and writes down inventory that is expected to expire prior to being sold, inventory in excess of expected sales requirements and inventory that fails to meet commercial sale specifications, with a corresponding charge to cost of goods sold. The determination of whether inventory costs will be realizable requires estimates by management of future expected inventory requirements based on sales forecasts. If actual net realizable value is less than the estimated amount or if actual market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.
Property, Plant and Equipment, Net
Property, plant and equipment is recorded at historical cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Construction-in-progress reflects amounts incurred for property, plant or equipment construction or improvements that have not yet been placed in service and are not depreciated or amortized, which primarily relates to the build-out of the Company’s manufacturing plant in Ireland (see Note 5). Repairs and maintenance are expensed
when incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the determination of net loss.
Estimated useful lives by major asset category are as follows:
|
|
|
Manufacturing equipment
|
10 years
|
Laboratory equipment
|
7 years
|
Furniture and fixtures
|
5 years
|
Software, computer and other equipment
|
3 years
|
Leasehold improvements
|
Lower of estimated useful life or term of lease
|
Leases
The Company determines if an arrangement is a lease at inception. For each lease, the lease term is determined at the commencement date and includes renewal options and termination options when it is reasonably certain that the Company will exercise that option. Operating leases with lease terms greater than one year are included in operating lease right-of-use (“ROU”) assets and current and long-term operating lease liabilities in the Company’s condensed consolidated balance sheets.
Operating lease ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term using an estimated rate of interest the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The operating lease ROU assets are based on the liability adjusted for any prepaid or deferred rent and lease incentives. The incremental borrowing rate was utilized to discount lease payments over the expected term given our operating leases do not provide an implicit rate. The Company estimates the incremental borrowing rate to reflect the profile of secured borrowing over the expected term of the leases based on the information available at the later of the date of adoption or the lease commencement date. Rent expense for the operating lease is recognized on a straight-line basis over the lease term.
The Company’s lease agreements have lease and non-lease components, which are generally accounted for as a single lease component. Non-lease components include lease operating expenses, which are variable costs under the Company’s current leases. For vehicle leases, the Company accounts for the lease and non-lease components as a single lease component and applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Investments
Available-for-sale investments in debt securities are recorded at fair value, with unrealized gains or losses included in comprehensive loss on the condensed consolidated statements of operations and comprehensive loss and in accumulated other comprehensive loss on the condensed consolidated balance sheets. Realized gains and losses, interest income earned on the Company’s cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on investments are included within other income (expense), net. Interest income was
$0.8 million
and
$0.8 million
for the
three months ended
March 31, 2019
and
2018
, respectively. There were
no
realized gains or losses recognized during the
three months ended
March 31, 2019
or
2018
.
Fair Value Measurements
The Company records certain financial assets and liabilities at fair value in accordance with the provisions of ASC Topic 820,
Fair Value Measurements and Disclosures
. As defined in the guidance, fair value, defined as an exit price, represents the amount that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering these assumptions, the guidance defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
|
|
•
|
Level 1—Unadjusted quoted prices in active, accessible markets for identical assets or liabilities.
|
|
|
•
|
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
|
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity.
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s cash equivalents are valued utilizing Level 1 inputs in the fair value hierarchy as of
March 31, 2019
and
December 31, 2018
. There were no transfers between the different levels of the fair value hierarchy during the
three months
ended
March 31, 2019
.
Stock-Based Compensation
The estimated fair value of options to purchase common stock is determined on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock awards (“RSAs”) granted is based on the market value of Aerie’s common stock on the date of grant. Compensation expense related to time-based RSAs is expensed on a straight-line basis over the vesting period. For RSAs with non-market performance conditions, the Company evaluates the criteria for each grant to determine the probability that the performance condition will be achieved. Compensation expense for RSAs with non-market performance conditions is recognized over the respective service period when it is deemed probable that the performance condition will be satisfied. Upon issuance and at each reporting period, the fair value of each stock appreciation rights (“SARs”) award is estimated using the Black-Scholes option pricing model and is marked to market through stock-based compensation expense. SARs are liability-based awards as they may only be settled in cash.
Adoption of New Accounting Standards
In June 2018, the FASB issued ASU 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”)
,
which expands the scope of ASC Topic 718,
Compensation—Stock Compensation
to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This ASU was effective for the Company beginning January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASC Topic 842”). ASC Topic 842 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASC Topic 842 is effective for financial statements issued for annual and interim periods beginning on January 1, 2019. The Company has elected the optional transition method that provided the option to use the effective date of ASC 842 as the date of initial application on transition. Accordingly, the Company did not adjust comparative periods or make the new required lease disclosures for periods before the effective date of January 1, 2019. There was no cumulative effect adjustment recognized to accumulated deficit upon adoption. As of the date of adoption of the new leasing standards, the Company recognized an operating lease ROU asset of approximately
$17.3 million
and a corresponding operating lease liability of approximately
$17.9 million
, which are included in the condensed consolidated balance sheet. The adoption of the new leasing standards did not have a material impact on the condensed consolidated statements of operations and comprehensive loss.
The Company has elected to utilize the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance (i) without reassessing the classification of the operating leases in accordance with ASC Topic 842, (ii) without reassessing whether an existing contract contained a lease and (iii) without reassessing initial direct costs. In addition, the Company has elected not to allocate the consideration between lease and non-lease components for its operating leases. The Company was also required to reassess its lease conclusions for its manufacturing plant in Athlone, Ireland, under ASC Topic 842 since construction was still in progress as of the date of adoption. Upon the reassessment, the Company concluded it is the owner of the leased space for accounting purposes under ASC Topic 842 and therefore, maintained its previous build-to-suit lease accounting under the transition guidance of ASC Topic 842.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820-10): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC Topic 820. Under this ASU, certain disclosure requirements for fair value measurements are eliminated, amended or added. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance is effective for the Company beginning on January 1, 2020 and prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which requires that financial assets measured at amortized cost be
presented at the net amount expected to be collected. Currently, U.S. GAAP delays recognition of the full amount of credit losses until the likelihood of the loss occurring is probable. Under this ASU, the income statement will reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses will be based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down of the security. In November 2018, the FASB issued ASU No. 2018-19,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses
(“ASU 2018-19”), which clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. The guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted beginning on January 1, 2019. The new guidance prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2016-13 or ASU 2018-19 to have a material impact on its consolidated financial statements and disclosures.
Net Loss per Common Share
Basic net loss per common share (“Basic EPS”) is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for potentially dilutive securities with the exception of warrants for common stock with a
$0.05
exercise price, which are exercisable for nominal consideration and are therefore included in the calculation of the weighted average number of shares of common stock as common stock equivalents. Diluted net loss per share (“Diluted EPS”) gives effect to all dilutive potential shares of common stock outstanding during this period. For Diluted EPS, net loss used in calculating Basic EPS may be adjusted for certain items related to the dilutive securities.
For all periods presented, Aerie’s potential common stock equivalents have been excluded from the computation of Diluted EPS as their inclusion would have had an anti-dilutive effect.
The potential common stock equivalents that have been excluded from the computation of Diluted EPS consist of the following:
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THREE MONTHS ENDED
MARCH 31,
|
|
2019
|
|
2018
|
2014 Convertible Notes
(1)
|
—
|
|
|
5,040,323
|
|
Outstanding stock options
|
7,444,736
|
|
|
7,125,947
|
|
Stock purchase warrants
|
79,500
|
|
|
157,500
|
|
Nonvested restricted stock awards
|
781,903
|
|
|
605,163
|
|
Total
|
8,306,139
|
|
|
12,928,933
|
|
|
|
(1)
|
In July 2018, the entire outstanding principal amount of senior secured convertible notes (the “2014 Convertible Notes”) was converted into shares of Aerie common stock.
|
3. Revenue Recognition
Net product revenues for the
three months ended
March 31, 2019
were derived from sales of Rhopressa
®
in the United States to customers, which include a limited number of national and select regional wholesalers (the “Distributors”). These Distributors subsequently resell the product, primarily to retail pharmacies that dispense the product to patients. For the three months ended
March 31, 2019
,
three
Distributors accounted for
36%
,
34%
and
27%
of total revenues, respectively. The product that is ultimately used by patients is generally covered by third-party payers, such as government or private healthcare insurers and pharmacy benefit managers (“Third-party Payers”) and may be subject to rebates and discounts payable directly to those Third-party Payers.
The Company has already obtained formulary coverage for approximately
90%
of lives covered under commercial plans and approximately
75%
of lives covered under Medicare Part D plans. Rocklatan
®
was approved by the FDA on March 12, 2019 and was commercially launched in the United States in May 2019. The Company expects to recognize product revenue for sales of Rocklatan
®
commencing in the second quarter of 2019.
The Company calculates its net product revenue based on the wholesale acquisition cost that the Company charges its Distributors for Rhopressa
®
less provisions for (i) trade discounts and allowances, such as discounts for prompt payment and
Distributor fees, (ii) estimated rebates to Third-party Payers, estimated payments for Medicare Part D prescription drug program coverage gap (commonly called the “donut hole”), patient co-pay program coupon utilization, chargebacks and other discount programs and (iii) reserves for expected product returns. Provisions for revenue reserves reduced product revenues by
$16.2 million
for the
three months ended
March 31, 2019
.
Trade Discounts and Allowances
: The Company generally provides discounts on sales of Rhopressa
®
to its Distributors for prompt payment and pays fees for distribution services and for certain data that Distributors provide to the Company. The Company expects its Distributors to earn these discounts and fees, and accordingly deducts the full amount of these discounts and fees from its gross product revenues at the time such revenues are recognized.
Rebates, Chargebacks and Other Discounts
: The Company contracts with Third-party Payers for coverage and reimbursement of Rhopressa
®
. The Company estimates the rebates and chargebacks it expects to be obligated to provide to Third-party Payers and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. The Company estimates the rebates and chargebacks that it expects to be obligated to provide to Third-party Payers based upon (i) the Company's contracts and negotiations with these Third-party Payers, (ii) estimates regarding the payer mix for Rhopressa
®
and (iii) historical industry information regarding the payer mix for comparable pharmaceutical products and product portfolios. Other discounts include the Company’s co-pay assistance coupon programs for commercially-insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to pay associated with product that has been recognized as revenue.
Product Returns
: The Company estimates the amount of Rhopressa
®
that will be returned and deducts these estimated amounts from its gross revenue at the time the revenue is recognized. The Company currently estimates product returns based on historical industry information regarding rates for comparable pharmaceutical products and product portfolios, the estimated remaining shelf life of Rhopressa
®
shipped to Distributors, and contractual agreements with the Company's Distributors intended to limit the amount of inventory they maintain. Reporting from the Distributors includes Distributor sales and inventory held by Distributors, which provides the Company with visibility into the distribution channel to determine when product would be eligible to be returned.
The Company did not have any contract assets (unbilled receivables) at
March 31, 2019
or
December 31, 2018
, as customer invoicing generally occurs before or at the time of revenue recognition. The Company did not have any contract liabilities at
March 31, 2019
or
December 31, 2018
, as the Company did not receive payments in advance of fulfilling its performance obligations to its customers. Amounts billed or invoiced are included in accounts receivable, net on the condensed consolidated balance sheets.
4. Inventory
Inventory consists of the following:
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(in thousands)
|
|
MARCH 31, 2019
|
|
DECEMBER 31, 2018
|
Raw materials
|
|
$
|
766
|
|
|
$
|
836
|
|
Work-in-process
|
|
7,377
|
|
|
6,885
|
|
Finished goods
|
|
2,049
|
|
|
2,391
|
|
Total inventory
|
|
$
|
10,192
|
|
|
$
|
10,112
|
|
5. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
MARCH 31, 2019
|
|
DECEMBER 31, 2018
|
Manufacturing equipment
|
|
$
|
2,374
|
|
|
$
|
2,366
|
|
Laboratory equipment
|
|
6,013
|
|
|
6,038
|
|
Furniture and fixtures
|
|
1,651
|
|
|
1,815
|
|
Software, computer and other equipment
|
|
2,786
|
|
|
2,702
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|
Leasehold improvements
|
|
4,174
|
|
|
4,072
|
|
Construction-in-progress
|
|
51,832
|
|
|
49,057
|
|
Property, plant and equipment
|
|
68,830
|
|
|
66,050
|
|
Less: Accumulated depreciation
|
|
(5,848
|
)
|
|
(5,525
|
)
|
Property, plant and equipment, net
|
|
$
|
62,982
|
|
|
$
|
60,525
|
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Manufacturing Plant Build-Out
The Company is in process of building its own manufacturing plant in Athlone, Ireland, and is leasing approximately
30,000
square feet of interior floor space for build-out. The lease expires in 2037, but the Company is permitted to terminate the lease beginning in September 2027. The Company is not the legal owner of the leased space. However, in accordance with ASC Topic 842,
Leases
, the Company is deemed to be the owner of the leased space.
The Company capitalized approximately
$4.2 million
as a build-to-suit asset within property, plant and equipment, net related to the value of the building shell at the commencement of the lease. The build-to-suit facility lease obligation was approximately
$4.4 million
as of March 31, 2019, of which
$0.2 million
was classified as other current liabilities. The build-to-suit facility lease obligation was approximately
$4.5 million
as of December 31, 2018, of which
$0.2 million
was classified as other current liabilities. Additionally, equipment and construction costs incurred as part of the build-out are capitalized within property, plant and equipment, net. Capital expenditures related to the manufacturing plant totaled approximately
$2.8 million
during the
three months
ended
March 31, 2019
.
The Company has not yet commenced amortization of the build-to-suit asset, included in property, plant and equipment, net on the condensed consolidated balance sheets, as construction of the facility was still in progress as of
March 31, 2019
. Rental payments made under the lease will be allocated to interest expense and the financing liability based on the implicit rate of the build-to-suit facility lease obligation. Interest expense related to the financing liability is immaterial. The lease obligation is denominated in Euros and is remeasured to U.S. dollars at the balance sheet date with any foreign exchange gain or loss recognized within other income (expense), net on the condensed consolidated statements of operations and comprehensive loss. Unrealized foreign currency gain related to the remeasurement of the lease obligation was
$0.1 million
for the
three months ended
March 31, 2019
. For the
three months ended
March 31, 2018
, the unrealized foreign currency loss was
$0.1 million
.
6. Leases
The Company has operating leases for corporate offices, research and development facilities, and a fleet of vehicles. The properties primarily relate to the Company’s principal executive office and research facility located in Durham, North Carolina, regulatory, commercial support and other administrative activities located in Irvine, California and clinical, finance and legal operations located in Bedminster, New Jersey. The Durham, North Carolina, facility consists of approximately
61,000
square feet of laboratory and office space under leases that expire between June 2020 and June 2024 and the Irvine, California, location consists of approximately
37,300
square feet of office space under a lease that expires in January 2022. The Company terminated its previous lease and entered into a lease for its new Bedminster, New Jersey, location, which consists of approximately
34,000
square feet of office space under a lease that expires in October 2029. There are also small offices in Malta, Ireland, the United Kingdom and Japan. These leases have remaining lease terms of approximately
1 year
to
11 years
, some of which include options to extend the leases.
Balance sheet information related to leases was as follows:
|
|
|
|
|
(in thousands)
|
MARCH 31, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets
|
$
|
16,394
|
|
|
|
Operating lease liabilities
|
$
|
5,032
|
|
Long-term operating lease liabilities
|
12,044
|
|
Total operating lease liabilities
|
$
|
17,076
|
|
|
|
|
|
|
MARCH 31, 2019
|
Operating Leases
|
|
Weighted-Average Remaining Lease Term
|
6 years
|
|
Weighted-Average Discount Rate
|
7.7
|
%
|
Maturities of lease liabilities as of
March 31, 2019
were as follows
(1)
:
|
|
|
|
|
|
(in thousands)
|
|
|
Year Ending December 31,
|
|
Operating leases
|
Remainder of 2019
|
|
$
|
3,634
|
|
2020
|
|
5,302
|
|
2021
|
|
3,744
|
|
2022
|
|
1,478
|
|
2023
|
|
1,440
|
|
Thereafter
|
|
6,576
|
|
Total undiscounted lease payments
|
|
22,174
|
|
Less: present value adjustment
|
|
(5,098
|
)
|
Total lease liabilities
|
|
$
|
17,076
|
|
|
|
(1)
|
Uses foreign exchange rates in effect at
March 31, 2019
.
|
Under prior lease guidance, minimum lease payments under operating leases were as follows at
December 31, 2018
:
|
|
|
|
|
|
(in thousands)
|
|
|
Year Ending December 31,
|
|
Operating leases
|
2019
|
|
$
|
4,283
|
|
2020
|
|
4,855
|
|
2021
|
|
4,278
|
|
2022
|
|
1,643
|
|
2023
|
|
1,438
|
|
Thereafter
|
|
6,698
|
|
Total minimum lease payments
|
|
$
|
23,195
|
|
Lease expense for the Company’s operating leases was
$1.2 million
, including variable lease payments of
$0.2 million
, for the three months ended
March 31, 2019
. Rent expense for the Company’s operating leases was
$0.6 million
for the three months ended
March 31, 2018
.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
MARCH 31, 2019
|
|
DECEMBER 31, 2018
|
Accrued compensation and benefits
|
$
|
6,822
|
|
|
$
|
10,438
|
|
Accrued consulting and professional fees
|
4,130
|
|
|
3,927
|
|
Accrued research and development expenses
(1)
|
6,692
|
|
|
7,503
|
|
Accrued revenue reserves
|
16,500
|
|
|
10,155
|
|
Accrued other
(2)
|
1,666
|
|
|
6,358
|
|
Total accrued expenses and other current liabilities
|
$
|
35,810
|
|
|
$
|
38,381
|
|
|
|
(1)
|
Comprised of accruals related to fees for investigative sites, contract research organizations, contract manufacturing organizations and other service providers that assist in conducting preclinical research studies and clinical trials.
|
|
|
(2)
|
Comprised of accruals related to commercial manufacturing activities for the Company’s product candidates prior to receipt of regulatory approval, as well as other business-related expenses.
|
8. Credit Facility
On July 23, 2018, Aerie entered into a credit agreement (as amended on August 7, 2018) with certain entities affiliated with Deerfield Management Company L.P. (“Deerfield”) providing for a
$100 million
credit facility. The credit facility includes fees upon drawdown of
1.75%
of amounts drawn, an
8.625%
annual interest rate on drawn amounts, and annual fees on undrawn amounts of
1.5%
. There is also an exit fee of
$1.5 million
payable upon termination of the credit facility (whether at maturity or otherwise). The allowable draw period ends
two
years from the effective date of the credit facility. Fees on undrawn amounts are not payable until July 2020, and
no
principal payments will be due on drawn amounts, if any, until July 2020. The credit facility matures in July 2024 in respect of any drawn amounts. The credit facility includes affirmative and negative covenants and prepayment terms.
No
funds have been drawn. In May 2019, the Company entered into an amendment of its existing credit facility providing for an additional
$100 million
senior secured delayed draw term loan with Deerfield. No funds were drawn at closing. See Note 12 for additional information.
Interest expense was
$0.8 million
and
$0.5 million
for the
three months ended
March 31, 2019
and
2018
, respectively, and included amortization of debt discount and issuance costs related to the 2014 Convertible Notes through the date of conversion as well as issuance costs and fees related to the credit facility commencing in July 2018.
9. Stockholders’ Equity
Warrants
As of
March 31, 2019
, the following equity-classified warrants to purchase common stock were outstanding:
|
|
|
|
|
|
NUMBER OF
UNDERLYING
SHARES
|
|
EXERCISE
PRICE PER
SHARE
|
|
WARRANT
EXPIRATION
DATE
|
75,000
|
|
$5.00
|
|
November 2019
|
4,500
|
|
$5.00
|
|
August 2020
|
223,482
|
|
$0.05
|
|
December 2019
|
The warrants outstanding as of
March 31, 2019
are all currently exercisable.
10. Stock-Based Compensation
Stock-based compensation expense for options granted, RSAs, performance stock awards (“PSAs”), SARs and stock purchase rights is reflected in the condensed consolidated statements of operations and comprehensive loss as follows:
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
MARCH 31,
|
(in thousands)
|
2019
|
|
2018
|
Selling, general and administrative
|
$
|
9,121
|
|
|
$
|
6,214
|
|
Pre-approval commercial manufacturing
|
849
|
|
|
470
|
|
Research and development
|
2,650
|
|
|
2,035
|
|
Total
|
$
|
12,620
|
|
|
$
|
8,719
|
|
Equity Plans
The Company maintains
three
equity compensation plans, the 2005 Aerie Pharmaceutical Stock Plan (the “2005 Plan”), the 2013 Omnibus Incentive Plan (the “2013 Equity Plan”), which was amended and restated as the Aerie Pharmaceuticals, Inc. Second Amended and Restated Omnibus Incentive Plan (the “Second Amended and Restated Equity Plan”), as described below, and the Aerie Pharmaceuticals, Inc. Inducement Award Plan (the “Inducement Award Plan”), as described below. The 2005 Plan, the Second Amended and Restated Equity Plan and the Inducement Award Plan are referred to collectively as the “Plans.” The 2005 Plan was frozen in 2013 and
no
additional awards have been or will be made under the 2005 Plan.
On June 7, 2018, Aerie’s stockholders approved the adoption of the Second Amended and Restated Equity Plan to increase the number of shares issuable under the plan by
4,500,000
. The Second Amended and Restated Equity Plan provides for the granting of up to
10,229,068
equity awards in respect of Aerie common stock.
On December 7, 2016, Aerie’s Board of Directors approved the Inducement Award Plan which provides for the granting of up to
418,000
equity awards in respect of common stock of Aerie and was subsequently amended during 2017 to increase the equity awards that may be issued by an additional
874,500
shares. Awards granted under the Inducement Award Plan are intended to qualify as employment inducement awards under NASDAQ Listing Rule 5635(c)(4).
Options to Purchase Common Stock
The following table summarizes the stock option activity under the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF
SHARES
|
|
WEIGHTED AVERAGE
EXERCISE PRICE
|
|
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS)
|
|
AGGREGATE
INTRINSIC
VALUE
(000’s)
|
Options outstanding at December 31, 2018
|
6,935,119
|
|
|
$
|
28.97
|
|
|
|
|
|
|
Granted
|
753,010
|
|
|
43.94
|
|
|
|
|
|
Exercised
|
(111,242
|
)
|
|
32.96
|
|
|
|
|
|
Canceled
|
(132,151
|
)
|
|
52.08
|
|
|
|
|
|
Options outstanding at March 31, 2019
|
7,444,736
|
|
|
$
|
30.01
|
|
|
6.8
|
|
$
|
145,052
|
|
Options exercisable at March 31, 2019
|
4,908,673
|
|
|
$
|
20.97
|
|
|
5.7
|
|
$
|
134,432
|
|
As of
March 31, 2019
, the Company had
$79.2 million
of unrecognized compensation expense related to options granted under its equity plans. This expense is expected to be recognized over a weighted average period of
2.9 years
as of
March 31, 2019
.
Restricted Stock Awards
The following table summarizes the RSAs, including PSAs, activity under the Plans:
|
|
|
|
|
|
|
|
|
NUMBER OF
SHARES
|
|
WEIGHTED AVERAGE
FAIR VALUE PER SHARE
|
Nonvested RSAs at December 31, 2018
|
572,706
|
|
|
$
|
48.18
|
|
Granted
|
369,648
|
|
|
45.70
|
|
Vested
|
(140,291
|
)
|
|
41.67
|
|
Canceled
|
(20,160
|
)
|
|
52.35
|
|
Nonvested RSAs at March 31, 2019
|
781,903
|
|
|
$
|
48.07
|
|
As of
March 31, 2019
, the Company had
$31.6 million
of unrecognized compensation expense related to unvested RSAs, including PSAs. This expense is expected to be recognized over the weighted average period of
3.2 years
as of
March 31, 2019
.
The vesting of the RSAs is time and service based with terms of
one
to
four
years. During the year ended December 31, 2017, the Company granted
98,817
PSAs with non-market performance conditions that vest upon the satisfaction of certain performance conditions and service conditions. During the
three months ended March 31, 2019
, the vesting for the remaining PSAs was deemed probable to occur. As of
March 31, 2019
,
19,764
PSAs were vested.
Stock Appreciation Rights
During the
three months
ended
March 31, 2019
, the Company granted
43,851
SARs awards at a weighted average exercise price of
$44.93
. As of
March 31, 2019
,
123,002
SARs awards were outstanding and had a weighted average remaining contractual life of
4.3 years
.
Holders of the SARs are entitled under the terms of the Plans to receive cash payments calculated based on the excess of the Company’s common stock price over the target price in their award; consequently, these awards are accounted for as liability-classified awards and the Company measures compensation cost based on their estimated fair value at each reporting date, net of actual forfeitures, if any.
11. Commitments and Contingencies
The Company may periodically become subject to legal proceedings and claims arising in connection with its business. The Company is not a party to any known litigation, is not aware of any material unasserted claims and does not have contingency reserves established for any litigation liabilities.
12. Subsequent Events
On May 2, 2019, the Company announced that it entered into an amendment of its existing credit agreement with certain affiliates of Deerfield providing for an additional
$100 million
senior secured delayed draw term loan facility (the “additional credit facility”), pursuant to which Aerie may borrow up to
$100 million
in aggregate in one or more borrowings at any time on or prior to July 23, 2020. Amounts drawn under the additional credit facility will mature on July 23, 2024. With this additional credit facility, Aerie has a total of
$200 million
available through the Deerfield credit facility arrangements.
The additional credit facility includes fees upon drawdown of
2.0%
of amounts drawn, an annual interest rate of LIBOR (subject to a floor of
2%
) plus
7.2%
, up to a maximum of
13.0%
on drawn amounts and annual fees on undrawn amounts of
2.0%
. The allowable draw period ends July 23, 2020. Fees on undrawn amounts are not payable until July 23, 2020, and no principal payments will be due on drawn amounts, if any, until July 23, 2020. The additional credit facility includes certain prepayment premiums if drawn. The terms of the original
$100 million
credit facility remain unchanged.