Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

 

 

 

 

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

 

For the quarterly period ended March  31, 2019.

 

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

 

For the transition period from            to            .

 

Commission file number: 001-35347

 


Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)


 

 

 

Delaware

90-0475355

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

5500 Flatiron Parkway, Suite 100

 

Boulder, Colorado

80301

(Address of principal executive offices)

(Zip Code)

 

(303) 625-5000

(Registrant’s telephone number, including area code)

 

Not Applicable

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


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

 

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

 

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

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

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

 

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

 

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

 

 

 

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock par Value $0.001 per share

CLVS

The NASDAQ Global Select Market

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of May 3, 2019 was 53,004,845.

 

 

1


 

Table of Contents

 

CLOVIS ONCOLOGY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

PART I. Financial Information  

3

 

 

 

 

ITEM 1.  

 

Financial Statements (unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss — for the three months ended March  31, 2019 and March 31, 2018

3

 

 

 

 

 

 

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

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows — for the three months ended March  31, 2019 and 2018

6

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

 

ITEM 2.  

 

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

25

 

 

 

 

ITEM 3.  

 

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

 

ITEM 4.  

 

Controls and Procedures

35

 

 

PART II. Other Information  

37

 

 

 

 

ITEM 1.  

 

Legal Proceedings

37

 

 

 

 

ITEM 1A.  

 

Risk Factors

38

 

 

 

 

ITEM 2.  

 

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

 

ITEM 3.  

 

Defaults Upon Senior Securities

39

 

 

 

 

ITEM 4.  

 

Mine Safety Disclosures

39

 

 

 

 

ITEM 5.  

 

Other Information

39

 

 

 

 

ITEM 6 .

 

Exhibits

40

 

 

SIGNATURES  

44

 

 

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CLOVIS ONCOLOGY, INC.

Consolidated  Statements of  O perations and  Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

Product revenue

 

$

33,118

 

$

18,523

 

Operating expenses:

 

 

  

 

 

  

 

Cost of sales - product

 

 

7,405

 

 

4,006

 

Cost of sales - intangible asset amortization

 

 

1,120

 

 

372

 

Research and development

 

 

62,031

 

 

43,543

 

Selling, general and administrative

 

 

47,761

 

 

39,274

 

Total expenses

 

 

118,317

 

 

87,195

 

Operating loss

 

 

(85,199)

 

 

(68,672)

 

Other income (expense):

 

 

  

 

 

  

 

Interest expense

 

 

(3,590)

 

 

(2,635)

 

Foreign currency loss

 

 

(192)

 

 

(81)

 

Legal settlement loss

 

 

 —

 

 

(7,975)

 

Other income

 

 

2,400

 

 

1,409

 

Other expense, net

 

 

(1,382)

 

 

(9,282)

 

Loss before income taxes

 

 

(86,581)

 

 

(77,954)

 

Income tax benefit

 

 

160

 

 

260

 

Net loss

 

$

(86,421)

 

$

(77,694)

 

Other comprehensive income (loss):

 

 

  

  

 

  

  

Foreign currency translation adjustments, net of tax

 

 

(5)

  

 

1,517

  

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

 

 

75

  

 

(5)

  

Other comprehensive (loss) income:

 

 

70

  

 

1,512

  

Comprehensive loss

 

$

(86,351)

 

$

(76,182)

 

 

 

 

 

 

 

 

 

Loss per basic and diluted common share:

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(1.63)

 

$

(1.54)

 

Basic and diluted weighted average common shares outstanding

 

 

52,891

 

 

50,602

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

C LOVIS ONCOLOGY, INC.

Consolidated  Balance  S heets

(Unaudited)

(In thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

ASSETS

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

123,308

 

$

221,876

 

Accounts receivable, net

 

 

16,096

 

 

12,889

 

Inventories, net

 

 

24,986

 

 

27,072

 

Available-for-sale securities

 

 

283,474

 

 

298,270

 

Prepaid research and development expenses

 

 

3,761

 

 

3,579

 

Other current assets

 

 

15,452

 

 

8,613

 

Total current assets

 

 

467,077

 

 

572,299

 

Inventories

 

 

114,996

 

 

113,908

 

Deposit on inventory

 

 

12,350

 

 

12,350

 

Property and equipment, net

 

 

16,193

 

 

26,524

 

Right-of-use assets, net

 

 

23,919

 

 

 —

 

Intangible assets, net

 

 

65,810

 

 

51,930

 

Goodwill

 

 

63,074

 

 

63,074

 

Other assets

 

 

21,198

 

 

23,475

 

Total assets

 

$

784,617

 

$

863,560

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

43,288

 

$

28,517

 

Accrued research and development expenses

 

 

33,303

 

 

29,676

 

Lease liabilities

 

 

4,253

 

 

 —

 

Other accrued expenses

 

 

25,578

 

 

67,556

 

Total current liabilities

 

 

106,422

 

 

125,749

 

Long-term lease liabilities - less current portion

 

 

26,047

 

 

 —

 

Convertible senior notes

 

 

576,003

 

 

575,470

 

Other long-term liabilities

 

 

1,294

 

 

15,872

 

Total liabilities

 

 

709,766

 

 

717,091

 

Commitments and contingencies (Note 15)

 

 

  

 

 

  

 

Stockholders' equity:

 

 

  

 

 

  

 

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

 

 

 —

 

 

 —

 

Common stock, $0.001 par value per share, 100,000,000 shares authorized at March 31, 2019 and December 31, 2018; 52,994,050 and 52,797,516 shares issued and outstanding at March 31, 2019 and December 31, 2018 respectively

 

 

53

 

 

53

 

Additional paid-in capital

 

 

2,048,875

 

 

2,034,142

 

Accumulated other comprehensive loss

 

 

(44,564)

 

 

(44,634)

 

Accumulated deficit

 

 

(1,929,513)

 

 

(1,843,092)

 

Total stockholders' equity

 

 

74,851

 

 

146,469

 

Total liabilities and stockholders' equity

 

$

784,617

 

$

863,560

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

C LOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

Total

 

 

(in thousands, except for share amounts)

Balance at January 1, 2019

 

52,797,516

 

$

53

 

$

2,034,142

 

$

(44,634)

 

$

(1,843,092)

 

$

146,469

Exercise of stock options

 

83,132

 

 

 —

 

 

1,093

 

 

 —

 

 

 —

 

 

1,093

Issuance of common stock from vesting of restricted stock units, net of shares withheld for taxes

 

113,402

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation expense

 

 —

 

 

 —

 

 

13,640

 

 

 —

 

 

 —

 

 

13,640

Net unrealized gain on available-for-sale securities

 

 —

 

 

 —

 

 

 —

 

 

75

 

 

 —

 

 

75

Foreign currency translation adjustments

 

 —

 

 

 —

 

 

 —

 

 

(5)

 

 

 —

 

 

(5)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(86,421)

 

 

(86,421)

Balance at March 31, 2019

 

52,994,050

 

$

53

 

$

2,048,875

 

$

(44,564)

 

$

(1,929,513)

 

$

74,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

Total

 

 

(in thousands, except for share amounts)

Balance at January 1,2018

 

50,565,119

 

$

51

 

$

1,887,197

 

$

(42,173)

 

$

(1,477,440)

 

$

367,635

Exercise of stock options

 

21,463

 

 

 —

 

 

514

 

 

 —

 

 

 —

 

 

514

Issuance of common stock from vesting of restricted stock units, net of shares withheld for taxes

 

110,889

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation expense

 

 —

 

 

 —

 

 

11,913

 

 

 —

 

 

 —

 

 

11,913

Net unrealized gain on available-for-sale securities

 

 —

 

 

 —

 

 

 —

 

 

(5)

 

 

 —

 

 

(5)

Foreign currency translation adjustments

 

 —

 

 

 —

 

 

 —

 

 

1,517

 

 

 —

 

 

1,517

Adoption of new revenue recognition standard

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,356

 

 

2,356

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(77,694)

 

 

(77,694)

Balance at March 31, 2018

 

50,697,471

 

$

51

 

$

1,899,624

 

$

(40,661)

 

$

(1,552,778)

 

$

306,236

 

 

 

 

 

 

 

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Table of Contents

 

 

 

 

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

  

 

 

  

 

 

Net loss

 

$

(86,421)

 

$

(77,694)

 

 

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

 

 

 

 

 

  

 

 

Share-based compensation expense

 

 

13,640

 

 

11,913

 

 

Depreciation and amortization

 

 

1,722

 

 

586

 

 

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

 

 

(129)

 

 

(171)

 

 

Amortization of debt issuance costs

 

 

645

 

 

326

 

 

Allowance for obsolete inventories

 

 

174

 

 

 —

 

 

Lease liabilities

 

 

(175)

 

 

 —

 

 

Deferred income taxes

 

 

 —

 

 

(101)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

 

Accounts receivable

 

 

(3,205)

 

 

(3,418)

 

 

Inventory

 

 

(24,110)

 

 

(41,716)

 

 

Prepaid and accrued research and development expenses

 

 

3,437

 

 

637

 

 

Deposit on inventory

 

 

 —

 

 

11,157

 

 

Other operating assets

 

 

(4,726)

 

 

(1,890)

 

 

Accounts payable

 

 

5,389

 

 

(1,730)

 

 

Other accrued expenses

 

 

(4,692)

 

 

1,466

 

 

Net cash used in operating activities

 

 

(98,451)

 

 

(100,635)

 

 

Investing activities

 

 

  

 

 

  

 

 

Purchases of property and equipment

 

 

(1,231)

 

 

(217)

 

 

Purchases of available-for-sale securities

 

 

(138,415)

 

 

 —

 

 

Sales of available-for-sale securities

 

 

153,500

 

 

10,000

 

 

Acquired in-process research and development - milestone payment

 

 

(15,000)

 

 

 —

 

 

Net cash (used in) provided by investing activities

 

 

(1,146)

 

 

9,783

 

 

Financing activities

 

 

  

 

 

  

 

 

Proceeds from the exercise of stock options and employee stock purchases

 

 

1,093

 

 

514

 

 

Net cash provided by financing activities

 

 

1,093

 

 

514

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(64)

 

 

254

 

 

Decrease in cash and cash equivalents

 

 

(98,568)

 

 

(90,084)

 

 

Cash and cash equivalents at beginning of period

 

 

221,876

 

 

464,198

 

 

Cash and cash equivalents at end of period

 

$

123,308

 

$

374,114

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

 

 

Cash paid for interest

 

$

3,594

 

$

3,594

 

 

Non-cash investing and financing activities:

 

 

  

 

 

  

 

 

Vesting of restricted stock units

 

$

3,277

 

$

6,409

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

CLOVIS ONCOLOGY, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of Business and Basis of Presentation

 

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

 

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

 

In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. As this is a conditional approval, it will be necessary to complete certain confirmatory post marketing commitments.  In January 2019, the European Commission granted a variation to the marketing authorization to include the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Rubraca was the first PARP inhibitor licensed for an ovarian cancer treatment indication in the EU and is now the first to be authorized for both treatment and maintenance treatment among eligible patients with ovarian cancer. We completed our launch of Rubraca as maintenance therapy in Germany and the UK in March 2019 and we plan to launch in other EU countries during 2019 and 2020.

 

The initial TRITON2 data presented at ESMO 2018 demonstrated a 44% confirmed objective response rate by investigator assessment in 25 RECIST/PCWG3 response-evaluable patients with a BRCA1/2 alteration. The median duration of response in these patients had not yet been reached at time of presentation. In addition, a 51% confirmed prostate-specific antigen (“PSA”) response rate was observed in 45 PSA response-evaluable patients with a BRCA1/2 alteration. In April 2019, we submitted updated data on 52 patients with BRCA-mutant mCRPC to the FDA, and the response rates in that submission were highly consistent with those shown at ESMO 2018. In the initial TRITON2 data presented at ESMO 2018, the most common treatment-emergent adverse events (“TEAEs”) of any grade (CTCAE Grade 1-4) in all patients regardless of causality included asthenia/fatigue (44.7%, or 38/85), nausea (42.4%, or 36/85), anemia/decreased hemoglobin (28.2%, or 24/85), decreased appetite (28.2%, or 24/85) and constipation (22.4%, or 19/85). Five patients (5.9%) discontinued therapy due to a non-progression TEAE. One patient died due to disease progression. Safety data for Rubraca in men with mCRPC continues to be consistent with those observed in patients with ovarian cancer and other solid tumors.

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Beyond our initial labeled indication, we have a robust Rubraca clinical development program underway to further evaluate Rubraca in a variety of solid tumor types, either as monotherapy or in combination with other agents, including several studies as part of our ongoing clinical collaboration with Bristol-Myers Squibb Company to evaluate its immunotherapy OPDIVO® (nivolumab) in combination with Rubraca. We hold worldwide rights for Rubraca.

 

In addition to Rubraca, we have one other product candidate. Lucitanib is an oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors 1 through 3 (VEGFR1-3), platelet-derived growth factor receptors alpha and beta (PDGFR α/β) and fibroblast growth factor receptors 1 through 3 (FGFR1-3). We believe that recent data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – provide support for development of lucitanib in combination with a PD-1 inhibitor and a Clovis-sponsored study of lucitanib in combination with nivolumab is planned in gynecologic cancers. In addition, we intend to initiate a study of lucitanib in combination with Rubraca in ovarian cancer, based on encouraging data of VEGF and PARP inhibitors in combination. We intend to initiate each of these Phase 1b/2 combination studies in mid-2019.

 

Lucitanib was previously partnered with Les Laboratoires Servier and Institut de Recherches Internationales Servier (collectively, “Servier”) outside the U.S. and Japan (also excluding China); Servier returned its rights to lucitanib in late 2018. We now hold the global development and commercialization rights (except for China) for lucitanib.

   

In early 2019, we provided notice to Celgene Corporation exercising the right to terminate our license to rociletinib, an oral mutant-selective inhibitor of epidermal growth factor receptor (“EGFR”). That termination became effective in the second quarter of 2019. 

 

Basis of Presentation

 

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

 

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

 

Use of Estimates

 

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

 

Liquidity

 

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

 

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

 

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2. Summary of Significant Accounting Policies

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered after, the date of initial application, with an option to use certain transition relief. We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective method which leaves the comparative period reporting unchanged. Comparative reporting periods are presented in accordance with Topic 840, while periods subsequent to the effective date are presented in accordance with Topic 842. We have elected to adopt the package practical expedient which allows us: 1) to not reassess whether any expired or existing contracts are or contain leases, 2) to not reassess the lease classification for any expired or existing leases and 3) to not reassess initial direct costs for any existing leases. We also elected not to recognize on the balance sheet leases with terms of 12 months or less. For these short-term leases, we will recognize the lease payments in profit or loss on a straight-line basis over the lease term and the variable lease payments in the period in which the obligation for those payments is incurred.

 

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

  

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

 

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

 

Recently Issued Accounting Standards

 

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

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2018-02 as of January 1, 2020. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-13 as of January 1, 2020. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

 

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Revenue Recognition

 

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

 

Product Revenue

 

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

 

Reserves for Variable Consideration

   

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

 

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

 

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

 

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

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

     

Returns . Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or product that is six months beyond the expiration date. To date, we have had minimal product returns and we currently have a minimal accrual for product returns. We will continue to assess our estimate for product returns as we gain additional historical experience.

 

Cost of Sales – Product

 

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

 

Cost of Sales – Intangible Asset Amortization

 

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

 

Inventory

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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3. Financial Instruments and Fair Value Measurements

 

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

 

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

 

Level 1:

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

 

 

Level 2:

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

 

 

Level 3:

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

Level 1

    

Level 2

    

Level 3

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

44,084

 

$

44,084

 

$

 —

 

$

 —

 

U.S. treasury securities

 

 

303,435

 

 

19,961

 

 

283,474

 

 

 —

 

Total assets at fair value

 

$

347,519

 

$

64,045

 

$

283,474

 

$

 —

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

81,968

 

$

81,968

 

$

 —

 

$

 —

 

U.S. treasury securities

 

 

308,251

 

 

9,981

 

 

298,270

 

 

 —

 

Total assets at fair value

 

$

390,219

 

$

91,949

 

$

298,270

 

$

 —

 

 

There we no liabilities that were measured at fair value on a recurring basis as of March 31, 2019. There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three months ended March  31, 2019.  

 

Financial instruments not recorded at fair value include our convertible senior notes. At March 31, 2019, the carrying amount of the 2021 Notes was $283.9 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $265.2 million. At March 31, 2019, the carrying amount of the 2025 Notes was $292.1 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $233.9 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 9, Convertible Senior Notes for discussion of the convertible senior notes.

 

4. Available-for-Sale Securities

 

As of March 31, 2019, available-for-sale securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

Aggregate

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. treasury securities

 

$

283,434

 

$

40

 

$

 —

 

$

283,474

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

Aggregate

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. treasury securities

 

$

298,305

 

$

 —

 

$

(35)

 

$

298,270

 

 

As of March 31, 2019, there were no available-for-sale securities that have been in a continuous unrealized loss position for less than 12 months.

 

As of March 31, 2019, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

Due in one year or less

 

$

283,434

 

$

283,474

 

Due in one year to two years

 

 

 —

 

 

 —

 

Total

 

$

283,434

 

$

283,474

 

 

 

 

5. Inventories

 

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

    

2019

    

2018

Work-in-process

 

$

129,248

 

$

126,620

Finished goods

 

 

10,888

 

 

14,360

Allowance for obsolete inventories

 

 

(154)

 

 

 —

Total inventories

 

$

139,982

 

$

140,980

 

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

 

At March 31, 2019, we had $25.0 million of current inventory and $115.0 million of long-term inventory. In addition, we had $12.4 million long-term deposit on inventory, which consists of API which we expect to be converted to finished goods and sold beyond the next twelve months.

 

6. Other Current Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

Prepaid insurance

 

$

1,720

 

$

244

 

Prepaid advertising

 

 

1,620

 

 

1,620

 

Prepaid expenses - other

 

 

3,870

 

 

3,519

 

Value-added tax ("VAT") receivable

 

 

6,337

 

 

 —

 

Receivable - other

 

 

1,772

 

 

2,274

 

Other

 

 

133

 

 

956

 

Total

 

$

15,452

 

$

8,613

 

 

 

 

 

 

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7. Intangible Assets and Goodwill

 

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

2019

    

2018

Intangible asset - milestones

 

$

71,100

 

$

56,100

Accumulated amortization

 

 

(5,290)

 

 

(4,170)

Total intangible asset, net

 

$

65,810

 

$

51,930

  

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

 

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

 

We recorded amortization expense of $1.1 million and $0.4 million related to capitalized milestone payments during the three months ended March 31, 2019 and March 31, 2018, respectively. Amortization expense is included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.

 

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

 

 

 

 

 

 

 

 

2019

 

 

 

 

$

3,588

2020

 

 

 

 

 

4,784

2021

 

 

 

 

 

4,784

2022

 

 

 

 

 

4,784

2023

 

 

 

 

 

4,784

Thereafter

 

 

 

 

 

43,086

 

 

 

 

 

$

65,810

 

 

 

 

 

 

 

8. Other Accrued Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

Accrued personnel costs

 

$

8,969

 

$

15,265

 

Accrued interest payable

 

 

1,862

 

 

2,721

 

Income tax payable

 

 

920

 

 

847

 

Accrued corporate legal fees and professional services

 

 

965

 

 

677

 

Accrued royalties

 

 

5,200

 

 

4,854

 

Accrued variable considerations

 

 

3,428

 

 

2,183

 

Current portion of capital lease obligations

 

 

 —

 

 

1,031

 

Purchase of API received not yet invoiced

 

 

177

 

 

35,472

 

Accrued expenses - other

 

 

4,057

 

 

4,506

 

Total

 

$

25,578

 

$

67,556

 

 

 

9. Lease

 

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are

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recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2019

Lease cost

 

 

 

Finance lease cost:

 

 

 

    Amortization of right-of-use assets

 

$

356

    Interest on lease liabilities

 

 

184

Operating lease cost

 

 

1,149

Short-term lease cost

 

 

49

Variable lease cost

 

 

725

Total lease cost

 

$

2,463

 

 

 

 

Operating cash flows from finance leases

 

$

184

Operating cash flows from operating leases

 

$

1,149

Financing cash flows from finance leases

 

$

250

 

 

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

 

 

 

 

 

 

 

March 31, 

 

    

2019

Weighted-average remaining lease term (years)

 

 

 

    Operating leases

 

 

6.9

    Finance leases

 

 

6.8

Weighted-average discount rate

 

 

 

    Operating leases

 

 

8%

    Finance leases

 

 

8%

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Future minimum commitments due under these lease agreements as of March 31, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

Finance Leases

 

Total

2019 (remaining nine months)

 

$

3,591

 

$

1,302

 

$

4,893

2020

 

 

4,668

 

 

1,736