akca-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 001-38137

 

 

Akcea Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

47-2608175

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

22 Boston Wharf Road, 9th Floor, Boston, MA 02210

(Address of principal executive offices, including zip code)

617-207-0202

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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, 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 12(b)-2 of the Securities Exchange Act of 1934). Yes No

 

The number of shares of common stock outstanding as of May 2, 2019 was 92,770,397.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

AKCA

 

NASDAQ

 

 

 

 

 


AKCEA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018

 

5

 

 

 

 

 

Condensed Consolidated Statements of  Stockholders' Equity

 

6

 

 

 

 

 

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

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

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

 

28

 

 

 

 

 

Overview

 

28

 

 

 

 

 

Results of Operations

 

31

 

 

 

 

 

Liquidity and Capital Resources

 

33

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

35

 

 

 

 

Item 4.

Controls and Procedures

 

36

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

 

 

 

Item 1A

Risk Factors

 

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

65

 

 

 

 

Item 4.

Mine Safety Disclosures

 

65

 

 

 

 

Item 5.

Other Information

 

65

 

 

 

 

Item 6.

Exhibits

 

65

 

 

 

 

Signatures

 

66

 

TRADEMARKS

"Akcea," the Akcea logo, and other trademarks or service marks of Akcea Therapeutics, Inc. appearing in this Report are the property of Akcea Therapeutics, Inc. This Report contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Report may appear without the ® or TM symbols.

 

2


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

201,027

 

 

$

86,454

 

Short-term investments

 

 

120,765

 

 

 

166,155

 

Accounts receivable

 

 

10,269

 

 

 

4,597

 

Receivable from Ionis Pharmaceuticals, Inc.

 

 

7,206

 

 

 

 

Other current assets

 

 

11,618

 

 

 

10,029

 

Total current assets

 

 

350,885

 

 

 

267,235

 

Property, plant and equipment, net

 

 

5,336

 

 

 

5,696

 

Operating lease right-of-use-assets

 

 

11,602

 

 

 

 

Intangible assets, net

 

 

87,468

 

 

 

88,914

 

Deposits and other assets

 

 

3,426

 

 

 

3,416

 

Total assets

 

$

458,717

 

 

$

365,261

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,153

 

 

$

12,068

 

Payable to Ionis Pharmaceuticals, Inc.

 

 

 

 

 

18,901

 

Accrued compensation

 

 

6,300

 

 

 

8,583

 

Accrued liabilities

 

 

17,255

 

 

 

14,787

 

Current portion of deferred revenue

 

 

21,539

 

 

 

25,354

 

Other current liabilities

 

 

1,863

 

 

 

968

 

Total current liabilities

 

 

53,110

 

 

 

80,661

 

Long-term portion of lease liabilities

 

 

15,018

 

 

 

4,442

 

Long-term portion of deferred revenue

 

 

1,725

 

 

 

3,434

 

Total liabilities

 

 

69,853

 

 

 

88,537

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 shares authorized at

   March 31, 2019 and December 31, 2018; 92,635,374 and 89,345,978

   shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.

 

 

93

 

 

 

89

 

Additional paid-in capital

 

 

883,653

 

 

 

799,001

 

Accumulated other comprehensive loss

 

 

(27

)

 

 

(324

)

Accumulated deficit

 

 

(494,855

)

 

 

(522,042

)

Total stockholders’ equity

 

 

388,864

 

 

 

276,724

 

Total liabilities and stockholders’ equity

 

$

458,717

 

 

$

365,261

 

 

See accompanying notes.

3


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Product revenue, net

 

$

6,754

 

 

$

 

Research and development and license revenue under collaborative

   agreement

 

 

157,062

 

 

 

17,108

 

Total revenue

 

 

163,816

 

 

 

17,108

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Cost of sales - product

 

 

1,041

 

 

 

 

Cost of sales - intangible asset amortization

 

 

1,403

 

 

 

 

Research and development

 

 

99,619

 

 

 

27,970

 

Selling, general and administrative

 

 

44,602

 

 

 

19,465

 

Net loss share from commercial activities under arrangement with Ionis

   Pharmaceuticals, Inc.

 

 

(9,056

)

 

 

 

Total expenses

 

 

137,609

 

 

 

47,435

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

26,207

 

 

 

(30,327

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Investment income

 

 

1,224

 

 

 

868

 

Other expense

 

 

(112

)

 

 

(168

)

 

 

 

 

 

 

 

 

 

Income (loss) before income tax expense

 

 

27,319

 

 

 

(29,627

)

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(132

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

27,187

 

 

$

(29,627

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share of common stock owned by Ionis, basic

 

$

0.35

 

 

$

(0.44

)

Weighted-average shares of common stock outstanding owned by Ionis, basic

 

 

68,581,967

 

 

 

45,447,879

 

Net income (loss) per share of common stock owned by others, basic

 

$

0.15

 

 

$

(0.44

)

Weighted-average shares of common stock outstanding owned by others, basic

 

 

22,126,363

 

 

 

21,171,372

 

Net income (loss) per share of common stock owned by Ionis, diluted

 

$

0.34

 

 

$

(0.44

)

Weighted-average shares of common stock outstanding owned by Ionis,

   diluted

 

 

68,581,967

 

 

 

45,447,879

 

Net income (loss) per share of common stock owned by others, diluted

 

$

0.15

 

 

$

(0.44

)

Weighted-average shares of common stock outstanding owned by others,

   diluted

 

 

25,545,975

 

 

 

21,171,372

 

 

See accompanying notes.

4


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Net income (loss)

 

$

27,187

 

 

$

(29,627

)

Unrealized gains (losses) on investments, net of tax

 

 

212

 

 

 

(45

)

Currency translation adjustment

 

 

85

 

 

 

28

 

Comprehensive income (loss)

 

$

27,484

 

 

$

(29,644

)

 

See accompanying notes.

5


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, expect share amounts)

(Unaudited)

 

 

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid In

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

Description

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

89,346

 

 

$

89

 

 

$

799,001

 

 

$

(324

)

 

$

(522,042

)

 

$

276,724

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,187

 

 

 

27,187

 

Change in unrealized gains (losses), net of tax

 

 

 

 

 

 

 

 

 

 

 

212

 

 

 

 

 

 

 

212

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

85

 

 

 

 

 

 

85

 

Exercise of common stock options

 

 

434

 

 

 

1

 

 

 

4,205

 

 

 

 

 

 

 

 

 

 

4,206

 

Issuance of common stock in connection with

   employee stock purchase plan

 

 

18

 

 

 

0

 

 

 

382

 

 

 

 

 

 

 

 

 

382

 

Issuance of common stock in connection with Ionis

   sublicense fee

 

 

2,837

 

 

 

3

 

 

 

74,997

 

 

 

 

 

 

 

 

 

75,000

 

Distribution to Ionis

 

 

 

 

 

 

 

 

(13,492

)

 

 

 

 

 

 

 

 

 

(13,492

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

18,560

 

 

 

 

 

 

 

 

 

18,560

 

Balance at March 31, 2019

 

 

92,635

 

 

$

93

 

 

$

883,653

 

 

$

(27

)

 

$

(494,855

)

 

$

388,864

 

 

 

 

 

For the Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid In

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

Description

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

 

66,542

 

 

$

67

 

 

$

464,430

 

 

$

(451

)

 

$

(296,221

)

 

$

167,825

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,627

)

 

 

(29,627

)

Change in unrealized gains (losses), net of tax

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

 

 

 

(45

)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

28

 

Exercise of common stock options

 

 

246

 

 

 

0

 

 

 

1,617

 

 

 

 

 

 

 

 

 

1,617

 

Issuance of common stock in connection with

   employee stock purchase plan

 

 

16

 

 

 

0

 

 

 

118

 

 

 

 

 

 

 

 

 

118

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

6,384

 

 

 

 

 

 

 

 

 

6,384

 

Balance at March 31, 2018

 

 

66,804

 

 

$

67

 

 

$

472,549

 

 

$

(468

)

 

$

(325,848

)

 

$

146,300

 

 

See accompanying notes.

6


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

27,187

 

 

$

(29,627

)

Adjustments to reconcile net income (loss) to net cash provided by

   (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

207

 

 

 

27

 

Amortization of intangibles

 

 

1,446

 

 

 

30

 

Amortization of discount/premium on investment securities, net

 

 

(229

)

 

 

149

 

Non-cash sublicensing expense

 

 

75,000

 

 

 

 

Stock-based compensation expense

 

 

18,560

 

 

 

6,384

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,672

)

 

 

5,413

 

Other current and long-term assets

 

 

(1,269

)

 

 

(4,326

)

Accounts payable

 

 

(4,673

)

 

 

197

 

Payable/receivable to/from Ionis Pharmaceuticals, Inc.

 

 

(26,165

)

 

 

13,372

 

Accrued compensation

 

 

(2,283

)

 

 

(310

)

Accrued liabilities

 

 

2,063

 

 

 

5,833

 

Income taxes payable

 

 

(56

)

 

 

63

 

Deferred revenue

 

 

(5,524

)

 

 

(13,968

)

Net cash provided by (used in) operating activities

 

 

78,592

 

 

 

(16,763

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(13,858

)

 

 

(9,906

)

Proceeds from sale of short-term investments

 

 

59,689

 

 

 

36,447

 

Purchase of property, plant and equipment

 

 

(1,031

)

 

 

 

Net cash provided by investing activities

 

 

44,800

 

 

 

26,541

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options and employee stock

   purchase plan issuances

 

 

4,588

 

 

 

1,724

 

Distribution to Ionis

 

 

(13,492

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(8,904

)

 

 

1,724

 

Effect of exchange rates on cash

 

 

85

 

 

 

38

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

114,573

 

 

 

11,540

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

88,838

 

 

 

58,367

 

Cash, cash equivalents and restricted cash at end of period

 

$

203,411

 

 

$

69,907

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash financing activities:

 

 

 

 

 

 

 

 

Unpaid deferred offering costs

 

$

 

 

$

450

 

 

See accompanying notes.

7


The following table presents the line items and amounts of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets:

 

 

 

March 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

201,027

 

 

$

69,907

 

Restricted cash included in deposits and other assets

 

 

2,384

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

203,411

 

 

$

69,907

 

 

See accompanying notes.

8


AKCEA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

1.

Organization and Basis of Presentation

We were incorporated in Delaware in December 2014. We were organized by Ionis Pharmaceuticals, Inc., or Ionis, to focus on developing and commercializing drugs to treat patients with rare and serious diseases. On July 19, 2017, we completed our initial public offering, or IPO. As of March 31, 2019, Ionis owned approximately 76% of our common stock and is our majority shareholder. Prior to our IPO, we were wholly owned by Ionis.

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP.

The condensed consolidated financial statements include the accounts of Akcea Therapeutics, Inc. and our wholly owned subsidiaries ("we," "our," and "us"). All intercompany transactions and balances were eliminated in consolidation. We included all normal recurring adjustments in the financial statements, which we considered necessary for a fair presentation of our financial position and our operating results and cash flows for the interim periods ended March 31, 2019 and 2018. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

In accordance with Accounting Standard Codification, or ASC, 205-40, Going Concern, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. We have incurred losses since our inception and have funded our cash flow deficits primarily through the issuance of capital stock and the proceeds from licensing and collaboration agreements. As of March 31, 2019, we had an accumulated deficit of $494.9 million. During the three months ended March 31, 2019, we generated income of $27.2 million and provided $78.6 million of cash from operations. We expect to generate operating losses and negative operating cash flows for the foreseeable future. The transition to sustained profitability is dependent upon the successful development, approval, and commercialization of our products and product candidates and the achievement of a level of revenue adequate to support our cost structure.  We believe that our currently available funds of $321.8 million as of March 31, 2019, cash expected to be generated from sales of TEGSEDI, which has been approved in the U.S., the EU and Canada, and cash expected to be generated from sales of WAYLIVRA, which has received conditional approval in the EU, will be sufficient to fund our operations through at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and commercialize our drugs even if we would otherwise prefer to develop and commercialize the drugs ourselves.

2.

Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses and prior to our IPO, the valuation of common stock. Estimates are periodically reviewed in light of changes in facts, circumstances and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Translation of Foreign Currency

For our foreign subsidiaries that report in a functional currency other than U.S. dollars, we translate their assets and liabilities into U.S. dollars using the exchange rate at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates for the period. We translate transactions in our capital accounts at the historic exchange rate in effect at the date of the transaction. We include foreign currency translation adjustments as a component of accumulated other comprehensive income (loss) within the condensed consolidated statements of comprehensive income (loss).

9


Revenue Recognition

Collaboration and License Revenue

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, which amended the guidance for accounting for revenue from contracts with customers. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, then assess whether each promised good or service is distinct. When we offer options for additional goods or services, such as an option to license a drug in the future or for additional goods or services to be provided in the future, we evaluate whether such options are material rights that should be treated as additional performance obligations. We typically have concluded that the option to license a drug or the options for additional goods or services that may be requested in the future under our collaboration agreement are not material rights as the amounts attributable to such options represent standalone selling price, and therefore no consideration is allocated to these items at the inception of an agreement. When a partner exercises its option to license a drug or requests the additional goods or services, a new performance obligation is created for that item. Once performance obligations are identified, we then recognize as revenue the amount of the transaction price that we allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of an output or input method. As of March 31, 2019, we have three revenue agents: our strategic collaboration, option and license agreement, or collaboration agreement, with Novartis Pharma AG, or Novartis, which we entered into in January 2017, our collaboration and license agreement with PTC Therapeutics International Limited, or PTC Therapeutics, which we entered into in August 2018, and commercial product revenue related to TEGESDI sales subsequent to product launch in the fourth quarter of 2018. For a complete discussion of the accounting related to our revenue streams, see Note 6, Strategic Collaboration with Novartis, Note 8, Collaboration and License Agreement with PTC Therapeutics, and the section below entitled Product Revenue, Net.

 

Product Revenue, Net

 

Subsequent to regulatory approval in Europe on July 11, 2018 and FDA approval in the U.S. on October 5, 2018, in the fourth quarter of 2018, we began to sell TEGSEDI in the U.S. and Europe.  In the U.S., the product is distributed through an exclusive distribution agreement with a third-party logistics (3PL) company that takes title to the product and represents our sole customer in the U.S.  Our U.S. customer distributes TEGSEDI to a specialty pharmacy and a specialty distributor (collectively referred to as “wholesalers”), who then distribute the product to health care providers and patients.  In Europe, the product is currently distributed through a non-exclusive distribution model with a 3PL that takes title to the product and currently is  our sole customer in Europe.  Our customer then distributes TEGSEDI to hospitals and pharmacies in Europe.  

 

Revenue from product sales are recognized when the customer obtains control of our product, which occurs upon transfer of title to the customer.  We record shipping and handling costs within cost of goods sold on our consolidated statement of operations. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our consolidated statements of operations. Payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below.  Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. We have elected not to adjust consideration for the effects of a significant financing component when the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less.  Our payment terms are generally between thirty to ninety days.

 

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customers, wholesalers, health care providers and other indirect customers relating to the sale of TEGSEDI. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than the customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, product

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revenue net of these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

The following are the components of variable consideration related to product revenue:

Chargebacks:  In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what they pay for the product and the selling price to the qualified healthcare providers. We record reserves for these chargebacks related to product sold to our U.S. customer during the reporting period, as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers in future periods.

 

Government rebates: We are subject to discount obligations under government programs, including Medicaid programs and Medicare in the United States and we record reserves for government rebates based on statutory discount rates and estimated utilization in the period in which revenue is recognized. We estimate Medicaid and Medicare rebates based upon estimated payer mix.  These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses on our consolidated balance sheet.  For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.

Trade discounts and allowances: We provide customary invoice discounts on TEGSEDI sales to our U.S. customer for prompt payment that are recorded as a reduction of revenue in the period the related product revenue is recognized.  In addition, we receive and pay for various distribution services from our U.S. customer and wholesalers in the U.S. distribution channel.  For services that are either not distinct from the sale of our product or for which we cannot reasonably estimate the fair value, such fees are classified as a reduction of product revenue.

 

Product Returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that may be returned and record the estimate as a reduction of revenue and a refund liability in the period the related product revenue is recognized. Based on the distribution model for TEGSEDI, contractual inventory limits with our customer and wholesalers and the price of TEGSEDI, we believe there will be minimal returns. Our customer only takes title to the product once it receives an order from a hospital or pharmacy and therefore does not maintain any inventory of TEGSEDI. Therefore, there is limited return risk and the Company has not recorded any return estimate in the transaction price for TEGSEDI sold in Europe.

 

Other incentives:  In the U.S., other incentives include co-payment assistance we provide to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue. The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized.

 

During the three months ended March 31, 2019, we recorded TEGSEDI product revenue, net, of $6.8 million. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2019 (in thousands):

 

 

 

Chargebacks,

discounts and

fees

 

 

Government

and other

rebates

 

 

Returns

 

 

Total

 

Balance at December 31, 2018

 

$

50

 

 

$

293

 

 

$

5

 

 

$

348

 

Provision related to current period sales

 

 

155

 

 

 

375

 

 

 

52

 

 

 

582

 

Adjustment related to prior period sales

 

 

 

 

 

(30

)

 

 

 

 

 

(30

)

Credit or payments made during the period

 

 

(104

)

 

 

 

 

 

 

 

 

(104

)

Balance at March 31, 2019

 

$

101

 

 

$

638

 

 

$

57

 

 

$

796

 

 

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Leases

Topic 842 Adoption

In February 2016, the FASB issued amended accounting guidance related to lease accounting. This guidance supersedes the lease requirements we previously followed in Accounting Standards Codification, or ASC, Topic 840, Leases, or Topic 840, and created a new lease accounting standard, Topic 842, Leases, or Topic 842. Under Topic 842, an entity will record all leases with a term longer than one year on its balance sheet. Further, an entity will record a liability with a value equal to the present value of payments it will make over the life of the lease (lease liability) and an asset representing the underlying leased asset (right-of-use asset). The new accounting guidance requires entities to determine if its leases are operating or financing leases. Entities will recognize expense for operating leases on a straight-line basis as an operating expense. If an entity determines a lease is a financing lease, it will record both interest and amortization expense and generally the expense will be higher in the earlier periods of the lease.

We adopted Topic 842 on January 1, 2019 and adjusted our opening balance sheet on that date to record our right-of-use operating lease assets and operating lease liabilities.  We adopted Topic 842 using the available practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification of those leases we had in place as of January 1, 2019. The adoption did not have a significant impact on our financial statements. Results for the three months ended March 31, 2019 are presented under Topic 842. Results for the three months ended March 31, 2018 are presented in accordance with our historic accounting under Topic 840.

The impact of the adoption of Topic 842 on the accompanying Consolidated Balance Sheet as of January 1, 2019 was as follows (in thousands):

 

 

 

December 31,

2018

 

 

Adjustment

due to

adoption of

Topic 842

 

 

January 1,

2019

 

Operating lease right-of-use-assets

 

 

 

 

 

11,932

 

 

 

11,932

 

Other current liabilities

 

 

968

 

 

 

1,029

 

 

 

1,997

 

Long-term portion of lease liabilities

 

 

4,442

 

 

 

10,915

 

 

 

15,357

 

 

Leases

We determine if an arrangement contains a lease at inception. We currently have operating leases. We recognize a right-of-use operating lease asset and associated short and long-term operating lease liability for operating leases greater than one year on our condensed consolidated balance sheet. We calculate our right-of-use operating lease asset and operating lease liability based on the present value of the future minimum lease payments we will pay over the lease term. We determine the lease term at the commencement date of the lease, and we include renewal options in the lease term if we are reasonably certain that we will exercise the option. As our current leases do not provide an implicit interest rate, we used our incremental borrowing rate, based on the information available at the date we adopted Topic 842, in determining the present value of future payments. We estimate the incremental borrowing rate based on the observed interest rates for secured debt issued by companies with similar credit ratings and with similar terms. Our right-of-use operating lease asset also includes any lease payments we made and excludes any tenant improvement allowances we received.

We recognize rent expense for the lease components of our operating leases on a straight-line basis over the term of our lease. We recognize non-lease components and non-components, such as common area maintenance expenses, in the period we incur the expense.

New Accounting Pronouncements - Recently Issued

 

In June 2016, the FASB issued guidance that changes the measurement of credit losses for most financial assets and certain other instruments. If we have credit losses, this updated guidance requires us to record allowances for these instruments under a new expected credit loss model. This model requires us to estimate the expected credit loss of an instrument over its lifetime, which represents the portion of the amortized cost basis we do not expect to collect. The new guidance requires us to remeasure our allowance in each reporting period we have credit losses. The new standard is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. When we adopt the new standard, we will make any adjustments to beginning balances through a cumulative-effect adjustment to accumulated deficit on that date. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our condensed consolidated financial statements and disclosures.

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In August 2018, the FASB issued clarifying guidance on how to account for implementation costs related to hosted cloud-servicing arrangements. The guidance states that if these fees qualify to be capitalized and amortized over the service period, they need to be expensed in the same line item as the service expense and recognized in the same balance sheet category. The update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The updated guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently assessing the effects this updated guidance could have on our condensed consolidated financial statements and timing of potential adoption.

In August 2018, the FASB updated its disclosure requirements related to Level 1, 2 and 3 fair value measurements. The update included deletion and modification of certain disclosure requirements and additional disclosure related to Level 3 measurements.  The guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We adopted this updated guidance on January 1, 2019 and it did not have a significant impact on our disclosures.

In November 2018, the FASB issued clarifying guidance of the interaction between the collaboration accounting guidance and the new revenue recognition guidance we adopted on January 1, 2018 (Topic 606). Below is the clarifying guidance and how we will implement it (in italics):  

1)When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied

We will apply all of the associated accounting under Topic 606 when we determine a participant in a collaborative arrangement is a customer

2)Adds “unit of account” concept to collaboration accounting guidance to align with Topic 606. The “unit of account” concept is used to determine if revenue is recognized or if a contra expense is recognized from consideration received under a collaboration

We will use the “unit of account” concept when we receive consideration under a collaboration to determine when we recognize revenue or a contra expense

3)The clarifying guidance precludes us from recognizing revenue under Topic 606 when we determine a transaction with a collaborative partner is not a customer and is not directly related to the sales to third parties

When we conclude a collaboration partner is not a customer and is not directly related to the sales to third parties, we will not recognize revenue for the transaction  

The updated guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our condensed consolidated financial statements and disclosures.

3.

Investments and Fair Value Measurements

Investments

As of March 31, 2019 and December 31, 2018, we primarily invested our excess cash in debt instruments of the U.S. Treasury, financial institutions, corporations and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody's, S&P or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.

The following is a summary of our investments at March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

Gross Unrealized

 

 

Estimated

 

March 31, 2019

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

54,414

 

 

$

4

 

 

$

(14

)

 

$

54,404

 

Debt securities issued by U.S. government agencies

 

 

58,371

 

 

 

23

 

 

 

(2

)

 

 

58,392

 

Total securities with a maturity of one year or less

 

$

112,785

 

 

$

27

 

 

$

(16

)

 

$

112,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities issued by U.S. government agencies

 

 

7,961

 

 

 

8

 

 

 

 

 

 

7,969

 

Total securities with a maturity of one to two years

 

 

7,961

 

 

 

8

 

 

 

 

 

 

7,969

 

Total available-for-sale securities

 

$

120,746

 

 

$

35

 

 

$

(16

)

 

$

120,765

 

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Gross Unrealized

 

 

Estimated

 

December 31, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

81,770

 

 

$

 

 

$

(151

)

 

$

81,619

 

Debt securities issued by U.S. government agencies

 

 

85,578

 

 

 

 

 

 

(42

)

 

 

85,536

 

Total securities with a maturity of one year or less

 

$

167,348

 

 

$

 

 

$

(193

)

 

$

167,155

 

 

We recorded unrealized gains (losses) related to the securities listed above as of March 31, 2019 and December 31, 2018. We believe that the decline in value of some of our securities is temporary and primarily related to the change in market interest rates since purchase. We believe it is more likely than not that we will be able to hold our debt securities to maturity. Therefore, we anticipate a full recovery of the amortized cost basis of our debt securities at maturity.

All of our available-for-sale securities are available to us for use in our current operations. As a result, we categorized all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.

 

Fair Value Measurements

The following tables present the investments we held at March 31, 2019 and December 31, 2018 that are regularly measured and carried at fair value. The table segregates each security by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities' fair value (in thousands):

 

 

 

At

March 31, 2019

 

 

Quoted Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

Money market funds (1)

 

$

74,541

 

 

$

74,541

 

 

$

 

Corporate debt securities

 

 

54,404

 

 

 

 

 

 

54,404

 

Debt securities issued by U.S. government agencies (3)

 

 

66,361

 

 

 

 

 

 

66,361

 

Total

 

$

195,306

 

 

$

74,541

 

 

$

120,765

 

 

 

 

At

December 31,

2018

 

 

Quoted Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

Money market funds (1)

 

$

82,343

 

 

$

82,343

 

 

$

 

Corporate debt securities (2)

 

 

81,619

 

 

 

 

 

 

81,619

 

Debt securities issued by U.S. government agencies (3)

 

 

85,536

 

 

 

 

 

 

85,536

 

Total

 

$

249,498

 

 

$

82,343

 

 

$

167,155

 

 

 

(1)

Included in cash and cash equivalents on our condensed consolidated balance sheets.

 

(2)

At December 31, 2018, $1.0 million was included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

 

(3)

Included in short-term investments on our condensed consolidated balance sheets.

 

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4.

Property, Plant and Equipment

The following table presents property and equipment, at cost, and related accumulated depreciation (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Furniture and fixtures

 

$

1,611

 

 

$

1,611

 

Computer equipment and software

 

 

139

 

 

 

102

 

Leasehold improvements

 

 

4,013

 

 

 

4,213

 

Total property and equipment, at cost

 

 

5,763

 

 

 

5,926

 

Less accumulated depreciation and amortization

 

 

(427

)

 

 

(230