NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of MacroGenics, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of the Company believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying unaudited interim consolidated financial statements include the accounts of MacroGenics, Inc. and its wholly owned subsidiary, MacroGenics UK Limited. All intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's
2017
Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 27, 2018.
Summary of Significant Accounting Policies
With the exception of the adoption of Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
and all related amendments (collectively ASC 606) during the
six months ended June 30, 2018
, discussed below, there have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with
accounting standards in effect for the period presented
. The Company applied the modified retrospective transition method only to contracts that were not completed as of January 1, 2018, the effective date of adoption for ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company enters into licensing agreements that are within the scope of ASC 606, under which it may license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products. The Company also enters into manufacturing service agreements.
For each arrangement that results in revenues, the Company identifies all performance obligations, which may include a license to intellectual property and know-how, research and development activities, transition activities and/or manufacturing services. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone
selling price basis. The Company must develop assumptions that require judgment to determine the standalone selling price in order to account for these agreements. To determine the standalone selling price, the Company’s assumptions may include (i) assumptions regarding the probability of obtaining marketing approval for the product candidate, (ii) estimates regarding the timing of and the expected costs to develop and commercialize the product candidate, and (iii) estimates of future cash flows from potential product sales with respect to the product candidate. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.
Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Licenses.
If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and when (or as) the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the licensee and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the licensee can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes 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. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
Research, Development and/or Manufacturing Services.
The promises under the Company’s agreements may include research and development or manufacturing services to be performed by the Company on behalf of the counterparty. If these services are determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to these services as revenue over time based on an appropriate measure of progress when the performance by the Company does not create an asset with an alternative use and the Company has an enforceable right to payment for the performance completed to date. If these services are determined not to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to the combined performance obligation as the related performance obligations are satisfied.
Customer Options.
If an arrangement contains customer options, the Company evaluates whether the options are material rights because they allow the customer to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised. If the options are deemed not to be a material right, they are excluded as performance obligations at the outset of the arrangement, and the potential payments that the Company is eligible to receive upon exercise of the options are excluded from the transaction price.
Milestone Payments.
At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates 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 associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts
its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties.
For arrangements that include sales-based royalties which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.
The Company analyzes its collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties who are both active participants in the activities and are both exposed to significant risks and rewards dependent on the commercial success of such activities. Such arrangements generally are within the scope of ASC 808,
Collaborative Arrangements
(ASC 808). While ASC 808 defines collaborative arrangements and provides guidance on income statement presentation, classification, and disclosures related to such arrangements, it does not address recognition and measurement matters, such as (1) determining the appropriate unit of accounting or (2) when the recognition criteria are met. Therefore, the accounting for these arrangements is either based on an analogy to other accounting literature or an accounting policy election by the Company. The Company accounts for certain components of the collaboration agreement that are reflective of a vendor-customer relationship (e.g., licensing arrangement) based on an analogy to ASC 606. The Company accounts for other components based on a reasonable, rational and consistently applied accounting policy election. Reimbursements from the counter-party that are the result of a collaborative relationship with the counter-party, instead of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense as the services are performed.
For a complete discussion of accounting for revenue from collaborative and other agreements, see Note 6, Collaboration and Other Agreements.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued ASC 606. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts that were not completed as of January 1, 2018. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with available practical expedients.
Comparative prior period information continues to be reported under the accounting standards in effect for the period presented.
As a result of applying the modified retrospective method to adopt the new guidance, the following adjustments were made to accounts on the consolidated balance sheet as of January 1, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Adoption
|
|
ASC 606 Adjustment
|
|
Post-Adoption
|
Deferred revenue, current
|
$
|
7,202
|
|
|
$
|
540
|
|
|
$
|
7,742
|
|
Deferred revenue, net of current portion
|
13,637
|
|
|
5,939
|
|
|
19,576
|
|
Accumulated deficit
|
(312,340
|
)
|
|
(6,479
|
)
|
|
(318,819
|
)
|
The transition adjustment resulted primarily from changes in
the pattern of revenue recognition for upfront fees and the accounting for milestones.
The following table shows the impact of adoption to our consolidated statement of income and balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
As Reported
|
|
Balances without adoption of ASC 606
|
|
Effect of Change Higher/(Lower)
|
Revenue from collaborative agreements
|
$
|
18,552
|
|
|
$
|
18,416
|
|
|
$
|
136
|
|
Net loss
|
(43,244
|
)
|
|
(43,380
|
)
|
|
$
|
(136
|
)
|
Basic and diluted net loss per common share
|
$
|
(1.03
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
—
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
As Reported
|
|
Balances without adoption of ASC 606
|
|
Effect of Change Higher/(Lower)
|
Revenue from collaborative agreements
|
$
|
23,053
|
|
|
$
|
22,783
|
|
|
$
|
270
|
|
Net loss
|
(92,780
|
)
|
|
(93,050
|
)
|
|
$
|
(270
|
)
|
Basic and diluted net loss per common share
|
$
|
(2.35
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
—
|
|
|
|
|
As of June 30, 2018
|
|
As Reported
|
|
Balances without adoption of ASC 606
|
|
Effect of Change Higher/(Lower)
|
Deferred revenue, current
|
$
|
7,999
|
|
|
$
|
7,133
|
|
|
$
|
866
|
|
Deferred revenue, net of current portion
|
15,948
|
|
|
10,606
|
|
|
$
|
5,342
|
|
Accumulated deficit
|
(411,599
|
)
|
|
(405,391
|
)
|
|
$
|
(6,208
|
)
|
The following table presents changes in the Company’s contract liabilities during the six months ended June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Additions
|
|
Deductions
|
|
Balance at End of Period
|
Deferred revenue
|
$
|
27,318
|
|
|
$
|
500
|
|
|
$
|
(3,871
|
)
|
|
$
|
23,947
|
|
During the six months ended June 30, 2018, the Company recognized
$3.9 million
in revenue as a result of changes in the contract liability balance.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope Modification Accounting
. The new standard is intended to reduce the diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The new standard was effective beginning January 1, 2018. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations upon adoption.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(ASU 2016-02) that provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. ASU 2016-02 includes a short-term lease exception for leases with a term of 12 months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance.
Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements,
which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10,
Codification Improvements to Topic 842, Leases,
which clarifies how to apply certain aspects of ASU 2016-02.
ASU 2016-02 is effective for the Company’s fiscal year beginning January 1, 2019. Early adoption is permitted, but the Company has not made the election to do so. The Company is currently evaluating the impact that the adoption of this standard may have on its consolidat
ed financial statements.
2. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses.
The carrying amount of accounts receivable, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of their short-term nature.
The Company accounts for recurring and non-recurring fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures
(ASC 820). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
|
|
•
|
Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.
|
|
|
•
|
Level 3 - Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity - e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security.
|
The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the ASC 820 hierarchy.
Financial assets measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2018
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
91,936
|
|
|
$
|
91,936
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Treasury securities
|
1,994
|
|
|
—
|
|
|
1,994
|
|
|
—
|
|
Government-sponsored enterprises
|
3,441
|
|
|
—
|
|
|
3,441
|
|
|
—
|
|
Corporate debt securities
|
60,065
|
|
|
—
|
|
|
60,065
|
|
|
—
|
|
Common stock warrants
|
6,130
|
|
|
—
|
|
|
—
|
|
|
6,130
|
|
Total assets measured at fair value
(a)
|
$
|
163,566
|
|
|
$
|
91,936
|
|
|
$
|
65,500
|
|
|
$
|
6,130
|
|
(a) Total assets measured at fair value at
June 30, 2018
includes approximately
$95.2 million
reported in cash and cash equivalents and
$6.1 million
reported in other assets on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
61,512
|
|
|
$
|
61,512
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Treasury securities
|
3,990
|
|
|
—
|
|
|
3,990
|
|
|
—
|
|
Government-sponsored enterprises
|
11,990
|
|
|
—
|
|
|
11,990
|
|
|
—
|
|
Corporate debt securities
|
78,418
|
|
|
—
|
|
|
78,418
|
|
|
—
|
|
Total assets measured at fair value
(a)
|
$
|
155,910
|
|
|
$
|
61,512
|
|
|
$
|
94,398
|
|
|
$
|
—
|
|
(a) Total assets measured at fair value at
December 31, 2017
includes approximately
$62.5 million
reported in cash and cash equivalents on the balance sheet.
The fair value of Level 2 securities is determined from market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data.
The fair value of Level 3 securities is determined using the Black-Scholes option-pricing model. There were no transfers between levels during the periods presented.
3. Marketable Securities
Available-for-sale marketable securities as of
June 30, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Treasury securities
|
$
|
1,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,994
|
|
Government-sponsored enterprises
|
3,441
|
|
|
—
|
|
|
—
|
|
|
3,441
|
|
Corporate debt securities
|
56,781
|
|
|
19
|
|
|
(2
|
)
|
|
56,798
|
|
Total
|
$
|
62,216
|
|
|
$
|
19
|
|
|
$
|
(2
|
)
|
|
$
|
62,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Treasury securities
|
$
|
3,995
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
3,989
|
|
Government-sponsored enterprises
|
11,998
|
|
|
—
|
|
|
(7
|
)
|
|
11,991
|
|
Corporate debt securities
|
77,462
|
|
|
2
|
|
|
(50
|
)
|
|
77,414
|
|
Total
|
$
|
93,455
|
|
|
$
|
2
|
|
|
$
|
(63
|
)
|
|
$
|
93,394
|
|
All available-for-sale marketable securities held as of
June 30, 2018
had contractual maturities of less than one year. All of the Company's available-for-sale marketable securities in an unrealized loss position as of
June 30, 2018
and
December 31, 2017
were in a loss position for less than twelve months. There were
no
unrealized losses at
June 30, 2018
or
December 31, 2017
that the Company determined to be other-than-temporary.
4. Stockholders' Equity
In April 2017, the Company entered into a definitive agreement with an institutional healthcare investor to purchase
1,100,000
shares of its common stock at a purchase price of
$21.50
per share in a registered direct offering. Proceeds to the Company, before deducting estimated offering expenses, were
$23.7 million
. The shares were offered pursuant to the Company’s effective shelf registration
on Form S-3 that was filed with the SEC on November 2, 2016
.
In May 2017, the Company entered into a sales agreement with an agent to sell, from time to time, shares of its common stock having an aggregate sales price of up to
$75.0 million
through an “at the market offering” (ATM Offering) as defined in Rule 415 under the Securities Act of 1933, as amended. The shares that may be sold under the sales agreement would be issued and sold pursuant to the Company's shelf registration statement on Form S-3 that was filed with the SEC on November 2, 2016. During the year ended December 31, 2017, the Company sold
599,284
shares of common stock under the sales agreement, resulting in net proceeds of
$10.8 million
related to the ATM Offering.
No
shares of common stock were sold under the sales agreement during the three and
six months ended June 30, 2018
.
On April 2, 2018, the Company completed a firm-commitment underwritten public offering, in which the Company sold
4,500,000
shares of its common stock at a price of
$21.25
per share. Additionally, the underwriters of the offering exercised the full amount of their over-allotment option resulting in the sale of an additional
675,000
shares of the Company's common stock at a price of
$21.25
per share. Upon closing, the Company received net proceeds of approximately
$103.0 million
from this offering, net of underwriting discounts and commissions and other offering expenses.
5. Collaboration and Other Agreements
Incyte
In October 2017, the Company entered into an exclusive global collaboration and license agreement with Incyte Corporation (Incyte) for MGA012 (also known as INCMGA0012), an investigational monoclonal antibody that inhibits programmed cell death protein 1 (PD-1) (Incyte Agreement). Incyte has obtained exclusive worldwide rights for the development and commercialization of MGA012 in all indications, while the Company retains the right to develop its pipeline assets in combination with MGA012. The Company received a
$150.0 million
upfront payment from Incyte when the transaction closed in the fourth quarter of 2017.
Under the terms of the Incyte Agreement, Incyte will lead global development of MGA012. Assuming successful development and commercialization by Incyte, the Company could receive up to approximately
$420.0 million
in development and regulatory milestones, and up to
$330.0 million
in commercial milestones. If commercialized, the Company would be eligible to receive tiered royalties of
15%
to
24%
on any global net sales. The Company retains the right to develop its pipeline assets in combination with MGA012, with Incyte commercializing MGA012 and the Company commercializing its asset(s), if any such potential combinations are approved. In addition, the Company retains the right to manufacture a portion of both companies' global clinical and commercial supply needs of MGA012, subject to a separate development manufacturing and clinical supply agreement. Finally, Incyte will fund the Company's activities related to the ongoing monotherapy clinical study until the Company transfers the Investigational New Drug application (IND) and certain clinical activities to Incyte.
The Company evaluated the Incyte Agreement under the provisions of ASC 606 and identified the following
two
performance obligations under the agreement: (i) the license of MGA012 and (ii) the performance of certain clinical activities through a brief technology transfer period. The Company determined that the license and clinical activities are separate performance obligations because they are capable of being distinct, and are distinct in the context of the contract. The license has standalone functionality as it is sublicensable, Incyte has significant capabilities in performing clinical trials, and Incyte is capable of performing these activities without the Company's involvement; the Company is performing the activities during the transfer period as a matter of convenience. The Company determined that the transaction price of the Incyte Agreement was
$154.0 million
, consisting of the consideration to which the Company was entitled in exchange for the license and an estimate of the consideration for clinical activities to be performed. The transaction price was allocated to each performance obligation based on their relative standalone selling price. The standalone selling price of the license was determined using the adjusted market assessment approach considering similar collaboration and license agreements. The standalone selling price for agreed-upon clinical activities to be performed was determined using the expected cost approach based on similar arrangements the Company has with other parties. The potential development and regulatory milestone payments are
fully constrained until the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods,
and as such have been excluded from the transaction price. Any consideration related to sales-based milestones and royalties will be recognized when the related sales occur, as they were determined to relate predominantly to the license granted to Incyte and, therefore, have also been excluded from the transaction price. The Company re-assesses the transaction price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.
The Company recognized the
$150.0 million
allocated to the license when it satisfied its performance obligation and transferred the license to Incyte in October 2017. The
$4.0 million
allocated to the clinical activities is being recognized over the period from the effective date of the agreement until such time as the clinical activities are transferred to Incyte (which had been substantially completed as of June 30, 2018), using an input method according to research and development costs incurred to date compared to estimated total research and development costs. Prior to the adoption of ASC 606 on January 1, 2018, the accounting for this agreement did not materially differ from the accounting under ASC 606. The Company recognized revenue of
$0.6 million
and
$3.1 million
related to clinical activities under the Incyte Agreement during the three and
six months ended June 30, 2018
, respectively.
As of June 30, 2018, the Company and Incyte have an agreement for the Company to supply MGA012 for Incyte’s clinical needs. The Company evaluated the agreement under ASC 606 and identified one performance obligation under the agreement - to perform services related to manufacturing the clinical supply of MGA012. The transaction price is based on the costs incurred to develop and manufacture drug product and drug substance, and will be recognized over time as the services are provided, as the performance by the Company does not create an asset with an alternative use and the Company has an enforceable right to payment for the performance completed to date. During the three months ended June 30, 2018, the Company recognized revenue of
$9.9 million
for services performed under this agreement.
Roche
In December 2017, the Company entered into a research collaboration and license agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively, Roche) to jointly discover and develop novel bispecific molecules to undisclosed targets (Roche Agreement). During the research term, both companies will leverage their respective platforms, including the Company's DART platform and Roche's CrossMAb and DutaFab technologies to select a bispecific format and lead product candidate. Roche would then further develop and commercialize any such product candidate. Each company will be responsible for their own expenses during the research period.
Under the terms of the Roche Agreement, Roche received rights to use certain of the Company’s intellectual property rights to exploit collaboration compounds and products, and paid the Company an upfront payment of
$10.0 million
which was received in January 2018. The Company will also be eligible to receive up to
$370.0 million
in potential milestone payments and royalties on future sales.
The Company evaluated the Roche Agreement under the provisions of ASC 606 and identified the following promises under the agreement: (i) the non-exclusive, non-transferable, non-sublicensable license to the Company's intellectual property and (ii) the performance of certain activities during the research period. The Company determined that the license is capable of being distinct, but is not distinct in the context of the contract because it has limited value to Roche without the research activities required to be performed by the Company. Therefore, the Company concluded that there is
one
performance obligation under the agreement. The Company determined that the transaction price of the Roche Agreement was
$10.0 million
. The potential milestone payments are
fully constrained
and have been excluded from the transaction price. Any consideration related to sales-based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Roche and therefore have also been excluded from the transaction price.
The
$10.0 million
transaction price will be recognized over the expected research period, which is
30
months, using a cost-based input method to measure performance. Prior to the adoption of ASC 606 on January 1, 2018, the accounting for this agreement did not materially differ from the accounting under ASC 606. The Company recognized revenue under this agreement of
$1.0 million
and
$2.0 million
during the three and
six months ended June 30, 2018
, respectively. At
June 30, 2018
,
$8.0 million
of revenue was deferred under this agreement,
$4.0 million
of which was current.
Les Laboratoires Servier
In
September 2012
, the Company entered into a collaboration agreement with Les Laboratoires Servier and Institut de Recherches Servier (collectively, Servier) and granted it exclusive options to obtain
three
separate exclusive licenses to develop and commercialize DART molecules, consisting of those designated by the Company as flotetuzumab (also known as MGD006 or S80880) and MGD007, as well as a third DART molecule, in all countries other than the United States, Canada, Mexico, Japan, South Korea and India (Servier Agreement). During 2014, Servier exercised its exclusive option to develop and commercialize flotetuzumab, and during 2016 Servier notified the Company that it did not intend to exercise the option for the third DART molecule. Servier retains the option to obtain a license for MGD007.
Upon execution of the agreement, Servier made a nonrefundable payment of
$20.0 million
to the Company. In addition, if Servier exercises the remaining available options and successfully develops, obtains regulatory approval for, and commercializes a product under each license, the Company will be eligible to receive up to
$25.0 million
in license grant fees,
$53.0 million
in clinical milestone payments,
$188.0 million
in regulatory milestone payments and
$420.0 million
in sales milestone payments. In addition to these milestones, the Company and Servier will share Phase 2 and Phase 3 development costs. Under this agreement, Servier would be obligated to pay the Company from low double-digit to mid-teen royalties on net product sales in its territories.
The Company evaluated the Servier Agreement under the provisions of ASC 606 and concluded that Servier is a customer prior to the exercise of any of the
three
options. The Company identified the following material promises under the arrangement for each of the three molecules: (i) a limited evaluation license to conduct activities under the research plan and (ii) research and development services concluding with an option trigger data package. The Servier Agreement also provided exclusive options for an exclusive license to research, develop, manufacture and commercialize each subject molecule. The Company evaluated these options and concluded that the options were not issued at a significant and incremental discount, and therefore do not provide material rights. As such, they are excluded as performance obligations at the outset of the arrangement. The Company determined that each license and the related research and development services were not distinct from one another, as the license has limited value without the performance of the research and development activities. As such, the Company determined that these promises should be combined into a single performance obligation for each molecule, resulting in a total of
three
performance obligations; one for flotetuzumab, one for MGD007, and one for the third DART molecule.
The Company determined that the
$20.0 million
upfront payment from Servier constituted the entirety of the consideration to be included in the transaction price as of the outset of the arrangement, and the transaction price was allocated
to the
three
performance obligations based on their relative standalone selling price.
The milestone payments that the Company was eligible to receive prior to the exercise of the options were excluded from the transaction price, as all milestone amounts were fully constrained based on the probability of achievement.
Two
milestones were achieved in 2014 when the INDs for flotetuzumab and MGD007 were cleared by the Food and Drug Administration (FDA). Upon achievement of each milestone, the constraint related to the
$5.0 million
milestone payment was removed and the transaction price was re-assessed. This variable consideration was allocated to each specific performance obligation in accordance with ASC 606.
Revenue associated with each performance obligation is being recognized as the research and development services are provided using an input method according to research and development costs incurred to date compared to estimated total research and development costs. The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation. The full transaction price allocated to flotetuzumab and the third DART molecule was recognized as revenue prior to the adoption of ASC 606 on January 1, 2018 as the option periods had ended. The development period for MGD007 was estimated to be
75
months, ending in December 2018, therefore the transaction price allocated to MGD007 is being recognized through that date. Upon the adoption of ASC 606 on January 1, 2018, the pattern of revenue recognition for the upfront fee and the accounting for the milestones received in 2014 changed, but there was no material impact to revenue recognized during the three and
six months ended June 30, 2018
. The Company recognized revenue of
$0.4 million
and
$0.9 million
during the three and
six months ended June 30, 2018
, respectively, related to the MGD007 option. At
June 30, 2018
,
$0.9 million
of revenue related to the MGD007 option was deferred, all of which was current.
As discussed above, in 2014, Servier exercised its option to obtain a license to develop and commercialize flotetuzumab in its territories and paid the Company a
$15.0 million
license grant fee. Upon exercise, the Company's contractual obligations include (i) granting Servier an exclusive license to its intellectual property, (ii) technical, scientific and intellectual property support to the research plan and (iii) participation on an executive committee and a research and development committee. Under the terms of the Servier Agreement, the Company and Servier will share costs incurred to develop flotetuzumab during the license term. Due to the fact that both parties share costs and are exposed to significant risks and rewards dependent on the commercial success of the product, the Company determined that the arrangement is a collaborative arrangement within the scope of ASC 808. The arrangement consists of
two
components; the license of flotetuzumab and the research and development activities, including committee participation, to support the research plan.
Under the provisions of ASC 808, the Company has determined that it will use ASC 606 by analogy to recognize the revenue related to the license. The Company evaluated its performance obligation to provide Servier with an exclusive license to
develop and commercialize flotetuzumab and determined that its transaction price is equal to the upfront payment of
$15.0 million
and Servier consumes the benefits of the license over time as the research and development activities are performed. Therefore, the Company will recognize the transaction price over the development period, using an input method according to research and development costs incurred to date compared to estimated total research and development costs. The additional potential clinical, regulatory and sales milestones are
fully constrained
and have been excluded from the transaction price.
The research and development activities component of the arrangement is not analogous to ASC 606, therefore the Company will follow its policy to record expense incurred as research and development expense and reimbursements received from Servier will be recognized as an offset to research and development expense on the consolidated statement of operations and comprehensive loss during the development period. During the three and
six months ended June 30, 2018
, the Company recorded approximately
$1.6 million
and
$2.8 million
, respectively, as an offset to research and development expense under this collaborative arrangement.
The Company recognized revenue of
$0.3 million
and
$0.6 million
, respectively, during the three and
six months ended June 30, 2018
related to the flotetuzumab option exercise. At
June 30, 2018
,
$13.2 million
of revenue related to the flotetuzumab option exercise was deferred,
$1.9 million
of which was current. The deferred revenue balance related to the flotetuzumab option exercise as of December 31, 2017, prior to the adoption of ASC 606, was
$7.4 million
. The adoption of ASC 606 increased that balance by approximately
$6.4 million
. The adoption of ASC 606 did not have a material impact on revenue recognized during the three and
six months ended June 30, 2018
, however it will increase the revenue to be recognized in the future as the pattern of revenue recognition has changed.
Provention
In May 2018, the Company entered into a License Agreement with Provention Bio, Inc. (Provention), pursuant to which the Company granted Provention exclusive global rights for the purpose of developing and commercializing MGD010 (renamed PRV-3279), a CD32B x CD79B DART molecule being developed for the treatment of autoimmune indications. As partial consideration for the Provention License Agreement, Provention granted the Company a warrant to purchase shares of Provention’s common stock at an exercise price of
$2.50
per share. The warrant expires on May 7, 2025. If Provention successfully develops, obtains regulatory approval for, and commercializes PRV-3279, the Company will be eligible to receive
up to
$65.0 million
in development and regulatory milestones and up to
$225.0 million
in commercial milestones. If commercialized, the Company would be eligible to receive single-digit royalties on net sales of the product. The license agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by Provention without cause upon prior notice to the Company, and by the Company in the event that Provention challenges the validity of any licensed patent under the agreement, but only with respect to the challenged patent.
Also in May 2018, the Company entered into an Asset Purchase Agreement with Provention pursuant to which Provention acquired the Company’s interest in teplizumab (renamed PRV-031), a monoclonal antibody being developed for the treatment of type 1 diabetes (Asset Purchase Agreement). As partial consideration for the Asset Purchase Agreement, Provention granted the Company a warrant to purchase shares of Provention’s common stock at an exercise price of
$2.50
per share. The warrant expires on May 7, 2025. If Provention successfully develops, obtains regulatory approval for, and commercializes PRV-031, the Company will be eligible to receive up to
$170.0 million
in regulatory milestones and up to
$225.0 million
in commercial milestones. If commercialized, the Company would be eligible to receive single-digit royalties on net sales of the product. Provention has also agreed to pay third-party obligations, including low single-digit royalties, a portion of which is creditable against royalties payable to the Company, aggregate milestone payments of up to approximately
$1.3 million
and other consideration, for certain third-party intellectual property under agreements Provention is assuming pursuant to the Asset Purchase Agreement. Further, Provention is required to pay the Company a low double-digit percentage of certain consideration to the extent it is received in connection with a future grant of rights to PRV-031 by Provention to a third party.
The Company evaluated the Provention License Agreement and Asset Purchase Agreement under the provisions of ASC 606 and determined that they should be accounted for as a single contract and identified
two
performance obligations within that contract: (i) the license of MGD010 and (ii) the title to teplizumab. The Company determined that the transaction price of the Provention agreements was
$6.1 million
, based on the Black-Scholes valuation of the warrants to purchase
2,432,688
shares of Provention's common stock. The transaction price was allocated to each performance obligation based on the number of shares of common stock the Company is entitled to purchase under each warrant. The potential development and regulatory milestone payments are fully constrained until the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods, and as such have been excluded from the transaction price. Any consideration related to sales-based milestones and royalties will be recognized when the related sales occur, therefore they have also been excluded from the transaction price. The Company re-assesses the transaction price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.
The Company recognized revenue of
$6.1 million
when it satisfied its performance obligations and transferred the MGD010 license and teplizumab assets to Provention during the three months ended June 30, 2018. The warrants are reported in other assets on the balance sheet at
June 30, 2018
, and there was no material change in the valuation of the warrants from May 2018 through that date.
NIAID Contract
The Company entered into a contract with the National Institute of Allergy and Infectious Diseases (NIAID), effective as of September 15, 2015, to perform product development and to advance up to
two
DART molecules, including MGD014. Under this contract, the Company will develop these product candidates for Phase 1/2 clinical trials as therapeutic agents, in combination with latency reversing treatments, to deplete cells infected with human immunodeficiency virus (HIV) infection. NIAID does not receive goods or services from the Company under this contract, therefore the Company does not consider NIAID to be a customer and concluded this contract is outside the scope of Topic 606.
This contract includes a base period of up to
$7.5 million
to support development of MGD014 through IND application submission with the FDA, as well as up to
$17.0 million
in additional development funding via NIAID options. Should NIAID fully exercise such options, the Company could receive total payments of up to
$24.5 million
. The total potential period of performance under the award is from
September 15, 2015
through
September 14, 2022
. In 2017, NIAID exercised the first option in the amount of up to
$10.8 million
. The Company recognized
$0.2 million
and
$0.4 million
in revenue under this contract during the
three months ended June 30, 2018
and
2017
, respectively. The Company recognized
$0.4 million
and
$1.0 million
in revenue under this contract during the
six months ended June 30, 2018
and
2017
, respectively.
6. Stock-Based Compensation
Employee Stock Purchase Plan
In May 2017, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (the 2016 ESPP). The 2016 ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986,
as amended, and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company reserved
800,000
shares of common stock for issuance under the 2016 ESPP. The 2016 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to
10%
of their eligible compensation, subject to any plan limitations. The 2016 ESPP provides for six-month offering periods ending on May 31 and November 30 of each year. At the end of each offering period, employees are able to purchase shares at
85%
of the fair market value of the Company’s common stock on the last day of the offering period. During the
six
months ended
June 30, 2018
,
20,231
shares of common stock were purchased under the 2016 ESPP for net proceeds to the Company of approximately
$0.5 million
.
Employee Stock Option Plans
Effective February 2003, the Company implemented the 2003 Equity Incentive Plan (2003 Plan), and it was amended and approved by the Company's stockholders in 2005. The 2003 Plan originally allowed for the grant of awards in respect of an aggregate of
2,051,644
shares of the Company's common stock. Between 2006 and 2012, the maximum number of shares of common stock authorized to be issued by the Company under the 2003 Plan was increased to
4,336,730
. Stock options granted under the 2003 Plan may be either incentive stock options as defined by the Internal Revenue Code (IRC), or non-qualified stock options.
In 2013, the 2003 Plan was terminated, and no further awards may be issued under the plan. Any shares of common stock subject to awards under the 2003 Plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased without having been fully exercised, or resulting in any common stock being issued, will become available for issuance under the Company's 2013 Stock Incentive Plan (2013 Plan), up to a specified number of shares. As of
June 30, 2018
there were options to purchase an aggregate of
840,281
shares of common stock outstanding at a weighted average exercise price of
$1.92
per share under the 2003 Plan.
Under the provisions of the 2013 Plan, the number of shares of common stock reserved for issuance will automatically increase on January 1 of each year from January 1, 2014 through and including January 1, 2023, by the lesser of (a)
1,960,168
shares, (b)
4.0%
of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or (c) the number of shares of common stock determined by the Board of Directors. During the
six
months ended
June 30, 2018
, the maximum number of shares of common stock authorized to be issued by the Company under the 2013 Plan was increased to
8,244,131
. As of
June 30, 2018
, there were options to purchase an aggregate of
4,527,473
shares of common stock outstanding at a weighted average exercise price of
$25.66
per share under the 2013 Plan.
The following table shows stock-based compensation expense for stock options, RSUs and ESPP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Research and development
|
$
|
1,989
|
|
|
$
|
1,833
|
|
|
$
|
3,689
|
|
|
$
|
3,506
|
|
General and administrative
|
2,174
|
|
|
1,769
|
|
|
3,906
|
|
|
3,557
|
|
Total stock-based compensation expense
|
$
|
4,163
|
|
|
$
|
3,602
|
|
|
$
|
7,595
|
|
|
$
|
7,063
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions in the following table for options issued during the period indicated:
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Expected dividend yield
|
0%
|
|
0%
|
Expected volatility
|
67.8% - 72.2%
|
|
66.7% - 67.7%
|
Risk-free interest rate
|
2.4% - 3.1%
|
|
2.0% - 2.3%
|
Expected term
|
6.25 years
|
|
6.25 years
|
The following table summarizes stock option and restricted stock unit (RSU) activity during the
six
months ended
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding, December 31, 2017
|
4,504,642
|
|
|
$
|
19.79
|
|
|
7.0
|
|
|
Granted
|
1,163,517
|
|
|
27.78
|
|
|
|
|
|
Exercised
|
(185,773
|
)
|
|
5.35
|
|
|
|
|
|
Forfeited or expired
|
(114,632
|
)
|
|
(23.50
|
)
|
|
|
|
|
Outstanding, June 30, 2018
|
5,367,754
|
|
|
21.94
|
|
|
7.2
|
|
$
|
18,118
|
|
As of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
3,108,933
|
|
|
18.99
|
|
|
5.9
|
|
17,733
|
|
Vested and expected to vest
|
5,141,748
|
|
|
21.75
|
|
|
7.1
|
|
18,081
|
|
The weighted-average grant-date fair value of options granted during the
six
months ended
June 30, 2018
was
$18.29
. The total intrinsic value of options exercised during the
six
months ended
June 30, 2018
was approximately
$3.7 million
, and the total cash received for options exercised was approximately
$0.7 million
. The total fair value of shares vested in the
six
months ended
June 30, 2018
was approximately
$6.3 million
. As of
June 30, 2018
, the total unrecognized compensation expense related to non-vested stock options, net of related forfeiture estimates, was approximately
$31.7 million
, which the Company expects to recognize over a weighted-average period of approximately
2.8
years.
7. Net Loss Per Share
Basic loss per common share is determined by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company's stock option grants.
5,367,754
stock options (common stock equivalents) were excluded from the calculation of diluted loss per share for the
three and six
months ended
June 30, 2018
because their inclusion would have been anti-dilutive.
4,621,008
stock options were excluded from the calculation of diluted loss per share for the
three and six
months ended
June 30, 2017
because their inclusion would have been anti-dilutive.
Basic and diluted loss per common share is computed as follows (in thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Net loss used for calculation of basic and diluted EPS
|
$
|
(43,244
|
)
|
|
$
|
(40,654
|
)
|
|
$
|
(92,780
|
)
|
|
$
|
(78,310
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
42,153,813
|
|
|
35,784,804
|
|
|
39,559,599
|
|
|
35,373,799
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding, diluted
|
42,153,813
|
|
|
35,784,804
|
|
|
39,559,599
|
|
|
35,373,799
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
$
|
(1.03
|
)
|
|
$
|
(1.14
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
(2.21
|
)
|