UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2016

OR

For the transition period from          to          

Commission file number 001-35587

TESARO, INC.

(Exact Name of Registrant as Specified in Its Charter)

(339) 970-0900

(Registrant’s Telephone Number, Including Area Code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):

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

As of May 2, 2016, there were 45,845,028 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

TESARO, INC.

FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2016

TABLE OF CONTENTS

PART IFINANCIAL INFORMATION

Item 1. Financial Statements.

TESARO, INC.

Condensed Consolidated Balance Sheets

(all amounts in 000’s, except share and per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TESARO, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(all amounts in 000’s, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TESARO, INC.

Condensed Consolidated Statements of Cash Flows

(all amounts in 000’s)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

TESARO, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.  Description of Business

TESARO, Inc., or the Company or TESARO, was incorporated in Delaware on March 26, 2010 and commenced operations in May 2010.  Headquartered in Waltham, Massachusetts, TESARO is an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients.  TESARO acquires, in-licenses, develops, and commercializes oncology products and product candidates.  Since incorporation, primary activities have consisted of acquiring product candidates, advancing development of these product candidates, developing intellectual property, recruiting personnel and raising capital.  As part of its business strategy, the Company intends to continue to in-license or acquire additional product candidates across various stages of development. The Company operates in one segment.  The Company is subject to a number of risks, including dependence on key individuals, the need to develop commercially viable products, competition from other companies, many of which are larger and better capitalized, and the need to obtain adequate additional financing to fund the development and potential commercialization of its product candidates and further its in-licensing and acquisition activities.

On September 1, 2015, the Company’s first commercial product, VARUBI® (rolapitant), was approved by the United States Food and Drug Administration, or FDA, in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  The Company commenced sales of VARUBI during the fourth quarter of 2015.

The Company has incurred significant operating losses since inception and has relied on its ability to fund its operations through private and public equity and debt financings.  Management expects operating losses and negative operating cash flows to continue for the foreseeable future.  As the Company continues to incur losses, transition to profitability is dependent upon the successful development, approval, and commercialization of its products and product candidates and the achievement of a level of revenues adequate to support its cost structure.  The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital.  On March 18, 2016, the Company closed a private placement of its common stock with certain accredited investors, whereby an aggregate of 4,404,658 shares of common stock were issued at a price per share of $35.19 for aggregate gross proceeds of approximately $155.0 million.  On April 5, 2016, the Company closed a private placement of its common stock with one accredited investor for gross proceeds of approximately $50.0 million.  Management intends to fund future operations in part through the proceeds from these financings and additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources.  

2.  Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by TESARO in conformity with accounting principles generally accepted in the United States of America, or GAAP.

The Company’s condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.  The Company currently operates in one business segment, which is the identification, acquisition, development and commercialization of oncology therapeutics and supportive care product candidates, and has a single reporting and operating unit structure.

Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted.  These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended March 31, 2015 and 2016.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.  These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2015 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, other comprehensive income and the related disclosures.  On an ongoing basis, management evaluates its estimates, including estimates related to sales of its approved product, accrued clinical trial and manufacturing development expenses, which form part of the Company’s research and development expenses, and stock-based compensation expense.  Significant estimates in these condensed consolidated financial statements include estimates made in connection with accrued research and development expenses, stock-based compensation expense, product revenue, and valuation of convertible notes.  The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances.  Actual results may differ from those estimates or assumptions. 

Cash and Cash Equivalents

The Company considers all highly-liquid investments with original or remaining maturity from the date of purchase of three months or less to be cash equivalents.  Cash and cash equivalents include bank demand deposits and money market funds that invest primarily in certificates of deposit, commercial paper and U.S. government and U.S. government agency obligations.  Cash equivalents are reported at fair value.

Fair Value of Financial Instruments

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values.  The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs.  The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of investment credit quality.  The hierarchy defines three levels of valuation inputs:

Level 1 inputsQuoted prices in active markets for identical assets or liabilities

Level 2 inputsObservable inputs other than Level 1 inputs, including quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active

Level 3 inputsUnobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of December 31, 2015 and March 31, 2016 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

The carrying amounts of accounts payable and accrued expenses approximate their fair values due to their short-term maturities.

In September 2014, the Company issued $201.3 million aggregate principal amount of 3.00% convertible senior notes due October 1, 2021, or the Convertible Notes.  Interest is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2015.  As of March 31, 2016, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $123.8 million and the estimated fair value of the principal amount was $309.2 million.  The Convertible Notes are discussed in more detail in Note 5, “Convertible Notes.”

Revenue Recognition

Product Revenue

Revenues from product sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred and title to the product and associated risk of loss has passed to the customer, the price is fixed or determinable, collection from the customer has been reasonably assured, all performance obligations have been met and returns and allowances can be reasonably estimated.  Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions as well as estimated product returns.  Allowances are recorded as a reduction of revenue at the time product revenues are recognized.

VARUBI is currently distributed in the U.S. principally through a limited number of specialty distributors and to a lesser extent though the specialty pharmacy channel, or collectively, Customers.  Customers subsequently resell VARUBI to health care providers and payers. 

In addition to distribution agreements with Customers, the Company has entered into arrangements with many health care providers and payers that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of VARUBI. 

Due to the recent launch of VARUBI, with the exception of actual payer data provided by the specialty pharmacy channel, the Company has determined that it does not yet have sufficient actual historical data regarding the ultimate third-party payer mix and resulting rebates related to shipments of VARUBI to its Customers.  In addition, the Company has further determined that it does not currently have the necessary volume of activity to provide sufficient visibility into the distribution channel and the ultimate utilization of the product, which inhibits the Company’s ability to determine a reasonable estimate of potential returns.  As a result of the above, at March 31, 2016, the Company has determined that it is not yet able to reliably make all of the estimates necessary to meet certain of the key recognition criteria in order to recognize net product revenues with respect to shipments of VARUBI to specialty distributor Customers.  Accordingly, the Company concluded that revenue related to shipments to specialty distributors, for which the Company has received payment, should be deferred.

With respect to shipments into the specialty pharmacy channel, for which the Company receives payer data once the specialty pharmacy ships VARUBI to providers and other third parties, the Company has determined that revenue from sales to the specialty pharmacy will be recognized once such shipments to providers and other third parties occur.  For such specialty pharmacy sales, allowances for government and non-government rebates and discounts are established based on the actual payer information, which is known at the time of shipment to patients or providers, as well as the related contracted discount rates applicable to each.  In certain cases an estimate of utilization of the rebate by the patient within each payer group is needed and is estimated based on market research data.  During the three months ended March 31, 2016, the Company recognized $0.2 million in net product revenues related to VARUBI sales through the specialty pharmacy channel.  No net product revenue was recorded for the three months ended March 31, 2015.  

Payments received from Customers in advance of recognition of revenue are recorded as deferred revenue by the Company, net of payments made to Customers, providers and payers.

License Revenue

The Company may enter into arrangements under which it licenses certain rights to its product candidates to third parties.  Activities under licensing agreements are evaluated to determine if they represent a multiple element arrangement.  The Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting.  The Company accounts for those components as separate units of accounting if the following two criteria are met:

Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the licensee could use the delivered item for its intended purpose without the receipt of the remaining deliverables.  When multiple deliverables are combined and accounted for as a single unit of accounting, the Company bases its revenue recognition on the last element to be delivered using the straight-line or proportional performance method depending on the Company’s ability to estimate the performance obligation.  Amounts received or recorded as receivable prior to satisfying the associated revenue recognition criteria are recorded as deferred revenue in the condensed consolidated balance sheets.  Amounts not expected to be recognized within one year following the balance sheet date are classified as non-current deferred revenue.

If a future milestone payment under a license agreement is contingent upon the achievement of a substantive milestone, license revenue is recognized in its entirety in the period in which the milestone is achieved.  A milestone is substantive if:

The commercial milestone and royalty payments received under license agreements, if any, will be recognized as license revenue when they are earned.

In July 2014, the Company entered into a license agreement with Jiangsu Hengrui Medicine Co., Ltd., or Hengrui, pursuant to which Hengrui has licensed rights to develop, manufacture and commercialize rolapitant in China, including Hong Kong and Macao.  For this arrangement, the Company has determined that there is only one unit of accounting that includes the licensed patents and the licensed know-how, which will be delivered over a period of time.  The Company recorded $0.1 million of license revenue related to a $1.0 million up-front payment under this arrangement during the three months ended March 31, 2016, and recorded $0.7 million as deferred revenue as of March 31, 2016.  This $1.0 million payment is being recognized as license revenue over the two-year period of performance

relating to the Company’s obligations to provide the licensed know-how to Hengrui.  Under the terms of the agreement, the Company would be entitled to additional payments of up to $2.0 million contingent on the achievement of certain regulatory milestones, as well as royalties on product sales at percentage rates in the low teens.

In April 2016, the Company entered into a collaboration and license agreement with Janssen Biotech, Inc., or Janssen, under which the Company granted Janssen licenses under certain patent rights and know-how relating to niraparib, for prostate cancer worldwide.  See Note 12, “Subsequent Events,” for further discussion. 

Research and Development Expenses

Research and development costs are charged to expense as incurred and include:

Costs for certain development activities, such as clinical trials and manufacturing development activities, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by its vendors on their actual costs incurred or level of effort expended.  Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the condensed consolidated balance sheets as prepaid or accrued research and development expenses.  Certain clinical development costs incurred by the Company with respect to its niraparib program are reimbursed as part of a collaborative research agreement with Merck.  Cost-sharing amounts received by the Company are recorded as a reduction to research and development expenses.

Acquired In-Process Research and Development Expense

The Company has acquired the rights to develop and commercialize new product candidates.  Up-front payments that relate to the acquisition of a new drug compound, as well as pre-commercial milestone payments, are immediately expensed as acquired in-process research and development in the period in which they are incurred, provided that the new drug compound did not also include processes or activities that would constitute a “business” as defined under GAAP, the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use.  Milestone payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized over the estimated remaining useful life of the related product.  Royalties owed on sales of the products licensed pursuant to the agreements are expensed in the period the related revenues are recognized.

Intangible Assets

We maintain definite-lived intangible assets related to certain capitalized milestones.  These assets are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life.  If our estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used.  Amortization expense is recorded as a component of cost of sales in the consolidated statements of operations.

We assess our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist.  Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate or new information regarding potential sales for the drug.  In connection with each impairment assessment, we compare the fair value of the asset as of the date of the assessment with the carrying value of the asset on our consolidated balance sheet.

Stock-Based Compensation Expense

Stock-based compensation is recognized as expense for each stock-based award based on its estimated fair value.  The Company determines the fair value of each stock option award at its grant date using the Black-Scholes option pricing model.  The Company determines the fair value of each restricted stock unit at its grant date based on the closing market price of the Company’s common stock on that date.  The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period.  The cumulative effect of any changes to the estimated forfeiture rates are accounted for as an adjustment to expense in the period of the change.

Inventory

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis.   

Prior to the regulatory approval of its product candidates, the Company incurs expenses for the manufacture of drug product that could potentially be available to support the commercial launch of its products.  Until the first reporting period when regulatory approval has been received or is otherwise considered probable, the Company records all such costs as research and development expense.  The Company periodically analyzes its inventory levels, and writes down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory in excess of expected sales requirements as cost of product sales.  The determination of whether inventory costs will be realizable requires estimates by management.  If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required which would be recorded as a cost of product sales in the consolidated statements of operations.

New Accounting Pronouncements - Recently Adopted

In June 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-12.  The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after a requisite service period.  The amendments require an entity to treat a performance target that affects vesting, and that could be achieved after the requisite service period, as a performance condition.  A reporting entity should apply existing guidance in ASC Topic 718 relating to awards with performance conditions that affect vesting to account for such awards.  The performance target should not be reflected in estimating the grant-date fair value of the award.  Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.  The amendments in this ASU are effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, and early adoption is permitted.  The Company adopted this ASU on January 1, 2016, and the adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, which provides guidance to customers about whether a cloud computing arrangement includes a software license.  If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the

acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The guidance will not change GAAP for a customer’s accounting for service contracts.  ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date, or (2) retrospectively.  For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change.  For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change.  The Company adopted this ASU prospectively on January 1, 2016 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements - Recently Issued

In May 2014, the FASB issued ASU No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers.  This ASU supersedes the revenue recognition requirements in Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts with Customers.  Two adoption methods are permitted: retrospectively to all prior reporting periods presented, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application.  In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date, including interim periods within those periods.  The FASB also approved permitting early adoption of the standard, but not before the original effective date of December 15, 2016.  In March 2016, the FASB issued ASU No. 2016-08, which clarifies the implementation guidance on principal versus agent considerations.  The Company is currently in the process of evaluating which adoption method it will utilize and the impact that the adoption of this guidance will have on its potential future revenue streams and consolidated financial statements. 

In August 2014, the FASB issued ASU No. 2014-15, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.  Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or are available to be issued).  ASU No. 2014-15 provides guidance to an organization’s management, with principles and definitions intended to reduce diversity in the timing and content of disclosures commonly provided by organizations in the footnotes of their financial statements.  ASU No. 2014-15 is effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter.  Early adoption is permitted.  We have not yet adopted this standard; however, if this standard had been adopted as of March 31, 2016, the Company believes that it would have concluded there was not substantial doubt about its ability to continue as a going concern.  

In July 2015, the FASB issued ASU No. 2015-11, which amends existing guidance for measurement of inventory.  Current inventory guidance requires an entity to measure inventory at the lower of cost or market.  Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin.  The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method.  The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost.  An entity should measure all inventory to which the amendments apply at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.  The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.  The amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.  The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently in the process of evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, a comprehensive new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees and requires lessees to recognize a lease liability and a right-of-use asset for most leases.  The new guidance is effective for fiscal years

beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.  The new standard must be applied using a modified retrospective transition approach which requires application of the new guidance for all periods presented.  The Company is currently in the process of evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, which simplifies various aspects of accounting for share-based payments to employees.  Key provisions of the new standard include requiring excess tax benefits and shortfalls to be recorded as income tax benefit or expense in the income statement, rather than in equity, and permitting an election to record the impact of pre-vesting forfeitures as they occur.  The new guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted.  The Company is currently in the process of evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

3.  Net Loss per Share

Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents.  The Company’s potentially dilutive shares, which include outstanding stock options, unvested restricted stock units, and shares issuable upon conversion of the Convertible Notes, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following table presents amounts that were excluded from the calculation of diluted net loss per share, due to their anti-dilutive effect (in thousands):

In September 2014, the Company issued Convertible Notes, which provide in certain situations for the conversion of the outstanding principal amount of the Convertible Notes into shares of the Company’s common stock at a predefined conversion rate.  See Note 5, “Convertible Notes”, for additional information.  In conjunction with the issuance of the Convertible Notes, the Company entered into capped call option transactions, or Capped Calls, with certain counterparties.  The Capped Calls are expected generally to reduce the potential dilution, and/or offset, to an extent, the cash payments the Company may choose to make in excess of the principal amount, upon conversion of the Convertible Notes.

As provided by the terms of the indenture underlying the Convertible Notes, the Company has a choice to settle the conversion obligation for the Convertible Notes in cash, shares or any combination of the two.  The Company currently intends to settle the par value of the Convertible Notes in cash and any excess conversion premium in shares.  Accordingly, the par value of the Convertible Notes will not be included in the calculation of diluted net income per share, but the dilutive effect of the conversion premium will be considered in the calculation of diluted net income per share using the treasury stock method.  The share figure in the table above represents the estimated incremental shares that would be issued, after consideration of the Capped Calls, assuming conversion of all of the outstanding Convertible Notes as of March 31, 2016.

4. Inventories

The following table presents inventories as of December 31, 2015 and March 31, 2016 (in thousands):

5.  Convertible Notes

On September 29, 2014, in a registered underwritten public offering, the Company completed the issuance of $201.3 million aggregate principal amount of Convertible Notes.  In conjunction with the sale of the Convertible Notes, the Company used $20.8 million of the net proceeds to enter into separate Capped Calls.

The Convertible Notes bear interest at a rate of 3.00% per annum, payable semi-annually on April 1 and October 1, and will be convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.  The Convertible Notes will mature on October 1, 2021, unless earlier converted or repurchased in accordance with their terms.  Prior to the close of business on the business day immediately preceding April 1, 2021, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods as discussed below, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.  The initial conversion price of the Convertible Notes is approximately $35.13 per share of common stock at an initial conversion rate of 28.4627 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes.

The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends.  At any time prior to the close of business on the business day immediately preceding April 1, 2021, holders may convert their Convertible Notes at their option only under the following circumstances:

The following table sets forth total interest expense recognized related to the Convertible Notes during the three months ended March 31, 2015 and 2016 (in thousands):

6.  Stock-Based Compensation

The Company maintains several equity compensation plans, including the TESARO, Inc. 2012 Omnibus Incentive Plan, or the 2012 Incentive Plan, the TESARO, Inc. 2010 Stock Incentive Plan, or the 2010 Incentive Plan, the TESARO, Inc. 2015 Non-Employee Director Stock Incentive Plan, or the 2015 Director Plan, and the TESARO, Inc. 2012 Employee Stock Purchase Plan, or the 2012 ESPP.

On April 27, 2012, the stockholders of the Company approved the 2012 Incentive Plan, which had been previously adopted by the board of directors.  Upon effectiveness of the 2012 Incentive Plan, the Company ceased making awards under the 2010 Incentive Plan.  The 2012 Incentive Plan initially allowed the Company to grant awards for up to 1,428,571 shares of common stock plus the number of shares of common stock available for grant under the 2010 Incentive Plan as of the effectiveness of the 2012 Incentive Plan (an additional 6,857 shares) plus the number of shares of common stock related to awards outstanding under the 2010 Incentive Plan that terminate by expiration, forfeiture, cancellation, cash settlement or otherwise.  In addition, each year starting in 2014, the number of shares

available for grants of awards under the 2012 Incentive Plan is increased automatically on January 1 by a number of shares of common stock equal to the lesser of 4% of the shares of common stock outstanding at such time or the number of shares determined by the Company’s board of directors.  Most recently, on January 1, 2015 and 2016, the number of shares authorized for issuance under the 2012 Incentive Plan was increased by 1,444,403 shares and 1,611,191 shares, respectively.  On May 14, 2015, the stockholders of the Company approved an increase of 2,000,000 shares of common stock available for grant under the 2012 Incentive Plan. Awards under the 2012 Incentive Plan may include the following award types: stock options, which may be either incentive stock options or nonqualified stock options; stock appreciation rights; restricted stock; restricted stock units; dividend equivalent rights; performance shares; performance units; cash-based awards; other stock-based awards, including unrestricted shares; or any combination of the foregoing.  The exercise price of stock options granted under the 2012 Incentive Plan is equal to the closing price of a share of the Company’s common stock on the grant date.

On May 14, 2015, the stockholders of the Company approved the 2015 Director Plan, which had been previously adopted by the board of directors in order to have a plan in addition to the 2012 Incentive Plan for purposes of granting awards to non-employee directors.  The 2015 Director Plan allows the Company to grant awards for up to 500,000 shares of common stock.  Awards under the 2015 Director Plan may include the following award types: stock options; stock appreciation rights; restricted stock; restricted stock units; unrestricted stock; or any combination of the foregoing.  The exercise price of stock options granted under the 2015 Director Plan is equal to the closing price of a share of the Company’s common stock on the grant date.

Stock-based compensation expense as reflected in the Company’s condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

Stock Options

The following table presents a summary of the Company’s stock option activity and related information:

At March 31, 2016, there was approximately $97.4 million of total unrecognized compensation cost related to unvested stock options, which the Company expects to recognize over a remaining weighted-average period of  3.1 years.

Restricted Stock Units

The following table presents a summary of the Company’s restricted stock unit, or RSU, activity and related information:

At March 31, 2016, there was approximately $19.4 million of unrecognized compensation cost related to RSUs, which the Company expects to recognize over a remaining weighted-average period of 3.8 years. 

ESPP

Under the Company’s 2012 ESPP, an aggregate of 275,000 shares of common stock have been reserved for issuance pursuant to purchase rights granted to the Company’s employees or to employees of the Company’s designated subsidiaries.  As of March 31, 2016, 236,723 shares remained available for issuance.  During the three months ended March 31, 2015 and 2016, the Company did not issue any shares under the 2012 ESPP, and recognized approximately $0.1 million and $0.3 million in related stock-based compensation expense, respectively.

7.  Common Stock Transactions

In March 2015, the Company sold 3,755,000 shares of common stock in an underwritten public offering at a price to the public of $51.00 per share, resulting in gross proceeds of approximately $191.5 million.  Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $179.8 million.  The shares were issued pursuant to an automatic shelf registration statement on Form S-3.

In March 2016, the Company sold 4,404,658 shares of common stock in an private placement offering at a price of $35.19 per share, with certain accredited investors, including funds affiliated with three of its directors and current investors, resulting in gross proceeds of approximately $155.0 million.  The price per share was equal to the volume weighted average price for the ten-day period ending on March 17, 2016.  There were no placement agents used for this financing.  The sale and issuance of the shares of common stock in the private placement was made in reliance on the exemption afforded by Section 4(a)(2) under the Securities Act of 1933 and Regulation D promulgated under the Securities Act.

8.  Income Taxes

Deferred tax assets and deferred tax liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A valuation allowance is recorded against deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

For the three months ended March 31, 2015 and 2016, the Company did not record any current or deferred income tax provisions or benefits.  Due to the uncertainty surrounding the future realization of the favorable tax attributes, the Company has recorded full valuation allowances against its otherwise recognizable net deferred tax assets at both December 31, 2015 and March 31, 2016.

9. Intangible Assets

The following table presents intangible assets as of December 31, 2015 and March 31, 2016 (in thousands):

The Company recorded $0.5 million in amortization expense related to this intangible asset during the three months ended March 31, 2016.   Estimated future amortization expense for intangible assets as of March 31, 2016 is $1.4 million for the remainder of 2016, $1.9 million per year for 2017, 2018, 2019, and 2020, and $5.5 million thereafter.

10.  Commitments and Contingencies

The Company leases approximately 70,900 square feet of office space in Waltham, Massachusetts under a non-cancelable operating lease agreement.  The term of the lease commenced April 1, 2013 and continues through June 30, 2017.  The lease agreement provides for one month of free rent with respect to a portion of the leased premises and a tenant improvement allowance of $0.1 million.  The Company recognizes rental expense on a straight-line basis over the respective lease term including any free rent periods and tenant allowances. 

Future minimum rental commitments under the lease as of March 31, 2016 were $1.8 million and $1.2 million for the remainder of the year ending December 31, 2016 and for the year ending December 31, 2017, respectively.

The Company has entered into agreements with certain vendors for the provision of services, including services related to data management, clinical and commercial operation support and companion diagnostic development, that the Company is not contractually able to terminate for convenience and avoid any and all future obligations to the vendors.  Under such agreements, the Company is contractually obligated to make certain minimum payments to the vendors, with the exact amounts in the event of termination to be based on the timing of the termination and the exact terms of the agreement.

The Company has certain obligations under licensing agreements with third parties that are contingent upon achieving various development, regulatory and commercial milestones.  Pursuant to these license agreements, the Company is required to make milestone payments if certain development, regulatory and commercial sales milestones are achieved, and may have certain additional research funding obligations.  Also, pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, the Company will pay royalties to its licensors on net sales of the respective products.

Legal Proceedings

The Company may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which the Company is focused.  The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities.

11. Collaboration Arrangements

In May 2015, the Company entered into a research agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., or Merck, to perform a trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® in patients with triple negative breast cancer and patients with ovarian cancer.  Under the terms of this agreement, the Company is responsible for providing niraparib study materials and for carrying out clinical research activities.  The Company and Merck share in the external costs of the study equally, with certain exceptions.  The Company records cost-sharing payments due from Merck as reductions of research and development expense.  During the three months ended March 31, 2016, the Company incurred $0.8 million in external costs related to this study, of which $0.4 million is reimbursable by Merck.  At March 31, 2016, $0.9 million of cost-sharing receivable from Merck has been recorded in accounts receivable in the condensed consolidated balance sheets.

12. Subsequent Events

On April 5, 2016, the Company entered into separate transactions with Janssen and its affiliate, Johnson & Johnson Innovation — JJDC, Inc., or JJDC, consisting of a collaboration and license agreement with Janssen, or the Collaboration Agreement, and a stock purchase agreement and investor agreement, each with JJDC, or the Stock Purchase Agreement and the Investor Agreement, respectively. 

Under the terms of the Collaboration Agreement, the Company granted Janssen licenses under certain patent rights and know-how relating to niraparib, for prostate cancer worldwide, except for Japan.  The Company retains all rights worldwide to develop and commercialize niraparib other than for prostate cancer. 

The Company received a $35.0 million upfront license fee from Janssen in April 2016.  Assuming successful development and commercialization of niraparib products for prostate cancer, the Company could receive up to an additional $415.0 million in clinical, regulatory and sales milestones as well as tiered, double-digit royalties on aggregate net sales of products in the field of prostate cancer.  Janssen is responsible for conducting and funding all development and commercialization of niraparib for prostate cancer worldwide (excluding Japan), including research, development, manufacturing, regulatory and commercialization activities.

Under the terms of the Stock Purchase Agreement, the Company sold and issued 1,130,198 shares of common stock to JJDC on April 5, 2016 at a price per share of $44.24, for an aggregate purchase price of approximately $50.0 million.  The price per share was equal to the volume weighted average price for the five-day period ending on April 4, 2016.  There were no placement agents used, or any underwriting discounts or commissions paid in connection with the transaction.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  In this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Examples of forward looking statements contained in this report include statements regarding the following: our intent to in-license or acquire additional product candidates; our expectation that research and development and selling, general and administrative expenses will increase in the future; our expectations regarding the timing and design of our clinical development plans, the timing of regulatory filings, and the timing of data from clinical trials, with respect to each of our IV rolapitant, niraparib, TSR-042, and TSR-022 programs, particularly with respect to the expected timing of data from our niraparib NOVA trial and the expected timing of the submission of both the NDA and MAA for niraparib; our expected gross-to-net adjustment range for VARUBI®; our expectation that we will continue to incur significant expenses, and our expectation that our operating losses and negative cash flows will continue to increase for the foreseeable future; the expected impact of recent accounting pronouncements and guidance on our financial statements; and our needs for additional capital and the forecast of the period of time through which our financial resources will be adequate to support our operations.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements.  We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.  In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

These forward-looking statements involve substantial risks and uncertainties that could cause actual future results, performance or achievements to differ significantly from those expressed or implied by the forward-looking statements.  Such risks and uncertainties include, among others, the uncertainties inherent in the development or launch of any new pharmaceutical product and the execution and completion of clinical trials, uncertainties surrounding the timing of availability of data from our clinical trials, ongoing discussions with and actions by regulatory authorities, patient accrual rates for clinical trials, manufacturing and supply risks, and other matters that could affect the timing of data, the potential regulatory approval, or the commercial availability of our product candidates or the success of any product.  The following information and any forward-looking statements should be considered in light of these factors and the factors discussed elsewhere in this Quarterly Report on Form 10-Q, including under the heading “Risk Factors,” and in light of factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.  We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients.  We have in-licensed and are currently developing several oncology-related product candidates, including rolapitant, niraparib, and the product candidates under our immuno-oncology platform.

On September 1, 2015, our first commercial product, VARUBI, which is the oral formulation of rolapitant, was approved by the United States Food and Drug Administration, or FDA, for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of

emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  We commenced shipments of VARUBI to distributors in November 2015.

In February 2016, we and the Institute for Applied Cancer Science at The University of Texas MD Anderson Cancer Center, or MDACC, entered into an exclusive collaboration to discover and develop small molecule product candidates against undisclosed immuno-oncology targets.  This collaboration is intended to leverage MDACC’s expertise in drug discovery and translational medicine and our oncology drug development and commercialization capabilities.  Under terms of the agreement, we will receive exclusive worldwide rights to develop and commercialize any small molecule product candidates that result from this collaboration.  MDACC will be responsible for conducting research activities aimed at identifying clinical candidates with defined characteristics targeting certain immuno-oncology targets.  We will fund research, development, and commercialization expenses for this collaboration.

In April 2016, we entered into a global prostate cancer collaboration and license agreement, or the Collaboration Agreement, with Janssen Biotech, Inc., or Janssen, under which we granted Janssen licenses under certain patent rights and know-how relating to niraparib, for prostate cancer worldwide, except for Japan.  We retain all rights worldwide to develop and commercialize niraparib outside of prostate cancer.  In connection with the execution of the Collaboration Agreement, we received a $35.0 million upfront license fee from Janssen, and assuming successful development and commercialization of niraparib products for prostate cancer, we could receive up to an additional $415 million in clinical, regulatory and sales milestones as well as tiered, double-digit royalties on aggregate net sales of products in the field of prostate cancer.  Janssen is responsible for conducting and funding all development and commercialization of niraparib in prostate cancer worldwide (excluding Japan), including research, development, manufacturing, regulatory and commercialization activities.  We also entered into stock purchase and investor agreements with an affiliate of Janssen, Johnson & Johnson Innovation — JJDC, Inc., or JJDC, whereby we sold and issued 1,130,198 shares of our common stock to JJDC on April 5, 2016 at a price per share of $44.24, for an aggregate purchase price of approximately $50.0 million. 

A summary description of our current products and product candidates is as follows:

We commenced business operations in May 2010.  Our operations to date have been primarily focused on organizing and staffing our company, raising capital, identifying, acquiring and developing product candidates, undertaking preclinical studies and clinical trials, manufacturing activities related to our product and product candidates,

and the commercialization of VARUBI.  We have only recently launched our first commercial product, and to date we have recorded limited revenues from product sales and a license related to the development of rolapitant in China.  We have financed our operations primarily with net proceeds from public and private offerings of our common stock, private placements of our preferred stock and the issuance of convertible notes.

As of March 31, 2016, we had an accumulated deficit of $692.7 million.  Our net losses were $90.8 million, $251.4 million, $171.0 million, and $92.4 million for the three months ended March 31, 2016 and the years ended December 31, 2015, 2014 and 2013, respectively.  We expect to incur significant expenses and operating losses for the foreseeable future.  Overall, assuming that we receive positive results from our ongoing NOVA Phase 3 trial of niraparib in ovarian cancer, we expect operating expenses to continue to increase throughout 2016 over current levels as we incur increased costs related to our ongoing commercialization activities including executing related marketing and promotional programs for the commercialization of VARUBI, costs related to the advancement of clinical trial and other development and regulatory activities under our current development programs such as IV rolapitant, niraparib, TSR-042 and TSR-022, costs related to the immuno-oncology development activities under our collaboration with AnaptysBio, costs related to expanding our international operations, and costs related to other research and development activities and potential future collaborative or in-licensed development programs.  In addition, future license payments or milestone payments could cause our total operating expenses and cash usage to fluctuate.  If we obtain regulatory approval for any of our product candidates in addition to VARUBI, or in anticipation of obtaining regulatory approval, we expect that we will incur significant additional commercialization expenses related to product sales, marketing, manufacturing and distribution.  Furthermore, we expect to incur increasing selling, general and administrative costs associated with our anticipated growth and continuing operation as a public company, and we will continue to incur substantial interest expense related to our outstanding convertible debt.  The actual amount of many of the expenditures described above will depend on numerous factors, including the timing of expenses and the timing, progress, and results of our clinical trial activity (such as the niraparib Phase 3 NOVA trial results, which we expect in the second quarter of 2016) and commercialization efforts for VARUBI.  Accordingly, until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance our operations in part through additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources.  Adequate additional financing may not be available to us on acceptable terms, or at all.  Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.  We will need to generate significant revenues to achieve profitability, and we may never do so.

Public Offerings of Common Stock, Private Placements of Securities and Issuance of Convertible Notes.  As of March 31, 2016, our principal source of liquidity was cash and cash equivalents, which totaled $314.5 million.  Since our inception on March 26, 2010, we have funded our operations primarily through public offerings of our common stock, the private placement of our equity securities and issuance of convertible notes.  From inception through December 31, 2015, we received $758.3 million in proceeds, net of underwriting discounts and commissions and offering expenses, from private placements of convertible preferred stock, and public offerings of common stock and convertible notes.  On March 18, 2016, we completed a private placement whereby we sold 4,404,658 shares of our common stock at a price of $35.19 per share and received approximately $155.0 million in proceeds.  In addition, as noted above, on April 5, 2016, we completed a private placement whereby we sold 1,130,198 shares of our common stock at a price of $44.24 per share and received approximately $50.0 million in proceeds.

Financial Operations Overview

Product and License Revenue

Product revenue consists of sales of our product, VARUBI, in the United States.

License revenue relates to our license agreement with Jiangsu Hengrui Medicine Co., Ltd., or Hengrui, pursuant to which Hengrui has licensed the rights to develop, manufacture and commercialize rolapitant in China, including Hong Kong and Macao.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

Research and development costs are expensed as incurred.  License fees and development milestone payments related to in-licensed products and technology are expensed as acquired in-process research and development if it is determined at that point that they have no established alternative future use.  Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

Research and development activities are central to our business model.  Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and manufacturing costs.  We expect that our total future research and development costs will continue to increase over current levels, depending on the progress of our clinical development programs as well as expected increasing costs associated with our collaborations with AnaptysBio and Merck, manufacturing related costs, and potential development milestone payments.  More specifically, we expect costs to increase as we: continue our currently ongoing Phase 2 and 3 trials, continue our manufacturing development and validation, and initiate additional investigative and collaborative studies, related to niraparib; continue clinical, manufacturing and regulatory development activities for the IV formulation of rolapitant; incur potential research and development related milestones; incur increased discovery, development and manufacturing related expenses associated with our immuno-oncology platform; and hire additional development and scientific personnel.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval.  We may never succeed in achieving regulatory approval for any of our currently unapproved product candidates.  The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation.  In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.  We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as based upon an assessment of each product candidate’s commercial potential. If we experience delays in the completion of, or the termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our future ability to generate product revenues from any of these product candidates will be delayed or jeopardized.  These occurrences would harm our business, financial condition and prospects, perhaps significantly, which would require us to alter our current operation plan and potentially delay, scale back, or discontinue the development or commercialization of one or more programs and/or other areas of the business in order to reduce our future expenses and continue to fund our remaining operations. 

The following table presents research and development expenses and acquired in-process research and development expenses on a program-specific basis for our in-licensed products and product candidates for the three months ended March 31, 2015 and 2016 (in thousands):

For further discussion of the changes in our research and development expenses with respect to the three months ended March 31, 2016 and the corresponding period of 2015, see “Results of Operations — Comparison of the Three Months Ended March 31, 2015 and 2016 — Research and Development Expenses” below.

Personnel-related costs, depreciation and stock-based compensation are not allocated to any programs, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist principally of salaries and related costs, including stock-based compensation, for our commercial personnel, including our field sales force, certain medical education professionals and other commercial support personnel, as well as personnel in executive and other administrative or non-research and development functions.  Other selling, general and administrative expenses include certain facility-related costs, communication expenses, pre-commercial and commercial consulting, advertising, market research and other activities necessary to prepare for and support the launch of VARUBI, and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our selling, general and administrative expenses will continue to increase in the future in support of our commercial activities related to VARUBI and continued research and development activities, as well as the continued costs of operating as a public company.  These increases will likely include increased costs related to the hiring of additional personnel, executing marketing and promotional programs, hiring consultants, and legal and other professional fees, among other expenses. 

Other Income and Expense

Other income and expense consists primarily of interest expense related to the Convertible Notes and interest income earned on cash and cash equivalents.  A portion of the interest expense on the Convertible Notes is non-cash expense relating to accretion of the debt discount and amortization of issuance costs.

Results of Operations

Comparison of the Three Months Ended March 31, 2015 and 2016

Product Revenue.  We recorded $0.2 million of net product revenue for the three months ended March 31, 2016.  No product revenue was recorded for the three months ended March 31, 2015.  This amount relates to sales of VARUBI, our first commercial product, which we began shipping in November of 2015.  Through March 31, 2016 we have recorded product revenue related to VARUBI that has been shipped by the specialty pharmacy to patients.  We have not recorded any product revenue from shipments that we have made to our other direct customers, specialty distributors.  We expect specialty distributors to comprise a majority of our ultimate product sales.  We have not recognized product revenue for sales to the specialty distributors as we have concluded that we did not meet the revenue recognition criteria under current accounting guidance for these shipments, and we anticipate recognizing revenue on product sales to these customers at such time as we have concluded that we have met all applicable revenue recognition criteria under current accounting guidance.  For further discussion regarding our revenue recognition policy, see the “Critical Accounting Policies” section below and Note 2, “Basis of Presentation and Significant Accounting Policies”, in the Notes to Condensed Consolidated Financial Statements.  The corresponding costs of product sales for which we have not recognized product revenue have similarly not yet been reflected in the condensed consolidated statement of operations.

Since the launch of VARUBI, through March 31, 2016, we have shipped approximately 7,000 units for stocking and to satisfy reorders from distributors.    Of these units, approximately 4,000 units were subsequently shipped from our distributors to providers and patients through March 31, 2016.  The Wholesale Acquisition Cost, or WAC, which is the gross list price at which our direct customers purchase each unit of VARUBI, is $530 per unit.  For product sales recognized to date, which, as described above, are comprised solely of units sold to the specialty pharmacy channel, the average net sales price per unit to us (after accounting for fees, rebates, chargebacks, and other discounts or reserves, or, the gross-to-net adjustment) was $355 or approximately 67% of WAC.  We expect that our gross-to-net adjustment to revenues will be higher in the future as a result of changes to our customer and payer mix.  Overall, we expect that our gross-to-net adjustments will increase throughout 2016 such that our average net sales price will represent around 60% of WAC per unit.

License Revenue.  License revenue of $0.1 million for the three months ended March 31, 2016 relates to our license agreement with Hengrui, which we entered into in July 2015 and pursuant to which Hengrui has licensed the rights to develop, manufacture and commercialize rolapitant in China, including Hong Kong and Macao.  No license revenue was recorded for the three months ended March 31, 2015.  

Cost of Sales - Product. Cost of sales of $0.1 million for the three months ended March 31, 2016 consists of costs of product shipped from our specialty pharmacy to providers and other third parties, as well as costs of product provided under our sampling and other commercial programs and certain period costs. No product cost of sales was recorded for the three months ended March 31, 2015.

Cost of Sales - Intangible Asset Amortization. Cost of sales of $0.5 million for the three months ended March 31, 2016 consists of amortization of the intangible asset recorded as a result of the $15.0 million milestone paid to OPKO upon the first commercial sale of VARUBI. No similar amortization was recorded for the three months ended March 31, 2015.

Research and Development Expenses.  Research and development expenses were $52.6 million for the three months ended March 31, 2016, compared to $33.5 million for the three months ended March 31, 2015, an increase of $19.1 million. The increase was primarily due to higher external costs associated with our niraparib development efforts, development of TSR-042 and TSR-022 and our other immuno-oncology product candidates, as well as higher personnel and related costs.  Significant changes resulting in this increase included:

In addition, stock-based compensation expense included in research and development expenses increased by $1.9 million, primarily due to increased awards of employee stock options and restricted stock units.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $30.0 million for the three months ended March 31, 2016, compared to $11.2 million for the three months ended March 31, 2015, an increase of $18.8 million.  The increase was primarily due to increases of: $10.8 million in salaries, benefits and other personnel-related costs, primarily due to the hiring of sales, marketing, medical affairs and other support personnel associated with the commercialization of VARUBI; $4.5 million in professional and consulting fees and other expenses to support corporate operational and commercialization activities; and $3.5 million in stock-based compensation expense.

Acquired In-Process Research and Development.  Acquired in-process research and development expenses were $4.0 million for the three months ended March 31, 2016, comprised of a milestone paid to AnaptysBio.  Our obligation to pay this milestone was triggered by the clearance of our IND for TSR-042, which occurred in January 2016. There were no acquired in-process research and development expenses for the three months ended March 31, 2015.

Other Income (Expense), Net.  Other income (expense) is primarily comprised of interest expense related to our Convertible Notes and interest income earned on cash and cash equivalents.  Interest expense increased by $0.3 million in the three months ended March 31, 2016 due to the accretion of the debt discount, which is a component of interest expense, and the use of the effective interest method.  Interest income increased by $0.1 million in the three months ended March 31, 2016.

Liquidity and Capital Resources

Sources of Liquidity

As of March 31, 2016, our principal source of liquidity was cash and cash equivalents, which totaled $314.5 million, exclusive of the $35.0 million upfront payment from Janssen Biotech, Inc. as well as the $50.0 million in proceeds from our sale of 1,130,198 shares of our common stock to Johnson & Johnson Innovation — JJDC, Inc., both of which we received in April of 2016 and which are more fully described above.  Since our inception on March 26, 2010, we have funded our operations primarily through public offerings of our common stock, the private placement of our equity securities and the issuance of convertible notes.  From inception through December 31, 2015, including our

2012 initial public offering, we raised a total of $758.3 million in net cash proceeds from private placements of convertible preferred stock and public offerings of common stock, and convertible notes.  On March 18, 2016, we issued an aggregate of 4,404,658 shares of our common stock in a private placement at a price of $35.19 per share and received approximately $155.0 million in proceeds.

Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods noted (in thousands):

Cash Flows from Operating Activities

The use of cash in operating activities during both the three months ended March 31, 2015 and 2016 resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.  Net cash used in operating activities increased by $27.3 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to increased external expenses related to commercialization activities and increased external research and development expenses as we continued to progress the niraparib development program and the immuno-oncology platform.  Higher costs associated with increased employee headcount related to commercial preparation activities also contributed to the increase in cash used in operating activities.  These factors were partially offset by lower external costs associated with our oral rolapitant development program.

Cash Flows from Investing Activities

The increase of $4.2 million in net cash used in investing activities for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was due primarily to a $4.0 million milestone payment to AnaptysBio, which was earned in January 2016.

Cash Flows from Financing Activities

The decrease of $26.4 million in net cash provided by financing activities for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily due to cash proceeds of $155.0 million from the closing of our March 2016 private placement of common stock, compared to cash proceeds of $180.0 million in the prior year period from the closing of our March 2015 public offering of common stock (both amounts net of underwriting discounts and commissions and offering expenses, if any).  In addition, cash proceeds from exercises of employee stock options decreased by $1.5 million during the current year period.

Operating Capital Requirements

We expect to incur significant expenses and operating losses for the foreseeable future.  Overall, we expect 2016 operating expenses to increase over current levels as we incur increased costs related to the continued development of IV rolapitant, costs related to the advancement of our clinical trials and other development activities under our current development programs, such as niraparib and the immuno-oncology activities under our collaboration with AnaptysBio, costs related to ongoing commercial activities, including our commercial sales force, executing marketing and promotional programs and other commercialization costs associated with VARUBI, costs related to expanding our international operations, and costs related to potential future in-licensed development programs.  We are subject to the risks incident in the development of new biopharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business and cause increased uses of cash.

We will require additional capital for the continuing commercialization of VARUBI, further development and potential commercialization of our other product candidates, including any license payments or milestone obligations that may arise, required costs relating to our March 2014 collaboration and exclusive license agreement with AnaptysBio, and cash interest obligations related to our Convertible Notes.  We may also need additional funds to

pursue our strategy of in-licensing or acquiring additional product candidates and to meet our obligation to repay the Convertible Notes at maturity or, at our election, upon conversion.  On March 18, 2016, we issued an aggregate of 4,404,658 shares of our common stock in a private placement at a price per share of $35.19 for gross proceeds of approximately $155.0 million.  On April 5, 2016, we issued 1,130,198 shares of our common stock in a private placement at a price per share of $44.24 for gross proceeds of approximately $50.0 million. The funds we received upon closing of these private placements, coupled with our existing cash and cash equivalents and the cash we expect to generate from sales of VARUBI, are expected to be sufficient to meet our existing cash flow requirements and fund our existing operations at their currently planned levels through at least the 12 months following the filing of this Quarterly Report on Form 10-Q. 

Unless and until we can generate a sufficient amount of revenue from our products, we expect to finance future cash needs through public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources.  Additional capital may not be available on reasonable terms, if at all.  If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we would have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates and/or other areas of our business.  Raising additional funds through the issuance of equity or debt securities could result in dilution to our existing stockholders, increased fixed payment obligations, or both.  Furthermore, these securities may have rights senior to those of our common stock and Convertible Notes and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.  Any of these events could significantly harm our business, financial condition and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors.  We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.  Our future funding requirements, both short and long-term, will depend on many factors, including:

If we lack sufficient capital to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Off-Balance Sheet Arrangements

As of March 31, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements.  On an ongoing basis, we evaluate our estimates and judgments, including those related to net product revenue, accrued research and development expenses and stock-based compensation expense.  We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  In making estimates and judgments, management employs critical accounting policies.

Product Revenue

In September 2015, our product VARUBI, which is the oral formulation of rolapitant, was approved for sale by the FDA, and in November 2015 we began shipping VARUBI to our U.S. customers.  We distribute our product in the U.S. principally through a limited number of specialty distributors and to a lesser extent though the specialty pharmacy channel, or collectively, our Customers.  Our Customers subsequently resell our products to health care providers and payers.  

Revenues from product sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred and title of the product and associated risk of loss has passed to the customer, the price is fixed or determinable, collection from the customer has been reasonably assured and all performance obligations have been met and returns and allowances can be reasonably estimated.  Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions as well as estimated product returns.  Allowances are recorded as a reduction of revenue at the time product revenues are recognized. 

In addition to distribution agreements with our Customers, we have entered into direct and indirect arrangements with many health care providers and payers that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of VARUBI.  Due to the short period of time since the launch of VARUBI, and with the exception of actual payer data provided to us by the specialty pharmacy channel, we do not yet have sufficient actual historical data regarding the ultimate third-party payer mix and resulting rebates related to shipments of VARUBI to our Customers.  Therefore, we are not yet otherwise able to reasonably make estimates related to payer mix and resulting rebates for specialty distributor Customers.  In addition, one of the key elements to meet certain of the revenue recognition criteria is to have the necessary volume of activity to provide sufficient visibility into the distribution channel and the ultimate utilization of the product, such that we are able to determine a reasonable estimate of potential returns.  At March 31, 2016, we have therefore determined that we do not yet have sufficient visibility to reliably make certain estimates necessary to recognize net product revenues with respect to shipments of VARUBI to certain Customers.  Accordingly, we have determined that revenue related to shipments to specialty distributors, for which we have received payment, should be deferred.

With respect to shipments into the specialty pharmacy channel, for which we receive payer data once the specialty pharmacy ships VARUBI to providers and other third parties, we have determined that revenue from sales to

the specialty pharmacy will be recognized once the product has been shipped by the specialty pharmacy to the third party. For such specialty pharmacy sales, allowances for government and non-government rebates and discounts are established based on the actual payer information, which is known at the time of shipment to patients or providers, as well as the related contracted discount rates applicable to each. In certain cases an estimate of utilization of the rebate by the patient within each payer group is needed and is estimated based on market research data.  During the three months ended March 31, 2016, we recognized $0.2 million in net product revenues related to VARUBI sales through the specialty pharmacy channel. 

Payments received from Customers in advance of recognition of revenue are recorded as deferred revenue by the Company net of payments made to Customers, providers and payers. 

For those quantities shipped to our customers for which revenue has not been recognized, the cost of the related units has been accounted for within “Other current assets” in the condensed consolidated balance sheets, and will be recorded to cost of sales upon recognition of the related product revenue.  We will assess the recoverability of these costs on a quarterly basis.  We will continue to evaluate the criteria for revenue recognition in future periods to determine if and when we have met these criteria with respect to any previously deferred product revenues.

The following table presents an analysis of product sales allowances and accruals for the three months ended March 31, 2016 (in thousands):

Allowances and accruals are comprised of direct and indirect fees, discounts and rebates.  Direct fees, certain discounts and rebates are contractual fees and price adjustments payable to specialty distributors and specialty pharmacies that purchase products directly from us.  Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as physicians, clinics, hospitals, and group purchasing organizations that purchase products from specialty distributors and specialty pharmacies. Indirect rebates also include amounts owed to health insurance providers and pharmacy benefit managers.  Both types of allowances are based on definitive contractual agreements or legal requirements (such as Medicaid) related to the purchase and/or utilization of the product by these entities.  In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer (including a reseller of a vendor’s products), these fees, discounts and rebates are presumed to be a reduction of the selling price of our product.  Allowances are recorded in the same period that the related product revenue is recognized and are estimated using either historical, actual and/or other data, including estimated patient usage, customer buying patterns, applicable contractual rebate rates, and contract performance by the benefit providers.  Reserve estimates are evaluated quarterly and may require adjustments to better align estimates with actual results.  As part of this evaluation, we review changes to federal legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends.  Although allowances are accrued at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the related sale.

Chargebacks, Discounts and Fees: Chargeback and discount reserves represent our estimated obligations resulting from the difference (which is charged to us by specialty distributors and specialty pharmacies) between the specialty distributor and specialty pharmacy price and the lower pricing as mandated by statute to eligible federally funded healthcare providers or lower contractual pricing to certain private organizations.    Fees

under our arrangements with specialty distributors and specialty pharmacies are based upon units of VARUBI purchased during the prior month. 

Governmental and Other Rebates and Fees: Governmental and other rebate and fee reserves relate to our reimbursement arrangements with state Medicaid programs, the Medicare program, or volume or performance rebate agreements with certain other private organizations, such as health insurance providers and pharmacy benefit managers.

Returns: Consistent with industry practice, we generally offer Customers a limited right to return units of VARUBI that have been purchased directly from us based on the product’s expiration date, which generally lapses upon shipment to the patient.  To date, there have been no returns.  Net product revenue for the three months ended March 31, 2016 relates to sales to the specialty pharmacy, once the product has been shipped by the specialty pharmacy to a patient. 

For a description of our other critical accounting policies, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015. Other than as described above, there have not been any material changes to our critical accounting policies since December 31, 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates.  As of March 31, 2016 and December 31, 2015, we had cash and cash equivalents of $314.5 million and $230.1 million, respectively, consisting primarily of money market funds.  Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates, particularly because our investments are in short-term securities.  Our securities are subject to interest rate risk and will fall in value if market interest rates increase.  Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.  There has been no material change to our interest rate sensitivity during the three months ended March 31, 2016.

Item 4. Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

Our principal executive officer and our principal financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act, Rule 13a-15(e) or Rule 15d-15(e)), with the participation of our management, has concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective and are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  It should be noted that any system of controls is designed to provide reasonable, but not absolute, assurances that the system will achieve its stated goals under all reasonably foreseeable circumstances.  Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at a level that provides such reasonable assurances.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART IIOTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors.