srpt-10q_20190331.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 March 31, 2019

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:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging growth company

 

  

  

 

 

 

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

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

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

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, $0.0001 par value per share

SRPT

The NASDAQ Global Select Market

 

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

  

74,153,868

(Class)

  

(Outstanding as of May 3, 2019)

 

 

 

 


SAREPTA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss — For the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity – For the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2019
and 2018

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

61

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

61

 

 

 

 

 

Item 5.

 

Other Information

 

61

 

 

 

 

 

Item 6.

 

Exhibits

 

61

 

 

 

 

 

Exhibits

 

62

 

 

 

 

 

Signatures

 

63

 

 

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

March 31,

2019

 

 

As of

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

732,190

 

 

$

370,829

 

Short-term investments

 

 

612,018

 

 

 

803,083

 

Accounts receivable

 

 

50,510

 

 

 

49,044

 

Inventory

 

 

140,467

 

 

 

125,445

 

Other current assets

 

 

136,238

 

 

 

77,782

 

Total current assets

 

 

1,671,423

 

 

 

1,426,183

 

Property and equipment, net of accumulated depreciation of $32,612

   and $28,149 as of March 31, 2019, and December 31, 2018, respectively

 

 

106,280

 

 

 

97,024

 

Intangible assets, net of accumulated amortization of $4,276 and $3,852 as of

   March 31, 2019, and December 31, 2018, respectively

 

 

11,781

 

 

 

11,574

 

Right of use asset, net of accumulated amortization of $1,491 and nil as of

  March 31, 2019 and December 31, 2018, respectively

 

 

41,098

 

 

 

 

Other assets

 

 

133,313

 

 

 

107,294

 

Total assets

 

$

1,963,895

 

 

$

1,642,075

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

26,499

 

 

$

33,829

 

Accrued expenses

 

 

100,120

 

 

 

134,095

 

Deferred revenue

 

 

3,985

 

 

 

3,303

 

Other current liabilities

 

 

6,762

 

 

 

2,463

 

Total current liabilities

 

 

137,366

 

 

 

173,690

 

Long-term debt

 

 

425,752

 

 

 

420,554

 

Lease liabilities

 

 

52,165

 

 

 

 

Deferred rent and other

 

 

48

 

 

 

15,555

 

Total liabilities

 

 

615,331

 

 

 

609,799

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

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; 74,133,521

   and 71,071,887 issued and outstanding at March 31, 2019, and

   December 31, 2018, respectively

 

 

7

 

 

 

7

 

Additional paid-in capital

 

 

3,004,107

 

 

 

2,611,294

 

Accumulated other comprehensive income (loss)

 

 

19

 

 

 

(99

)

Accumulated deficit

 

 

(1,655,569

)

 

 

(1,578,926

)

Total stockholders’ equity

 

 

1,348,564

 

 

 

1,032,276

 

Total liabilities and stockholders’ equity

 

$

1,963,895

 

 

$

1,642,075

 

 

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

March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Product, net

 

$

87,011

 

 

$

64,604

 

Total revenues

 

 

87,011

 

 

 

64,604

 

Cost and expenses:

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of in-licensed rights)

 

$

12,063

 

 

 

5,582

 

Research and development

 

 

90,553

 

 

 

46,204

 

Selling, general and administrative

 

 

60,566

 

 

 

43,341

 

Amortization of in-licensed rights

 

 

216

 

 

 

216

 

Total cost and expenses

 

 

163,398

 

 

 

95,343

 

Operating loss

 

 

(76,387

)

 

 

(30,739

)

Other loss:

 

 

 

 

 

 

 

 

Interest expense and other, net

 

 

(172

)

 

 

(4,485

)

Other loss

 

 

(172

)

 

 

(4,485

)

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

 

(76,559

)

 

 

(35,224

)

Income tax expense

 

 

84

 

 

 

139

 

Net loss

 

 

(76,643

)

 

 

(35,363

)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gain (loss) on cash equivalents and short-term

   investments

 

 

118

 

 

 

(264

)

Total other comprehensive income (loss)

 

 

118

 

 

 

(264

)

Comprehensive loss

 

$

(76,525

)

 

$

(35,627

)

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(1.07

)

 

$

(0.55

)

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock used in

   computing basic and diluted net loss per share

 

 

71,731

 

 

 

64,631

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

71,072

 

 

 

7

 

 

 

2,611,294

 

 

 

(99

)

 

 

(1,578,926

)

 

 

1,032,276

 

Exercise of options for common stock

 

382

 

 

 

 

 

 

9,973

 

 

 

 

 

 

 

 

 

9,973

 

Grant of restricted stock awards and vest of restricted stock units, net of cancellations

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

(7

)

 

 

 

 

 

(889

)

 

 

 

 

 

 

 

 

(889

)

Issuance of common stock for cash, net of

   offering costs

 

2,604

 

 

 

 

 

 

365,264

 

 

 

 

 

 

 

 

 

365,264

 

Issuance of common stock under employee

   stock purchase plan

 

48

 

 

 

 

 

 

2,326

 

 

 

 

 

 

 

 

 

2,326

 

Stock-based compensation

 

 

 

 

 

 

 

16,139

 

 

 

 

 

 

 

 

 

16,139

 

Unrealized gain from cash equivalents and available-for-sale securities

 

 

 

 

 

 

 

 

 

 

118

 

 

 

 

 

 

118

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(76,643

)

 

 

(76,643

)

Balance at March 31, 2019

 

74,134

 

 

$

7

 

 

$

3,004,107

 

 

$

19

 

 

$

(1,655,569

)

 

$

1,348,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

64,792

 

 

 

6

 

 

 

2,006,598

 

 

 

(379

)

 

 

(1,217,008

)

 

 

789,217

 

Exercise of options for common stock

 

653

 

 

 

1

 

 

 

11,887

 

 

 

 

 

 

 

 

 

11,888

 

Grant of restricted stock awards and vest of restricted stock units, net of cancellations

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee

   stock purchase plan

 

34

 

 

 

 

 

 

756

 

 

 

 

 

 

 

 

 

756

 

Stock-based compensation

 

 

 

 

 

 

 

10,526

 

 

 

 

 

 

 

 

 

10,526

 

Unrealized loss from cash equivalents and available-for-sale securities

 

 

 

 

 

 

 

 

 

 

(264

)

 

 

 

 

 

(264

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,363

)

 

 

(35,363

)

Balance at March 31, 2018

 

65,493

 

 

$

7

 

 

$

2,029,767

 

 

$

(643

)

 

$

(1,252,371

)

 

$

776,760

 

 

 

5


SAREPTA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(76,643

)

 

$

(35,363

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,370

 

 

 

2,252

 

Amortization of investment discount

 

 

(3,476

)

 

 

(1,259

)

Non-cash interest expense

 

 

5,208

 

 

 

4,940

 

Loss on disposal of assets

 

 

88

 

 

 

10

 

Stock-based compensation

 

 

16,139

 

 

 

10,526

 

Changes in operating assets and liabilities, net:

 

 

 

 

 

 

 

 

Net increase in accounts receivable

 

 

(1,466

)

 

 

(10,380

)

Net increase in inventory

 

 

(15,022

)

 

 

(15,770

)

Net (increase) decrease in other assets

 

 

(79,564

)

 

 

4,672

 

Net decrease in accounts payable, accrued expenses, deferred revenue and

   other liabilities

 

 

2,133

 

 

 

4,704

 

Net cash used in operating activities

 

 

(146,233

)

 

 

(35,668

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(16,263

)

 

 

(12,166

)

Purchase of intangible assets

 

 

(855

)

 

 

(673

)

Purchase of available-for-sale securities

 

 

(494,481

)

 

 

(91,514

)

Maturity and sale of available-for-sale securities

 

 

646,830

 

 

 

90,093

 

Net cash provided by (used in) investing activities

 

 

135,231

 

 

 

(14,260

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving line of credit

 

 

 

 

 

96,235

 

Repayment of revolving line of credit

 

 

 

 

 

(100,142

)

Repayments on mortgage loans

 

 

 

 

 

(1,265

)

Proceeds from sale of common stock, net of offering costs

 

 

365,264

 

 

 

 

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

   Employee Stock Purchase Program

 

 

12,299

 

 

 

12,643

 

Net cash provided by financing activities

 

 

377,563

 

 

 

7,471

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

366,561

 

 

 

(42,457

)

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Beginning of period

 

 

370,829

 

 

 

599,827

 

End of period

 

$

737,390

 

 

$

557,370

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

732,190

 

 

$

557,234

 

Restricted cash in other assets

 

 

5,200

 

 

 

136

 

Total cash, cash equivalents and restricted cash

 

$

737,390

 

 

$

557,370

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

 

 

$

853

 

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

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

$

889

 

 

$

 

Sale of available-for-sale securities included in investment receivable

 

$

42,300

 

 

$

 

Reclassification of long term investments to short term investments

 

$

 

 

$

9,980

 

Intangible assets included in accrued expenses

 

$

230

 

 

$

202

 

Property and equipment included in accrued expenses

 

$

2,878

 

 

$

2,980

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


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 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 U.S. Food and Drug Administration (the “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. In December 2018, the Company completed the submission of its rolling new drug application to the FDA seeking accelerated approval for golodirsen, the Company’s PMO chemistry and exon-skipping technology to skip exon 53 of the DMD gene.

As of March 31, 2019, the Company had approximately $1,350.4 million of cash, cash equivalents and investments, consisting of $732.2 million of cash and cash equivalents, $612.0 million of short-term investments, and $6.2 million of restricted cash and investments. 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 rare diseases.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2018 which are contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 28, 2019. The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.

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.

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 March 31, 2019, 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 61 days. Outside of the U.S., the payment terms range between 30 and 150 days. Three individual customers accounted for 41%, 40% and 15% of net product revenues for the three months ended March 31, 2019 and 57%, 26% and 8% of accounts receivable from product sales as of March 31, 2019. 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 March 31, 2019, the Company believes that such customers are of high credit quality.

As of March 31, 2019 the Company’s cash equivalents and investments were concentrated at three 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.

7


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, 2018.

Leases

Effective January 1, 2019, the Company adopted ASC Topic 842, Leases (“ASC 842”), using the required modified retrospective approach and utilizing the effective date as its date of initial application, for which prior periods are presented in accordance with the previous guidance in ASC Topic 840, Leases (“ASC 840”).

As a result of the cumulative impact of adopting ASC 842, the Company recorded lease right-of-use (“ROU”) assets of $42.5 million and lease liabilities of $60.1 million as of January 1, 2019, primarily related to real estate leases, based on the present value of future lease payments on the date of adoption. The difference between the ROU assets and lease liabilities was due to previously recorded net deferred rent balances reclassified into the ROU assets. There was no impact to retained earnings upon adoption of ASC 842. Amounts related to finance leases were immaterial as of March 31, 2019.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than 12 months are recognized on the balance sheet as ROU assets and short-term and long-term lease liabilities, as applicable. The Company has elected not to recognize on the balance sheet leases with terms of 12 months or less. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew. The Company monitors its plans to renew its material leases on a quarterly basis. In addition, the Company’s lease agreements generally do not contain any residual value guarantees or restrictive covenants.

Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of future lease payments over the expected remaining lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. Certain adjustments to the ROU asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rate.

In accordance with ASC 842, components of a lease should be bifurcated between lease components and non-lease components. The fixed and in-substance fixed contract consideration identified must then be allocated based on the respective relative fair values to the lease components and non-lease components. However, ASC 842 provides entities with a practical expedient that allows them to make an accounting policy election to not separate lease and non-lease components by class of underlying asset. In using this expedient, entities would account for each lease component and the related non-lease component together as a single component. For new and amended leases beginning after January 1, 2019, the Company has elected to account for the lease and non-lease components together for classes of all underlying assets and will allocate the contract consideration to the lease component only.

There have not been any other material changes to the Company’s accounting policies as of March 31, 2019.

 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (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 and loss 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 March 31, 2019, 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.

8


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 March 31, 2019, 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.

 

 

3. LICENSE AND COLLABORATION AGREEMENTS

 

Myonexus Therapeutics

On May 3, 2018, the Company entered into a Warrant to Purchase Common Stock Agreement (“Warrant Agreement”) with Myonexus Therapeutics, Inc. (“Myonexus”), a clinical-stage gene therapy biotechnology company that was developing gene therapies for Limb-Girdle muscular dystrophies (“LGMD”). 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.

On February 27, 2019, the Company announced that it exercised the exclusive option to acquire Myonexus. The final exercise price as negotiated between the Company and Myonexus was $165.0 million. In addition, the Company incurred transaction fees associated with the exercise of approximately $8.7 million. The Company may also be required to make up to $200.0 million in additional payments to selling shareholders of Myonexus based on the achievement of certain milestones. The acquisition was completed on April 4, 2019. As a result, the Company is expected to recognize approximately $168.7 million in in-process research and development expense during the three months ended June 30, 2019.

 

Milestone Obligations

 

The Company has license and collaboration agreements in place for which it could be obligated to pay, in addition to the payment of up-front fees upon execution of the agreements, certain milestone payments as a product candidate proceeds from the submission of an investigational new drug application through approval for commercial sale and beyond. As of March 31, 2019, the Company may be obligated to make up to $555.8 million of future development, regulatory, commercial, and up-front royalty milestone payments associated with its license and collaboration agreements. For the three months ended March 31, 2019, the Company recognized milestone payments of $1.1 million as research and development expense in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss, with no such activity for the three months ended March 31, 2018.

 

 

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.

9


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 March 31, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

155,406

 

 

$

155,406

 

 

$

 

 

$

 

Commercial paper

 

 

65,779

 

 

 

 

 

 

65,779

 

 

 

 

Government and government agency bonds

 

 

807,025

 

 

 

807,025

 

 

 

 

 

 

 

Corporate bonds

 

 

33,582

 

 

 

33,582

 

 

 

 

 

 

 

Strategic equity investments

 

 

32,359

 

 

 

2,359

 

 

 

 

 

 

30,000

 

Certificates of deposit

 

 

1,001

 

 

 

1,001

 

 

 

 

 

 

 

Total

 

$

1,095,152

 

 

$

999,373

 

 

$

65,779

 

 

$

30,000

 

 

 

 

Fair Value Measurement as of December 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

42,920

 

 

$

42,920

 

 

$

 

 

$

 

Commercial paper

 

 

125,907

 

 

 

 

 

 

125,907

 

 

 

 

Government and government agency bonds

 

 

760,235

 

 

 

760,235

 

 

 

 

 

 

 

Corporate bonds

 

 

43,468

 

 

 

43,468

 

 

 

 

 

 

 

Strategic equity investments

 

 

31,739

 

 

 

1,739

 

 

 

 

 

 

30,000

 

Certificates of deposit

 

 

1,001

 

 

 

1,001

 

 

 

 

 

 

 

Total

 

$

1,005,270

 

 

$

849,363

 

 

$

125,907

 

 

$

30,000

 

 

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, the Company’s strategic investment in Lysogene S.A. and certificates of deposit. Certain of the government and government agency bonds are publically traded fixed income securities and are presented as cash equivalents on the unaudited condensed consolidated balance sheets as of March 31, 2019.

The Company’s assets with fair value categorized as Level 2 within the fair value hierarchy consist of commercial paper. 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 Therapeutics, Inc. (“Lacerta”) as more fully described in Note 3, License and Collaboration Agreements of the Annual Report on the Form 10-K for the year ended December 31, 2018. The fair value of the asset was initially based on a cost approach corroborated by the Black-Scholes option pricing model. At the end of each reporting period, the fair value will be adjusted if Lacerta issues similar or identical equity securities or when there is a triggering event for impairment.

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

March 31,

2019

 

 

As of

December 31,

2018

 

 

 

(in thousands)

 

Money market funds

 

$

155,406

 

 

$

42,920

 

Government and government agency bonds

 

 

294,368

 

 

 

111,587

 

Commercial paper

 

 

 

 

 

14,940

 

Total

 

$

449,774

 

 

$

169,447

 

10


 

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 March 31, 2019 and December 31, 2018 was approximately two months.

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

 

 

 

As of March 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

437,822

 

 

$

 

 

$

 

 

$

437,822

 

Commercial paper

 

 

65,779

 

 

 

 

 

 

 

 

$

65,779

 

Government and government agency bonds

 

 

807,001

 

 

 

31

 

 

 

(7

)

 

$

807,025

 

Corporate bonds

 

 

33,587

 

 

 

 

 

 

(5

)

 

$

33,582

 

Total cash, cash equivalents and investments

 

$

1,344,189

 

 

$

31

 

 

$

(12

)

 

$

1,344,208

 

As reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

732,179

 

 

$

11

 

 

$

 

 

$

732,190

 

Short-term investments

 

 

612,010

 

 

 

20

 

 

 

(12

)

 

$

612,018

 

Total cash, cash equivalents and investments

 

$

1,344,189

 

 

$

31

 

 

$

(12

)

 

$

1,344,208

 

 

 

 

 

As of December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

 

 

(in thousands)

 

Cash and money market funds

 

$

244,302

 

 

$

 

 

$

 

 

$

244,302

 

Commercial paper

 

 

125,907

 

 

 

 

 

 

 

 

 

125,907

 

Government and government agency bonds

 

 

760,258

 

 

 

12

 

 

 

(35

)

 

 

760,235

 

Corporate bonds

 

 

43,544

 

 

 

 

 

 

(76

)

 

 

43,468

 

Total cash, cash equivalents and investments

 

$

1,174,011

 

 

$

12

 

 

$

(111

)