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EX-32.2 - EX-32.2 - Clovis Oncology, Inc.clvs-20170930ex322342114.htm
EX-32.1 - EX-32.1 - Clovis Oncology, Inc.clvs-20170930ex321e1c277.htm
EX-31.2 - EX-31.2 - Clovis Oncology, Inc.clvs-20170930ex31226349b.htm
EX-31.1 - EX-31.1 - Clovis Oncology, Inc.clvs-20170930ex311a172e5.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

 

 

 

 

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

 

For the quarterly period ended September 30, 2017.

 

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

 

For the transition period from            to           .

 

Commission file number: 001-35347

 


Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)


 

 

 

Delaware

90-0475355

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

5500 Flatiron Parkway, Suite 100

 

Boulder, Colorado

80301

(Address of principal executive offices)

(Zip Code)

 

(303) 625-5000

(Registrant’s telephone number, including area code)

 

Not Applicable

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


 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) 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.

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

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

 

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

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of October 27, 2017 was 49,014,867.

 


 

CLOVIS ONCOLOGY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

PART I. Financial Information 

3

 

 

 

 

ITEM 1. 

 

Financial Statements (unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss — for the three and nine months ended September 30, 2017 and 2016

3

 

 

 

 

 

 

Consolidated Balance Sheets — as of September 30, 2017 and December 31, 2016

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows — for the nine months ended September 30, 2017 and 2016

5

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

 

ITEM 2. 

 

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

21

 

 

 

 

ITEM 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

 

ITEM 4. 

 

Controls and Procedures

34

 

 

PART II. Other Information 

35

 

 

 

 

ITEM 1. 

 

Legal Proceedings

35

 

 

 

 

ITEM 1A. 

 

Risk Factors

38

 

 

 

 

ITEM 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

 

ITEM 3. 

 

Defaults Upon Senior Securities

38

 

 

 

 

ITEM 4. 

 

Mine Safety Disclosures

38

 

 

 

 

ITEM 5. 

 

Other Information

38

 

 

 

 

ITEM 6.

 

Exhibits

38

 

 

SIGNATURES 

42

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

16,806

 

$

 —

 

$

38,471

 

$

 —

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Cost of sales - product

 

 

3,026

 

 

 —

 

 

6,920

 

 

 —

 

Cost of sales - intangible asset amortization

 

 

372

 

 

 —

 

 

1,115

 

 

 —

 

Research and development

 

 

38,924

 

 

54,338

 

 

104,479

 

 

196,675

 

Selling, general and administrative

 

 

35,011

 

 

9,162

 

 

100,384

 

 

28,541

 

Acquired in-process research and development

 

 

 —

 

 

500

 

 

 —

 

 

800

 

Impairment of intangible asset

 

 

 —

 

 

 —

 

 

 —

 

 

104,517

 

Change in fair value of contingent purchase consideration

 

 

 —

 

 

 —

 

 

 —

 

 

(24,936)

 

Total expenses

 

 

77,333

 

 

64,000

 

 

212,898

 

 

305,597

 

Operating loss

 

 

(60,527)

 

 

(64,000)

 

 

(174,427)

 

 

(305,597)

 

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense

 

 

(2,618)

 

 

(2,108)

 

 

(7,796)

 

 

(6,318)

 

Foreign currency loss

 

 

(44)

 

 

(66)

 

 

(127)

 

 

(434)

 

Legal settlement loss, net of insurance receivable

 

 

 —

 

 

 —

 

 

(117,000)

 

 

 —

 

Other income

 

 

1,291

 

 

252

 

 

2,237

 

 

473

 

Other expense, net

 

 

(1,371)

 

 

(1,922)

 

 

(122,686)

 

 

(6,279)

 

Loss before income taxes

 

 

(61,898)

 

 

(65,922)

 

 

(297,113)

 

 

(311,876)

 

Income tax benefit

 

 

1,234

 

 

227

 

 

2,599

 

 

33,467

 

Net loss

 

$

(60,664)

 

$

(65,695)

 

$

(294,514)

 

$

(278,409)

 

Other comprehensive income:

 

 

  

  

 

  

 

 

  

  

 

  

 

Foreign currency translation adjustments, net of tax

 

 

1,595

  

 

58

 

 

4,874

  

 

2,190

 

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

 

 

10

  

 

(18)

 

 

 5

  

 

260

 

Other comprehensive income

 

 

1,605

  

 

40

 

 

4,879

  

 

2,450

 

Comprehensive loss

 

$

(59,059)

 

$

(65,655)

 

$

(289,635)

 

$

(275,959)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per basic and diluted common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(1.24)

 

$

(1.70)

 

$

(6.39)

 

$

(7.24)

 

Basic and diluted weighted average common shares outstanding

 

 

48,917

 

 

38,538

 

 

46,062

 

 

38,429

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

3


 

CLOVIS ONCOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

ASSETS

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

611,472

 

$

216,186

 

Accounts receivable, net

 

 

 —

 

 

121

 

Insurance receivable

 

 

25,000

 

 

 —

 

Inventories

 

 

5,345

 

 

 —

 

Available-for-sale securities

 

 

16,499

 

 

49,997

 

Prepaid research and development expenses

 

 

2,853

 

 

6,427

 

Deposit on inventory

 

 

31,818

 

 

 —

 

Other current assets

 

 

5,911

 

 

6,679

 

Total current assets

 

 

698,898

 

 

279,410

 

Property and equipment, net

 

 

4,070

 

 

4,440

 

Intangible assets, net

 

 

19,932

 

 

21,047

 

Goodwill

 

 

64,253

 

 

57,192

 

Other assets

 

 

18,206

 

 

2,468

 

Total assets

 

$

805,359

 

$

364,557

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

14,308

 

$

10,912

 

Accrued research and development expenses

 

 

21,344

 

 

35,198

 

Deferred revenue

 

 

2,755

 

 

 —

 

Milestone liability

 

 

21,511

 

 

20,062

 

Accrued liability for legal settlement

 

 

142,000

 

 

 —

 

Other accrued expenses

 

 

17,467

 

 

19,487

 

Total current liabilities

 

 

219,385

 

 

85,659

 

Deferred income taxes, net

 

 

421

 

 

 —

 

Convertible senior notes

 

 

282,082

 

 

281,126

 

Deferred rent, long-term

 

 

4,282

 

 

1,406

 

Total liabilities

 

 

506,170

 

 

368,191

 

Commitments and contingencies (Note 14)

 

 

  

 

 

  

 

Stockholders' equity (deficit):

 

 

  

 

 

  

 

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock, $0.001 par value per share, 100,000,000 shares authorized at September 30, 2017 and December 31, 2016; 49,002,468 and 38,724,090 shares issued and outstanding at September 30, 2017 and December 31, 2016 respectively

 

 

49

 

 

39

 

Additional paid-in capital

 

 

1,767,397

 

 

1,174,950

 

Accumulated other comprehensive loss

 

 

(42,701)

 

 

(47,580)

 

Accumulated deficit

 

 

(1,425,556)

 

 

(1,131,043)

 

Total stockholders' equity (deficit)

 

 

299,189

 

 

(3,634)

 

Total liabilities and stockholders' equity (deficit)

 

$

805,359

 

$

364,557

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

4


 

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

  

 

 

  

 

 

Net loss

 

$

(294,514)

 

$

(278,409)

 

 

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

 

 

  

 

 

  

 

 

Share-based compensation expense

 

 

32,201

 

 

29,744

 

 

Depreciation and amortization

 

 

1,911

 

 

819

 

 

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

 

 

 6

 

 

190

 

 

Amortization of debt issuance costs

 

 

956

 

 

928

 

 

Legal settlement loss, net of insurance receivable

 

 

117,000

 

 

 —

 

 

Impairment of intangible asset

 

 

 —

 

 

104,517

 

 

Change in fair value of contingent purchase consideration

 

 

 —

 

 

(24,661)

 

 

Loss on disposal of property and equipment

 

 

 —

 

 

105

 

 

Deferred income taxes

 

 

(2,403)

 

 

(33,320)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

 

Accounts receivable

 

 

121

 

 

 —

 

 

Inventory

 

 

(5,345)

 

 

 —

 

 

Prepaid and accrued research and development expenses

 

 

(16,284)

 

 

(14,877)

 

 

Deposit on inventory

 

 

(31,818)

 

 

 —

 

 

Other operating assets

 

 

(4,156)

 

 

2,358

 

 

Accounts payable

 

 

5,050

 

 

(322)

 

 

Other accrued expenses

 

 

1,949

 

 

923

 

 

Net cash used in operating activities

 

 

(195,326)

 

 

(212,005)

 

 

Investing activities

 

 

  

 

 

  

 

 

Purchases of property and equipment

 

 

(416)

 

 

(761)

 

 

Deposits for purchases of property and equipment

 

 

(2,515)

 

 

65

 

 

Purchases of available-for-sale securities

 

 

(180,000)

 

 

 —

 

 

Maturities of available-for-sale securities

 

 

213,500

 

 

175,000

 

 

Acquired in-process research and development - milestone payment

 

 

(1,100)

 

 

 —

 

 

Net cash provided by investing activities

 

 

29,469

 

 

174,304

 

 

Financing activities

 

 

  

 

 

  

 

 

Proceeds from the sale of common stock, net of issuance costs

 

 

545,838

 

 

 —

 

 

Proceeds from the exercise of stock options and employee stock purchases

 

 

14,419

 

 

2,602

 

 

Net cash provided by financing activities

 

 

560,257

 

 

2,602

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

886

 

 

67

 

 

Increase (decrease) in cash and cash equivalents

 

 

395,286

 

 

(35,032)

 

 

Cash and cash equivalents at beginning of period

 

 

216,186

 

 

278,756

 

 

Cash and cash equivalents at end of period

 

$

611,472

 

$

243,724

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

 

 

Cash paid for interest

 

$

7,188

 

$

7,188

 

 

Non-cash investing and financing activities:

 

 

  

 

 

  

 

 

Vesting of restricted stock units

 

$

9,449

 

$

157

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

5


 

CLOVIS ONCOLOGY, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of Business and Basis of Presentation

 

Clovis Oncology, Inc. (together with its consolidated subsidiaries, the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and other international markets. We have and intend to continue to license or acquire rights to oncology compounds in all stages of development. In exchange for the right to develop and commercialize these compounds, we generally expect to provide the licensor with a combination of upfront payments, milestone payments and royalties on future sales. In addition, we generally expect to assume the responsibility for future drug development and commercialization costs. We currently operate in one segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities.

 

On December 19, 2016, the FDA approved Rubraca® (rucaparib) tablets as monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies, and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. We began selling Rubraca in the U.S. in the fourth quarter of 2016. Rucaparib is being studied as a potential maintenance therapy for ovarian cancer patients in the ARIEL3 trial. On June 19, 2017, we announced that the ARIEL3 trial successfully achieved the primary endpoint of improved progression-free survival (“PFS”) by investigator review in each of three populations studied. PFS was also improved in the rucaparib group compared with placebo by blinded independent central review (“BICR”), a key secondary endpoint. Based on these findings, we submitted a supplemental New Drug Application (“sNDA”) in October 2017 for a second-line or later maintenance treatment indication for all women with platinum-sensitive ovarian cancer who have responded to their most recent platinum therapy.

 

Our Marketing Authorization Application (“MAA”) for rucaparib that we submitted to the European Medicines Agency (“EMA”) for an ovarian cancer treatment indication is currently under review. We anticipate an opinion from the Committee for Medicinal Products for Human Use (“CHMP”) in late 2017, and, if we receive a favorable opinion from the CHMP, a potential approval from the EMA may follow during the first quarter of 2018.  Following a potential approval for the treatment indication, we intend to submit a variation to the MAA for the second-line or later maintenance treatment indication, for which we anticipate a potential approval during the third quarter of 2018.

 

Basis of Presentation

 

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

 

The unaudited financial statements of Clovis Oncology, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the periods presented herein. Interim results may not be indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical

6


 

experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

 

Liquidity

 

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

 

In January 2017, we sold 5,750,000 shares of our common stock in a public offering at $41.00 per share. The net proceeds from the offering were $221.2 million, after deducting underwriting discounts and commissions and offering expenses. In June 2017, we sold 3,920,454 shares of our common stock in a public offering at $88.00 per share. The net proceeds from the offering were $324.6 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds of the offerings for general corporate purposes, including sales and marketing expenses associated with Rubraca in the United States and, if approved by the EMA, in Europe, funding of our development programs, selling, general and administrative expenses, acquisition or licensing of additional product candidates or businesses and working capital. Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.

 

2. Summary of Significant Accounting Policies

 

Revenue Recognition

 

Product revenue is derived from sales of our product, Rubraca, in the United States. We distribute our product in the U.S. principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently resell our products to patients and healthcare providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and other discounts.

 

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. Revenue is recorded net of estimated rebates, chargebacks, discounts and other deductions as well as estimated product returns (collectively, “sales deductions”). Although the specialty distributor and specialty pharmacy providers are our customers, we recognize revenue on product sales once the product is resold to the patient or healthcare provider by the specialty distributor or specialty pharmacy provider, therefore reducing the significance of estimates made for product returns. To date, we have had minimal product returns and we currently do not have an accrual for product returns. We will continue to assess our estimate for product returns as we gain additional historical experience.

 

Cost of Sales – Product

 

Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales. Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, certain of the manufacturing costs of Rubraca units recognized as revenue during the three and nine months ended September 30, 2017 were expensed prior to the December 19, 2016 FDA approval, and therefore, a minimal amount is included in costs of sales during the current period. We expect cost of sales to increase in relation to product revenues as we deplete these inventories and we expect to use the remaining pre-commercialization inventory for product sales during the fourth quarter of 2017.

7


 

Cost of Sales – Intangible Asset Amortization

 

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

 

Inventory

 

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We began capitalizing incurred inventory related costs upon the regulatory approval of Rubraca. Prior to the regulatory approval of Rubraca, we incurred costs for the manufacture of the drug that could potentially be available to support the commercial launch of Rubraca and all such costs were recognized as research and development expense. We periodically analyze our inventory levels, and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements as cost of product revenues. Expired inventory would be disposed of and the related costs would be written off as cost of product revenues. 

 

The active pharmaceutical ingredient (“API”) in Rubraca is currently produced by a single supplier. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory.     

 

Our other significant accounting policies are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our 2016 Form 10-K.

 

Recently Issued Accounting Standards

 

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

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively, “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. ASC 606 is intended to provide a more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability.  Adoption of ASC 606 is required for annual and interim periods beginning after December 15, 2017. Upon adoption, we must elect to adopt either retrospectively to each prior reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized at the date of initial application. We expect to apply the new standard using the modified retrospective method upon its adoption date on January 1, 2018. 

 

We have begun a comprehensive scoping process to identify and disaggregate all revenue streams that may be impacted by the adoption of ASC 606. To date, we have examined our revenue recognition policy specific to revenue streams from representative contracts governing product sales from Rubraca and have come to preliminary conclusions on the impact of the new standard using the 5-step process prescribed by ASC 606. We have reviewed a representative sample of contracts, including our collaboration agreements with Servier and Bristol-Myers Squibb discussed in Note 12, License Agreements, and determined the potential impact to our accounting policies, financial controls and operations. Our preliminary conclusions include recognizing revenue on product sales once the product is sold to the specialty distributor and specialty pharmacy providers. We have not yet completed our final review of the impact of this guidance including the new disclosure requirements, as we are continuing to evaluate the impacts of adoption. We continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact our preliminary conclusions.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into

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after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” which clarifies the definition of a business in ASC 805. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. Currently, there is no impact to our consolidated financial statements and related disclosures, but we will adopt on January 1, 2018 for any business combinations and will consider adopting early for any acquisitions prior to January 1, 2018.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which we would be required to apply modification accounting under ASC 718. Specifically, we would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures should we have a modification to our share-based payment awards in the future.

 

3. Financial Instruments and Fair Value Measurements

 

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

 

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

 

Level 1:

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

 

 

Level 2:

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

 

 

Level 3:

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

Level 1

    

Level 2

    

Level 3

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

590,037

 

$

590,037

 

$

 —

 

$

 —

 

U.S. treasury securities

 

 

16,499

 

 

 —

 

 

16,499

 

 

 —

 

Total assets at fair value

 

$

606,536

 

$

590,037

 

$

16,499

 

$

 —

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

202,361

 

$

202,361

 

$

 —

 

$

 —

 

U.S. treasury securities

 

 

49,997

 

 

 —

 

 

49,997

 

 

 —

 

Total assets at fair value

 

$

252,358

 

$

202,361

 

$

49,997

 

$

 —

 

 

There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three and nine months ended September 30, 2017.

 

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Financial instruments not recorded at fair value include our convertible senior notes. At September 30, 2017, the carrying amount of the convertible senior notes was $282.1 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $444.2 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 9, Convertible Senior Notes for discussion of the convertible senior notes.

 

4. Available-for-Sale Securities

 

As of September 30, 2017, available-for-sale securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

Aggregate

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. treasury securities

 

$

16,498

 

$

 1

 

$

 —

 

$

16,499

 

 

As of December 31, 2016, available-for-sale securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

Aggregate

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. treasury securities

 

$

50,004

 

$

 —

 

$

(7)

 

$

49,997

 

 

As of September 30, 2017, there were no available-for-sale securities that have been in a continuous unrealized loss position for less than 12 months.

 

As of September 30, 2017, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

Due in one year or less

 

$

16,498

 

$

16,499

 

Due in one year to two years

 

 

 —

 

 

 —

 

Total

 

$

16,498

 

$

16,499

 

 

 

 

5. Inventories

 

The following table presents inventories as of September 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Work in process

 

3,482

 

 —

Finished goods

 

1,863

 

 —

Total inventories

 

5,345

 

 —

 

Some of the costs related to our finished goods on-hand as of September 30, 2017 were expensed as incurred prior to the commercialization of Rubraca on December 19, 2016.

 

At September 30, 2017, deposit on inventory on the Consolidated Balance Sheets is a cash deposit of $31.8 million made to a manufacturer for the purchase of inventory which we expect to be converted to finished goods within the next twelve months.

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6. Other Current Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Receivable from partners

 

$

64

 

$

2,882

 

Prepaid insurance

 

 

604

 

 

1,234

 

Prepaid expenses - other

 

 

3,811

 

 

2,109

 

Receivable - other

 

 

1,274

 

 

364

 

Other

 

 

158

 

 

90

 

Total

 

$

5,911

 

$

6,679

 

 

 

 

 

 

 

7. Intangible Assets and Goodwill

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

2017

    

2016

 

Intangible asset - milestones

 

$

21,100

 

$

21,100

 

Accumulated amortization

 

 

(1,168)

 

 

(53)

 

Total intangible asset, net

 

$

19,932

 

$

21,047

 

  

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

 

We recorded amortization expense of $0.4 million and $1.2 million related to capitalized milestone payments during the three and nine months ended September 30, 2017, respectively, included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss. There was no amortization expense during the three and nine months ended September 30, 2016.

 

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

 

 

 

 

 

 

 

 

 

2017 (remaining)

 

 

 

 

$

372

 

2018

 

 

 

 

 

1,486

 

2019

 

 

 

 

 

1,486

 

2020

 

 

 

 

 

1,486

 

2021

 

 

 

 

 

1,486

 

Thereafter

 

 

 

 

 

13,616

 

 

 

 

 

 

$

19,932

 

 

The change in goodwill established as part of the purchase accounting of EOS in November 2013 consisted of the following (in thousands):

 

 

 

 

 

 

Balance at December 31, 2016

 

$

57,192

 

Change in foreign currency gains and losses

 

 

7,061

 

Balance at September 30, 2017

 

$

64,253

 

 

 

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8. Other Accrued Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Accrued personnel costs

 

$

9,770

 

$

15,850

 

Accrued interest payable

 

 

299

 

 

2,096

 

Income tax payable

 

 

74

 

 

556

 

Accrued corporate legal fees and professional services

 

 

612

 

 

589

 

Accrued royalties

 

 

2,932

 

 

 —

 

Accrued sales deductions

 

 

1,254

 

 

 —

 

Accrued expenses - other

 

 

2,526

 

 

396

 

Total

 

$

17,467

 

$

19,487

 

 

 

9. Convertible Senior Notes

 

On September 9, 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “Notes”) resulting in net proceeds of $278.3 million after deducting offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.

 

The Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on March 15 and September 15 of each year. The Notes will mature on September 15, 2021, unless earlier converted, redeemed or repurchased.

 

Holders may convert all or any portion of the Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 16.1616 shares per $1,000 in principal amount of Notes, equivalent to a conversion price of approximately $61.88 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

 

On or after September 15, 2018, we may redeem the Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.

 

If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the Notes, holders may require us to repurchase for cash all or any portion of the Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

 

The Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to all of our liabilities that are not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

 

In connection with the issuance of the Notes, we incurred $9.2 million of debt issuance costs. The debt issuance costs are presented as a deduction from convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the Notes using the effective interest method. We determined the expected

12


 

life of the debt was equal to the seven-year term of the Notes. As of September 30, 2017 and December 31, 2016, the balance of unamortized debt issuance costs was $5.4 million and $6.4 million, respectively.

 

The following table sets forth total interest expense recognized during the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Contractual interest expense

 

$

1,797

 

$

1,797

 

$

5,391

 

$

5,390

 

Accretion of interest on milestone liability

 

 

500

 

 

 —

 

 

1,449

 

 

 —

 

Amortization of debt issuance costs

 

 

321

 

 

311

 

 

956

 

 

928

 

Total interest expense

 

$

2,618

 

$

2,108

 

$

7,796

 

$

6,318

 

 

 

10. Stockholders’ Equity

 

Common Stock

 

In January 2017, we sold 5,750,000 shares of our common stock in a public offering at $41.00 per share. The net proceeds from the offering were $221.2 million, after deducting underwriting discounts and commissions and offering expenses. In June 2017, we sold 3,920,454 shares of our common stock in a public offering at $88.00 per share. The net proceeds from the offering were $324.6 million, after deducting underwriting discounts and commissions and offering expenses.

 

The holders of common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors.

 

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss consists of changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency, and unrealized gains and losses on available-for-sale securities.

 

The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the three months ended September 30, 2017 and 2016, as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized

 

Total Accumulated

 

 

 

Translation Adjustments

 

(Losses) Gains

 

Other Comprehensive Loss

 

 

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

Balance at July 1,

 

$

(44,155)

 

$

(44,945)

 

$

(151)

 

$

(105)

 

$

(44,306)

 

$

(45,050)

 

Other comprehensive income (loss)

 

 

2,510

 

 

115

 

 

15

 

 

(29)

 

 

2,525

 

 

86

 

Total before tax

 

 

(41,645)

 

 

(44,830)

 

 

(136)

 

 

(134)

 

 

(41,781)

 

 

(44,964)

 

Tax effect

 

 

(915)

 

 

(57)

 

 

(5)

 

 

11

 

 

(920)

 

 

(46)

 

Balance at September 30, 

 

$

(42,560)

 

$

(44,887)

 

$

(141)

 

$

(123)

 

$

(42,701)

 

$

(45,010)

 

 

The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the nine months ended September 30, 2017 and 2016 as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized

 

Total Accumulated

 

 

 

Translation Adjustments

 

(Losses) Gains

 

Other Comprehensive Loss

 

 

 

2017

 

2016

 

2017

 

2016

 

2017