Item 1. Financial Statements
See accompanying notes to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Business
La Jolla Pharmaceutical Company (collectively with its wholly owned subsidiaries, “La Jolla” or the “Company”) is dedicated to the development and commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZA™ (angiotensin II) injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. XERAVA™ (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older.
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. and its subsidiaries (“Tetraphase”), a biopharmaceutical company focused on commercializing XERAVA, for $43 million in upfront cash plus potential future cash payments of up to $16 million. The Company’s consolidated financial results exclude Tetraphase’s financial results prior to the acquisition closing date of July 28, 2020 (see Note 11).
In January 2021, La Jolla and certain of its wholly owned subsidiaries, including La Jolla Pharma, LLC, entered into a license agreement with PAION AG to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland. Pursuant to the agreement: (i) the Company has received an upfront cash payment of $22.5 million, less a 15% refundable withholding tax; and (ii) the Company is entitled to receive potential commercial milestone payments of up to $109.5 million and royalties on net sales of GIAPREZA and XERAVA.
In March 2021, under its license agreement with Everest Medicines Limited (“Everest”), the Company received a $3.0 million milestone payment associated with the submission of a New Drug Application (“NDA”) with the China National Medical Products Administration (“NMPA”) for XERAVA for the treatment of cIAI in patients in China. The Company previously granted Everest an exclusive license to develop and commercialize XERAVA for the treatment of cIAI and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines. The Company is eligible to receive an additional $8.0 million regulatory milestone payment and up to an aggregate of $20.0 million in sales milestone payments. The Company is also entitled to receive royalties from Everest on sales, if any, by Everest of products containing eravacycline.
As of March 31, 2021 and December 31, 2020, the Company had cash and cash equivalents of $38.6 million and $21.2 million, respectively. Based on the Company’s current operating plans and projections, the Company expects that its existing cash and cash equivalents will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”).
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of SEC Regulation S-X. Accordingly, certain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 8, 2021 (the “Form 10-K”). The accompanying condensed consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from these estimates. Certain amounts previously
5
reported in the financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not affect net loss, shareholders’ deficit or cash flows. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or any future interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated balance sheet as of December 31, 2020 contained in the Form 10-K.
Summary of Significant Accounting Policies
During the three months ended March 31, 2021, other than the license revenue recognition policy described below, there have been no changes to the Company’s significant accounting policies as described in Note 2 of the Form 10-K.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. The Company maintains its cash in checking and savings accounts at federally insured financial institutions in excess of federally insured limits.
During the three months ended March 31, 2021, 291 hospitals in the U.S. purchased GIAPREZA. During the three months ended March 31, 2021, 390 hospitals and other healthcare organizations in the U.S. purchased XERAVA. Hospitals and other healthcare organizations purchase our products through a network of specialty and wholesale distributors. These specialty and wholesale distributors are considered our customers for accounting purposes. The Company does not believe that the loss of one of these distributors would significantly impact the ability to distribute our products, as the Company expects that sales volume would be absorbed by the remaining distributors. The following table includes the percentage of U.S. net product sales and accounts receivable balances for the Company’s three major customers, each of which comprised 10% or more of its U.S. net product sales:
|
|
U.S. Net Product
Sales
|
|
|
|
Accounts
Receivable
|
|
|
|
Three Months Ended
March 31, 2021
|
|
|
|
As of March 31, 2021
|
|
Customer A
|
|
|
38
|
%
|
|
|
|
30
|
%
|
Customer B
|
|
|
33
|
%
|
|
|
|
39
|
%
|
Customer C
|
|
|
25
|
%
|
|
|
|
29
|
%
|
Total
|
|
|
96
|
%
|
|
|
|
98
|
%
|
Business Combinations
The Company accounts for business combinations using the acquisition method pursuant to the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 805. This method requires, among other things, that results of operations of acquired companies are included in La Jolla's financial results beginning on the respective acquisition dates, and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow model. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, the cost of capital and terminal values from the perspective of a market participant. Any excess of the fair value of consideration transferred (the “Purchase Price”) over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized as part of the Purchase Price at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration liabilities will be included in other (expense) income, net in the consolidated statements of operations. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other acquisition-related costs are expensed when incurred.
Intangible Assets
Intangible assets acquired in a business combination are initially recorded at fair value. Intangible assets with a definite useful life are amortized on a straight-line basis over the estimated useful life of the related assets. Intangible assets with an indefinite useful life are not amortized.
6
The Company reviews its intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Fair value is estimated through discounted cash flow models to project cash flows from the asset.
The Company recognized no impairment charge for the three months ended March 31, 2021.
Goodwill
Goodwill represents the excess of the Purchase Price over the fair value of the net assets acquired as of the acquisition date. Goodwill has an indefinite useful life and is not amortized.
The Company reviews its goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the Company may exceed its fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the Company is less than its carrying amount, including goodwill. If that is the case, the Company performs a quantitative impairment test, and, if the carrying amount of the Company exceeds its fair value, then the Company will recognize an impairment charge for the amount by which its carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill.
The Company recognized no impairment charge for the three months ended March 31, 2021.
Revenue Recognition
Pursuant to FASB ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when its customers obtain control of the Company’s product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations.
Product Sales
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns, Medicaid rebates and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:
|
•
|
Chargebacks—Chargebacks are discounts the Company provides to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to the Company’s customers.
|
|
•
|
Discounts—The Company offers customers various forms of incentives and consideration, including prompt-pay and other discounts. The Company estimates discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to the Company’s customers.
|
|
•
|
Returns—The Company offers customers a limited right of return, generally for damaged or expired product. The Company estimates returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to the Company’s customers.
|
|
•
|
Medicaid Rebates—We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the
|
7
|
|
quarter in which product was sold. The estimates for rebates are recorded as a reduction of revenue on delivery to the Company’s customers.
|
|
•
|
Administrative Fees—The Company pays administrative fees to GPOs for services and access to data. Additionally, the Company pays an Industrial Funding Fee as part of the U.S. General Services Administration’s Federal Supply Schedules program. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency. Administrative fees are recorded as a reduction of revenue on delivery to customers.
|
The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.
License Revenue
We enter into out-license agreements with counterparties to develop and/or commercialize our products in territories outside of the U.S. in exchange for: (i) nonrefundable, upfront license fees; (ii) development and regulatory milestone payments; and/or (iii) sales-based royalties and milestones.
If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of progress and related revenue recognition.
At the inception of each arrangement that include milestone and other payments, other than sales-based milestone payments and nonrefundable, upfront license fees, we evaluate whether achieving each milestone payment or other payment is considered probable and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators or where attainment of the specified event is dependent on the development activities of a third party, are not considered probable of being achieved until those approvals are received or the specified event occurs.
For arrangements that include sales-based royalties and milestone payments, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of: (i) when the related sales occur; or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position and results of operations.
3. Earnings (Loss) per Share
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding plus potential common shares. Convertible preferred stock and stock options are considered potential common shares and are included in the calculation of diluted earnings (loss) per share using the treasury stock method when their effect is dilutive. Potential common shares are excluded from the calculation of diluted earnings (loss) per share when their effect is anti-dilutive. For the three months ended March 31, 2021, there were 6.8 million potential common shares that were included in the calculation of diluted earnings per share, which consists of: (i) 6.7 million shares of common stock issuable upon conversion of existing convertible preferred stock; and (ii) 21,000 stock options. For the three months ended March 31, 2021 and 2020, there were 4.1 million and 11.6 million, respectively, of potential common shares that were excluded from the calculation of diluted loss per share because their effect was anti-dilutive.
8
4. Balance Sheet Details
Restricted Cash
Restricted cash as of March 31, 2021 and December 31, 2020 consisted of a $40,000 security deposit for the Company’s corporate purchasing credit card.
Inventory, Net
Inventory, net consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
802
|
|
|
$
|
802
|
|
Work-in-process
|
|
|
3,235
|
|
|
|
3,213
|
|
Finished goods
|
|
|
1,337
|
|
|
|
1,998
|
|
Total inventory, net
|
|
$
|
5,374
|
|
|
$
|
6,013
|
|
As of March 31, 2021 and December 31, 2020, inventory, net included zero and $0.9 million, respectively, of the fair value step-up adjustment to Tetraphase’s inventory recorded in connection with the acquisition of Tetraphase (see Note 11). As of March 31, 2021 and December 31, 2020, total inventory is recorded net of inventory reserves of $1.1 million and $0.9 million, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Refundable withholding tax
|
|
$
|
3,375
|
|
|
$
|
-
|
|
Prepaid manufacturing costs
|
|
|
529
|
|
|
|
930
|
|
Prepaid clinical costs
|
|
|
294
|
|
|
|
820
|
|
Prepaid insurance
|
|
|
319
|
|
|
|
505
|
|
Other prepaid expenses and current assets
|
|
|
1,587
|
|
|
|
1,133
|
|
Total prepaid expenses and other current assets
|
|
$
|
6,104
|
|
|
$
|
3,388
|
|
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Computer hardware
|
|
$
|
310
|
|
|
$
|
310
|
|
Furniture and fixtures
|
|
|
309
|
|
|
|
309
|
|
Software
|
|
|
203
|
|
|
|
733
|
|
Total property and equipment, gross
|
|
|
822
|
|
|
|
1,352
|
|
Accumulated depreciation and amortization
|
|
|
(636
|
)
|
|
|
(1,137
|
)
|
Total property and equipment, net
|
|
$
|
186
|
|
|
$
|
215
|
|
9
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
|
|
Weighted-average
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Years
|
|
2021
|
|
|
2020
|
|
Technology
|
|
10
|
|
$
|
14,000
|
|
|
$
|
14,000
|
|
Trade name
|
|
10
|
|
|
1,520
|
|
|
|
1,520
|
|
Total intangible assets, gross
|
|
|
|
|
15,520
|
|
|
|
15,520
|
|
Accumulated amortization
|
|
|
|
|
(1,035
|
)
|
|
|
(647
|
)
|
Total intangible assets, net
|
|
|
|
$
|
14,485
|
|
|
$
|
14,873
|
|
The intangible assets were recorded in connection with the acquisition of Tetraphase (see Note 11). The Company recorded amortization expense of $0.4 million and zero for the three months ended March 31, 2021 and 2020, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accrued interest expense on deferred royalty obligation, current portion
|
|
$
|
3,514
|
|
|
$
|
3,567
|
|
Accrued royalties and in-license fees
|
|
|
2,445
|
|
|
|
685
|
|
Accrued manufacturing costs
|
|
|
1,306
|
|
|
|
627
|
|
Accrued professional fees
|
|
|
581
|
|
|
|
660
|
|
Accrued clinical costs
|
|
|
22
|
|
|
|
20
|
|
Accrued other
|
|
|
853
|
|
|
|
935
|
|
Total accrued expenses
|
|
$
|
8,721
|
|
|
$
|
6,494
|
|
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Paycheck Protection Program loan
|
|
$
|
2,308
|
|
|
$
|
2,302
|
|
Fair value of contingent value rights (see Note 11)
|
|
|
2,260
|
|
|
|
1,810
|
|
Total other noncurrent liabilities
|
|
$
|
4,568
|
|
|
$
|
4,112
|
|
On April 22, 2020, Tetraphase entered into a promissory note for $2.3 million under the Paycheck Protection Program (the “PPP Loan”). The interest rate on the PPP Loan is 1.0% per annum. The PPP Loan is unsecured and guaranteed by the U.S. Small Business Administration (the “SBA”). The principal amount of the PPP Loan may be forgiven under the Paycheck Protection Program, subject to certain requirements and to the extent that the PPP Loan proceeds are used to pay permitted expenses, including certain payroll, rent and utility payments. The Company intends to apply for forgiveness of the PPP Loan. The Company will be obligated to make monthly payments of principal and interest with respect to any unforgiven portion of the PPP Loan. The obligation to repay the PPP Loan may be accelerated upon the occurrence of an event of default.
10
5. Deferred Royalty Obligation
In May 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the royalty rate will be a maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by 4% if an agreed-upon, cumulative net product sales threshold has not been met, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if a different agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.
On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three months ended March 31, 2021 and 2020, the Company recognized interest expense, including amortization of the obligation discount, of $2.6 million and $2.4 million, respectively. The carrying value of the deferred royalty obligation as of March 31, 2021 was $124.5 million, net of unamortized obligation discount of $0.5 million, and was classified as noncurrent. The related accrued interest expense was $24.4 million and $22.7 million as of March 31, 2021 and December 31, 2020, respectively, of which $20.9 million and $19.1 million was classified as noncurrent liabilities, respectively. During the three months ended March 31, 2021 and March 31, 2020, the Company made royalty payments to HCR of $0.9 million and $0.7 million, respectively, and, as of March 31, 2021, the Company recorded royalty obligations payable of $0.7 million in accrued expenses. The deferred royalty obligation is classified as Level 3 in the FASB ASC Topic 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.
Under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. In the event that La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the Company determined that the fair value of the embedded derivatives is immaterial as of March 31, 2021 and December 31, 2020. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any material change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the consolidated statements of operations.
11
6. Commitments and Contingencies
Lease Commitments
Future minimum lease payments, excluding Lease Operating Costs, as of March 31, 2021 are as follows (in thousands):
2021
|
|
$
|
175
|
|
2022
|
|
|
181
|
|
2023
|
|
|
166
|
|
Thereafter
|
|
|
-
|
|
Total future minimum lease payments
|
|
|
522
|
|
Less: discount
|
|
|
(32
|
)
|
Total lease liabilities
|
|
$
|
490
|
|
Lease expense under current and former leases was approximately $0.1 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease liabilities was $50,000 and $1.6 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the weighted-average remaining lease term and the weighted-average discount rate for the Company’s only operating lease, the Waltham Sublease, was 2.6 years and 4.0%, respectively.
Waltham Sublease
In December 2020, the Company entered into a sublease agreement for office space in Waltham, Massachusetts (the “Waltham Sublease”). The Waltham Sublease commenced on December 21, 2020 and expires on November 30, 2023. In addition to rent of approximately $15,000 per month, the Waltham Sublease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises (collectively, “Lease Operating Costs”). The Waltham Sublease contains customary default provisions, representations, warranties and covenants. The Waltham Sublease is classified as an operating lease. The Company recognizes the Waltham Sublease expense in the consolidated statements of operations and records a lease liability and right-of-use asset for this lease.
San Diego Sublease
In September 2020, the Company entered into a sublease agreement for office space in San Diego, California with an entity of which the Chairman of the Company’s board of directors is also the chairman and chief executive officer (the “San Diego Sublease”). The San Diego Sublease term is approximately 7 years, and the rent is approximately $12,000 per month. The San Diego Sublease is cancellable without penalty by either party with 30-days’ written notice. The San Diego Sublease is a short-term lease for accounting purposes. The Company made payments of approximately $36,000 under the San Diego Sublease during the three months ended March 31, 2021. The Company recognizes the San Diego Sublease payments in the consolidated statements of operations and does not record a lease liability or right-of-use asset for this lease.
Contingencies
From time to time, the Company may become subject to claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is it aware of any material pending or threatened litigation.
12
7. Shareholders’ Equity
Preferred Stock
As of March 31, 2021 and December 31, 2020, 3,906 shares of Series C-12 Convertible Preferred Stock (“Series C-12 Preferred”) were issued, outstanding and convertible into 6,735,378 shares of common stock. As of March 31, 2021 and December 31, 2020, the Series C-12 Preferred liquidation preference was approximately $3.9 million. The Series C-12 Preferred does not pay a dividend. The holders of the Series C-12 Preferred do not have voting rights, other than for general protective rights required by the California General Corporation Law.
8. Equity Incentive Plans
2013 Equity Incentive Plan
A total of 9,600,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2013 Equity Incentive Plan (the “2013 Equity Plan”). As of March 31, 2021, 5,488,481 shares of common stock remained available for future grants under the 2013 Equity Plan.
2018 Employee Stock Purchase Plan
A total of 750,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2018 Employee Stock Purchase Plan (the “ESPP”). As of March 31, 2021, 438,845 shares of common stock remained available for future grants under the ESPP.
Equity Awards
The activity related to equity awards, which are comprised of stock options, during the three months ended March 31, 2021 is summarized as follows:
|
|
Equity
Awards
|
|
|
Weighted-
average
Exercise Price
per Share
|
|
|
Weighted-
average
Remaining
Contractual
Term(1)
(years)
|
|
|
Aggregate
Intrinsic
Value(2)
|
|
Outstanding at December 31, 2020
|
|
|
4,121,666
|
|
|
$
|
8.67
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
335,548
|
|
|
$
|
5.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(29,000
|
)
|
|
$
|
5.25
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(316,695
|
)
|
|
$
|
8.00
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
4,111,519
|
|
|
$
|
8.48
|
|
|
|
8.39
|
|
|
$
|
175,807
|
|
Exercisable at March 31, 2021
|
|
|
1,146,185
|
|
|
$
|
17.18
|
|
|
|
5.68
|
|
|
$
|
21,693
|
|
(1) Represents the weighted-average remaining contractual term of stock options.
(2) Aggregate intrinsic value represents the product of the number of equity awards outstanding or equity awards exercisable multiplied by the difference between the Company’s closing stock price per share on the last trading day of the period, which was $4.24 as of March 31, 2021, and the exercise price.
Share-based Compensation Expense
The classification of share-based compensation expense is summarized as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Selling, general and administrative
|
|
$
|
840
|
|
|
$
|
844
|
|
Research and development
|
|
|
276
|
|
|
|
1,563
|
|
Total share-based compensation expense
|
|
$
|
1,116
|
|
|
$
|
2,407
|
|
As of March 31, 2021, total unrecognized share-based compensation expense related to unvested equity awards was $9.8 million, which is expected to be recognized over a weighted-average period of 3.1 years. As of March 31, 2021, there was no unrecognized share-based compensation expense related to shares of common stock issued under the ESPP.
13
9. Other Income—Related Party
The Company has a non-voting profits interest in a related party, which provides the Company with the potential to receive a portion of the future distributions of profits, if any. Investment funds affiliated with the Chairman of the Company’s board of directors have a controlling interest in the related party. During the three months ended March 31, 2021, the Company did not receive any distributions in connection with this profits interest. During the three months ended March 31, 2020, the Company received distributions of $4.1 million in connection with this profits interest.
10. License Agreements
In-license Agreements
George Washington University
In December 2014, the Company entered into a patent license agreement with George Washington University (“GW”), which was subsequently amended and restated (the “GW License”) and assigned to La Jolla Pharma, LLC. Pursuant to the GW License, GW exclusively licensed to the Company certain intellectual property rights relating to GIAPREZA, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA. Under the GW License, La Jolla Pharma, LLC is obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a one-time license initiation fee, annual maintenance fees, an amendment fee, additional payments following the achievement of certain development and regulatory milestones and royalties. As a result of the European Commission’s approval of GIAPREZA in August 2019, the Company made a milestone payment to GW in the amount of $0.5 million in the first quarter of 2020. The Company is obligated to pay a 6% royalty on net sales of GIAPREZA and 15% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA. During the three months ended March 31, 2021 and 2020, the Company made payments to GW of $2.8 million and $0.4 million, respectively.
Harvard University
In August 2006, the Company entered into a license agreement with Harvard University (“Harvard”), which was subsequently amended and restated (the “Harvard License”). Pursuant to the Harvard License, Harvard exclusively licensed to the Company certain intellectual property rights relating to tetracycline-based products, including XERAVA, including the exclusive rights to certain issued patents and patent applications covering such products. Under the Harvard License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell tetracycline-based products, including XERAVA. For each product covered by the Harvard License, the Company is obligated to make certain payments for the following: (i) up to approximately $15.1 million upon the achievement of certain clinical development and regulatory milestones; (ii) a 5% royalty on direct U.S. net sales of XERAVA; (iii) a single-digit tiered royalty on direct ex-U.S. net sales of XERAVA, starting at a minimum royalty rate of 4.5%, with step-ups to a maximum royalty of 7.5% based on the achievement of annual net product sales thresholds; and (iv) 20% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering tetracycline-based products, including XERAVA. During the three months ended March 31, 2021, the Company paid $0.1 million of royalties to Harvard, and did not make any payments to Harvard related to clinical development and regulatory milestones.
Paratek Pharmaceuticals, Inc.
In March 2019, the Company entered into a license agreement with Paratek Pharmaceuticals, Inc. (“Paratek”), which was subsequently amended and restated (the “Paratek License”). Pursuant to the Paratek License, Paratek non-exclusively licensed to the Company certain intellectual property rights relating to XERAVA, including non-exclusive rights to certain issued patents and patent applications covering XERAVA. The Company is obligated to pay Paratek a 2.25% royalty based on direct U.S. net sales of XERAVA. The Company’s obligation to pay royalties with respect to the licensed product is retroactive to the date of the first commercial sale of XERAVA and shall continue until there are no longer any valid claims of the Paratek patents, which will expire in October 2023. During the three months ended March 31, 2021, the Company paid $51,000 of royalties to Paratek.
14
Out-license Agreements
PAION AG
On January 12, 2021, La Jolla Pharmaceutical Company and certain of its wholly owned subsidiaries, including La Jolla Pharma, LLC, entered into an exclusive license agreement (the “PAION License”) with PAION AG and its wholly owned subsidiary (collectively, “PAION”). Pursuant to the PAION License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”). La Jolla has received an upfront cash payment of $22.5 million, less a 15% refundable withholding tax, and is entitled to receive potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments. In addition, royalties payable under the PAION License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction. Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA and XERAVA in the PAION Territory. PAION is required to use commercially reasonable efforts to commercialize GIAPREZA and XERAVA in the PAION Territory. The Company agreed to use commercially reasonable efforts to negotiate and enter into a separate commercial supply agreement to manufacture drug product for commercial supply. The Company has not yet entered into a commercial supply agreement with PAION, which would set the quantity and timing of commercial supply. The Company has not received any payments from PAION related to either royalties or commercial milestones.
Everest Medicines Limited
In February 2018, the Company entered into a license agreement with Everest, which was subsequently amended and restated (the “Everest License”). Pursuant to the Everest License, the Company granted Everest an exclusive license to develop and commercialize XERAVA for the treatment of cIAI and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Everest Territory”). The Company is eligible to receive an additional $8.0 million regulatory milestone payment and up to an aggregate of $20.0 million in sales milestone payments. The Company is also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Everest Territory of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Everest Territory until the latest to occur of: (1) the last-to-expire of specified patent rights in such jurisdiction in the Everest Territory; (2) expiration of marketing or regulatory exclusivity in such jurisdiction in the Everest Territory; or (3) 10 years after the first commercial sale of a product in such jurisdiction in the Everest Territory. The Company agreed to use commercially reasonable efforts to manufacture drug product for clinical development, which will be paid by Everest at the cost to manufacture, as well as manufacture drug product for commercial supply, which will be paid by Everest at cost plus a reasonable margin. During the three months ended March 31, 2021, the Company received a $3.0 million milestone payment associated with the submission of an NDA with the China NMPA for XERAVA for the treatment of cIAI in patients in China. Amounts due under the Harvard University license agreement were included as research and development expense on the consolidated statements of operations.
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11. Acquisition of Tetraphase Pharmaceuticals, Inc.
On June 24, 2020, La Jolla entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tetraphase, a biopharmaceutical company focused on commercializing its novel tetracycline XERAVA to treat serious and life‑threatening infections, and TTP Merger Sub, Inc., a wholly owned subsidiary of La Jolla. On July 28, 2020, La Jolla completed its acquisition of Tetraphase for $43 million in upfront cash plus potential future cash payments of up to $16 million pursuant to contingent value rights (“CVRs”). The holders of the CVRs are entitled to receive potential future cash payments of up to $16 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $2.5 million if 2021 XERAVA U.S. net sales are at least $20 million; (ii) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (iii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024. Following the acquisition, Tetraphase became a wholly owned subsidiary of La Jolla.
The acquisition of Tetraphase was accounted for as a business combination using the acquisition method pursuant to FASB ASC Topic 805. As the acquirer for accounting purposes, La Jolla has estimated the Purchase Price, assets acquired and liabilities assumed as of the acquisition date, with the excess of the Purchase Price over the fair value of net assets acquired recognized as goodwill. The estimated fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value.
The Purchase Price is comprised of the upfront cash of $43 million and the estimated fair value of potential future cash payments pursuant to the CVRs. The estimated fair value of assets acquired was $54.7 million, and the estimated fair value of liabilities assumed was $9.1 million.
The Purchase Price allocation as of the acquisition date is presented as follows (in thousands):
|
|
July 28,
|
|
|
|
2020
|
|
Cash
|
|
$
|
42,990
|
|
Fair Value of CVRs
|
|
|
2,610
|
|
Total Purchase Price
|
|
$
|
45,600
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,778
|
|
Accounts receivable
|
|
|
1,187
|
|
Inventory
|
|
|
4,767
|
|
Prepaid expenses and other current assets
|
|
|
1,218
|
|
Property and equipment
|
|
|
58
|
|
Right-of-use lease assets
|
|
|
2,302
|
|
Restricted cash
|
|
|
699
|
|
Identifiable intangible assets
|
|
|
15,520
|
|
Goodwill
|
|
|
20,123
|
|
Accounts payable
|
|
|
(1,400
|
)
|
Accrued expenses
|
|
|
(2,979
|
)
|
Lease liabilities, current portion
|
|
|
(967
|
)
|
Lease liabilities, less current portion
|
|
|
(1,420
|
)
|
Other noncurrent liabilities
|
|
|
(2,286
|
)
|
Total Purchase Price
|
|
$
|
45,600
|
|
The estimated fair value of potential future cash payments pursuant to the CVRs was based on a Monte Carlo simulation and is classified as Level 3 in the ASC Topic 820-10, three-tier fair value hierarchy.
CVRs are measured at fair value on a recurring basis. During the three months ended March 31, 2021, the Company recorded a $0.5 million loss in other (expense) income in the consolidated statements of operations resulting from the change in fair value of CVRs.
The Company recorded a $3.3 million fair value step-up adjustment to Tetraphase’s inventory as of the acquisition date. Raw material components and active pharmaceutical ingredients were recorded based on estimated replacement cost. Finished drug product was valued at estimated selling cost, adjusted for costs of selling effort and a reasonable profit allowance for such selling effort from the viewpoint of a market participant. This
16
fair value step-up adjustment is recorded as cost of product sales when the inventory is sold to customers, $0.9 million of which was included in cost of product sales during the three months ended March 31, 2021.
Identifiable intangible assets consist of certain technology and trade names acquired from Tetraphase, and include the value of the Harvard, Paratek and Everest Licenses (see Note 10). The acquired intangible assets have definite useful lives and are being amortized on a straight-line basis over an estimated useful life of 10 years.
Goodwill represents the excess of the Purchase Price over the fair value of the net assets acquired as of the acquisition date. Goodwill represents the value of the stronger platform to increase patient access to the Company’s commercial products and the operational synergies of the combined Company. Goodwill has an indefinite useful life and is not amortized. The goodwill is only deductible for tax purposes if the Company makes a U.S. Internal Revenue Code Section 338 (“Section 338”) election. The Company did not make a Section 338 election.
12. Company-wide Realignments
On May 28, 2020, the Board of Directors of the Company approved a restructuring plan (the “2020 Realignment”) to align its organization with the Company’s sole focus on the commercialization of its products. The 2020 Realignment reduced the Company’s headcount. For the year ended December 31, 2020, total expense was comprised of $4.1 million for one-time termination benefits to the affected employees, including severance and health care benefits, offset by a $0.4 million reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. As of March 31, 2021, the Company had made substantially all of the payments related to the 2020 Realignment.
In connection with the acquisition of Tetraphase, the Company incurred one-time charges related to a reduction in the combined Company’s headcount. For the year ended December 31, 2020, total expense was comprised of $3.1 million for one-time termination benefits to the affected employees, including severance and health care benefits. As of March 31, 2021, the Company had paid $2.5 million of the $3.1 million cash severance and health care benefits charges, and the remaining $0.6 million of the cash severance and health care benefits charges were included in accrued payroll and related expenses. The Company expects to make substantially all of the payments related to this headcount reduction by the end of the second quarter of 2021.
13. Income Taxes
For the three months ended March 31, 2021, the Company recorded an $18,000 provision for income taxes related to state income taxes. For the three months ended March 31, 2020, the Company did not record a provision for income taxes. As of March 31, 2021 and December 31, 2020, the Company established a full valuation allowance against its federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets. There were no unrecognized tax benefits as of March 31, 2021 and December 31, 2020. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months.
14. Subsequent Events
On April 21, 2021, La Jolla received a distribution of $2.5 million in connection with its non-voting profits interest (see Note 9). The distribution will be recorded as other income for the three months ended June 30, 2021.
On May 6, 2021, the Company entered into a commercial supply agreement with Everest whereby the Company will supply Everest a minimum quantity of XERAVA through December 31, 2023 and will transfer to Everest certain XERAVA-related manufacturing know-how. Pursuant to the supply agreement, the Company is entitled to receive $5.0 million of technology transfer payments in 2021 and will be reimbursed for manufacturing costs at 110% of costs through December 31, 2023.
17