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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, 2020

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: 001-36721

Coherus BioSciences, Inc.

(Exact name of registrant as specified in its charter)

Delaware

 

27-3615821

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

333 Twin Dolphin Drive, Suite 600

Redwood City, California 94065

(650) 649-3530

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

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, $0.0001 par value per share

CHRS

The Nasdaq Global 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).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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  

As of October 31, 2020, 72,048,012 shares of the registrant’s common stock were outstanding.

COHERUS BIOSCIENCES, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020

INDEX

    

Page

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

3

PART I

FINANCIAL INFORMATION

5

ITEM 1

Unaudited Condensed Consolidated Financial Statements

5

 

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

5

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019

6

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019

7

Condensed Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

8

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

10

Notes to Condensed Consolidated Financial Statements

11

ITEM 2

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

32

ITEM 3

Quantitative and Qualitative Disclosure About Market Risk

46

ITEM 4

Controls and Procedures

46

PART II

OTHER INFORMATION

48

ITEM 1.

Legal Proceedings

48

ITEM 1A.

Risk Factors

48

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

100

ITEM 3

Defaults Upon Senior Securities

100

ITEM 4

Mine Safety Disclosures

100

ITEM 5

Other Information

100

ITEM 6.

Exhibits

101

Exhibit Index

101

Signatures

102

2

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts contained in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by words such as “aim,” “anticipate,” “assume,” “attempt,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “seek,” “should,” “strive,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

whether we will be able to continue to maintain or increase sales for UDENYCA® (pegfilgrastim-cbqv) in the United States;

our expectations regarding our ability to develop and commercialize our bevacizumab (Avastin®) biosimilar candidate in the United States and Canada, including the anticipated three-way pharmacokinetic study, the planned additional analytical similarity characterizations and our plans to submit a 351(k) biologics license application (“BLA”) to the U.S. Food and Drug Administration (FDA”);

whether our CHS-1420 (our adalimumab (Humira®) biosimilar candidate) trial results, data package or BLA will be sufficient to support domestic or global regulatory approval;

whether our ranibizumab (Lucentis®) biosimilar candidate partner, Bioeq AG (Bioeq”), will be able to file a BLA and obtain regulatory approval in the United States or if we will be able successfully initiate sales of Bioeq’s biosimilar candidate upon such approval;

whether we will be able to continue or choose to continue the development for CHS-2020 (our aflibercept (Eylea®) biosimilar candidate);

our ability to maintain regulatory approval for UDENYCA® and our ability to obtain and maintain regulatory approval of our product candidates;

our expectations regarding government and third-party payer coverage and reimbursement;

our ability to manufacture our product candidates in conformity with regulatory requirements and to scale up manufacturing capacity of these products for commercial supply;

our reliance on third-party contract manufacturers to supply our product candidates for us;

our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved for commercial use;

our financial performance, including, but not limited to, maintaining profitability for the future, as well as the 2020 and future performance of our gross margins, research and development expenses and selling and general administrative expenses;

the implementation of strategic plans for our business and products;

3

the initiation, timing, progress and results of future preclinical and clinical studies and our research and development programs;

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates;

our expectations regarding the scope or enforceability of third-party intellectual property rights, or the applicability of such rights to our product candidates;

the cost, timing and outcomes of litigation involving our product candidates;

our reliance on third-party contract research organizations to conduct clinical trials of our product candidates;

the benefits of the use of our product candidates;

the rate and degree of market acceptance of our current or any future product candidates;

our ability to compete with companies currently producing the reference products, including Neulasta®, Avastin®, Humira®, Lucentis® or Eylea®;

developments and projections relating to our competitors and our industry; and

the potential impact of COVID-19 on our business and prospects.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. Risk Factors and discussed elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

4

PART I. FINANCIAL INFORMATION

ITEM 1.              Unaudited Condensed Consolidated Financial Statements

Coherus BioSciences, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

September 30, 

December 31, 

    

2020

    

2019

(unaudited)

(1)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

292,465

$

177,668

Investments in marketable securities

210,966

Trade receivables, net

 

160,707

 

141,992

Inventory

 

35,247

 

9,807

Prepaid manufacturing

 

21,928

 

8,578

Other prepaid and other assets

 

5,607

 

4,964

Total current assets

 

726,920

 

343,009

Property and equipment, net

 

10,647

 

5,840

Inventory, non-current

 

50,717

 

45,264

Operating lease right-of-use assets

 

10,470

 

10,649

Intangible assets

 

2,620

 

2,620

Goodwill

 

943

 

943

Restricted cash, non-current

 

440

 

240

Other assets, non-current

 

976

 

362

Total assets

$

803,733

$

408,927

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

11,990

$

25,985

Accrued rebates, fees and reserve

 

75,961

 

51,120

Accrued compensation

 

17,412

 

18,410

Accrued liabilities

 

23,446

 

17,258

Other current liabilities

 

4,623

 

2,196

Total current liabilities

 

133,432

 

114,969

Contingent consideration, non-current

 

102

 

102

Convertible notes due 2022

 

79,537

 

78,542

Convertible notes due 2022 - related parties

 

26,512

 

26,181

Convertible notes due 2026

222,718

Term loan

 

74,267

 

73,663

Lease liabilities, non-current

 

10,729

 

10,256

Other liabilities, non-current

 

705

 

Total liabilities

 

548,002

 

303,713

Commitments and contingencies (Note 8)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock

 

7

 

7

Additional paid-in capital

 

1,028,441

 

1,000,763

Accumulated other comprehensive loss

 

(255)

 

(558)

Accumulated deficit

 

(772,462)

 

(894,998)

Total stockholders' equity

 

255,731

 

105,214

Total liabilities and stockholders’ equity

$

803,733

$

408,927

(1) The consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet included in the Companys 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2020.

See accompanying notes to condensed consolidated financial statements.

5

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Revenue:

 

  

 

  

  

 

  

Net product revenue

$

113,551

$

111,684

$

365,405

$

232,215

Operating expenses:

 

  

 

  

 

 

  

Cost of goods sold

 

9,000

 

6,447

 

25,994

 

9,273

Research and development

 

38,851

 

21,568

 

98,131

 

59,240

Selling, general and administrative

 

31,984

 

31,828

 

101,386

 

100,967

Total operating expenses

 

79,835

 

59,843

 

225,511

 

169,480

Income from operations

 

33,716

 

51,841

 

139,894

62,735

Interest expense (includes related party of $625 and $615 for the three months ended September 30, 2020 and 2019, respectively; and $1,867 and $1,839 for the nine months ended September 30, 2020 and 2019, respectively)

 

(5,656)

 

(4,469)

 

(15,495)

 

(13,118)

Other income, net

 

56

 

518

 

548

 

1,887

Net income before income taxes

 

28,116

 

47,890

 

124,947

 

51,504

Income tax provision

 

183

 

847

 

2,411

 

898

Net income

$

27,933

 

47,043

$

122,536

$

50,606

 

  

 

  

 

  

 

  

Net income per share:

 

  

 

  

 

  

 

  

Basic

$

0.39

$

0.67

$

1.72

$

0.73

Diluted

$

0.33

$

0.63

$

1.52

$

0.69

Weighted-average number of shares used in computing net income per share:

 

  

 

  

 

  

 

  

Basic

 

71,649,350

 

69,877,693

 

71,138,973

 

69,501,835

Diluted

 

87,470,337

 

78,530,227

 

82,043,469

 

72,872,076

See accompanying notes to condensed consolidated financial statements.

6

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Net income

$

27,933

$

47,043

$

122,536

$

50,606

Other comprehensive income (loss):

 

 

 

 

Unrealized gain on available-for-sale securities, net of tax

6

18

Foreign currency translation adjustments, net of tax

 

(4)

 

59

 

285

 

(170)

Comprehensive income

$

27,935

$

47,102

$

122,839

$

50,436

See accompanying notes to condensed consolidated financial statements.

7

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share data)

(unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balances at December 31, 2019

 

70,366,661

$

7

$

1,000,763

$

(558)

$

(894,998)

$

105,214

Issuance of common stock upon exercise of stock options

 

421,850

 

 

4,438

 

 

 

4,438

Issuance of common stock upon vesting of restricted stock units (RSUs)

 

10,000

 

 

 

 

 

Issuance of common stock upon 2019 bonus payout

 

134,099

 

 

2,378

 

 

 

2,378

Taxes paid related to net share settlement of bonus payout in RSUs

(49,616)

(880)

(880)

Stock-based compensation expense

 

 

 

9,945

 

 

 

9,945

Cumulative translation adjustment

 

 

 

 

608

 

 

608

Net income

 

 

 

 

 

35,572

 

35,572

Balances at March 31, 2020

 

70,882,994

 

7

 

1,016,644

 

50

 

(859,426)

 

157,275

Issuance of common stock upon exercise of stock options

 

289,241

 

 

3,305

 

 

 

3,305

Issuance of common stock under the employee stock purchase plan ("ESPP")

 

180,970

 

 

2,557

 

 

 

2,557

Stock-based compensation expense

 

 

 

9,686

 

 

 

9,686

Purchase of capped call options related to convertible notes due 2026

 

(18,170)

 

(18,170)

Unrealized gain in marketable securities

12

12

Cumulative translation adjustment

 

 

 

 

(319)

 

 

(319)

Net income

 

 

 

 

 

59,031

 

59,031

Balances at June 30, 2020

 

71,353,205

$

7

$

1,014,022

$

(257)

$

(800,395)

$

213,377

Issuance of common stock upon exercise of stock options

 

598,577

4,962

 

4,962

Issuance of common stock upon vesting of restricted stock units (RSUs)

72,584

 

Stock-based compensation expense

 

9,457

 

9,457

Unrealized gain in marketable securities

6

6

Cumulative translation adjustment

 

(4)

 

(4)

Net income

 

27,933

 

27,933

Balances at September 30, 2020

 

72,024,366

$

7

$

1,028,441

$

(255)

$

(772,462)

$

255,731

See accompanying notes to condensed consolidated financial statements.

8

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except share and per share data)

(unaudited)

Accumulated

Total

Additional

Other

Stockholders'

Common Stock

Paid-In

Comprehensive

Accumulated

Equity

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

(Deficit)

Balances at December 31, 2018

 

68,302,681

$

7

$

946,515

$

(282)

$

(984,831)

$

(38,591)

Issuance of common stock in connection with common stock offerings, net

 

761,130

 

 

8,228

 

 

 

8,228

Issuance of common stock upon exercise of stock options

 

143,523

 

 

825

 

 

 

825

Issuance of common stock upon vesting of restricted stock units (RSUs)

 

22,195

 

 

 

 

 

Issuance of common stock upon 2018 bonus payout

 

109,168

 

 

1,350

 

 

 

1,350

Stock-based compensation expense

 

 

 

9,813

 

 

 

9,813

Cumulative translation adjustment

 

 

 

 

(136)

 

 

(136)

Net loss

 

 

 

 

 

(20,004)

 

(20,004)

Balances at March 31, 2019

 

69,338,697

 

7

 

966,731

 

(418)

 

(1,004,835)

 

(38,515)

Issuance of common stock upon exercise of stock options

 

108,374

 

 

674

 

 

 

674

Issuance of common stock under the ESPP

 

180,077

 

 

1,878

 

 

 

1,878

Stock-based compensation expense

 

 

 

8,504

 

 

 

8,504

Cumulative translation adjustment

 

 

 

 

(93)

 

 

(93)

Net income

 

 

 

 

 

23,567

 

23,567

Balances at June 30, 2019

 

69,627,148

$

7

$

977,787

$

(511)

$

(981,268)

$

(3,985)

Issuance of common stock upon exercise of stock options

 

447,269

 

 

3,707

 

 

 

3,707

Issuance of common stock upon vesting of RSUs

 

17,570

 

 

 

 

 

Stock-based compensation expense

 

 

 

9,199

 

 

 

9,199

Cumulative translation adjustment

 

 

 

 

59

 

 

59

Net income

 

 

 

 

 

47,043

 

47,043

Balances at September 30, 2019

 

70,091,987

$

7

$

990,693

$

(452)

$

(934,225)

$

56,023

See accompanying notes to condensed consolidated financial statements.

9

Coherus BioSciences, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Nine Months Ended

September 30, 

    

2020

    

2019

Operating activities

 

  

 

  

Net income

$

122,536

$

50,606

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Depreciation and amortization

 

2,048

 

2,204

Stock-based compensation expense

 

28,287

 

26,319

Non-cash accretion of discount on marketable securities

 

(103)

 

(142)

Non-cash interest expense from amortization of debt discount

 

2,492

 

1,726

Excess and obsolete inventory

 

 

410

Other non-cash adjustments

422

(1)

Non-cash operating lease expense

 

1,567

 

1,305

Upfront and milestone based license fee payments to Innovent

 

7,500

 

Changes in operating assets and liabilities:

 

 

Trade receivables, net

 

(18,885)

 

(89,646)

Inventory

 

(30,053)

 

(31,151)

Prepaid manufacturing

 

(13,350)

 

2,525

Other prepaid and current assets

 

(171)

 

(653)

Other assets, non-current

 

(614)

 

(500)

Accounts payable

 

(13,108)

 

(1,436)

Accrued rebates, fees and reserve

 

24,841

 

37,121

Accrued compensation

 

1,380

 

4,162

Accrued and other liabilities

 

5,521

 

9,416

Lease liabilities

 

6

 

(1,590)

Other liabilities, non-current

 

705

 

(30)

Net cash provided by operating activities

 

121,021

 

10,645

Investing activities

 

  

 

  

Purchases of property and equipment

 

(6,279)

 

(1,435)

Proceeds from disposal of property and equipment

167

Purchases of investments in marketable securities

 

(273,845)

 

(20,235)

Proceeds from maturities of investments in marketable securities

 

63,000

 

15,000

Upfront and milestone based license fee payments to Innovent

 

(7,500)

 

Net cash used in investing activities

 

(224,457)

 

(6,670)

Financing activities

 

  

 

  

Proceeds from common stock offering, net of underwriters discounts, commissions and offering costs

 

 

8,153

Proceeds from issuance of Convertible Notes due 2026, net of issuance costs

 

222,156

 

Purchase of capped call options related to Convertible Notes due 2026

(18,170)

Proceeds from term loan, net of issuance costs

 

 

72,955

Proceeds from issuance of common stock upon exercise of stock options

 

13,014

 

5,184

Proceeds from purchase under the employee stock purchase plan

 

2,557

 

1,878

Taxes paid related to net share settlement of bonus payout in RSUs

 

(880)

 

Other financing activities

(244)

Net cash provided by financing activities

 

218,433

 

88,170

Effect of exchange rate changes in cash, cash equivalents and restricted cash

 

 

(170)

Net increase in cash, cash equivalents and restricted cash

 

114,997

 

91,975

Cash, cash equivalents and restricted cash at beginning of period

 

177,908

 

73,191

Cash, cash equivalents and restricted cash at end of period

$

292,905

$

165,166

Supplemental disclosure of cash flow information

 

  

 

  

Non-cash bonus payment settled in common stock

1,498

1,350

Right-of-use assets obtained in exchange for lease obligations related to operating leases

1,388

5,267

Right-of-use assets obtained in exchange for lease obligations related to finance leases

1,771

See accompanying notes to condensed consolidated financial statements.

10

Coherus BioSciences, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.       Organization and Summary of Significant Accounting Policies

Organization

Coherus BioSciences, Inc. (the “Company”, “Coherus”, “we”, our” or “us”) is a commercial-stage biotherapeutics company, focused on the biosimilar market primarily in the United States. The Company’s headquarters and laboratories are located in Redwood City, California and in Camarillo, California, respectively. The Company’s biosimilar pipeline comprises of four biosimilar drugs, CHS-1420 (an adalimumab (Humira®) biosimilar), CHS-2020 (an aflibercept (Eylea®) biosimilar), a ranibizumab (Lucentis®) biosimilar in-licensed for U.S. and Canadian commercial rights from Bioeq AG, and a bevacizumab (Avastin®) biosimilar in-licensed for U.S. commercial rights from Innovent Biologics (Suzhou) Co., Ltd.

The Company commercializes UDENYCA® (pegfilgrastim-cbqv), a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, in the United States.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Coherus and its wholly-owned subsidiaries as of September 30, 2020: Coherus Intermediate Corp, InteKrin Therapeutics Inc. (“InteKrin”), and InteKrin’s wholly-owned subsidiary, InteKrin Russia. Unless otherwise specified, references to the Company are references to Coherus and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring accruals that the Company believes are necessary to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with U.S. GAAP. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period.

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2020.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources. Accounting estimates and judgements are inherently uncertain and the actual results could differ from these estimates.

During the second quarter of 2020, the Company identified that certain of its commercial payer invoices were erroneously overstated. The Company received a refund of $7.5 million from these payers related to fiscal year 2019. Additionally, the Company recorded an adjustment during the second quarter of 2020 to decrease accrued payer rebates by $5.8 million primarily related to the first quarter of 2020 based on the revised methodology after such invoice

11

overstatements were corrected.  These adjustments increased net product revenue by $0 and $13.3 million for the three and nine months ended September 30, 2020, respectively. These adjustments resulted in an increase in net income per share (basic) of $0 and $0.19 during the three and nine months ended September 30, 2020, respectively and an increase in net income per share (diluted) of $0 and $0.16 during the three and nine months ended September 30, 2020, respectively. Accrued commercial payer rebates of $23.7 million and $14.0 million were recorded in accrued rebates, fees and reserve as of September 30, 2020 and December 31, 2019, respectively, in the condensed consolidated balance sheet.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets and which, in aggregate, represent the amount reported in the condensed consolidated statements of cash flows (in thousands):

September 30, 

September 30, 

    

2020

    

2019

Cash and cash equivalents

$

292,465

$

165,116

Restricted cash

 

 

50

Restricted cash - non-current

 

440

 

Total cash, cash equivalents and restricted cash

$

292,905

$

165,166

Restricted cash – non-current consists of deposits for letter of credits that the Company has provided to secure its obligations under certain facility and other leases.

Investments in Marketable Securities

Management determines the appropriate classification of investments in marketable securities at the time of purchase based upon management’s intent with regards to such investment and reevaluates such designation as of each balance sheet date. The Company’s investment policy requires that it only invests in highly-rated securities and limit its exposure to any single issuer. All investments in marketable securities are held as “available-for-sale” and are carried at the estimated fair value as determined based upon quoted market prices or pricing models for similar securities.

The Company classifies investments in marketable securities as short-term when they have remaining contractual maturities of one year or less from the balance sheet date. Unrealized gains and losses are reported as a component of accumulated comprehensive income (loss), with the exception of unrealized losses believed to be related to credit losses, which, if any, are recognized through earnings in the period the impairment occurs. Impairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its cost at the balance sheet date, a determination is made as to whether the impairment is related to a credit loss and, if it is, the portion of the impairment relating to credit loss is recorded as an allowance through net income. Realized gains and losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are included in other income, net, based on the specific identification method.

Trade Receivables

Trade receivables are recorded net of allowances for chargebacks, chargeback prepayments, cash discounts for prompt payment and credit losses. The Company estimates an allowance for expected credit losses by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The corresponding expense for the credit loss allowance is reflected in selling, general and administrative expenses. The credit loss allowance was immaterial as of September 30, 2020.

12

Recent Accounting Pronouncements

The following are the recent accounting pronouncements adopted by the Company in 2020:

Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments — Credit Losses, (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which changed the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, the Company uses a new forward-looking expected loss model that generally results in the earlier recognition of allowances for losses. The Company is exposed to credit losses primarily through receivables from customers. The Company’s expected loss allowance methodology for the receivables is developed using historical collection experience, current and future economic market conditions, a review of the current aging status and financial condition of the entities. Specific allowance amounts are established to record the appropriate allowance for customers that have a higher probability of default. ASU 2016-13 also eliminates the concept of “other-than-temporary” impairment when evaluating available-for-sale debt securities and instead focuses on determining whether any impairment is a result of a credit loss or other factors. An entity will recognize an allowance for credit losses on available-for-sale debt securities, rather than an other-than-temporary impairment that reduces the cost basis of the investment.  The adoption of the new guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting periods thereafter. The Company adopted this accounting standard as of January 1, 2020. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (ASU 2018-13), which eliminates certain disclosure requirements for fair value measurements, and requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting periods thereafter. The Company adopted this accounting standard as of January 1, 2020. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the business or that no material effect is expected on the consolidated financial statements as a result of future adoption.

2.       Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash, cash equivalents, restricted cash, investments in marketable securities, accounts receivable, accounts payable and other current liabilities approximate their fair value due to their short maturities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable. These levels of inputs are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

13

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s financial instruments consist of Level 1 and Level 2 assets, and Level 3 liabilities. Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 assets consist of highly liquid money market funds that are included in cash and cash equivalents, and restricted cash. There were no unrealized gains and losses in the Company’s investments in these money market funds.

When quoted market prices are not available for the specific security, then the Company estimates the fair value by using quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and market reference data. Level 2 assets consist of corporate notes and commercial paper. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset.

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of the contingent consideration.

There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows (in thousands):

Fair Value Measurements

September 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Financial Assets:

 

  

 

  

 

  

 

  

Money market funds

$

278,258

$

278,258

$

$

Restricted cash (money market funds)

 

440

 

440

 

 

Corporate notes and Commercial paper

36,993

36,993

U.S. government agency securities

186,971

186,971

Total financial assets

$

502,662

$

465,669

$

36,993

$

Financial Liabilities:

 

 

  

 

  

 

  

Contingent consideration

$

102

$

$

$

102

14

    

Fair Value Measurements

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Financial Assets:

 

  

 

  

 

  

 

  

Money market funds

$

155,523

$

155,523

$

$

Restricted cash (money market funds)

 

240

 

240

 

 

Total financial assets

$

155,763

$

155,763

$

$

Financial Liabilities:

 

  

 

  

 

  

 

  

Contingent consideration

$

102

$

$

$

102

Cash equivalents, investments in marketable securities, which are classified as available-for-sale securities, and restricted cash, consisted of the following (in thousands):

September 30, 2020

    

Cost

    

Unrealized Gain

    

Unrealized (Loss)

    

Estimated Fair Value

Money market funds

$

278,258

$

$

$

278,258

Corporate notes and commercial paper

12,998

12,998

Classified as cash equivalents

$

291,256

$

$

$

291,256

 

 

 

 

Corporate notes and Commercial paper

$

23,995

 

$

$

$

23,995

U.S. government agency securities

186,953

 

18

186,971

Classified as investments in marketable securities

$

210,948

 

$

18

$

$

210,966

 

 

 

 

Restricted cash (money market funds)

$

440

 

$

$

$

440

Classified as restricted cash

$

440

 

$

$

$

440

December 31, 2019

    

Cost

    

Unrealized Gain

    

Unrealized (Loss)

    

Estimated Fair Value

Money market funds

$

155,523

$

$

$

155,523

Classified as cash equivalents

$

155,523

$

$

$

155,523

 

 

 

 

Restricted cash (money market funds)

$

240

 

$

$

$

240

Classified as restricted cash

$

240

$

$

$

240

As of September 30, 2020, the remaining contractual maturities of available-for-sale securities were less than one year. The average maturity of investments in available-for-sale marketable securities as of September 30, 2020 was approximately 4.7 months. There have been no realized gains or losses on marketable securities for the periods presented. None of the Company’s investments in marketable securities has been in an unrealized loss position for more than one year. The Company determined that it has the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of credit losses in the three and nine months ended September 30, 2020 and 2019. 

1.5% Convertible Notes due 2026

The estimated fair value of the 1.5% Convertible Notes due 2026, which the Company issued in April 2020 (see Note 7) is influenced by interest rates, the Company’s stock price and stock price volatility and is determined by prices observed in market trading. The market for trading of the Convertible Notes due 2026 is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the Convertible Notes due 2026 was approximately $268.2 million (par value $230.0 million) as of September 30, 2020.

15

8.2% Convertible Notes due 2022

The estimated fair value of the 8.2% Convertible Senior Notes due 2022, which the Company issued in February 2016 (see Note 7) is based on an income approach. The estimated fair value was approximately $112.8 million (par value $100.0 million) as of September 30, 2020 and represents a Level 3 valuation. When determining the estimated fair value of the Company’s long-term debt, the Company uses a single factor binomial lattice model, which incorporates the terms and conditions of the convertible notes and market based risk measurement that are indirectly observable, such as credit risk. The lattice model produces an estimated fair value based on changes in the price of the underlying common shares price over successive periods of time. An estimated yield based on market data is used to discount straight debt cash flows.

Term Loan

The principal amount outstanding under the Company’s Term Loan (see Note 7) of $75 million as of September 30, 2020 is subject to variable interest rate, which is based on a fixed percentage plus three month LIBOR (“LIBOR”), and as such, the Company believes the carrying amount of these obligations approximates fair value.

3.           Inventory

Inventory consisted of the following (in thousands):

    

September 30, 

    

December 31, 

2020

2019

Raw Materials

$

5,388

$

5,089

Work in process

 

64,039

 

43,446

Finished goods

 

16,537

 

6,536

Total

$

85,964

$

55,071

Balance sheet classifications (in thousands):

    

September 30, 

    

December 31, 

2020

2019

Inventory

$

35,247

$

9,807

Inventory, non-current

 

50,717

 

45,264

Total

$

85,964

$

55,071

Inventory expected to be sold in periods more than twelve months from the balance sheet date is classified as inventory, non-current on the condensed consolidated balance sheet. As of September 30, 2020 and December 31, 2019, the non-current portion of inventory consisted of raw materials and a portion of work in process.

Prepaid manufacturing of $21.9 million and $8.6 million included in current assets on the condensed consolidated balance sheet as of September 30, 2020 and December 31, 2019, respectively, includes prepayments of $13.2 million and $7.2 million as of September 30, 2020 and December 31, 2019, respectively, made to a contract manufacturing organization (“CMO”) for manufacturing services for UDENYCA®, which the Company expects to be converted into inventory within the next twelve months.

16

4.       Balance Sheet Components

Property and Equipment, Net

Property and equipment, net are as follows (in thousands):

    

September 30, 

    

December 31, 

2020

2019

Machinery and equipment

$

13,660

$

12,611

Computer equipment and software

 

2,256

 

2,923

Furniture and fixtures

 

1,255

 

714

Leasehold improvements

 

5,670

 

4,388

Finance lease right of use assets

1,554

Construction in progress

 

2,122

 

1,500

Total property and equipment

 

26,517

 

22,136

Accumulated depreciation and amortization

 

(15,870)

 

(16,296)

Property and equipment, net

$

10,647

$

5,840

Depreciation and amortization expense was $0.7 million and $2.0 million for the three and nine months ended September 30, 2020, respectively, and $0.8 million and $2.2 million for the three and nine months ended September 30, 2019, respectively.

Accrued Liabilities

Accrued liabilities are as follows (in thousands):

    

September 30, 

    

December 31, 

2020

2019

Accrued clinical and manufacturing

$

13,374

$

7,106

Accrued other

 

10,072

 

10,152

Accrued liabilities

$

23,446

$

17,258

5.        Revenue

The Company initiated U.S. sales of UDENYCA® on January 3, 2019. The Company recorded net product revenue of $113.6 million and $365.4 million during the three and nine months ended September 30, 2020, respectively, and $111.7 million and $232.2 million during the three and nine months ended September 30, 2019, respectively.

Revenue by significant Customer was distributed as follows:

    

Three Months Ended