Quarterly Report (10-q)

Date : 11/07/2019 @ 7:29PM
Source : Edgar (US Regulatory)
Stock : Clovis Oncology Inc (CLVS)
Quote : 9.61  0.75 (8.47%) @ 5:00AM
After Hours
Last Trade
Last $ 9.67 ▲ 0.06 (0.62%)

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2019.

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from            to           .

Commission file number: 001-35347

Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

90-0475355

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

5500 Flatiron Parkway, Suite 100

Boulder, Colorado

80301

(Address of principal executive offices)

(Zip Code)

(303625-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock par Value $0.001 per share

CLVS

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of November 1, 2019 was 54,815,202.

CLOVIS ONCOLOGY, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. Financial Information

3

ITEM 1.

Financial Statements (unaudited)

3

Consolidated Statements of Operations and Comprehensive Loss — for the three and nine months ended September 30, 2019 and September 30, 2018

3

Consolidated Balance Sheets — as of September 30, 2019 and December 31, 2018

4

Consolidated Statements of Stockholders’ Equity (Deficit) – for the nine months ended September 30, 2019

5

Consolidated Statements of Stockholders’ Equity (Deficit) – for the nine months ended September 30, 2018

6

Consolidated Statements of Cash Flows — for the nine months ended September 30, 2019 and 2018

7

Notes to Unaudited Consolidated Financial Statements

8

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

41

ITEM 4.

Controls and Procedures

42

PART II. Other Information

43

ITEM 1.

Legal Proceedings

43

ITEM 1A.

Risk Factors

44

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

ITEM 3.

Defaults Upon Senior Securities

45

ITEM 4.

Mine Safety Disclosures

45

ITEM 5.

Other Information

45

ITEM 6.

Exhibits

45

SIGNATURES

50

2

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

Three months ended September 30, 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

(in thousands, except per share amounts)

(in thousands, except per share amounts)

Revenues:

  

  

Product revenue

$

37,603

$

22,757

$

103,699

$

65,037

Operating expenses:

 

  

 

  

 

  

 

  

Cost of sales - product

8,134

4,766

21,984

13,262

Cost of sales - intangible asset amortization

1,212

771

3,549

1,851

Research and development

 

77,896

 

63,887

 

210,674

 

160,138

Selling, general and administrative

 

41,811

 

42,495

 

137,601

 

126,634

Acquired in-process research and development

9,440

9,440

Other operating expenses

5,539

5,539

Total expenses

 

144,032

 

111,919

 

388,787

 

301,885

Operating loss

 

(106,429)

 

(89,162)

 

(285,088)

 

(236,848)

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(5,278)

 

(3,376)

 

(12,684)

 

(9,592)

Foreign currency (loss) gain

 

(229)

 

151

 

(648)

 

(34)

Legal settlement loss

(1,750)

(26,750)

(27,975)

Gain on extinguishment of debt

18,480

18,480

Other income

 

781

 

2,536

 

5,081

 

5,419

Other expense, net

 

12,004

 

(689)

 

(16,521)

 

(32,182)

Loss before income taxes

 

(94,425)

 

(89,851)

 

(301,609)

 

(269,030)

Income tax benefit (expense)

 

350

 

(13)

 

686

 

280

Net loss

(94,075)

(89,864)

(300,923)

(268,750)

Other comprehensive income (loss):

 

  

  

 

  

 

  

  

 

  

  

Foreign currency translation adjustments, net of tax

 

(143)

  

 

(495)

 

(149)

  

 

(2,448)

  

Net unrealized gain (loss) on available-for-sale securities, net of tax

 

(68)

  

 

(10)

 

84

  

 

71

  

Other comprehensive (loss) income:

 

(211)

  

 

(505)

 

(65)

  

 

(2,377)

  

Comprehensive loss

$

(94,286)

$

(90,369)

$

(300,988)

$

(271,127)

Loss per basic and diluted common share:

Basic and diluted net loss per common share

$

(1.72)

$

(1.71)

$

(5.62)

$

(5.18)

Basic and diluted weighted average common shares outstanding

 

54,707

 

52,669

53,549

 

51,844

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

CLOVIS ONCOLOGY, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except for share amounts)

September 30, 

December 31, 

    

2019

    

2018

 

ASSETS

 

  

  

Current assets:

 

  

  

Cash and cash equivalents

$

201,481

$

221,876

Accounts receivable, net

16,816

12,889

Inventories, net

24,864

27,072

Available-for-sale securities

 

152,622

 

298,270

Prepaid research and development expenses

 

4,597

 

3,579

Other current assets

 

18,095

 

8,613

Total current assets

 

418,475

 

572,299

Inventories

97,221

113,908

Deposit on inventory

 

12,350

 

12,350

Property and equipment, net

 

15,223

 

26,524

Right-of-use assets, net

25,427

Intangible assets, net

 

64,132

 

51,930

Goodwill

 

63,074

 

63,074

Other assets

 

20,990

 

23,475

Total assets

$

716,892

$

863,560

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

31,655

$

28,517

Accrued research and development expenses

 

43,981

 

29,676

Lease liabilities

4,458

Other accrued expenses

 

31,266

 

67,556

Total current liabilities

 

111,360

 

125,749

Long-term lease liabilities - less current portion

27,768

Convertible senior notes

 

644,095

 

575,470

Borrowings under financing agreement

19,944

Other long-term liabilities

 

1,220

 

15,872

Total liabilities

 

804,387

 

717,091

Commitments and contingencies (Note 15)

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2019 and December 31, 2018

 

 

Common stock, $0.001 par value per share, 200,000,000 and 100,000,000 shares authorized at September 30, 2019 and December 31, 2018, respectively; 54,805,525 and 52,797,516 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

55

 

53

Additional paid-in capital

 

2,101,162

 

2,034,142

Accumulated other comprehensive loss

 

(44,699)

 

(44,634)

Accumulated deficit

 

(2,144,013)

 

(1,843,092)

Total stockholders' equity (deficit)

 

(87,495)

 

146,469

Total liabilities and stockholders' equity (deficit)

$

716,892

$

863,560

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Common Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(in thousands, except for share amounts)

January 1, 2019

52,797,516

$

53

$

2,034,142

$

(44,634)

$

(1,843,092)

$

146,469

Exercise of stock options

83,132

 

 

1,093

 

 

 

1,093

Issuance of common stock from vesting of restricted stock units

113,402

Share-based compensation expense

 

 

13,639

 

 

 

13,639

Net unrealized gain on available-for-sale securities

 

 

 

75

 

 

75

Foreign currency translation adjustments

 

 

 

(5)

 

 

(5)

Net loss

 

 

 

 

(86,420)

 

(86,420)

March 31, 2019

52,994,050

53

2,048,874

(44,564)

(1,929,512)

74,851

Issuance of common stock under employee stock purchase plan

92,275

1,166

1,166

Exercise of stock options

20,741

 

 

223

 

 

 

223

Issuance of common stock from vesting of restricted stock units

63,413

Share-based compensation expense

 

 

14,130

 

 

 

14,130

Net unrealized gain on available-for-sale securities

 

 

 

77

 

 

77

Foreign currency translation adjustments

 

 

 

(1)

 

 

(1)

Net loss

 

 

 

 

(120,426)

 

(120,426)

June 30, 2019

53,170,479

$

53

$

2,064,393

$

(44,488)

$

(2,049,938)

$

(29,980)

Exercise of stock options

84,482

 

 

45

 

 

 

45

Issuance of common stock from vesting of restricted stock units

68,506

Share-based compensation expense

 

 

13,979

 

 

 

13,979

Litigation settlement

1,482,058

2

22,745

22,747

Net unrealized gain on available-for-sale securities

 

 

 

(68)

 

 

(68)

Foreign currency translation adjustments

 

 

 

(143)

 

 

(143)

Net loss

 

 

 

 

(94,075)

 

(94,075)

September 30, 2019

54,805,525

$

55

$

2,101,162

$

(44,699)

$

(2,144,013)

$

(87,495)

See accompanying Notes to Unaudited Consolidated Financial Statements.

5

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Common Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(in thousands, except for share amounts)

January 1, 2018

50,565,119

$

51

$

1,887,197

$

(42,173)

$

(1,477,441)

$

367,634

Exercise of stock options

21,463

 

 

514

 

 

 

514

Issuance of common stock from vesting of restricted stock units

110,889

Share-based compensation expense

 

 

11,913

 

 

 

11,913

Net unrealized gain on available-for-sale securities

 

 

 

(5)

 

 

(5)

Foreign currency translation adjustments

 

 

 

1,517

 

 

1,517

Adoption of new revenue recognition standard

2,356

2,356

Net loss

 

 

 

 

(77,694)

 

(77,694)

March 31, 2018

50,697,471

51

1,899,624

(40,661)

(1,552,779)

306,235

Issuance of common stock, net or issuance costs

1,837,898

2

93,752

93,754

Issuance of common stock under employee stock purchase plan

35,636

1,377

1,377

Exercise of stock options

25,753

 

 

703

 

 

 

703

Issuance of common stock from vesting of restricted stock units

40,617

Share-based compensation expense

 

 

14,855

 

 

 

14,855

Net unrealized gain on available-for-sale securities

 

 

 

86

 

 

86

Foreign currency translation adjustments

 

 

 

(3,470)

 

 

(3,470)

Adoption of new revenue recognition standard

Net loss

 

 

 

 

(101,191)

 

(101,191)

June 30, 2018

52,637,375

$

53

$

2,010,311

$

(44,045)

$

(1,653,970)

$

312,349

Issuance of common stock, net or issuance costs

135

135

Exercise of stock options

23,514

 

 

604

 

 

 

604

Issuance of common stock from vesting of restricted stock units

47,878

Share-based compensation expense

 

 

10,947

 

 

 

10,947

Net unrealized loss on available-for-sale securities

 

 

 

(10)

 

 

(10)

Foreign currency translation adjustments

 

 

 

(495)

 

 

(495)

Adoption of new revenue recognition standard

Net loss

 

 

 

 

(89,864)

 

(89,864)

September 30, 2018

52,708,767

$

53

$

2,021,997

$

(44,550)

$

(1,743,834)

$

233,666

See accompanying Notes to Unaudited Consolidated Financial Statements9

6

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine months ended September 30, 

 

    

2019

    

2018

 

 

 

Operating activities

  

 

  

Net loss

$

(300,923)

$

(268,750)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

Share-based compensation expense

 

41,748

 

37,715

Depreciation and amortization

 

5,727

 

2,497

Amortization of premiums and discounts on available-for-sale securities

 

(1,269)

 

1,079

Amortization of debt issuance costs

 

2,070

 

1,536

Legal settlement loss

22,747

Acquired in-process research and development

9,440

Gain on extinguishment of debt

(18,480)

Loss on sale of property and equipment

783

Allowance for obsolete inventories

521

Lease liabilities

(716)

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

(3,952)

(4,978)

Inventory

(23,473)

(25,540)

Prepaid and accrued research and development expenses

 

13,293

 

1,390

Deposit on inventory

 

 

(24,173)

Other operating assets

 

(5,263)

 

(7,507)

Accounts payable

 

2,384

 

4,765

Other accrued expenses

 

1,895

 

(1,304)

Net cash used in operating activities

 

(253,468)

 

(283,270)

Investing activities

 

  

 

  

Purchases of property and equipment

 

(2,887)

 

(7,763)

Proceeds from sale of property and equipment

275

Purchases of available-for-sale securities

 

(335,104)

 

(320,000)

Sales of available-for-sale securities

480,097

105,000

Acquired in-process research and development - milestone payment

 

(15,750)

 

(55,000)

Net cash provided by (used in) investing activities

 

126,631

 

(277,763)

Financing activities

 

  

 

  

Proceeds from the sale of common stock, net of issuance costs

93,890

Proceeds from the issuance of convertible senior notes, net of issuance costs

254,965

290,887

Proceeds from borrowings under financing agreement, net of issuance costs

19,044

Proceeds from the exercise of stock options and employee stock purchases

 

2,526

 

3,197

Extinguishment of convertible senior notes

(169,853)

Net cash provided by financing activities

 

106,682

 

387,974

Effect of exchange rate changes on cash and cash equivalents

 

(240)

 

(286)

Decrease in cash and cash equivalents

 

(20,395)

 

(173,345)

Cash and cash equivalents at beginning of period

 

221,876

 

464,198

Cash and cash equivalents at end of period

$

201,481

$

290,853

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

8,640

$

9,188

Non-cash investing and financing activities:

 

  

 

  

Vesting of restricted stock units

$

4,735

$

10,130

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

CLOVIS ONCOLOGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Clovis Oncology, Inc. (together with its consolidated subsidiaries, the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, the European Union (“EU”) and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use. We have and intend to continue to license or acquire rights to oncology compounds in all stages of development. In exchange for the right to develop and commercialize these compounds, we generally expect to provide the licensor with a combination of upfront payments, milestone payments and royalties on future sales. In addition, we generally expect to assume the responsibility for future drug development and commercialization costs. We currently operate in one segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities and since 2016 we have also marketed and sold products.

Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is available in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial indication received approval from the United States Food and Drug Administration (“FDA”) in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.

In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. As this is a conditional approval, it will be necessary to complete certain confirmatory post marketing commitments. In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Rubraca was the first PARP inhibitor licensed for an ovarian cancer treatment indication in the EU and is the only drug to be authorized for both treatment and maintenance treatment among eligible patients with ovarian cancer. We completed our launch of Rubraca as maintenance therapy in Germany and patients with private insurance in the United Kingdom in March 2019, and are currently launching Rubraca in England with reimbursement now provided via the Cancer Drugs Fund.

In addition to Rubraca, we have a second product candidate currently in clinical development. Lucitanib is an investigational, oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors 1 through 3 (VEGFR1-3), platelet-derived growth factor receptors alpha and beta (PDGFR α/β) and fibroblast growth factor receptors 1 through 3 (FGFR1-3). We believe that recent data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – represent a scientific rationale for the development of lucitanib in combination with a PD-1 inhibitor, and a Clovis-sponsored study of lucitanib in combination with nivolumab is underway in advanced gynecologic cancers and other solid tumors. In addition, we have initiated a study of lucitanib in combination with Rubraca in ovarian cancer, based on encouraging data of VEGF and PARP inhibitors in combination. Each of these Phase 1b/2 studies is currently enrolling patients. We hold the global development and commercialization rights (except for China) for lucitanib.

8

In September 2019, we acquired rights from 3B Pharmaceuticals GmbH (“3BP”) to develop and commercialize a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast activation protein alpha (“FAP”), which is expressed by cancer-associated fibroblasts found in many epithelial cancers, including more than 90 percent of breast, lung, colorectal and pancreatic carcinomas. The collaboration is initially focused on the development of a FAP-targeted pre-clinical candidate identified by 3BP’s technology platform. Following completion of pre-clinical work to support an investigational new drug application for the lead candidate, FAP-2286, we plan to conduct global clinical trials in multiple solid tumor types. We hold global development rights, and U.S. and global commercialization rights, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. The parties have also entered into a non-binding letter of intent to negotiate the terms of a definitive agreement to collaborate on a discovery program directed to up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

 

Basis of Presentation

All financial information presented includes the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The unaudited financial statements of Clovis Oncology, Inc. included herein reflect all adjustments that, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the periods presented herein. Interim results may not be indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Liquidity

We have incurred significant net losses since inception and have relied on our ability to fund our operations through debt and equity financings. We expect operating losses and negative cash flows to continue for the foreseeable future. As we continue to incur losses, transition to profitability is dependent upon achieving a level of revenues from Rubraca adequate to support our cost structure. We may never achieve profitability, and unless or until we do, we will continue to need to raise additional cash.

Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered after, the date of initial application, with an option to use certain transition relief. We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective method which leaves the comparative period reporting unchanged. Comparative reporting periods are

9

presented in accordance with Topic 840, while periods subsequent to the effective date are presented in accordance with Topic 842. We have elected to adopt the package practical expedient which allows us: 1) to not reassess whether any expired or existing contracts are or contain leases, 2) to not reassess the lease classification for any expired or existing leases and 3) to not reassess initial direct costs for any existing leases. We also elected not to recognize on the balance sheet leases with terms of 12 months or less. For these short-term leases, we will recognize the lease payments in profit or loss on a straight-line basis over the lease term and the variable lease payments in the period in which the obligation for those payments is incurred.

Adoption of the new lease standard resulted in the recording of net right-of-use assets and lease liabilities of $24.9 million and $31.4 million, respectively, as of January 1, 2019.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the new standard on January 1, 2019 and elected not to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. We continue to release disproportionate income tax effects from AOCI based on the aggregate portfolio approach. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, simplifies the accounting for share-based payment granted to nonemployees for goods and services. Under the standard, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted ASU 2018-07 as of January 1, 2019. There was no material impact on our consolidated financial statements and related disclosures.

Recently Issued Accounting Standards

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an ASU.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2018-02 as of January 1, 2020. We do not expect significant impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-13 as of January 1, 2020 and we expect to recognize an allowance for credit losses related to our accounts receivable and available-for-sale securities. We do not expect significant impact on our consolidated financial statements and related disclosures.

Revenue Recognition

We are currently approved to sell Rubraca in the United States and the EU markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. 

10

Product Revenue

Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.

Reserves for Variable Consideration

 

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customers) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known.

Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare coverage gap program. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public-sector benefit providers. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on the expected utilization from historical data we have accumulated since the Rubraca product launch. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known or estimated prior quarters’ unpaid rebates.

Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service organizations and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the healthcare provider. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for specialty distributor chargebacks is estimated based on known chargeback rates and known sales to specialty distributors adjusted for the estimated utilization by healthcare providers.

Discounts and Fees. Our payment terms are generally 30 days. Specialty distributors and specialty pharmacies are offered various forms of consideration, including service fees and prompt pay discounts for payment within a specified period. We expect these customers will earn prompt pay discounts and therefore, we deduct the full amount of these discounts and service fees from product sales when revenue is recognized.

Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation provided by third-party administrators at month end.

     

Returns. Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or product that is six months beyond the expiration date. To date, we have had minimal

11

product returns and we currently have a minimal accrual for product returns. We will continue to assess our estimate for product returns as we gain additional historical experience.

Cost of Sales – Product

Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.

Cost of Sales – Intangible Asset Amortization

Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.

Inventory

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. Inventories include active pharmaceutical ingredient (“API”), contract manufacturing costs and overhead allocations. We began capitalizing incurred inventory related costs upon the regulatory approval of Rubraca. Prior to the regulatory approval of Rubraca, we incurred costs for the manufacture of the drug that could potentially be available to support the commercial launch of Rubraca and all such costs were recognized as research and development expense.

We regularly analyze our inventory levels for excess quantities and obsolescence (expiration), taking into account factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf-life of Rubraca. Rubraca finished goods have a shelf-life of four years from the date of manufacture. The API currently has a shelf-life of four years from the date of manufacture but can be retested at an immaterial cost with no expected reduction in potency, thereby extending its shelf-life as needed. We expect to consume substantially all of the API over a period of approximately nine years based on our long-range sales projections of Rubraca.

We write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements. Expired inventory would be disposed of and the related costs would be written off as cost of product revenue. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories. Long-term inventories primarily consist of API.

API is currently produced by a single supplier. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory. In addition, we currently manufacture Rubraca finished goods with a single third-party manufacturer. The disruption or termination of the supply of API or the disruption or termination of the manufacturing of our commercial products could have a material adverse effect on our business, financial position and results of operations.

Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.

Our other significant accounting policies are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our 2018 Form 10-K.

3. Financial Instruments and Fair Value Measurements

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

12

The three levels of inputs that may be used to measure fair value include:

Level 1:

Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consist of money market investments and U.S. treasury securities. We do not have Level 1 liabilities.

Level 2:

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets consist of U.S. treasury securities. We do not have Level 2 liabilities.

Level 3:

Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets or liabilities that are measured at fair value on a recurring basis.

The following table identifies our assets and liabilities that were measured at fair value on a recurring basis (in thousands):

    

Balance

    

Level 1

    

Level 2

    

Level 3

 

September 30, 2019

Assets:

Money market

$

98,103

$

98,103

$

$

U.S. treasury securities

 

152,622

 

 

152,622

 

Total assets at fair value

$

250,725

$

98,103

$

152,622

$

December 31, 2018

Assets:

Money market

$

81,968

$

81,968

$

$

U.S. treasury securities

 

308,251

 

9,981

 

298,270

 

Total assets at fair value

$

390,219

$

91,949

$

298,270

$

There we no liabilities that were measured at fair value on a recurring basis as of September 30, 2019. There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three and nine months ended September 30, 2019.

Financial instruments not recorded at fair value include our convertible senior notes. At September 30, 2019, the carrying amount of the 2021 Notes was $96.3 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $84.3 million. At September 30, 2019, the carrying amount of the 2024 Notes was $255.1 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $187.8 million. At September 30, 2019, the carrying amount of the 2025 Notes was $292.7 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $126.0 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 10, Long-term Debt for discussion of the convertible senior notes.

4. Available-for-Sale Securities

As of September 30, 2019, available-for-sale securities consisted of the following (in thousands):

    

    

    

Gross

    

Gross

    

Aggregate

 

Amortized

Unrealized

Unrealized

Fair

 

Cost

Gains

Losses

Value

 

U.S. treasury securities

$

152,575

$

47

$

$

152,622

13

As of December 31, 2018, available-for-sale securities consisted of the following (in thousands):

    

    

    

Gross

    

Gross

    

Aggregate

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. treasury securities

$

298,305

$

$

(35)

$

298,270

As of September 30, 2019, there were no available-for-sale securities that have been in a continuous unrealized loss position for more than 12 months.

As of September 30, 2019, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):

    

Amortized

    

Fair

 

Cost

Value

 

Due in one year or less

$

152,575

$

152,622

Due in one year to two years

 

 

Total

$

152,575

$

152,622

5. Inventories

The following table presents current and long-term inventories as of September 30, 2019 and December 31, 2018:

September 30, 

December 31,

    

2019

    

2018

Work-in-process

 

$

106,781

 

$

126,620

Finished goods

 

15,651

 

14,360

Allowance for obsolete inventories

(347)

Total inventories

 

$

122,085

 

$

140,980

Some of the costs related to our finished goods on-hand as of December 31, 2018 were expensed as incurred prior to the commercialization of Rubraca on December 19, 2016.

At September 30, 2019, we had $24.9 million of current inventory and $97.2 million of long-term inventory. In addition, we had $12.4 million long-term deposit on inventory, which consists of API which we expect to be converted to finished goods and sold beyond the next twelve months.

6. Other Current Assets

Other current assets were comprised of the following (in thousands):

September 30, 

December 31, 

    

2019

    

2018

 

Prepaid insurance

$

1,186

$

243

Prepaid advertising

1,802

Prepaid IT

1,080

666

Prepaid expenses - other

 

3,925

 

2,672

Value-added tax ("VAT") receivable

9,897

Receivable - other

 

1,851

 

2,274

Other

 

156

 

956

Total

$

18,095

$

8,613

14

7. Intangible Assets and Goodwill

Intangible assets related to capitalized milestones under license agreements consisted of the following (in thousands):

September 30, 

December 31,

2019

    

2018

Intangible asset - milestones

$

71,850

$

56,100

Accumulated amortization

 

(7,718)

 

(4,170)

Total intangible asset, net

$

64,132

$

51,930

The increase in our intangible asset – milestones since December 31, 2018 is due to a $15.0 million milestone payment to Pfizer related to the January 2019 European Commission approval and a $0.75 million milestone payment in June 2019 due to the launch of Rubraca as maintenance therapy in Germany in March 2019. See Note 13, License Agreements for further discussion of these approvals.

The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031 in Europe and 2035 in the U.S.

We recorded amortization expense of $1.2 million and $3.5 million related to capitalized milestone payments during the three and nine months ended September 30, 2019, respectively. We recorded amortization expense of $0.8 million and $1.9 million related to capitalized milestone payments during the three and nine months ended September 30, 2018. Amortization expense is included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.

Estimated future amortization expense associated with intangibles is expected to be as follows (in thousands):

2019

$

1,212

2020

4,847

2021

4,847

2022

4,847

2023

4,847

Thereafter

43,532

$

64,132

8. Other Accrued Expenses

Other accrued expenses were comprised of the following (in thousands):

September 30, 

December 31, 

    

2019

    

2018

 

Accrued personnel costs

$

14,631

$

15,265

Accrued interest payable

 

3,275

 

2,721

Income tax payable

732

847

Accrued corporate legal fees and professional services

99

677

Accrued royalties

5,805

4,854

Accrued variable considerations

3,317

2,183

Current portion of capital lease obligations

1,031

Purchase of API received not yet invoiced

135

35,472

Accrued expenses - other

 

3,272

 

4,506

Total

$

31,266

$

67,556

15

9. Lease

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values assigned to the lease components and non-lease components.

Our facilities operating leases have lease components, non-lease components and non-components, which we have separated because the non-lease components and non-components have variable lease payments and are excluded from the measurement of the lease liabilities. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

We lease all of our office facilities in the U.S. and Europe. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We have a finance lease for certain equipment at the dedicated production train at Lonza, our non-exclusive manufacturer of the Rubraca API.

The components of lease expense and related cash flows were as follows (in thousands):

Three months ended September 30, 

Nine months ended September 30, 

    

2019

    

2019

Lease cost

Finance lease cost:

Amortization of right-of-use assets

$

356

$

1,068

Interest on lease liabilities

 

174

 

537

Operating lease cost

 

667

 

2,811

Short-term lease cost

 

80

 

177

Variable lease cost

379

1,749

Total lease cost

$

1,656

$

6,342

Operating cash flows from finance leases

$

174

$

537

Operating cash flows from operating leases

$

667

$

2,811

Financing cash flows from finance leases

$

260

$

765

16

The weighted-average remaining lease term and weighted-average discount rate were as follows:

    

September 30, 2019

Weighted-average remaining lease term (years)

Operating leases

7.2

Finance leases

6.3

Weighted-average discount rate

Operating leases