srpt-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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 001-14895

 

SAREPTA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

93-0797222

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

215 First Street, Suite 415

Cambridge, MA

 

02142

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (617) 274-4000

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging growth company

 

  

  

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock with $0.0001 par value

  

66,823,624

(Class)

  

(Outstanding as of October 26, 2018)

 

 

 

 


SAREPTA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — As of September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss — For the Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2018
and 2017

 

5

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A.

 

Risk Factors

 

39

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

65

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

65

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

65

 

 

 

 

 

Item 5.

 

Other Information

 

65

 

 

 

 

 

Item 6.

 

Exhibits

 

65

 

 

 

 

 

Exhibits

 

66

 

 

 

 

 

Signatures

 

67

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share amounts)

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

209,702

 

 

$

599,691

 

Short-term investments

 

 

583,158

 

 

 

479,369

 

Accounts receivable

 

 

48,601

 

 

 

29,468

 

Inventory

 

 

115,816

 

 

 

83,605

 

Other current assets

 

 

54,800

 

 

 

36,511

 

Total current assets

 

 

1,012,077

 

 

 

1,228,644

 

Property and equipment, net of accumulated depreciation of $25,224

   and $18,022 as of September 30, 2018, and December 31, 2017, respectively

 

 

76,841

 

 

 

43,156

 

Intangible assets, net of accumulated amortization of $5,532 and $4,145 as of

  September 30, 2018, and December 31, 2017, respectively

 

 

15,324

 

 

 

14,355

 

Other assets

 

 

78,664

 

 

 

21,809

 

Total assets

 

$

1,182,906

 

 

$

1,307,964

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,408

 

 

$

8,467

 

Accrued expenses

 

 

88,687

 

 

 

68,982

 

Current portion of long-term debt

 

 

 

 

 

6,175

 

Deferred revenue

 

 

3,303

 

 

 

3,316

 

Other current liabilities

 

 

1,995

 

 

 

1,392

 

Total current liabilities

 

 

114,393

 

 

 

88,332

 

Long-term debt

 

 

415,446

 

 

 

424,876

 

Deferred rent and other

 

 

13,219

 

 

 

5,539

 

Total liabilities

 

 

543,058

 

 

 

518,747

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 3,333,333 shares authorized; none issued and

   outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value, 99,000,000 shares authorized; 66,693,348

   and 64,791,670 issued and outstanding at September 30, 2018, and

   December 31, 2017, respectively

 

 

7

 

 

 

6

 

Additional paid-in capital

 

 

2,077,864

 

 

 

2,006,598

 

Accumulated other comprehensive income (loss)

 

 

8

 

 

 

(379

)

Accumulated deficit

 

 

(1,438,031

)

 

 

(1,217,008

)

Total stockholders’ equity

 

 

639,848

 

 

 

789,217

 

Total liabilities and stockholders’ equity

 

$

1,182,906

 

 

$

1,307,964

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share amounts)

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product, net

 

$

78,486

 

 

$

45,954

 

 

$

216,619

 

 

$

97,307

 

Total revenues

 

 

78,486

 

 

 

45,954

 

 

 

216,619

 

 

 

97,307

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of in-licensed

   rights)

 

$

8,741

 

 

 

3,078

 

 

$

21,058

 

 

 

3,807

 

Research and development

 

 

86,584

 

 

 

34,239

 

 

 

255,636

 

 

 

122,266

 

Selling, general and administrative

 

 

53,044

 

 

 

28,176

 

 

 

143,541

 

 

 

90,461

 

EXONDYS 51 litigation and license charges

 

 

 

 

 

25,588

 

 

 

 

 

 

28,427

 

Amortization of in-licensed rights

 

 

216

 

 

 

780

 

 

 

649

 

 

 

837

 

Total costs and expenses

 

 

148,585

 

 

 

91,861

 

 

 

420,884

 

 

 

245,798

 

Operating loss

 

 

(70,099

)

 

 

(45,907

)

 

 

(204,265

)

 

 

(148,491

)

Other (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from sale of Priority Review Voucher

 

 

 

 

 

 

 

 

 

 

 

125,000

 

Interest (expense) income and other, net

 

 

(6,968

)

 

 

184

 

 

 

(16,671

)

 

 

703

 

Other (loss) income

 

 

(6,968

)

 

 

184

 

 

 

(16,671

)

 

 

125,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax (benefit) expense

 

 

(77,067

)

 

 

(45,723

)

 

 

(220,936

)

 

 

(22,788

)

Income tax (benefit) expense

 

 

(674

)

 

 

2,011

 

 

 

87

 

 

 

3,902

 

Net loss

 

 

(76,393

)

 

 

(47,734

)

 

 

(221,023

)

 

 

(26,690

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on cash equivalents and short-term

   investments

 

 

369

 

 

 

26

 

 

 

387

 

 

 

108

 

Total other comprehensive income

 

 

369

 

 

 

26

 

 

 

387

 

 

 

108

 

Comprehensive loss

 

$

(76,024

)

 

$

(47,708

)

 

$

(220,636

)

 

$

(26,582

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(1.15

)

 

$

(0.78

)

 

$

(3.38

)

 

$

(0.47

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock used in

   computing basic and diluted net loss per share

 

 

66,209

 

 

 

61,528

 

 

 

65,454

 

 

 

57,166

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(221,023

)

 

$

(26,690

)

Adjustments to reconcile net loss to cash flows from operating activities:

 

 

 

 

 

 

 

 

Gain from sale of Priority Review Voucher

 

 

 

 

 

(125,000

)

Depreciation and amortization

 

 

8,718

 

 

 

5,968

 

Amortization of investment discount

 

 

(4,742

)

 

 

(344

)

Loss from debt extinguishment

 

 

2,322

 

 

 

 

Non-cash interest expense

 

 

15,206

 

 

 

200

 

Loss on disposal of assets

 

 

94

 

 

 

792

 

Stock-based compensation

 

 

37,289

 

 

 

23,099

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

 

 

 

Net increase in accounts receivable

 

 

(19,133

)

 

 

(19,523

)

Net increase in inventory

 

 

(32,211

)

 

 

(51,880

)

Net increase in other assets

 

 

(84,344

)

 

 

(7,319

)

Net increase (decrease) in accounts payable, accrued expenses, deferred revenue and

   other liabilities

 

 

31,584

 

 

 

(241

)

Net cash used in operating activities

 

 

(266,240

)

 

 

(200,938

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(40,954

)

 

 

(8,101

)

Purchase of intangible assets

 

 

(2,633

)

 

 

(8,591

)

Purchase of available-for-sale securities

 

 

(651,387

)

 

 

(100,348

)

Maturity and sale of available-for-sale securities

 

 

562,575

 

 

 

296,225

 

Proceeds from sale of Priority Review Voucher

 

 

 

 

 

125,000

 

Purchases of restricted investment

 

 

(353

)

 

 

 

Maturity of restricted investment

 

 

 

 

 

10,695

 

Net cash (used in) provided by investing activities

 

 

(132,752

)

 

 

314,880

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from July 2017 Term Loan, net of cash debt issuance costs

 

 

 

 

 

29,620

 

Repayment of June 2015 and July 2017 Term Loan

 

 

(30,000

)

 

 

(15,000

)

Proceeds from revolving line of credit

 

 

217,722

 

 

 

24,000

 

Repayment of revolving line of credit

 

 

(218,631

)

 

 

(23,008

)

Repayments on mortgage loans

 

 

(1,265

)

 

 

(81

)

Payment of debt extinguishment

 

 

(1,990

)

 

 

 

Proceeds from sale of common stock, net of offering costs

 

 

 

 

 

353,959

 

Proceeds from exercise of stock options and purchase of stock under the Employee Stock

   Purchase Program

 

 

43,031

 

 

 

11,779

 

Net cash provided by financing activities

 

 

8,867

 

 

 

381,269

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

 

(390,125

)

 

 

495,211

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Beginning of period

 

 

599,827

 

 

 

122,556

 

End of period

 

$

209,702

 

 

$

617,767

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

209,702

 

 

$

617,630

 

Restricted cash in other assets

 

 

 

 

 

137

 

Total cash, cash equivalents and restricted cash

 

$

209,702

 

 

$

617,767

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

6,861

 

 

$

924

 

Supplemental schedule of non-cash investing activities and financing activities:

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

$

9,053

 

 

$

1,791

 

Reclassification of long term investments to short term investments

 

$

9,980

 

 

$

 

Reclassification of revolving line of credit balance to other receivable

 

$

683

 

 

$

 

Intangible assets included in accrued expenses

 

$

234

 

 

$

258

 

Asset held for sale

 

$

 

 

$

1,529

 

Debt issuance costs related to the term loans included in accrued expenses

 

$

 

 

$

600

 

Offering costs related to equity offerings included in accrued expenses

 

$

 

 

$

25

 

Property and equipment included in accrued expenses

 

$

2,515

 

 

$

385

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


SAREPTA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. ORGANIZATION AND NATURE OF BUSINESS

Sarepta Therapeutics, Inc. (together with its wholly-owned subsidiaries, “Sarepta” or the “Company”) is a commercial-stage biopharmaceutical company focused on the discovery and development of unique RNA-targeted therapeutics, gene therapy and other genetic medicine approaches for the treatment of rare neuromuscular diseases. Applying its proprietary, highly-differentiated and innovative platform technologies, the Company is able to target a broad range of diseases and disorders. Its first commercial product in the U.S., EXONDYS 51® (eteplirsen) Injection (“EXONDYS 51”), was granted accelerated approval by the United States Food and Drug Administration (“FDA”) on September 19, 2016. EXONDYS 51 is indicated for the treatment of Duchenne muscular dystrophy (“DMD”) in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 skipping. Continued approval for this indication may be contingent upon verification of a clinical benefit in confirmatory trials.

In addition to advancing its exon-skipping product candidates for DMD, including eteplirsen, golodirsen, casimersen and SRP-5051, the Company is working with several strategic partners under various agreements to research and develop multiple treatment approaches to DMD, which include Nationwide Children’s Hospital, Genethon, Duke University and Summit (Oxford) Ltd. (“Summit”).

In November 2016, the Company submitted a marketing authorization application (“MAA”) for eteplirsen to the European Medicines Agency (“EMA”) and the application was validated in December 2016. On June 1, 2018, the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA adopted a negative opinion for eteplirsen. On September 21, 2018, the Company announced that the CHMP has confirmed its negative opinion for eteplirsen. The Company expects the European Commission to adopt the CHMP opinion by year-end 2018.

The Company has also initiated a market access program (“MAP”) for eteplirsen in select countries in Europe, North America, South America and Asia where it currently has not been approved. The MAP provides a mechanism through which physicians can prescribe eteplirsen, within their professional responsibility, to patients who meet pre-specified medical and other criteria and can secure funding. The Company commenced shipments through the MAP. In addition, the Company contracted with third party distributors and service providers to distribute eteplirsen in certain areas outside the U.S., such as Israel, Brazil, and certain countries in the Middle East, on a named patient basis.

As of September 30, 2018, the Company had approximately $793.9 million of cash, cash equivalents and investments, consisting of $209.7 million of cash and cash equivalents, $583.2 million of short-term investments, and $1.0 million of long-term restricted investment. The Company believes that its balance of cash, cash equivalents and investments as of the date of the issuance of this report is sufficient to fund its current operational plan for at least the next twelve months, though it may pursue additional cash resources through public or private debt and equity financings, seek additional government contracts and establish collaborations with or license its technology to other companies.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), reflect the accounts of Sarepta Therapeutics, Inc. and its wholly-owned subsidiaries. All intercompany transactions between and among its consolidated subsidiaries have been eliminated. Management has determined that the Company operates in one segment: discovering, developing, manufacturing and delivering therapies to patients with DMD. The Company’s CEO, as the chief operating decision-maker, manages and allocates resources to the operations of the Company on a total company basis. The Company’s research and development organization is responsible for the research and discovery of new product candidates and supports development and registration efforts for potential future products. The Company’s supply chain organization manages the development of the manufacturing processes, clinical trial supply and commercial product supply. The Company’s commercial organization is responsible for commercialization of EXONDYS 51 in the U.S. and internationally. The Company is supported by other back-office general and administration functions. Consistent with this decision-making process, the Company’s CEO uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.

6


Estimates and Uncertainties

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include revenue recognition, inventory, convertible debt, valuation of stock-based awards, research and development expenses and income tax.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash, cash equivalents and investments held at financial institutions.  

As of September 30, 2018, the majority of the Company’s accounts receivable arose from product sales in the U.S. and all customers have standard payment terms which generally require payment within 30 to 60 days. Outside of the U.S., the payment terms range between 30 and 120 days. Three individual customers accounted for 43%, 36% and 18% of net product revenues for the nine months ended September 30, 2018 and 55%, 24% and 12% of accounts receivable from product sales as of September 30, 2018. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profile. As of September 30, 2018, the Company believes that such customers are of high credit quality.

As of September 30, 2018 the Company’s cash equivalents and investments were concentrated at two financial institutions in the U.S., which potentially exposes the Company to credit risks. However, the Company does not believe that there is significant risk of non-performance by the financial institutions.

Significant Accounting Policies

For details about the Company’s accounting policies, please read Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements of the Annual Report on Form 10-K for the year ended December 31, 2017.

The Company has adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective as of January 1, 2018. The Company has chosen to use the full retrospective transition method, under which it is required to revise its consolidated financial statements for the years ended December 31, 2016 and 2017 as well as any applicable interim periods within those years, as if ASC 606 had been effective for those periods. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for the goods or services provided. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied. For all contracts that fall into the scope of ASC 606, only one performance obligation has been identified by the Company: to timely deliver drug products to the customer’s designated warehouses.

 

Product Revenues

 

The Company distributes its product principally through a limited number of specialty distributor and specialty pharmacies in the U.S. and certain distributors in the European Union (“EU”), Brazil, Israel and Middle East (collectively, “Customers”). The Customers subsequently resell the product to patients and health care providers. The Company provides no right of return to the Customers except in cases of shipping error or product defect. Product revenues are recognized when the Customers take control of the product, which typically occurs upon delivery to the Customers. For both the three and nine months ended September 30, 2018, the majority of the revenues recognized were generated by the specialty distributor and specialty pharmacies in the U.S.

7


Variable Consideration

Product revenues are recorded at the net sales price (“transaction price”) which includes estimated reserves for variable consideration, such as Medicaid rebates, governmental chargebacks, including Public Health Service (“PHS”) chargebacks, prompt payment discounts, co-pay assistance and distribution fees. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if no payment is required by the Company) or a current liability (if a payment is required by the Company). These reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contracts. Additional details relating to variable consideration follows:

 

Medicaid rebates relate to the Company’s estimated obligations to states under established reimbursement arrangements. Rebate reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses.

 

Governmental chargebacks, including PHS chargebacks, relate to the Company’s estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices that the Company charges to wholesalers. The wholesaler charges the Company for the difference between what the wholesaler pays for the products and the ultimate selling price to the qualified healthcare providers. Chargeback reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider from the wholesaler, and the Company generally issues credits for such amounts within a few weeks of receiving notification of resale from the wholesaler.

 

Prompt payment discounts relate to the Company’s estimated obligations for credits to be granted to a specialty pharmacy for remitting payment on its purchases within established incentive periods. Reserves for prompt payment discounts are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable.

 

Co-pay assistance relates to financial assistance provided to qualified patients, whereby the Company may assist them with prescription drug co-payments required by the patient’s insurance provider. Reserves for co-pay assistance are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses.

 

Distribution fees relate to fees paid to Customers in the distribution channel that provide the Company with inventory management, data and distribution services and are generally accounted for as a reduction of revenue. To the extent that the services received are distinct from the Company’s sale of products to the Customer, these payments are accounted for as selling, general and administrative expenses.

The impact of adopting ASC 606 was not material. There have not been any other material changes to the Company’s accounting policies as of September 30, 2018.

 

Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. Under the new guidance, entities are required to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. However, for equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient available in ASC Topic 820, “Fair Value Measurement to estimate fair value using the net asset value per share (or its equivalent) of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted this ASU on January 1, 2018, which did not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes ASC Topic 840, “Leases”. Under the new guidance, a lessee should recognize assets and liabilities that arise from its leases and disclose qualitative and quantitative information about its leasing arrangements. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvement to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842), Targeted Improvements”. ASU No. 2018-10 made 16 technical corrections to the new leases standard, clarifying certain inconsistencies in the guidance. ASU No. 2018-11 provides entities with a new transition method that allows them to use the effective date of the new leases standard as the date of initial application on transition. Companies that elect this transition method will (1) not adjust their comparative period financial information for the effects of ASC 842; (2) not make the new required lease disclosures for periods before the effective date;

8


and (3) carry forward their ASC 840 disclosure for comparative periods. Additionally, this update allows lessors to make an accounting policy election by class of underlying assets to not separate lease and non-lease components if specified criteria are met. ASU No. 2016-02, ASU No. 2018-10 and ASU No. 2018-11 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of these standards is expected to have an impact on the amount of the Company’s assets and liabilities presented. The Company expects to utilize the new transition method described in ASU No. 2018-11 and use the effective date as the Company’s date of initial application for the new standard. The Company expects to elect the available package of practical expedients in transition which would allow it to not re-assess whether existing or expired arrangements contain a lease, the lease classification of existing or expired leases, or whether previous initial direct costs would qualify for capitalization under the new lease standard. As of September 30, 2018, the Company has not elected to early adopt the guidance or determined the effect that the adoption of this guidance will have on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. This new standard amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. ASU No. 2017-02 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. As of September 30, 2018, the Company is currently evaluating the potential impact that this new standard may have on its financial position and results of operations.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. ASU No. 2018-07 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted, although no earlier than the adoption date of Topic 606.  The Company elected to early adopt this ASU in the quarter ended June 30, 2018, which did not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted. As of September 30, 2018, the Company has not elected to early adopt this guidance but does not expect that the adoption of this guidance will have a material effect on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This ASU requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance contained in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrange is ready for its intended use. ASU No. 2018-15 will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted. As of September 30, 2018, the Company has not elected to early adopt this guidance but believes that the adoption of this guidance will not have a material effect on its consolidated financial statements.

 

 

9


3. COLLABORATION, LICENSE AND MANUFACTURING AGREEMENTS

 

Lacerta Therapeutics

 

On August 8, 2018 (the “Effective Date”), the Company entered into a License, Development and Option Agreement (the “License Agreement”) with Lacerta Therapeutics, Inc. (“Lacerta”). Pursuant to the License Agreement, the Company licensed in exclusive worldwide rights to develop, manufacture and commercialize a pre-clinical Pompe product candidate (the “Pompe License”). Lacerta also granted the Company exclusive options to enter into exclusive License Agreements to develop, manufacture and commercialize other gene therapy product candidates for Sanfilipo syndrome and L-Amino Acid Decarboxylase Deficiency for additional consideration of $42.0 million (collectively, the “Options”) when (and if) the Options are exercised. Additionally, the Company may be liable for up to approximately $44.0 million in development, regulatory and sales milestones associated with the Pompe License and may be required to make a high-single-digit royalty payments based on net sales of the Pompe product subsequent to its commercialization.

 

Concurrently with the execution of the License Agreement, the Company entered into a Series A Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Lacerta. Under the Purchase Agreement, the Company purchased approximately 4.5 million shares of Series A preferred stock issued by Lacerta.  

 

The Company considered whether it would have to consolidate the operations of Lacerta and concluded that, while Lacerta is a variable interest entity, the Company is not the primary beneficiary as it does not have the power to direct the activities that would most significantly impact the economic performance of Lacerta.

 

The Company made an up-front payment of $38.0 million to Lacerta in consideration of both the License Agreement and the Purchase Agreement. This payment was allocated to the fair value of the Series A preferred stock investment, the Pompe License and the Options based on their respective relative fair values on the Effective Date. The fair value of the Options were determined using an option pricing model, whereas the Series A preferred stock investment was determined using a cost approach corroborated by the Black-Scholes option pricing model. The fair value of the Pompe License was determined using a discounted cash flow model under the income approach. Accordingly: (i) $30.0 million was allocated to the Series A preferred stock investment, (ii) $8.0 million was allocated to the Pompe License, and (iii) no amount was allocated to the Options as they are far out of money and were determined to have a fair value of zero.  fThe Series A preferred stock investment was initially measured at cost and classified as an other non-current asset in the accompanying unaudited condensed consolidated balance sheets. Subsequently, changes in the carrying value of the investment will be reported as a component of earnings whenever there are observable price changes in orderly transactions for identical or similar investments of Lacerta in the future. The amount allocated to the Pompe License represents rights to potential future benefits associated with ongoing research and development activities that have no alternative future use.  Accordingly, this amount has been recorded as research and development expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2018.

 

Myonexus Therapeutics

 

In May 2018, the Company entered into a Warrant to Purchase Common Stock Agreement (“Warrant Agreement”) with Myonexus Therapeutics, Inc. (“Myonexus”). Pursuant to the terms of the Warrant Agreement, the Company made an up-front payment of $60.0 million to purchase an exclusive option to acquire Myonexus for $200.0 million plus sales-related and regulatory-related contingent payments. Prior to the exercise of the option to acquire Myonexus, the Company may be required to make additional development milestone payments to Myonexus of up to $45.0 million over an approximately two-year evaluation period. The Company considered whether it would have to consolidate the operations of Myonexus and concluded that, while Myonexus is a variable interest entity, the Company is not the primary beneficiary as it does not have the power to direct the activities that would most significantly impact the economic performance of Myonexus.

 

As of September 30, 2018, the Company made an up-front payment of $60.0 million and a milestone payment of $10.0 million to Myonexus corresponding to execution of the Warrant Agreement in May 2018 and achievement of a development milestone in September 2018, respectively. Prior to regulatory approval, considerations paid to Myonexus represent rights to potential future benefits associated with Myonexus’s ongoing research and development activities, which have not reached technological feasibility and have no alternative future use. Accordingly, the Company recorded $10.0 million and $70.0 million for the three and nine months ended September 30, 2018, respectively, as research and development expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

 

Brammer Bio MA, LLC

 

In June 2018, the Company entered into a Development, Commercial Manufacturing and Supply Agreement (“Brammer Manufacturing Agreement”), with Brammer Bio MA, LLC (“Brammer”). Pursuant to the terms of the Brammer Manufacturing Agreement, Brammer agreed to provide the Company with access to clinical and commercial manufacturing capacity for its gene therapy programs.

10


As part of the Brammer Manufacturing Agreement, the Company will purchase product in batches from Brammer, subject to minimum and maximum annual purchase requirements. Further, the Company: (i) was required to make a $20.0 million advance payment to Brammer upon execution of the agreement, (ii) is required to make two non-refundable payments of $5.0 million each to Brammer in the third and fourth quarter of 2018 to be used in the specification, selection, and procurement of the related process equipment to be utilized under the agreement, and (iii) is required to make a $10.0 million quarterly capacity access fee payment to Brammer throughout the term of the agreement. However, through June 30, 2019, a reduced quarterly capacity access fee will be in effect as Brammer works towards achieving full capacity at its facility. In addition, one-tenth of the $20.0 million advance payment will be applied as a credit to the quarterly capacity access fees due and payable from July 1, 2019 through December 31, 2021, resulting in a net capacity access fee of $8.0 million.

The term of the Brammer Manufacturing Agreement will continue for a period of six years following the first regulatory approval of a product manufactured under the agreement. The term will automatically renew for successive two years unless the Company notifies Brammer of its intention not to renew (no less than twenty-four months prior to the expiration of the term).  The Company also has the ability to terminate the agreement prior to expiration but would be required to continue remitting capacity access fees to Brammer for up to eight additional quarters.

 

The Company has determined that the Brammer Manufacturing Agreement does not contain an embedded lease because it does not convey the right to control the use of the facility or related equipment.  This conclusion was based on the Company’s inability or right to control physical access to Brammer’s facility and the related equipment, and the ability of one or more parties, other than the Company, to take more than a minor amount of the output that will be produced during the term of the agreement.

As of September 30, 2018, the Company has made payments totaling $35.0 million to Brammer under the Brammer Manufacturing Agreement consisting of: (i) the $20.0 million advance payment made in June 2018, (ii) the first $5.0 million process equipment fee paid in July 2018, and (iii) the first two reduced quarterly capacity access fee payments of $5.0 million made in July 2018 and September 2018. Of the cumulative amount paid of $35.0 million, $2.2 million was recorded as an other current asset and $32.8 million as an other non-current asset, in the accompanying unaudited condensed consolidated balance sheets.

The advance payment and process equipment fee will be amortized over their expected economic benefit to research and development expense, prior to regulatory approval of the related product, commencing upon the first batch delivery to the Company, which is currently estimated to occur in July 2019.  Upon regulatory approval, amortization expense will be classified to cost of sales. Capacity access fee payments made prior to the first batch delivery to the Company will be capitalized and amortized to expense in a manner similar to the advance payment and process equipment fee. Capacity access fee payments made subsequent to the first batch delivery to the Company will be expensed as incurred to research and development expense, prior to regulatory approval of the related product.  Upon regulatory approval, the expense associated with capacity access fee payments will be classified to cost of sales. In the event the Company does not expect services under the Brammer Manufacturing Agreement to be rendered, the capitalized payments will be charged to expense.

 

 

4. FAIR VALUE MEASUREMENTS

The Company has certain financial assets that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

 

Level 1 — quoted prices for identical instruments in active markets;

 

Level 2 — quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

Level 3 — valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

11


The tables below present information about the Company’s financial assets that are measured and carried at fair value and indicate the level within the fair value hierarchy of valuation techniques it utilizes to determine such fair value: 

 

 

 

Fair Value Measurement as of September 30, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

85,321

 

 

$

85,321

 

 

$

 

 

$

 

Commercial paper

 

 

89,795

 

 

 

 

 

 

89,795

 

 

 

 

Government and government agency bonds

 

 

510,028

 

 

 

510,028

 

 

 

 

 

 

 

Corporate bonds

 

 

83,261

 

 

 

83,261

 

 

 

 

 

 

 

Strategic investment

 

 

30,000

 

 

 

 

 

 

 

 

 

30,000

 

Certificates of deposit

 

 

1,001

 

 

 

1,001

 

 

 

 

 

 

 

Total

 

$

799,406

 

 

$

679,611

 

 

$

89,795

 

 

$

30,000

 

 

 

 

Fair Value Measurement as of December 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

352,370

 

 

$

352,370

 

 

$

 

 

$

 

Commercial paper

 

 

133,368

 

 

 

 

 

 

133,368

 

 

 

 

Government and government agency bonds

 

 

294,717

 

 

 

284,745

 

 

 

9,972

 

 

 

 

Corporate bonds

 

 

127,956

 

 

 

127,956

 

 

 

 

 

 

 

Certificates of deposit

 

 

648

 

 

 

648

 

 

 

 

 

 

 

Total

 

$

909,059

 

 

$

765,719

 

 

$

143,340

 

 

$

 

 

The Company’s assets with fair value categorized as Level 1 within the fair value hierarchy include money market funds, government and government agency bonds, corporate bonds and certificates of deposit. Certain of the government and government agency bonds and corporate bonds are publically traded fixed income securities and are presented as cash equivalents on the unaudited condensed consolidated balance sheets as of September 30, 2018.

The Company’s assets with fair value categorized as Level 2 within the fair value hierarchy consist of commercial paper and government and government agency bonds. These assets have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, through income-based approaches utilizing market observable data.

The Company’s assets with fair value categorized as Level 3 within the fair value hierarchy consists of a strategic investment in Series A preferred stock of Lacerta as more fully described in Note 3, Collaboration, License and Manufacturing Agreements. The fair value of the asset is based on a cost approach corroborated by the Black-Scholes option pricing model. The most significant assumptions in the option pricing model include historical volatility of similar public companies, estimated term through Lacerta’s potential exit and a risk free rate based on certain U.S. Treasury rates as of the Effective Date of the License Agreement with Lacerta.

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and revolving line of credit approximated fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts for the term loan approximated fair value based on market activity for other debt instruments with similar characteristics and comparable risk.

 

5. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

The following table summarizes the Company’s financial assets with maturities of less than 90 days from the date of purchase included in cash equivalents in the unaudited condensed consolidated balance sheets for each of the periods indicated:

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

 

 

(in thousands)

 

Money market funds

 

$

85,321

 

 

$

352,370

 

Corporate bonds

 

 

 

 

 

16,720

 

Government and government agency bonds

 

 

99,926

 

 

 

49,972

 

Total

 

$

185,247

 

 

$

419,062

 

 

12


It is the Company’s policy to mitigate credit risk in its financial assets by maintaining a well-diversified portfolio that limits the amount of exposure as to maturity and investment type. The weighted average maturity of the Company’s available-for-sale securities as of September 30, 2018 and December 31, 2017 was approximately two and seven months, respectively.

The following tables summarize the Company’s cash, cash equivalents and short-term investments for each of the periods indicated:

 

 

 

As of September 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

109,776

 

 

$

 

 

$

 

 

 

109,776

 

Commercial paper

 

 

89,795

 

 

 

 

 

 

 

 

 

89,795

 

Government and government agency bonds

 

 

509,944

 

 

 

213

 

 

 

(129

)

 

 

510,028

 

Corporate bonds

 

 

83,337

 

 

 

 

 

 

(76

)

 

 

83,261

 

Total

 

$

792,852

 

 

$

213

 

 

$

(205

)

 

 

792,860

 

As reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

209,576

 

 

$

126

 

 

$

 

 

 

209,702

 

Short-term investments

 

 

583,276

 

 

 

87

 

 

 

(205

)

 

 

583,158

 

Total

 

$

792,852

 

 

$

213

 

 

$

(205

)

 

 

792,860

 

 

 

 

 

As of December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

532,999

 

 

$

 

 

$

 

 

$

532,999

 

Commercial paper - current

 

 

133,368

 

 

 

 

 

 

 

 

 

133,368

 

Government and government agency bonds - current

 

 

294,915

 

 

 

2

 

 

 

(200

)

 

 

294,717

 

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

118,121

 

 

 

 

 

 

(145

)

 

 

117,976

 

Non-current

 

 

10,016

 

 

 

 

 

 

(36

)

 

 

9,980

 

Total

 

$

1,089,419

 

 

$

2

 

 

$

(381

)

 

$

1,089,040

 

As reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

599,698

 

 

$

2

 

 

$

(9

)

 

$

599,691

 

Short-term investments

 

 

479,705

 

 

 

 

 

 

(336

)

 

 

479,369

 

Long-term investments

 

 

10,016

 

 

 

 

 

 

(36

)

 

 

9,980

 

Total

 

$

1,089,419

 

 

$

2

 

 

$

(381

)

 

$

1,089,040

 

 

6. ACCOUNTS RECEIVABLE AND RESERVES FOR PRODUCT SALES

The Company’s accounts receivable arise from product sales, government research contracts and other grants. They are generally stated at the invoiced amount and do not bear interest. Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from Medicaid rebates, governmental chargebacks including Public Health Services chargebacks, prompt pay discounts, co-pay assistance and distribution fees. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if no payments are required of us), including Public Health Services chargebacks, prompt pay discounts and certain distribution fees, or a current liability (if a payment is required of us), including Medicaid rebates, co-pay assistance and certain distribution fees.

The accounts receivable from product sales represents receivables due from the Company’s specialty distributor and specialty pharmacies in the U.S. as well as certain distributors in the EU, Brazil, Israel and the Middle East. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profiles. The Company provides reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are written-off against the established reserve. As of September 30, 2018, the credit profiles for the Company’s customers are deemed to be in good standing and write-offs of accounts receivable are not considered necessary. Historically, no accounts receivable amounts related to government research contracts and other grants have been written off and, thus, an allowance for doubtful accounts receivable related to government research contracts and other grants is not considered necessary.

13


 

The following table summarizes the components of the Company’s accounts receivable for the periods indicated:

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

 

 

(in thousands)

 

Product sales, net of discounts and allowances

 

$

47,809

 

 

$

28,539

 

Government contract receivables

 

 

792

 

 

 

929

 

Total accounts receivable

 

$

48,601

 

 

$

29,468

 

 

The balance for government contract receivables for both periods presented is subject to government audit and will not be collected until the completion of the audit.

 

The following table summarizes an analysis of the change in reserves for discounts and allowances for the periods indicated:

 

 

 

Chargebacks

 

 

Rebates

 

 

Prompt Pay

 

 

Other

 

 

Total

 

 

 

(in thousands)

 

Balance, as of December 31, 2017

 

$

995

 

 

$

6,959

 

 

$

169

 

 

$

464

 

 

$

8,587

 

Provision

 

 

9,308

 

 

 

19,298

 

 

 

1,804

 

 

 

4,195

 

 

 

34,605