UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the quarterly period ended | |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number: 001-35347
Clovis Oncology, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware | 90-0475355 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
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5500 Flatiron Parkway, Suite 100 |
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Boulder, Colorado | 80301 |
(Address of principal executive offices) | (Zip Code) |
(303) 625-5000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐ |
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of OctoberJuly 27, 20172018 was 49,014,867.52,649,591.
CLOVIS ONCOLOGY, INC.
FORM 10-Q
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| Consolidated Balance Sheets — as of | 4 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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2
CLOVIS ONCOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
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| Three months ended September 30, |
| Nine months ended September 30, |
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| Three months ended June 30, |
| Six months ended June 30, | ||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
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Product revenue, net |
| $ | 16,806 |
| $ | — |
| $ | 38,471 |
| $ | — |
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Revenues: |
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Product revenue |
| $ | 23,757 |
| $ | 14,620 |
| $ | 42,279 |
| $ | 21,665 | |||||||||||||
Operating expenses: |
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Cost of sales - product |
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| 3,026 |
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| — |
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| 6,920 |
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| — |
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| 4,490 |
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| 2,730 |
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| 8,495 |
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| 3,893 |
Cost of sales - intangible asset amortization |
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| 372 |
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| — |
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| 1,115 |
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| — |
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| 709 |
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| 372 |
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| 1,080 |
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| 743 |
Research and development |
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| 38,924 |
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| 54,338 |
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| 104,479 |
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| 196,675 |
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| 52,707 |
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| 33,108 |
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| 96,250 |
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| 65,555 |
Selling, general and administrative |
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| 35,011 |
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| 9,162 |
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| 100,384 |
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| 28,541 |
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| 44,864 |
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| 36,149 |
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| 84,138 |
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| 65,373 |
Acquired in-process research and development |
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| 500 |
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| 800 |
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Impairment of intangible asset |
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| 104,517 |
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Change in fair value of contingent purchase consideration |
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| — |
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Total expenses |
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| 77,333 |
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| 64,000 |
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| 212,898 |
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| 305,597 |
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| 102,770 |
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| 72,359 |
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| 189,963 |
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| 135,564 |
Operating loss |
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| (60,527) |
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| (64,000) |
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| (174,427) |
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| (305,597) |
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| (79,013) |
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| (57,739) |
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| (147,684) |
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Other income (expense): |
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Interest expense |
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| (2,618) |
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| (2,108) |
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| (7,796) |
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| (6,318) |
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| (3,581) |
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| (2,598) |
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| (6,216) |
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Foreign currency loss |
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| (66) |
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| (127) |
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Legal settlement loss, net of insurance receivable |
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| (117,000) |
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Foreign currency (loss) gain |
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| (104) |
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| 76 |
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| (185) |
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Legal settlement loss |
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| (117,000) |
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| (7,975) |
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SEC settlement costs reserve |
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| (20,000) |
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| (20,000) |
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Other income |
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| 1,291 |
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| 252 |
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| 2,237 |
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| 473 |
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| 1,475 |
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| 594 |
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| 2,883 |
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| 946 |
Other expense, net |
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| (1,371) |
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| (1,922) |
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| (122,686) |
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| (6,279) |
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| (22,210) |
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| (118,928) |
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| (31,493) |
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| (121,315) |
Loss before income taxes |
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| (61,898) |
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| (65,922) |
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| (297,113) |
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| (311,876) |
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| (101,223) |
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| (176,667) |
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| (179,177) |
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| (235,214) |
Income tax benefit |
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| 1,234 |
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| 227 |
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| 2,599 |
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| 33,467 |
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| 33 |
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| 1,281 |
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| 292 |
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| 1,365 |
Net loss |
| $ | (60,664) |
| $ | (65,695) |
| $ | (294,514) |
| $ | (278,409) |
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| $ | (101,190) |
| $ | (175,386) |
| $ | (178,885) |
| $ | (233,849) |
Other comprehensive income: |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments, net of tax |
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| 1,595 |
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| 58 |
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| 4,874 |
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| 2,190 |
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| (3,470) |
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| 2,812 |
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| (1,953) |
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| 3,279 |
Net unrealized gain (loss) on available-for-sale securities, net of tax |
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| 10 |
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| (18) |
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| 5 |
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| 260 |
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| 86 |
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| 81 |
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Other comprehensive income |
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| 1,605 |
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| 40 |
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| 4,879 |
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| 2,450 |
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Other comprehensive (loss) income: |
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| (3,384) |
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| 2,812 |
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| (1,872) |
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| 3,274 | |||||||||||||
Comprehensive loss |
| $ | (59,059) |
| $ | (65,655) |
| $ | (289,635) |
| $ | (275,959) |
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| $ | (104,574) |
| $ | (172,574) |
| $ | (180,757) |
| $ | (230,575) |
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Loss per basic and diluted common share: |
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Basic and diluted net loss per common share |
| $ | (1.24) |
| $ | (1.70) |
| $ | (6.39) |
| $ | (7.24) |
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| $ | (1.94) |
| $ | (3.88) |
| $ | (3.48) |
| $ | (5.24) |
Basic and diluted weighted average common shares outstanding |
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| 48,917 |
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| 38,538 |
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| 46,062 |
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| 38,429 |
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| 52,223 |
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| 45,176 |
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| 51,425 |
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| 44,610 |
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
CLOVIS ONCOLOGY, INC.
(Unaudited)
(In thousands, except for share amounts)
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| September 30, |
| December 31, |
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| December 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 611,472 |
| $ | 216,186 |
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| $ | 468,321 |
| $ | 464,198 |
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Accounts receivable, net |
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| 121 |
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| 12,304 |
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| 6,181 |
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Insurance receivable |
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| 25,000 |
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| — |
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Inventories |
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| 5,345 |
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| — |
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| 62,989 |
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| 27,508 |
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Available-for-sale securities |
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| 16,499 |
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| 49,997 |
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| 213,921 |
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| 99,533 |
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Prepaid research and development expenses |
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| 2,853 |
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| 6,427 |
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| 2,723 |
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| 1,559 |
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Deposit on inventory |
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| 31,818 |
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| — |
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| — |
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| 20,461 |
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Other current assets |
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| 5,911 |
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| 6,679 |
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| 8,360 |
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| 7,500 |
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Total current assets |
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| 698,898 |
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| 279,410 |
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| 768,618 |
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| 626,940 |
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Deposit on inventory |
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| 53,937 |
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Property and equipment, net |
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| 4,070 |
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| 4,440 |
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| 5,696 |
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| 4,007 |
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Intangible assets, net |
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| 19,932 |
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| 21,047 |
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| 53,480 |
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| 19,561 |
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Goodwill |
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| 64,253 |
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| 57,192 |
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| 63,475 |
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| 65,217 |
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Other assets |
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| 18,206 |
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| 2,468 |
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| 22,526 |
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| 19,505 |
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Total assets |
| $ | 805,359 |
| $ | 364,557 |
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| $ | 967,732 |
| $ | 735,230 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 14,308 |
| $ | 10,912 |
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| $ | 15,900 |
| $ | 15,147 |
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Accrued research and development expenses |
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| 21,344 |
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| 35,198 |
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| 19,788 |
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| 18,465 |
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Deferred revenue |
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| 2,755 |
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| — |
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Milestone liability |
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| 21,511 |
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| 20,062 |
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| — |
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| 22,022 |
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Accrued liability for legal settlement |
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| 142,000 |
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| — |
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Accrued SEC settlement liability |
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| 20,000 |
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| — |
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Other accrued expenses |
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| 17,467 |
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| 19,487 |
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| 20,928 |
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| 25,883 |
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Total current liabilities |
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| 219,385 |
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| 85,659 |
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| 76,616 |
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| 81,517 |
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Deferred income taxes, net |
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| 421 |
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| — |
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Convertible senior notes |
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| 282,082 |
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| 281,126 |
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| 574,335 |
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| 282,406 |
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Deferred rent, long-term |
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| 4,282 |
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| 1,406 |
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| 4,431 |
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| 3,671 |
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Total liabilities |
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| 506,170 |
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| 368,191 |
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| 655,382 |
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| 367,594 |
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Commitments and contingencies (Note 14) |
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Stockholders' equity (deficit): |
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Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2017 and December 31, 2016 |
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Common stock, $0.001 par value per share, 100,000,000 shares authorized at September 30, 2017 and December 31, 2016; 49,002,468 and 38,724,090 shares issued and outstanding at September 30, 2017 and December 31, 2016 respectively |
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| 49 |
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| 39 |
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Stockholders' equity: |
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Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at June 30, 2018 and December 31, 2017 |
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| — |
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Common stock, $0.001 par value per share, 100,000,000 shares authorized at June 30, 2018 and December 31, 2017; 52,637,375 and 50,565,119 shares issued and outstanding at June 30, 2018 and December 31, 2017 respectively |
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| 53 |
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| 51 |
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Additional paid-in capital |
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| 1,767,397 |
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| 1,174,950 |
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| 2,010,311 |
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| 1,887,198 |
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Accumulated other comprehensive loss |
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| (42,701) |
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| (47,580) |
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| (44,045) |
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| (42,173) |
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Accumulated deficit |
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| (1,425,556) |
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| (1,131,043) |
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| (1,653,969) |
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| (1,477,440) |
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Total stockholders' equity (deficit) |
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| 299,189 |
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| (3,634) |
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Total liabilities and stockholders' equity (deficit) |
| $ | 805,359 |
| $ | 364,557 |
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Total stockholders' equity |
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| 312,350 |
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| 367,636 |
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Total liabilities and stockholders' equity |
| $ | 967,732 |
| $ | 735,230 |
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See accompanying Notes to Unaudited Consolidated Financial Statements.
4
CLOVIS ONCOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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| Nine months ended September 30, |
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| Six months ended June 30, |
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| 2016 |
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| 2018 |
| 2017 |
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Operating activities |
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Net loss |
| $ | (294,514) |
| $ | (278,409) |
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| $ | (178,885) |
| $ | (233,849) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Share-based compensation expense |
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| 32,201 |
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| 29,744 |
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| 26,768 |
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| 19,563 |
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Depreciation and amortization |
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| 1,911 |
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| 819 |
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| 1,507 |
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| 1,281 |
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Amortization of premiums and discounts on available-for-sale securities |
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| 6 |
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| 190 |
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| 693 |
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| 245 |
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Amortization of debt issuance costs |
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| 956 |
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| 928 |
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| 895 |
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| 635 |
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Legal settlement loss, net of insurance receivable |
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| 117,000 |
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| — |
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Impairment of intangible asset |
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| — |
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| 104,517 |
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Change in fair value of contingent purchase consideration |
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| — |
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| (24,661) |
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Loss on disposal of property and equipment |
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| — |
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| 105 |
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Legal settlement loss |
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| — |
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| 117,000 |
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Deferred income taxes |
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| (2,403) |
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| (33,320) |
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| — |
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| (1,266) |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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| 121 |
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| — |
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| (2,786) |
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| (1,023) |
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Inventory |
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| (5,345) |
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| — |
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| (35,543) |
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| (6,478) |
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Prepaid and accrued research and development expenses |
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| (16,284) |
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| (14,877) |
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|
|
| 102 |
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| (15,162) |
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Deposit on inventory |
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| (31,818) |
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| — |
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| (33,476) |
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| — |
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Other operating assets |
|
| (4,156) |
|
| 2,358 |
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|
|
| (3,881) |
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| (36,855) |
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Accounts payable |
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| 5,050 |
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| (322) |
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|
| 860 |
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| 3,202 |
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Other accrued expenses |
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| 1,949 |
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| 923 |
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| 12,902 |
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| 3,166 |
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Net cash used in operating activities |
|
| (195,326) |
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| (212,005) |
|
|
|
| (210,844) |
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| (149,541) |
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Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (416) |
|
| (761) |
|
|
|
| (2,208) |
|
| (249) |
|
|
Deposits for purchases of property and equipment |
|
| (2,515) |
|
| 65 |
|
|
|
| — |
|
| (2,515) |
|
|
Purchases of available-for-sale securities |
|
| (180,000) |
|
| — |
|
|
|
| (125,000) |
|
| (180,000) |
|
|
Maturities of available-for-sale securities |
|
| 213,500 |
|
| 175,000 |
|
| ||||||||
Sales of available-for-sale securities |
|
| 10,000 |
|
| 50,000 |
|
| ||||||||
Acquired in-process research and development - milestone payment |
|
| (1,100) |
|
| — |
|
|
|
| (55,000) |
|
| (1,100) |
|
|
Net cash provided by investing activities |
|
| 29,469 |
|
| 174,304 |
|
| ||||||||
Net cash used in investing activities |
|
| (172,208) |
|
| (133,864) |
|
| ||||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of common stock, net of issuance costs |
|
| 545,838 |
|
| — |
|
|
|
| 93,754 |
|
| 546,170 |
|
|
Proceeds from the issuance of convertible senior notes, net of issuance costs |
|
| 291,035 |
|
| — |
|
| ||||||||
Proceeds from the exercise of stock options and employee stock purchases |
|
| 14,419 |
|
| 2,602 |
|
|
|
| 2,593 |
|
| 12,270 |
|
|
Net cash provided by financing activities |
|
| 560,257 |
|
| 2,602 |
|
|
|
| 387,382 |
|
| 558,440 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 886 |
|
| 67 |
|
|
|
| (207) |
|
| 565 |
|
|
Increase (decrease) in cash and cash equivalents |
|
| 395,286 |
|
| (35,032) |
|
|
|
| 4,123 |
|
| 275,600 |
|
|
Cash and cash equivalents at beginning of period |
|
| 216,186 |
|
| 278,756 |
|
|
|
| 464,198 |
|
| 216,186 |
|
|
Cash and cash equivalents at end of period |
| $ | 611,472 |
| $ | 243,724 |
|
|
| $ | 468,321 |
| $ | 491,786 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 7,188 |
| $ | 7,188 |
|
|
| $ | 3,594 |
| $ | 3,594 |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted stock units |
| $ | 9,449 |
| $ | 157 |
|
|
| $ | 8,357 |
| $ | 2,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
5
CLOVIS ONCOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Clovis Oncology, Inc. (together with its consolidated subsidiaries, the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and otheradditional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use. We have and intend to continue to license or acquire rights to oncology compounds in all stages of clinical development. In exchange for the right to develop and commercialize these compounds, we generally expect to provide the licensor with a combination of upfront payments, milestone payments and royalties on future sales. In addition, we generally expect to assume the responsibility for future drug development and commercialization costs. We currently operate in one segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities.activities and since 2016 we have also marketed and sold products.
On December 19, 2016, the FDA approvedOur marketed product Rubraca® (rucaparib) tablets as monotherapyis approved in the United States by the Food and Drug Administration (“FDA”) for two indications, encompassing two settings for the treatment of recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial treatment indication received in December 2016 covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic) associated advancedepithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies, and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. We began sellingIn April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The FDA granted regular approval for Rubraca in this second, broader and earlier-line indication on a priority review timeline based on positive data from the U.S.phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in the fourth quarter of 2016. Rucaparib is being studied as a potential maintenance therapy for ovarian cancer patients in the ARIEL3 trial. On June 19, 2017, we announced that the ARIEL3 trial successfully achieved the primary endpoint of improved progression-free survival (“PFS”) by investigator review in each of three populations studied. PFS was also improved in the rucaparib group compared with placebo by blinded independent central review (“BICR”), a key secondary endpoint. Based on these findings, we submitted a supplemental New Drug Application (“sNDA”) in October 2017 for a second-line or laterthis maintenance treatment indicationindication.
In May 2018, the European Commission granted a conditional marketing authorization for all womenRubraca as monotherapy treatment of adult patients with platinum-sensitiveplatinum sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have respondedbeen treated with two or more prior lines of platinum based chemotherapy, and who are unable to their most recenttolerate further platinum therapy.based chemotherapy.
Our Marketing Authorization Application (“MAA”)As this is a conditional approval, it will be necessary to complete confirmatory post marketing commitments, including ensuring that sufficient partially platinum sensitive patients are enrolled in our ARIEL4 confirmatory trial to support the indication. This may require enrollment of additional patients into the study, increasing its overall size and extending the time for rucaparib thatenrollment. In June 2018, we submitted to the European Union’s European Medicines Agency (“EMA”) a variation to the marketing authorization for anthe maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer treatment indication is currently under review.who are in a complete or partial response to platinum-based chemotherapy, for which we received EMA validation for this application in July 2018. We anticipate an opinion on this application from the Committee for Medicinal Products for Human Use (“CHMP”) in late 2017, and, if we receive a favorable opinion from the CHMP, a potential approval fromof the EMA may follow duringby the end of 2018.
Beyond our initial labeled indication, we have a robust Rubraca clinical development program underway in a variety of solid tumor types, also including prostate and bladder cancers, and in July 2017, we entered into a broad clinical collaboration with Bristol-Myers Squibb Company to evaluate the combination of their immunotherapy OPDIVO® (nivolumab) with Rubraca in several tumor types. We hold worldwide rights for Rubraca.
In addition to Rubraca, we have two other product candidates.
Lucitanib is an oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors 1 through 3 (VEGFR1-3), platelet-derived growth factor receptors alpha and beta (PDGFR α/β) and fibroblast growth factor receptors 1 through 3 (FGFR1-3). Lucitanib was originally developed by Clovis and Servier with the hypothesis of activity in FGFR driven tumors; however, data in breast and lung cancer were insufficient to move the program forward. We have received notice from Servier of termination of their rights to lucitanib, resulting in the return of global rights (excluding China) for lucitanib to us later in 2018. We believe that recent data for a drug similar to lucitanib that
6
inhibits these same pathways – when combined with a PD-1 inhibitor – provide support for development of lucitanib in combination with a PD-(L)1 inhibitor, and we intend to initiate a study of the combination. We also intend to initiate a study of lucitanib in combination with Rubraca, based on encouraging data of VEGF and PARP inhibitors in combination. Each of these studies is expected to initiate in the first quarter of 2018.2019. We maintain certain development and commercialization rights for lucitanib. Following a potential approvalthe termination of the Servier license agreement, we will have global development and commercialization rights (except for the treatment indication,China) for lucitanib.
Rociletinib is an oral mutant-selective inhibitor of epidermal growth factor receptor (“EGFR”). While we intendhave stopped enrollment in ongoing trials for rociletinib, we continue to submit a variationprovide drug to the MAApatients whose clinicians recommend continuing therapy. We have global development and commercialization rights for the second-line or later maintenance treatment indication, for which we anticipate a potential approval during the third quarter of 2018.rociletinib.
Basis of Presentation
All financial information presented includes the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The unaudited financial statements of Clovis Oncology, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the periods presented herein. Interim results may not be indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 20162017 (“20162017 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical
6
experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Liquidity
We have incurred significant net losses since inception and have relied on our ability to fund our operations through debt and equity financings. We expect operating losses and negative cash flows to continue for the foreseeable future. As we continue to incur losses, transition to profitability is dependent upon achieving a level of revenues from Rubraca adequate to support our cost structure. We may never achieve profitability, and unless or until we do, we will continue to need to raise additional cash.
In January 2017,April 2018, we sold 5,750,0001,837,898 shares of our common stock in a public offering at $41.00$54.41 per share. The net proceeds from the offering were $221.2$93.8 million, after deducting underwriting discounts and commissions and offering expenses. In June 2017,Concurrently, we sold 3,920,454 shares of our common stock in acompleted the public offering at $88.00 per share.of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025. The net proceeds from thethis offering were $324.6$291.0 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds of the offerings for general corporate purposes, including sales and marketing expenses associated with Rubraca in the United States and if approved by the EMA, in Europe, funding of our development programs, selling, general and administrative expenses, acquisition or licensing of additional product candidates or businesses and working capital. Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.
7
2. Summary of Significant Accounting Policies
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers”, and has subsequently issued several supplemental and/or clarifying ASUs (collectively, “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. ASC 606 is intended to provide a more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability. Adoption of ASC 606 is required for annual and interim periods beginning after December 15, 2017. Upon adoption, we must elect to adopt either retrospectively to each prior reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized at the date of initial application. We adopted the new standard using the modified retrospective method on January 1, 2018 for contracts that are not completed as of the adoption date.
Under ASC 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 ASC 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. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
We examined our revenue recognition policy specific to revenue streams from contracts governing product sales from Rubraca and have come to conclusions on the impact of the new standard using the 5-step process prescribed by ASC 606. We reviewed all of our contracts, including our collaboration agreements with Servier and Bristol-Myers Squibb, and determined the potential impact to our accounting policies, financial controls and operations. Our conclusions include recognizing revenue on product sales once the product is sold to the specialty distributor and specialty pharmacy providers.
As noted above, we used the modified retrospective method to adopt the new standard. This means that we did not restate previously issued financial statements, but we recorded a one-time adjustment to retained earnings of $2.4 million. This adjustment represents the sales of our product to our customers prior to January 1, 2018, that had not been sold to patients or healthcare providers, offset by related gross-to-net adjustments and other direct costs, including royalties and sales incentive compensation.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
| Balance at |
| Adjustments due to |
| Balance at | |||
|
| December 31, 2017 |
| Adoption of ASC 606 |
| January 1, 2018 | |||
ASSETS |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
| $ | 6,181 |
| $ | 3,336 |
| $ | 9,517 |
Inventories |
| $ | 27,508 |
|
| (62) |
| $ | 27,446 |
Total assets |
| $ | 735,230 |
| $ | 3,274 |
| $ | 738,504 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
Other accrued expenses |
| $ | 25,883 |
| $ | 918 |
| $ | 26,801 |
Accumulated deficit |
| $ | (1,477,440) |
|
| 2,356 |
| $ | (1,475,084) |
Total liabilities and stockholders' equity |
| $ | 735,230 |
| $ | 3,274 |
| $ | 738,504 |
Previously, we recognized revenue on product sales once the product was sold to the patient or healthcare provider by the specialty distributor or specialty pharmacy provider, i.e. when product is sold through the channel. Effective January 1, 2018, we began recognizing revenue when our customers, the specialty distributors and specialty pharmacy providers, take control of our product or when product is sold into the channel. This will have the impact of us recognizing revenue approximately two to four weeks earlier than before adopting the new standard and will also
8
increase the significance of estimating variable consideration. The following financial statement line items for the three and six months ended June 30, 2018 were affected as a result of the adoption.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for per share amounts)
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, 2018 | |||||||
|
|
|
|
| Balances without |
| Effect of Change | ||
|
| As reported |
| Adoption of ASC 606 |
| Higher/(Lower) | |||
Product revenue |
| $ | 23,757 |
| $ | 20,372 |
| $ | 3,385 |
Cost of sales - product |
| $ | 4,490 |
| $ | 3,998 |
| $ | 492 |
Selling, general and administrative |
| $ | 44,864 |
| $ | 44,679 |
| $ | 185 |
Net loss |
| $ | (101,190) |
| $ | (103,898) |
| $ | (2,708) |
|
|
|
|
|
|
|
|
|
|
Loss per basic and diluted common share: |
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
| $ | (1.94) |
| $ | (1.99) |
| $ | (0.05) |
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, 2018 | |||||||
|
|
|
|
| Balances without |
| Effect of Change | ||
|
| As reported |
| Adoption of ASC 606 |
| Higher/(Lower) | |||
Product revenue |
| $ | 42,279 |
| $ | 38,328 |
| $ | 3,951 |
Cost of sales - product |
| $ | 8,495 |
| $ | 7,539 |
| $ | 956 |
Selling, general and administrative |
| $ | 84,138 |
| $ | 83,913 |
| $ | 225 |
Net loss |
| $ | (178,885) |
| $ | (181,654) |
| $ | (2,769) |
|
|
|
|
|
|
|
|
|
|
Loss per basic and diluted common share: |
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
| $ | (3.48) |
| $ | (3.53) |
| $ | (0.05) |
CONSOLIDATED BALANCE SHEET
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 | |||||||
|
|
|
|
| Balances without |
| Effect of Change | ||
|
| As reported |
| Adoption of ASC 606 |
| Higher/(Lower) | |||
ASSETS |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
| $ | 12,304 |
| $ | 8,644 |
| $ | 3,660 |
Inventories |
| $ | 62,989 |
| $ | 62,887 |
| $ | 102 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
Other accrued expenses |
| $ | 20,928 |
| $ | 19,880 |
| $ | 1,048 |
Accumulated deficit |
| $ | (1,653,969) |
| $ | (1,656,677) |
| $ | (2,708) |
ASC 606 did not have an aggregate impact on our net cash provided by operating activities but resulted in offsetting changes in certain assets and liabilities presented within net cash used in operating activities in our consolidated statement of cash flows, as reflected in the above tables.
Recently Issued Accounting Standards
From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an ASU.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
9
adoption is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.
Revenue Recognition
Product revenue is derived from sales of our product,We are currently approved to sell Rubraca in the United States. States market. We distribute our product in the U.S. principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently resellsell our products to patients and healthcarehealth care providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and other discounts.
Product Revenue
Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.
Reserves for Variable Consideration
Revenues from product sales are recognized when persuasive evidencerecorded at the net sales price (transaction price), which includes estimates of an arrangement exists, delivery has occurredvariable consideration for which reserves are established and title of the product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectionwhich result from the customer has been reasonably assured and all performance obligations have been met and returns and allowances can be reasonably estimated. Revenue is recorded net of estimated rebates, chargebacks, discounts, and other deductions as well asco-pay assistance, estimated product returns (collectively, “sales deductions”)and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. 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 customers) or a current liability (if the amount is payable to a party other than a customer). AlthoughWhere appropriate, these estimates take into consideration a range of possible outcomes which 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, 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 which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is 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 adjust these estimates, which would affect product revenue and earnings in the period such variances become known.
Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare coverage gap program. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public-sector benefit providers. 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 current liability which is included in accrued expenses on the consolidated balance sheet. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on statutory discount rates and known sales to specialty pharmacy patients or expected utilization for specialty distributor sales to healthcare providers. As we gain more historical experience, the accrual will be based solely on the expected utilization from historical data we have accumulated since the Rubraca product launch. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance
10
consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known or estimated prior quarters’ unpaid rebates.
Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service organizations and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and specialty pharmacy providers are our customers, we recognize revenue on product sales once the product is resolddiscounted price paid to the patient or healthcare provider by the specialty distributor by the healthcare provider. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for specialty distributor chargebacks is estimated based on known chargeback rates and known sales to specialty distributors adjusted for the estimated utilization by healthcare providers.
Discounts and Fees. Our payment terms are generally 30 days. Specialty distributors and specialty pharmacies are offered various forms of consideration, including service fees and prompt pay discounts for payment within a specified period. We expect these customers will earn prompt pay discounts and therefore, we deduct the full amount of these discounts and service fees from product sales when revenue is recognized.
Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation provided by third-party administrators at month end.
Returns. Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or specialty pharmacy provider, therefore reducingproduct that is six months beyond the significance of estimates made for product returns.expiration date. To date, we have had minimal product returns and we currently do not have an accrual for product returns. We will continue to assess our estimate for product returns as we gain additional historical experience.
Cost of Sales – Product
Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, certain of the manufacturing costs of Rubraca units recognized as revenue during the three and nine months ended September 30, 2017 were expensed prior to the December 19, 2016 FDA approval, and therefore, a minimal amount is included in costs of sales during the current period. We expect cost of sales to increase in relation to product revenues as we deplete these inventories and we expect to use the remaining pre-commercialization inventory for product sales during the fourth quarter of 2017.
7
Cost of Sales – Intangible Asset Amortization
Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out or FIFO,(“FIFO”) basis. We began capitalizing incurred inventory related costs upon the regulatory approval of Rubraca. Prior to the regulatory approval of Rubraca, we incurred costs for the manufacture of the drug that could potentially be available to support the commercial launch of Rubraca and all such costs were recognized as research and development expense. We periodically analyze our inventory levels, and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements as cost of product revenues. Expired inventory would be disposed of and the related costs would be written off as cost of product revenues.
The active pharmaceutical ingredient (“API”) in Rubraca is currently produced by a single supplier. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory. Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.
Our other significant accounting policies are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our 20162017 Form 10-K.
Recently Issued Accounting Standards
From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively, “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. ASC 606 is intended to provide a more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability. Adoption of ASC 606 is required for annual and interim periods beginning after December 15, 2017. Upon adoption, we must elect to adopt either retrospectively to each prior reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized at the date of initial application. We expect to apply the new standard using the modified retrospective method upon its adoption date on January 1, 2018.
We have begun a comprehensive scoping process to identify and disaggregate all revenue streams that may be impacted by the adoption of ASC 606. To date, we have examined our revenue recognition policy specific to revenue streams from representative contracts governing product sales from Rubraca and have come to preliminary conclusions on the impact of the new standard using the 5-step process prescribed by ASC 606. We have reviewed a representative sample of contracts, including our collaboration agreements with Servier and Bristol-Myers Squibb discussed in Note 12, License Agreements, and determined the potential impact to our accounting policies, financial controls and operations. Our preliminary conclusions include recognizing revenue on product sales once the product is sold to the specialty distributor and specialty pharmacy providers. We have not yet completed our final review of the impact of this guidance including the new disclosure requirements, as we are continuing to evaluate the impacts of adoption. We continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact our preliminary conclusions.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into
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after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” which clarifies the definition of a business in ASC 805. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. Currently, there is no impact to our consolidated financial statements and related disclosures, but we will adopt on January 1, 2018 for any business combinations and will consider adopting early for any acquisitions prior to January 1, 2018.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which we would be required to apply modification accounting under ASC 718. Specifically, we would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures should we have a modification to our share-based payment awards in the future.
3. Financial Instruments and Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The three levels of inputs that may be used to measure fair value include:
Level 1: | Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consist of money market investments. We do not have Level 1 liabilities. |
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Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets consist of U.S. treasury securities. We do not have Level 2 liabilities. |
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Level 3: | Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets or liabilities that are measured at fair value on a recurring basis. |
The following table identifies our assets and liabilities that were measured at fair value on a recurring basis (in thousands):
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| Balance |
| Level 1 |
| Level 2 |
| Level 3 |
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| Balance |
| Level 1 |
| Level 2 |
| Level 3 |
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September 30, 2017 |
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June 30, 2018 |
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Assets: |
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Money market |
| $ | 590,037 |
| $ | 590,037 |
| $ | — |
| $ | — |
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| $ | 422,029 |
| $ | 422,029 |
| $ | — |
| $ | — |
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U.S. treasury securities |
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| 16,499 |
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| — |
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| 16,499 |
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| — |
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| 213,921 |
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| — |
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| 213,921 |
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| — |
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Total assets at fair value |
| $ | 606,536 |
| $ | 590,037 |
| $ | 16,499 |
| $ | — |
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| $ | 635,950 |
| $ | 422,029 |
| $ | 213,921 |
| $ | — |
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December 31, 2016 |
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December 31, 2017 |
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Assets: |
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Money market |
| $ | 202,361 |
| $ | 202,361 |
| $ | — |
| $ | — |
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| $ | 433,136 |
| $ | 433,136 |
| $ | — |
| $ | — |
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U.S. treasury securities |
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| 49,997 |
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| — |
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| 49,997 |
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| — |
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| 99,533 |
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| — |
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| 99,533 |
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| — |
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Total assets at fair value |
| $ | 252,358 |
| $ | 202,361 |
| $ | 49,997 |
| $ | — |
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| $ | 532,669 |
| $ | 433,136 |
| $ | 99,533 |
| $ | — |
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There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three and ninesix months ended SeptemberJune 30, 2017.2018.
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Financial instruments not recorded at fair value include our convertible senior notes. At SeptemberJune 30 2017,2018, the carrying amount of the convertible senior notes2021 Notes was $282.1$283.0 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $444.2$310.2 million. At June 30 2018, the carrying amount of the 2025 Notes was $291.0 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $276.0 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Notes,these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 9, Convertible Senior Notes for discussion of the convertible senior notes.
4. Available-for-Sale Securities
As of SeptemberJune 30, 2018, available-for-sale securities consisted of the following (in thousands):
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| Gross |
| Gross |
| Aggregate |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
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| Cost |
| Gains |
| Losses |
| Value |
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U.S. treasury securities |
| $ | 213,957 |
| $ | — |
| $ | (36) |
| $ | 213,921 |
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As of December 31, 2017, available-for-sale securities consisted of the following (in thousands):
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| Gross |
| Gross |
| Aggregate |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
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| Cost |
| Gains |
| Losses |
| Value |
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U.S. treasury securities |
| $ | 16,498 |
| $ | 1 |
| $ | — |
| $ | 16,499 |
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| Gross |
| Gross |
| Aggregate |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
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| Cost |
| Gains |
| Losses |
| Value |
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U.S. treasury securities |
| $ | 99,650 |
| $ | — |
| $ | (117) |
| $ | 99,533 |
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As of December 31, 2016,June 30, 2018, our available-for-sale securities consisted of the following (in thousands):
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| Gross |
| Gross |
| Aggregate |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
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| Cost |
| Gains |
| Losses |
| Value |
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U.S. treasury securities |
| $ | 50,004 |
| $ | — |
| $ | (7) |
| $ | 49,997 |
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As of September 30, 2017, there were no available-for-sale securities that have been in a continuous unrealized loss position for less than 12 months. We have concluded that decline in the market value of the available-for-sale securities is temporary. A decline in the market value of a security below its cost that is deemed to be other than temporary is charged to earnings and results in the establishment of a new cost basis for the security. Factors evaluated to determine if an investment is other-than-temporarily impaired include significant deterioration in earnings performance, credit rating, asset quality or business prospects of the issuer; adverse changes in the general market conditions in which the issuer operates; and our intent and ability to hold the security until an anticipated recovery in value occurs.
As of SeptemberJune 30, 2017,2018, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):
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| Amortized |
| Fair |
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| Amortized |
| Fair |
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| Cost |
| Value |
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| Value |
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Due in one year or less |
| $ | 16,498 |
| $ | 16,499 |
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| $ | 213,957 |
| $ | 213,921 |
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Due in one year to two years |
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| — |
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| — |
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| — |
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| — |
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Total |
| $ | 16,498 |
| $ | 16,499 |
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| $ | 213,957 |
| $ | 213,921 |
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5. Inventories
The following table presents inventories as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
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| September 30, |
| December 31, |
| June 30, |
| December 31, | ||
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| 2017 |
| 2016 |
| 2018 |
| 2017 | ||
Work in process |
| 3,482 |
| — | ||||||
Work-in-process |
| $ | 57,453 |
| $ | 24,721 | ||||
Finished goods |
| 1,863 |
| — |
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| 5,536 |
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| 2,787 |
Total inventories |
| 5,345 |
| — |
| $ | 62,989 |
| $ | 27,508 |
Some of the costs related to our finished goods on-hand as of SeptemberJune 30, 20172018 were expensed as incurred prior to the commercialization of Rubraca on December 19, 2016.
At SeptemberJune 30, 2017,2018, deposit on inventory on the Consolidated Balance Sheets is a cash deposit of $31.8$53.9 million made to a manufacturer for the purchase of work-in-process inventory which we expect to be converted to finished goods withinbeyond the next twelve months.
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6. Other Current Assets
Other current assets were comprised of the following (in thousands):
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| September 30, |
| December 31, |
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| June 30, |
| December 31, |
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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Receivable from partners |
| $ | 64 |
| $ | 2,882 |
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Prepaid insurance |
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| 604 |
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| 1,234 |
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| $ | 1,403 |
| $ | 1,926 |
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Prepaid expenses - other |
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| 3,811 |
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| 2,109 |
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| 4,768 |
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| 3,355 |
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Receivable - other |
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| 1,274 |
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| 364 |
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| 1,918 |
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| 2,023 |
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Other |
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| 158 |
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| 90 |
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| 271 |
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| 196 |
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Total |
| $ | 5,911 |
| $ | 6,679 |
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| $ | 8,360 |
| $ | 7,500 |
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7. Intangible Assets and Goodwill
Intangible assets related to capitalized milestones under license agreements consisted of the following (in thousands):
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| September 30, |
| December 31, |
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| June 30, |
| December 31, | ||||
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| 2017 |
| 2016 |
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| 2018 |
| 2017 | ||||
Intangible asset - milestones |
| $ | 21,100 |
| $ | 21,100 |
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| $ | 56,100 |
| $ | 21,100 |
Accumulated amortization |
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| (1,168) |
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| (53) |
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| (2,620) |
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| (1,539) |
Total intangible asset, net |
| $ | 19,932 |
| $ | 21,047 |
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| $ | 53,480 |
| $ | 19,561 |
The increase in our intangible asset – milestones since December 31, 2017 is due to a $15.0 million milestone payment to Pfizer related to the April 6, 2018 FDA approval of our sNDA for Rubraca as maintenance treatment and a $20.0 million milestone payment to Pfizer related to the European Commission approval of Rubraca in May 2018. See Note 12, License Agreements for further discussion of these approvals.
The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031.2035.
We recorded amortization expense of $0.4$0.7 million and $1.2$1.1 million related to capitalized milestone payments during the three and ninesix months ended SeptemberJune 30, 2018, respectively. We recorded amortization expense of $0.4 million and $0.8 million related to capitalized milestone payments during the three and six months ended June 30, 2017, respectively,respectively. Amortization expense is included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss. There was no amortization expense during the three and nine months ended September 30, 2016.
Estimated future amortization expense associated with intangibles is expected to be as follows (in thousands):
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2017 (remaining) |
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| $ | 372 |
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2018 |
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| 1,486 |
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| $ | 1,603 |
2019 |
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| 1,486 |
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| 3,209 |
2020 |
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| 1,486 |
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| 3,209 |
2021 |
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| 1,486 |
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| 3,209 |
2022 |
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| 3,209 | |||||||
Thereafter |
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| 13,616 |
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| 39,041 |
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| $ | 19,932 |
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| $ | 53,480 |
The change in goodwill established as part of the purchase accounting of EOS in November 2013 consisted of the following (in thousands):
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Balance at December 31, 2016 |
| $ | 57,192 |
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Change in foreign currency gains and losses |
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| 7,061 |
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Balance at September 30, 2017 |
| $ | 64,253 |
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Balance at December 31, 2017 |
| $ | 65,217 |
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Change in foreign currency gains and losses |
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| (1,742) |
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Balance at June 30, 2018 |
| $ | 63,475 |
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8. Other Accrued Expenses
Other accrued expenses were comprised of the following (in thousands):
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| September 30, |
| December 31, |
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| June 30, |
| December 31, |
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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Accrued personnel costs |
| $ | 9,770 |
| $ | 15,850 |
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| $ | 9,552 |
| $ | 13,889 |
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Accrued interest payable |
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| 299 |
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| 2,096 |
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| 2,846 |
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| 2,096 |
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Income tax payable |
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| 74 |
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| 556 |
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| 100 |
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| — |
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Accrued corporate legal fees and professional services |
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| 612 |
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| 589 |
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| 219 |
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| 415 |
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Accrued royalties |
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| 2,932 |
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| — |
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| 4,163 |
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| 2,984 |
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Accrued sales deductions |
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| 1,254 |
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| — |
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Accrued variable considerations |
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| 1,788 |
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| 1,008 |
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Payable to third party logistics provider |
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| 14 |
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| 2,661 |
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Accrued expenses - other |
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| 2,526 |
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| 396 |
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| 2,246 |
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| 2,830 |
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Total |
| $ | 17,467 |
| $ | 19,487 |
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| $ | 20,928 |
| $ | 25,883 |
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9. Convertible Senior Notes
2021 Notes
On September 9, 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “Notes”“2021 Notes”) resulting in net proceeds of $278.3 million after deducting offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.
The 2021 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2021 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on March 15 and September 15 of each year. The 2021 Notes will mature on September 15, 2021, unless earlier converted, redeemed or repurchased.
Holders may convert all or any portion of the 2021 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 16.1616 shares per $1,000 in principal amount of 2021 Notes, equivalent to a conversion price of approximately $61.88 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture, but will not be adjusted for any accrued and unpaid interest.indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2021 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
On or after September 15, 2018, we may redeem the 2021 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2021 Notes.
If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2021 Notes, holders may require us to repurchase for cash all or any portion of the 2021 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2021 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2021 Notes; equal in right of payment to all of our liabilities that are not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the 2021 Notes, we incurred $9.2 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are
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amortized as interest expense over the expected life of the 2021 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2021 Notes.
2025 Notes
On April 19, 2018, we completed an underwritten public offering of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025 (the “2025 Notes”) resulting in net proceeds of $291.0 million, after deducting underwriting discounts and commissions and offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.
The 2025 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented by the terms of that certain first supplemental indenture thereto. The 2025 Notes are senior unsecured obligations and bear interest at a rate of 1.25% per year, payable semi-annually in arrears on May 1 and November 1 of each year. The 2025 Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased.
Holders may convert all or any portion of the 2025 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 13.1278 shares per $1,000 in principal amount of 2025 Notes, equivalent to a conversion price of approximately $76.17 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2025 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
On or after May 2, 2022, we may redeem the 2025 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.
If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or any portion of the 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2025 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In connection with the issuance of the 2025 Notes, we incurred $9.0 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2025 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2025 Notes.
As of June 30, 2018 and December 31, 2017, the balance of unamortized debt issuance costs was $13.2 million and $5.1 million, respectively.
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life of the debt was equal to the seven-year term of the Notes. As of September 30, 2017 and December 31, 2016, the balance of unamortized debt issuance costs was $5.4 million and $6.4 million, respectively.
The following table sets forth total interest expense recognized during the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in thousands):
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| Three months ended September 30, |
| Nine months ended September 30, |
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| Three months ended June 30, |
| Six months ended June 30, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Contractual interest expense |
| $ | 1,797 |
| $ | 1,797 |
| $ | 5,391 |
| $ | 5,390 |
|
| $ | 2,547 |
| $ | 1,797 |
| $ | 4,344 |
| $ | 3,594 |
|
Accretion of interest on milestone liability |
|
| 500 |
|
| — |
|
| 1,449 |
|
| — |
|
|
| 465 |
|
| 483 |
|
| 977 |
|
| 949 |
|
Amortization of debt issuance costs |
|
| 321 |
|
| 311 |
|
| 956 |
|
| 928 |
|
|
| 569 |
|
| 318 |
|
| 895 |
|
| 635 |
|
Total interest expense |
| $ | 2,618 |
| $ | 2,108 |
| $ | 7,796 |
| $ | 6,318 |
|
| $ | 3,581 |
| $ | 2,598 |
| $ | 6,216 |
| $ | 5,178 |
|
10. Stockholders’ Equity
Common Stock
In January 2017,April 2018, we sold 5,750,0001,837,898 shares of our common stock in a public offering at $41.00$54.41 per share. The net proceeds from the offering were $221.2$93.8 million, after deducting underwriting discounts and commissions and offering expenses.In June 2017, we sold 3,920,454 shares of our common stock in a public offering at $88.00 per share. The net proceeds from the offering were $324.6 million, after deducting underwriting discounts and commissions and offering expenses.
The holders of common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency, and unrealized gains and losses on available-for-sale securities.
The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the three months ended SeptemberJune 30, 20172018 and 2016,2017, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign Currency |
| Unrealized |
| Total Accumulated |
|
| Foreign Currency |
| Unrealized |
| Total Accumulated |
| ||||||||||||||||||||||||
|
| Translation Adjustments |
| (Losses) Gains |
| Other Comprehensive Loss |
|
| Translation Adjustments |
| (Losses) Gains |
| Other Comprehensive Loss |
| ||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||||||
Balance at July 1, |
| $ | (44,155) |
| $ | (44,945) |
| $ | (151) |
| $ | (105) |
| $ | (44,306) |
| $ | (45,050) |
| |||||||||||||||||||
Balance at April 1, |
| $ | (40,400) |
| $ | (46,967) |
| $ | (261) |
| $ | (151) |
| $ | (40,661) |
| $ | (47,118) |
| |||||||||||||||||||
Other comprehensive income (loss) |
|
| 2,510 |
|
| 115 |
|
| 15 |
|
| (29) |
|
| 2,525 |
|
| 86 |
|
|
| (3,944) |
|
| 4,451 |
|
| 88 |
|
| (3) |
|
| (3,856) |
|
| 4,448 |
|
Total before tax |
|
| (41,645) |
|
| (44,830) |
|
| (136) |
|
| (134) |
|
| (41,781) |
|
| (44,964) |
|
|
| (44,344) |
|
| (42,516) |
|
| (173) |
|
| (154) |
|
| (44,517) |
|
| (42,670) |
|
Tax effect |
|
| (915) |
|
| (57) |
|
| (5) |
|
| 11 |
|
| (920) |
|
| (46) |
|
|
| 474 |
|
| (1,639) |
|
| (2) |
|
| 3 |
|
| 472 |
|
| (1,636) |
|
Balance at September 30, |
| $ | (42,560) |
| $ | (44,887) |
| $ | (141) |
| $ | (123) |
| $ | (42,701) |
| $ | (45,010) |
| |||||||||||||||||||
Balance at June 30, |
| $ | (43,870) |
| $ | (44,155) |
| $ | (175) |
| $ | (151) |
| $ | (44,045) |
| $ | (44,306) |
|
The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the ninesix months ended SeptemberJune 30, 20172018 and 20162017, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Foreign Currency |
| Unrealized |
| Total Accumulated |
|
| Foreign Currency |
| Unrealized |
| Total Accumulated |
| ||||||||||||||||||||||||
|
| Translation Adjustments |
| (Losses) Gains |
| Other Comprehensive Loss |
|
| Translation Adjustments |
| (Losses) Gains |
| Other Comprehensive Loss |
| ||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||||||
Balance at January 1, |
| $ | (47,434) |
| $ | (47,077) |
| $ | (146) |
| $ | (383) |
| $ | (47,580) |
| $ | (47,460) |
|
| $ | (41,917) |
| $ | (47,434) |
| $ | (256) |
| $ | (146) |
| $ | (42,173) |
| $ | (47,580) |
|
Other comprehensive income (loss) |
|
| 7,695 |
|
| 3,526 |
|
| 8 |
|
| 412 |
|
| 7,703 |
|
| 3,938 |
|
|
| (1,953) |
|
| 5,186 |
|
| 81 |
|
| (8) |
|
| (1,872) |
|
| 5,178 |
|
Total before tax |
|
| (39,739) |
|
| (43,551) |
|
| (138) |
|
| 29 |
| (39,877) |
|
| (43,522) |
|
|
| (43,870) |
|
| (42,248) |
|
| (175) |
|
| (154) |
|
| (44,045) |
|
| (42,402) |
| |
Tax effect |
|
| (2,821) |
|
| (1,336) |
|
| (3) |
|
| (152) |
|
| (2,824) |
|
| (1,488) |
|
|
| — |
|
| (1,907) |
|
| — |
|
| 3 |
|
| — |
|
| (1,904) |
|
Balance at September 30, |
| $ | (42,560) |
| $ | (44,887) |
| $ | (141) |
| $ | (123) |
| $ | (42,701) |
| $ | (45,010) |
| |||||||||||||||||||
Balance at June 30, |
| $ | (43,870) |
| $ | (44,155) |
| $ | (175) |
| $ | (151) |
| $ | (44,045) |
| $ | (44,306) |
|
13
The period change in each of the periods presented was primarily due to the currency translation of the goodwill and deferred income taxes associated with the acquisition of EOS in November 2013. There were no reclassifications out of accumulated other comprehensive loss in each of the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
17
11. Share-Based Compensation
Share-based compensation expense for all equity based programs, including stock options, restricted stock units and the employee stock purchase plan, for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 was recognized in the accompanying Consolidated Statements of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three months ended September 30, |
| Nine months ended September 30, |
|
|
| Three months ended June 30, |
| Six months ended June 30, |
|
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| ||||||||
Research and development |
| $ | 5,636 |
| $ | 7,039 |
| $ | 14,628 |
| $ | 20,962 |
|
| $ | 4,966 |
| $ | 4,825 |
| $ | 10,342 |
| $ | 8,991 |
| ||
Selling, general and administrative |
|
| 7,001 |
|
| 2,164 |
|
| 17,573 |
|
| 8,782 |
|
|
| 9,889 |
|
| 5,792 |
|
| 16,426 |
|
| 10,572 |
| ||
Total share-based compensation expense |
| $ | 12,637 |
| $ | 9,203 |
| $ | 32,201 |
| $ | 29,744 |
|
| $ | 14,855 |
| $ | 10,617 |
| $ | 26,768 |
| $ | 19,563 |
|
We did not recognize a tax benefit related to share-based compensation expense during the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, as we maintain net operating loss carryforwards and have established a valuation allowance against the entire net deferred tax asset as of SeptemberJune 30, 2017.2018.
Stock Options
The following table summarizes the activity relating to our options to purchase common stock for the ninesix months ended SeptemberJune 30, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
| Average |
| Aggregate |
| ||
|
|
|
| Average |
| Remaining |
| Intrinsic |
| ||
|
| Number of |
| Exercise |
| Contractual |
| Value |
| ||
|
| Options |
| Price |
| Term (Years) |
| (Thousands) |
| ||
Outstanding at December 31, 2016 |
| 5,520,482 |
| $ | 42.00 |
|
|
|
|
|
|
Granted |
| 895,200 |
|
|
|
|
|
|
|
|
|
Exercised |
| (439,449) |
|
|
|
|
|
|
|
|
|
Forfeited |
| (217,771) |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
| 5,758,462 |
| $ | 46.32 |
| 7.3 |
| $ | 211,301 |
|
Vested and expected to vest at September 30, 2017 |
| 5,436,766 |
| $ | 46.10 |
| 7.2 |
| $ | 200,599 |
|
Vested and exercisable at September 30, 2017 |
| 3,280,881 |
| $ | 44.09 |
| 6.2 |
| $ | 127,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
| Average |
| Aggregate |
| ||
|
|
|
| Average |
| Remaining |
| Intrinsic |
| ||
|
| Number of |
| Exercise |
| Contractual |
| Value |
| ||
|
| Options |
| Price |
| Term (Years) |
| (Thousands) |
| ||
Outstanding at December 31, 2017 |
| 5,789,735 |
| $ | 46.77 |
|
|
|
|
|
|
Granted |
| 475,768 |
|
| 56.47 |
|
|
|
|
|
|
Exercised |
| (47,091) |
|
| 25.82 |
|
|
|
|
|
|
Forfeited |
| (114,991) |
|
| 62.86 |
|
|
|
|
|
|
Outstanding at June 30, 2018 |
| 6,103,421 |
| $ | 47.39 |
| 6.8 |
| $ | 68,594 |
|
Vested and expected to vest at June 30, 2018 |
| 5,864,188 |
| $ | 47.21 |
| 6.7 |
| $ | 67,088 |
|
Vested and exercisable at June 30, 2018 |
| 4,129,536 |
| $ | 45.35 |
| 5.9 |
| $ | 54,282 |
|
The aggregate intrinsic value in the table above represents the pretax intrinsic value, based on our closing stock price of $82.40$45.47 as of SeptemberJune 29, 2017,2018, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.
The following table summarizes information about our stock options as of and for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
| Nine months ended September 30, |
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Weighted-average grant date fair value per share |
| $ | 60.81 |
| $ | 17.09 |
| $ | 48.39 |
| $ | 16.07 |
|
| $ | 35.56 |
| $ | 44.94 |
| $ | 41.69 |
| $ | 46.53 |
|
Intrinsic value of options exercised |
| $ | 3,400 |
| $ | 930,417 |
| $ | 17,684 |
| $ | 1,555,342 |
|
| $ | 610 |
| $ | 4,759 |
| $ | 1,372 |
| $ | 14,284 |
|
Cash received from stock option exercises |
| $ | 2,149 |
| $ | 687,332 |
| $ | 13,262 |
| $ | 1,094,855 |
|
| $ | 702 |
| $ | 5,439 |
| $ | 1,216 |
| $ | 11,113 |
|
14
As of SeptemberJune 30, 2017,2018, the unrecognized share-based compensation expense related to unvested options, adjusted for expected forfeitures, was $77.5$66.2 million and the estimated weighted-average remaining vesting period was 2.52.52 years.
18
Restricted Stock
During 2016, we issued restricted stock units (“RSUs”) to certain employees under the 2011 Stock Incentive Plan. The RSUs vest either (i) over two years, with 50% vesting one year from the date of grant and the remaining 50% vesting two years from the date of grant or (ii) over four years, with 25% vesting one year from the date of grant and the remaining 75% vesting ratably each subsequent quarter over the following three years, as defined in the grant agreement. Vested RSUs are payable in shares of our common stock at the end of the vesting period. RSUs are measured based on the fair value of the underlying stock on the grant date. The minimum statutory tax on the value of common stock shares issued to employees upon vesting are paid by us through the sale of registered shares of our common stock.
The following table summarizes the activity relating to our unvested RSUsrestricted stock units (“RSUs”) for the ninesix months ended SeptemberJune 30, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
| Weighted |
| ||
|
|
|
| Average |
|
|
|
| Average |
| ||
|
| Number of |
| Grant Date |
|
| Number of |
| Grant Date |
| ||
|
| Units |
| Fair Value |
|
| Units |
| Fair Value |
| ||
Unvested at December 31, 2016 |
| 562,458 |
| $ | 24.70 |
| ||||||
Unvested at December 31, 2017 |
| 589,529 |
| $ | 41.67 |
| ||||||
Granted |
| 244,484 |
|
| 64.70 |
|
| 406,440 |
|
| 57.22 |
|
Vested |
| (136,795) |
|
| 21.45 |
|
| (151,599) |
|
| 39.55 |
|
Forfeited |
| (33,807) |
|
| 26.08 |
|
| (33,365) |
|
| 45.29 |
|
Unvested as of September 30, 2017 |
| 636,340 |
| $ | 40.69 |
| ||||||
Expected to vest after September 30, 2017 |
| 545,549 |
| $ | 40.35 |
| ||||||
Unvested as of June 30, 2018 |
| 811,005 |
| $ | 49.71 |
| ||||||
Expected to vest after June 30, 2018 |
| 689,899 |
| $ | 49.36 |
|
As of SeptemberJune 30, 2017,2018, the unrecognized share-based compensation expense related to unvested RSUs, adjusted for expected forfeitures, was $18.9$31.5 million and the estimated weighted-average remaining vesting period was 3.23.17 years.
12. License Agreements
Rucaparib
In June 2011, we entered into a worldwide license agreement with Pfizer, Inc. to obtain exclusive global rights to develop and commercialize rucaparib, a small molecule inhibitor of poly (ADP-ribose) polymerase (“PARP”), used for the treatment of selected solid tumors. The exclusive rights are exclusive even as to Pfizer and include the right to grant sublicenses. Pursuant to the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer and are required to make additional payments to Pfizer for the achievement of certain development and regulatory and sales milestones and royalties on sales as required by the license agreement. Prior to the FDA approval of rucaparib, discussed below, we made milestone payments of $1.4 million, which were recognized as acquired in-process research and development expense.
On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii) EMA approval of an MAA for 1st Indication in EU, to a date that is 18 months after the date of achievement of such milestones. In the event that we defer such milestone payments, we have agreed to certain higher payments related to the achievement of such milestones.
On December 19, 2016, the FDA approved Rubraca (rucaparib) tablets as monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies, and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. The FDA approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was made in the first quarter of 2017. The FDA approval also resulted in the obligation to pay a $20.0 million milestone payment, for which we have exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.
On April 6, 2018, the FDA approved our sNDA for Rubraca as maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. This approval resulted in the obligation to pay a $15.0 million milestone payment, which we paid in April 2018.
In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum based chemotherapy, and who are unable to tolerate further platinum based chemotherapy. This approval resulted in the obligation to pay a $20.0 million milestone payment, which we paid in June 2018.
These milestone payments were recognized as intangible assets and will be amortized over the estimated remaining useful life of Rubraca.
1519
We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize rucaparib and we are responsible for all remaining development and commercialization costs for rucaparib. We are required to make regulatory milestone payments to Pfizer of up to an additional $69.75$31.75 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for rucaparib are met, the majority of which relate to annual sales targets of $500.0$250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on our net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize rucaparib.
In April 2012, we entered into a license agreement with AstraZeneca UK Limited to acquire exclusive rights associated with rucaparib under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of rucaparib for the uses claimed by these patents. The FDA approval of rucaparib on December 19, 2016 resulted in a $0.35 million milestone obligation to AstraZeneca as required by the license agreement, which was paid in the first quarter of 2017. This payment was recognized in intangible assets and will be amortized over the estimated remaining useful life of rucaparib. AstraZeneca will also receivereceives royalties on any net sales of rucaparib.
On July 31, 2017,Lucitanib
In connection with our acquisition of EOS in November 2013, we gained rights to develop and commercialize lucitanib, an oral, selective tyrosine kinase inhibitor. As further described below, EOS licensed the worldwide rights, excluding China, to develop and commercialize lucitanib from Advenchen Laboratories LLC (“Advenchen”). Subsequently, rights to develop and commercialize lucitanib in markets outside the U.S. and Japan were sublicensed by EOS to Servier in exchange for upfront milestone fees, royalties on sales of lucitanib in the sublicensed territories and research and development funding commitments.
In October 2008, EOS entered into an exclusive license agreement with Advenchen to develop and commercialize lucitanib on a Master Clinical Trial Collaboration Agreementglobal basis, excluding China. We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, received pursuant to any sublicense agreements for lucitanib, including the agreement with Bristol-Myers Squibb Company (“BMS”). This agreement is a clinical collaborationServier. We are obligated under the agreement to evaluate the combination of Bristol-Myers Squibb’s immunotherapy Opdivouse commercially reasonable efforts to develop and Clovis’ Rubraca in pivotal phase 3 clinical trials in:commercialize at least one product candidate containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.
|
|
|
|
The collaborationlicense agreement with Advenchen will also includeremain in effect until the expiration of all our royalty obligations to Advenchen, determined on a Phase 2 studyproduct-by-product and country-by-country basis, unless we elect to evaluateterminate the safety and efficacy of Opdivo in combination with Rubraca in patients with metastatic castration-resistant prostate cancer (mCRPC). The Opdivo + Rubraca combination with mCRPC will be conducted as an arm of a larger BMS-sponsored study. The planned multi-arm clinical trials will be conducted in the U.S., Europe and possibly additional countries. Clovis will be the study sponsor and conducting party for the ovarian cancer study and BMS will be the study sponsor and conducting party for the breast and prostate cancer studies.
We are partyagreement earlier. If we fail to other product license agreements formeet our other drug candidates, lucitanib and rociletinib (see our 2016 Form 10-K for additional details). We and Les Laboratories Servier (“Servier”) are developing lucitanib pursuant to a global development plan agreed to between the parties. Servier is responsible for all of the global development costs for lucitanib up to €80.0 million. Cumulative global development costs in excess of €80.0 million, if any, will be shared equally between us and Servier. We recorded a $0.1 million and $1.3 million receivable at September 30, 2017 and December 31, 2016, respectively, for the reimbursable development costs incurredobligations under the global development plan, which is includedagreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in other current assets on the Consolidated Balance Sheets. For the three months ending September 30, 2017 and 2016, we incurred $0.2 million and $1.3 million, respectively, in research and development costs and recorded reductions in research and development expensea loss of $0.0 million and $1.3 million, respectively, for reimbursable development costs due from Servier. For the nine months ending September 30, 2017 and 2016, we incurred $0.6 million and $7.4 million, respectively, in research and development costs and recorded reductions in research and development expense of $1.0 million and $7.7 million, respectively, for reimbursable development costs due from Servier.our rights to lucitanib.
During the second quarter of 2016,2017, we and Servier agreed to discontinue the development of lucitanib for breast cancer and lung cancer and are continuing to evaluate, what, if any, further development of lucitanib will be pursued. Based on current estimates, we expect to completecompleted the committed on-going development activities in 2017related to lucitanib and expectreceived full reimbursement of our development costs from Servier. Reimbursements are recorded as a reduction to research and development expense on the Consolidated Statements of Operations. Lucitanib was originally developed by Clovis and Servier with the hypothesis of activity in FGFR driven tumors; however, data in breast and lung cancer were insufficient to move the program forward. We have received notice from Servier of termination of their rights to lucitanib, resulting in the return of global rights (excluding China) for lucitanib to us later in 2018.
We are party to a product license agreement for our other drug candidate rociletinib (see our 2017 Form 10-K for additional details).
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13. Net Loss Per Common Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding using the treasury-stock method for the stock options and RSUs and the if-converted method for the 2021 Notes and 2025 Notes. As a result of our net losses for the periods presented, all potentially dilutive common share equivalents were considered anti-dilutive and were excluded from the computation of diluted net loss per share.
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The shares outstanding at the end of the respective periods presented in the table below were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Three and Nine months ended September 30, |
|
| Three and Six months ended June 30, |
| ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
|
Common shares under option |
| 5,696 |
| 3,772 |
|
| 3,723 |
| 6,373 |
|
Convertible senior notes |
| 4,646 |
| 4,646 |
|
| 8,584 |
| 4,646 |
|
Total potential dilutive shares |
| 10,342 |
| 8,418 |
|
| 12,307 |
| 11,019 |
|
14. Commitments and Contingencies
Royalty and License Fee Commitments
We have entered into certain license agreements, as identified in Note 12, License Agreements, with third parties that include the payment of development and regulatory milestones, as well as royalty payments, upon the achievement of pre-established development, regulatory and commercial targets. Our payment obligation related to these license agreements is contingent upon the successful development, regulatory approval and commercialization of the licensed products. Due to the nature of these arrangements, the future potential payments are inherently uncertain, and accordingly, we only recognize payment obligations which are probable and estimable as of the balance sheet date. Milestone liabilities of $21.5$0.0 million and $20.1$22.0 million are recorded on our Consolidated Balance Sheets at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, and relate to milestone payments for the licensing of our rucaparib product, which was approved by the FDA on December 19, 2016.
Manufacture and Services Agreement Commitments
On October 3, 2016, we entered into a Manufacturing and Services Agreement (the “Agreement”) with a non-exclusive third-party supplier for the production of the active ingredient for Rubraca. Under the terms of the Agreement, we will provide the third-party supplier a rolling forecast for the supply of the active ingredient in Rubraca that will be updated by us on a quarterly basis. We are obligated to order material sufficient to satisfy an initial quantity specified in any forecast. In addition, the third-party supplier will construct, in its existing facility, a production train that will be exclusively dedicated to the manufacture of the Rubraca active ingredient. We are obligated to make scheduled capital program fee payments toward capital equipment and other costs associated with the construction of the dedicated production train. Further, once the facility is operational, we are obligated to pay a fixed facility fee each quarter for the duration of the Agreement, which expires on December 31, 2025, unless extended by mutual consent of the parties. As of SeptemberJune 30, 2017, $177.52018, $147.8 million of purchase commitments exist under the Agreement.
Legal Proceedings
We and certain of our officers were named as defendants in several lawsuits, as described below. We cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss or range of loss, if any, that may result. An adverse outcome in these proceedings could have a material adverse effect on our results of operations, cash flows or financial condition.
In November and December 2015, four purported shareholder class action complaints were filed in (or later transferred to) the United States District Court for the District of Colorado. The complaints generally alleged that the Company and certain of its officers violated federal securities laws by making allegedly false and misleading statements regarding the progress toward FDA approval and the potential for market success of rociletinib. Rociletinib-Related Litigation
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On February 18, 2016, the Court consolidated the various actions into a single proceeding (“Medina”), under Case No. 1-15-cv-02546, and appointed M. Arkin (1999) LTD and Arkin Communications LTD (the “Arkin Plaintiffs”) as the lead plaintiffs and Bernstein Litowitz Berger & Grossmann LLP as lead counseladverse developments in its ongoing clinical trials for the putative class.
On May 6, 2016, the Arkin Plaintiffs filed a consolidated complaint (the “Consolidated Complaint”), adding additional defendants, claims, including under the Securities Act of 1933 (the “Securities Act”) relating to a follow-on offering of Clovis securities in July 2015 (the “July 2015 Offering”), and allegations relating to purportedly false and misleading statements concerning the efficacy and safety profile of rociletinib.
The Company defendants, along with underwriters and venture capital investors also named as defendants in the Consolidated Complaint, filed a motion to dismiss on July 27, 2016. On February 9, 2017, the Medina Court issued an opinion and order granting in part and denying in part the Company defendants’ motion to dismiss, granting in part and denying in part the underwriter defendants’ motion to dismiss, and granting the venture capital investor defendants’ motion to dismiss. On February 22, 2017, the Arkin Plaintiffs filed an amended consolidated class action complaint (the “Amended Complaint”), directed solely at re-pleading its Section 12(a) claims against the underwriter defendants.
On June 18, 2017, the Clovis Defendants entered into a stipulation and agreement of settlement with the Arkin Plaintiffs whereby Clovis will issue to the plaintiffs and participating class members a total consideration comprised of $25.0 million in cash and the issuance of 1,472,324 shares of Clovis common stock (the “Settlement Shares”). The cash portion of the consideration was funded by Clovis’ insurance carriers. At September 30, 2017, the liability for the issuance of the shares and cash, including the amount to be reimbursed through insurance proceeds, was recorded to accrued liability for legal settlement on the Consolidated Balance Sheets in the amount of $142.0 million and a receivable of $25.0 million from the insurance carriers on the Consolidated Balance Sheets. Clovis issued the Settlement Shares on November 2, 2017, whereby the issuance of the shares will be recorded in common stock and additional paid-in capital and the accrued liability for legal settlement will be cleared.
As the settlement agreement is in response to the alleged violation of securities laws by certain of our officers, we have determined that the resulting loss does not relate to activities that are in the normal course of our operations and therefore, should not be recognized in operating losses for the period. Accordingly, we have recognized the entire expense associated to the settlement agreement in legal settlement loss within the other income (expense), net of insurance receivable on the Consolidated Statements of Operations and Comprehensive Loss.
On July 14, 2017, the Medina Court issued an order preliminarily approving the settlement. On September 21, 2017, counsel for the Arkin Plaintiffs and counsel for the Clovis Defendants executed an amendment to the stipulation and agreement of settlement, which provided, among other things, that in the event that lead counsel sells the Settlement Shares, it will be required to liquidate all Settlement Shares, including shares attributable to the settlement class and those attributable to lead counsel’s court-awarded attorneys’ fees.
On October 26, 2017, the Medina Court entered a judgment approving the class action settlement. The judgment certified the putative class for settlement purpose, found that the settlement is fair, reasonable, and adequate in all respects, and subject to certain exclusions and investor opt-outs, releases claims on behalf of the settlement class that were brought or could have been brought in the Medina action and forever bars and enjoins them from prosecuting such claims. Subject to any appeals, the judgment will become final, under the stipulation and agreement of settlement, within 30 days of entry.
On January 22, 2016, the Electrical Workers Local #357 Pension and Health & Welfare Trusts, a purported shareholder of Clovis, filed a purported class action complaint (the “Electrical Workers Complaint”) againstrociletinib, Clovis and certain of its officers, directors, investorscurrent and underwritersformer executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the Superior CourtDistrict of the State of California, County of San MateoColorado (the “Electrical Workers Court”“Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The Electrical Workers Complaint purports to be asserted on behalf of a class of persons who purchased stock in the July 2015 Offering. The complaint asserted claims under certain provisions of the Securities Act relating to the July 2015 Offering based on substantially similar allegations to those asserted in the Medina action. On June 30, 2016, the Electrical Workers Plaintiffs filed an amended complaint adding new allegations (the “Amended Complaint”).open actions currently pending against Clovis are discussed below.
On July 28, 2016, the defendants filed a motion to stay the Electrical Workers action pending resolution of the Medina action and a demurrer to the Amended Complaint. On September 23, 2016, after hearing oral argument, the Electrical Workers Court granted the motion to stay and reserved on issuing a ruling on defendants’ pending demurrer.
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The Company believes that the claims asserted in the Electrical Workers Action are released and barred by operation of law through the Medina settlement (discussed above), and accordingly plans to seek dismissal of the Electrical Workers Action on that basis.
On November 10, 2016, Antipodean Domestic Partners (“Antipodean”) filed a complaint (the “Antipodean Complaint”) against Clovis and certain of its officers, directors and underwriters in New York Supreme Court, County of New York. The Antipodean Complaint alleges that the defendants violated certain sections of the Securities Act by making allegedly false statements to Antipodean and in the offering materials for the July 2015 Offering relating to the efficacy of rociletinib, its safety profile, and its prospects for market success. In addition to the Securities Act claims, the
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Antipodean Complaint also asserts Colorado state law claims and common law claims. Both the state law and common law claims are based on allegedly false and misleading statements regarding rociletinib’s progress toward FDA approval. The Antipodean Complaint seeks compensatory, recessionary, and punitive damages.
On December 15, 2016, the Antipodean Plaintiffs filed an amended complaint (the “Antipodean Amended Complaint”) asserting substantially the same claims against the same defendants and purporting to correct certain details in the original Antipodean Complaint.
On January 31, 2017, Defendantsthe defendants filed a motion to stay the Antipodean action pending resolution of the Medina actionAction in the District of Colorado. Defendants also filed a motion to dismiss the Antipodean Amended Complaint on March 29, 2017.
On March 14, 2017, the Clovis Defendantsdefendants and Antipodean participated in a mediation, which did not result in a settlement.
On August 8,March 29, 2017, the parties participated indefendants filed a scheduled hearing on Defendants’ motion to stay and motion to dismiss beforethe Antipodean Amended Complaint. On August 8, 2017, Justice Masley of the New York Supreme Court, County of New York. AtYork granted the hearing, Justice Masley granted Defendants’defendants’ motion to stay until after the October 26, 2017 hearing in the Medina action.stay. Per the Court’s August 10, 2017 order, Defendants’the defendants’ motion to dismiss iswas held in abeyance and will be deemed submitted on November 1, 2017. On November 1, 2017, the defendants provided a status update to the Court regarding the outcome of the hearing. The update informed the Court that Antipodean had excluded itself from the Medina Settlement, as memorialized in the final judgment entered by the Medina Court.
On April 17, 2018, the parties participated in a Preliminary Conference, following which the Court entered a preliminary conference order, providing for, among other things, an end date for discovery of February 4, 2019.
On May 2, 2018, the Court issued an order denying the defendants’ motion to dismiss. Defendants filed an answer to the Antipodean Amended Complaint on June 6, 2018.
The Company intends to vigorously defend against the allegations in the Antipodean Amended Complaint. However, there can be no assurance that the defense will be successful.
Clovis received a letter dated May 31, 2016 from an alleged owner of its common stock, which purports to set forth a demand for inspection of certain of our books and records pursuant to 8 Del. C. § 220 (the “Macalinao Demand Letter”). Clovis also received a letter dated December 15, 2016 from a second alleged owner of Clovis common stock, which purports to set forth a similar demand for inspectionIn March 2017, two putative shareholders of the Company’s books and records pursuant to 8 Del. C. § 220 (the “McKenry Demand Letter”). Both the Macalinao Demand Letter and McKenry Demand Letter were purportedly made for the purposes of investigating alleged misconduct at the Company, relating to rociletinib. The Company produced certain books and records in response to the Macalinao Demand Letter and McKenry Demand Letter in January and February 2017, respectively.
In March 2017, Macalinao and McKenry (the “Derivative Plaintiffs”), filed shareholder derivative complaints against certain directors and officers of the Company in the Court of Chancery of the State of Delaware. On May 4, 2017, the Macalinao and McKenry actions were consolidated for all purposes in a single proceeding under the caption In re Clovis Oncology, Inc. Derivative Litigation,, Case No, 2017-0222 (the “Consolidated Derivative Action”).
On May 18, 2017, the Derivative Plaintiffs filed a Consolidated Verified Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”). The Consolidated Derivative Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations of the Company’s business operations and prospects, failing to ensure that the TIGER-X clinical trial was being conducted in accordance with applicable rules, regulations and protocols, and engaging in insider trading. The Consolidated Derivative Complaint purported to rely on documents produced by the Company in response to prior demands for inspection of the Company’s books and records served on the Company by each of Macalinao Demand Letter and McKenry Demand Letter.under 8 Del. C. § 220. The Consolidated Derivative Complaint sought, among other things, an award of money damages.
On July 31, 2017, the defendants filed a motion to dismiss the Consolidated Derivative Complaint. Plaintiffs filed an opposition to the motion to dismiss on August 31, 2017, and the defendants filed a reply in further support of the
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motion to dismiss on September 26, 2017. No date has been scheduled forOral argument on Defendants’the defendants’ motion to dismiss the Consolidated Derivative Complaint.Complaint has been scheduled for February 4, 2019.
The Company intends to vigorously defend against the allegations in the Consolidated Derivative Complaint, but there can be no assurance that the defense will be successful.
On May 10, 2017, John Solak, a purported shareholder of the Company, filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware (the “Solak Complaint”) against certain directors and an officer of the Company. The Solak Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by adopting a compensation plan that overcompensated the non-employee director defendants, in relation to companies of comparable market capitalization and size. The Solak Complaint also alleged claims of waste of corporate assets and unjust enrichment due to this allegedly wrongful compensation plan. The Solak Complaint sought, among other things, an award of money damages and the imposition of corporate governance reforms.
On September 27, 2017, the Court entered an order extending the defendants’ time to respond to the Solak Complaint to October 31, 2017 based on, among other factors, the fact that the parties are engaged in discussions in an effort to resolve the Solak action. On October 31, 2017, the parties submitted a joint stipulation and proposed order to the Court seeking a further extension of the defendants’ response deadline to November 30, 2017, which order was entered by the Court on November 1, 2017.
The Company intends to vigorously defend against the allegations in the Solak Complaint, if the parties are unable to reach a consensual resolution, but there can be no assurance that the defense will be successful.
On March 20, 2017, a purported shareholder of the Company, filed a shareholder derivative complaint (the “Guo Complaint”) against certain officers and directors of the Company in the United States District Court for the District of Colorado. The Guo Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by either recklessly or with gross negligence approving or permitting misrepresentations of the Company’s business operations and prospects. The Guo Complaint also alleged claims for waste of corporate assets and unjust enrichment. Finally, the Guo Complaint alleged that certain of the individual defendants violated Section 14(a) of the
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Securities Exchange Act, by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company’s Proxy Statement on Schedule DEF 14A in connection with the 2015 Annual Meeting of Stockholders, held on June 11, 2015. The Guo Complaint sought, among other things, an award of money damages.
On June 19, 2017, the parties filed a joint motion to stay the Guo action pending resolution of the motion to dismiss the Consolidated Derivative Complaint. On June 20, 2017, the court granted the motion to stay.
The Company intends to vigorously defend against the allegations in the Guo Complaint, but there can be no assurance that the defense will be successful.
In addition,As previously disclosed, the Company has received inquiries and requests for information from governmental agencies, including the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice, relating to the Company’s regulatory update announcement in November 2015 that the FDA requested additional clinical data on the efficacy and safety of rociletinib. On April 9, 2018, the Company received a “Wells Notice” letter from the staff of the SEC issued in connection with this investigation. In addition, the Company’s CEO, Patrick Mahaffy, also received a Wells notice. These Wells Notices advised that the staff had made a preliminary determination to recommend to the SEC that it file an action against the Company and Mr. Mahaffy regarding possible violations of the federal securities laws. The Company is continuingand Mr. Mahaffy then submitted Wells Submissions explaining their view that no enforcement action was warranted to cooperate with these agencies with respect to their investigations. The proposed settlement of the Medina action does not resolve these inquiries and the Company cannot predict their timing or outcome.SEC staff.
15. Subsequent EventsFollowing these submissions, the Company and Mr. Mahaffy then engaged in discussions with the SEC staff to resolve this matter. The Company has now reached an agreement in principle with the SEC staff to settle this matter on negligence-based charges. Pursuant to the proposed settlement, without admitting or denying the SEC’s allegations, the Company would agree to pay a $20.0 million civil penalty, which the Company reserved as a loss contingency on its consolidated balance sheet as of June 30, 2018, and would stipulate to a standard injunction against future violations of those provisions of the federal securities laws. Mr. Mahaffy has separately reached an agreement in principle with the SEC staff on similar negligence-based allegations, to which he would neither admit nor deny, and pay a civil penalty and be similarly enjoined. Mr. Mahaffy will continue to serve as the Company’s Chief Executive Officer and as a member of the Company’s Board of Directors.
The proposed settlements would not allege that the Company or any of its current or former officers engaged in any intentional fraud or misconduct. The proposed settlements are subject to approval by the SEC and will also require approval by the United States District Court where the settlements are ultimately filed. There can be no assurances that the proposed settlements ultimately will be approved on these terms by either the SEC or the court, or when the settlements will be finalized. Once finalized, the settlements will resolve the SEC’s nearly three year investigation into the regulatory approval process of rociletinib.
Director Compensation Litigation
On OctoberMay 10, 2017, John Solak, a purported shareholder of the Company, filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware (the “Solak Complaint”) against certain directors and an officer of the Company. The Solak Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by adopting a compensation plan that overcompensated the non-employee director defendants, in relation to companies of comparable market capitalization and size. The Solak Complaint also alleged claims of waste of corporate assets and unjust enrichment. The Solak Complaint sought, among other things, an award of money damages and the imposition of corporate governance reforms.
On February 26, 2017,2018, the defendants entered into a stipulation of compromise and settlement with plaintiff that was intended to settle the Solak action. On May 30, 2018, the Court approved the stipulation and agreementupon the conclusion of a settlement betweenhearing concerning the Clovis Defendants andfairness of the Arkin Plaintiffs was approved. Underterms of the proposed settlement. In accordance with the terms of the settlement, participating class members will receive total consideration comprised of $25.0 millionas incorporated by reference in cashthe Court’s Order and Final Judgment entered on the issuance of 1,472,324 Settlement Shares. The cash portionday of the consideration was funded by Clovis’ insurance carriers. At September 30, 2017,hearing, the liabilityCompany presented a new non-employee director compensation policy for shareholder vote at its 2018 annual shareholder meeting. Pursuant to the issuancesettlement, the Company is also instituting a number of corporate governance reforms, including, enhanced proxy disclosures, the codification of the sharesCompany’s stock ownership guidelines for directors, and enhanced disclosure requirements for certain forms of director compensation. While no cash including the amount to be reimbursed through insurance proceeds, was recorded to accrued liability for legal settlement on the Consolidated Balance Sheets in the amount of $142.0 million and a receivable of $25.0 million from the insurance carriers on the Consolidated Balance Sheets. On November 2, 2017, we issued 1,472,324 shares of Clovis common stock and recorded the issuance of shares in common stock and additional paid-in capital. In addition,payments
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were made to investors as part of the settlement, the court awarded a plaintiff’s fee of $395,000, which the Company paid on June 4, 2018. The settlement contained no admission of wrongdoing.
European Patent Opposition
Two oppositions were filed in the granted European counterpart of the rucaparib camsylate salt/polymorph patent on June 20, 2017. The grounds of opposition related to Rubraca were lack of novelty and lack of inventive step. A preliminary opinion and summons to oral proceedings were issued on April 4, 2018. The oral hearing is scheduled for December 4, 2018. The preliminary opinion provides a non-binding indication of the tribunal’s view. In the preliminary opinion, the tribunal agree with some of our positions and agree with certain objections made by the opponents. As part of the proceeding, we clearedhave the $142.0 million accrued liabilityopportunity to submit further argument and pursue alternative claims in the $25.0 million receivable fromform of auxiliary requests. While the insurance carriers in October 2017.ultimate results of patent challenges can be difficult to predict, we believe a number of factors, including a constellation of unexpected properties, support the novelty and non-obviousness of our rucaparib camsylate salt/polymorph composition of matter patent.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This Quarterly Report on Form 10-Q and the information incorporated herein by reference includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned non-clinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our results of operations, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry in which we operate may differ materially from the forward-looking statements contained herein.
Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
You should also read carefully the factors described in the “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”), as updated from time to time in our subsequent SEC filings, to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
Overview
We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.
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Our commercialmarketed product Rubraca® (rucaparib) is the first and only oral, small molecule poly ADP-ribose polymerase, or PARP, inhibitor of PARP1, PARP2 and PARP3 approved in the United States by the FDA as monotherapyFood and Drug Administration (“FDA”) for two indications, encompassing two settings for the treatment of recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial treatment indication received in December 2016 covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic) associated advancedepithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies, and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. In April 2018, the FDA also approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The FDA granted regular approval for Rubraca in this second, broader and earlier-line indication on a priority review timeline based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.
Rucaparib is being studiedIn May 2018, the European Commission granted a conditional marketing authorization for Rubraca as a potential maintenance therapy formonotherapy treatment of adult patients with platinum sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, cancer patients in the ARIEL3 trial. On June 19, 2017, we announced that the ARIEL3 trial successfully achieved thefallopian tube, or primary endpoint of improved PFS by investigator review in each of three populations studied. PFS was also improved in the rucaparib group compared with placebo by BICR, a key secondary endpoint. Based on these findings, we submitted a sNDA in October 2017 for a second-line or later maintenance treatment indication for all women with platinum-sensitive ovarianperitoneal cancer, who have respondedbeen treated with two or more prior lines of platinum based chemotherapy, and who are unable to their most recenttolerate further platinum therapy. Rucaparibbased chemotherapy. As this is also being developeda conditional approval, it will be necessary to complete confirmatory post marketing commitments, including ensuring that sufficient partially platinum sensitive patients are enrolled in our ARIEL4 confirmatory trial to support the indication. This may require enrollment of additional patients with mutant BRCA tumorsinto the study, increasing its overall size and other DNA repair deficiencies beyond BRCA – commonly referred to as homologous recombination
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deficiencies. Studies openextending the time for enrollment or under consideration include prostate, breast, pancreatic, gastroesophageal, bladder and lung cancers.
Our MAA for rucaparib thatenrollment. In June 2018, we submitted to the EMA a variation to the marketing authorization for anthe maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer treatment indication is currently under review. who are in a complete or partial response to platinum-based chemotherapy, for which we received EMA validation for this application in July 2018. We anticipate an opinion on this application from the CHMP in late 2017, and, if we receive a favorable opinion from the CHMP, a potential approval fromof the EMA may follow duringby the first quarterend of 2018. Following a potential approval for the treatment indication, we intend to submit a variation to the MAA for the second-line or later maintenance treatment indication, for which we anticipate a potential approval during the third quarter of 2018.
Beyond our initial labeled indication, we have a robust Rubraca clinical development program underway in a variety of solid tumor types, also including prostate and bladder cancers, and in July 2017, we entered into a broad clinical collaboration with Bristol-Myers Squibb Company to evaluate the combination of their immunotherapy OPDIVO (nivolumab) with Rubraca in several tumor types. We hold worldwide rights for rucaparib. Rubraca.
In June 2011, we obtained an exclusive, worldwide license from Pfizer to develop and commercialize rucaparib. U.S. Patent 6,495,541, and its equivalent counterparts issued in dozens of countries, directed to the rucaparib composition of matter, expire in 2020 and are potentially eligible for up to five years patent term extension in various jurisdictions. We believe that patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984 or Hatch-Waxman Act,(the “Hatch-Waxman Act”) could be available to extend our patent exclusivity for rucaparib to the fourth quarter of 2023 in the United States. In Europe, we believe that patent term extension under a supplementary protection certificate could be available for an additional five years for one European patent directed to at least 2025.Rubraca. In April 2012, we obtained an exclusive license from AstraZeneca under a family of patents and patent applications towhich will permit the development and commercialization of rucaparib for certain methods of treating patients with PARP inhibitors. Additionally, other patents and patent applications are directed to methods of making, methods of using, dosing regimens, various salt and polymorphic forms and formulations and have expiration dates ranging from 2020 through potentially 2035, including the camsylate salt/polymorph patent family licensed from Pfizer, which expires in 2031 and a patent applicationfamily directed to high dosage strength rucaparib tablets that ifexpires in 2035. As of May 3, 2018, the rucaparib camsylate salt/polymorph patent was issued will expire in 2035.47 countries to date (including US and Europe), with applications pending in 9 countries, and the rucaparib composition of matter patent was issued in 48 countries. We are aware of a number of cases wherechallenges of salt and polymorph patents have been challenged.patents. Two oppositions were filed in the granted European counterpart of the rucaparib camsylate salt/polymorph patent on June 20, 2017. European oppositions are commonly filed against patents related to pharmaceutical products. The grounds of opposition related to Rubraca were lack of novelty and lack of inventive step. The novelty and inventive step challenges are based on prior art references (or closely related disclosures) that were previously raised by the European patent examiner during prosecution of the application. The claims of the granted patent were found to be patentable over this prior art. A preliminary opinion and summons to oral proceedings were issued on April 4, 2018. The oral hearing is scheduled for December 4, 2018. The preliminary opinion provides a non-binding indication of the tribunal’s view. In the preliminary opinion, the tribunal agree with some of our positions and agree with certain objections made by the opponents. As part of the proceeding, we have the opportunity to submit further argument andpursue alternative claims in the form of auxiliary requests. While the ultimate results of patent challenges can be difficult to predict, we believe a number of factors, including a constellation of unexpected properties, support the novelty and non-obviousness of our rucaparib camsylate salt/polymorph composition of matter
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patent. Based on these factors, weWe believe a successful challenge of that patentall claims relevant to Rubraca would be difficult. Our high dosage strength rucaparib tablets patent issued in the United States on June 5, 2018, with claims that cover the commercial Rubraca product, including all commercial dosage strengths expires in 2035. Additionally, in Europe, regulatory exclusivity is available for ten years, plus one year for a new indication, therefore, we have regulatory exclusivity for Rubraca in Europe until 2028, and if an additional indication is approved, until 2029.
In addition to Rubraca, we have two other product candidates: lucitanib,candidates.
Lucitanib is an oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors (VEGFR) 1-3,1 through 3 (VEGFR1-3), platelet-derived growth factor receptors (PDGFR) alpha and beta (PDGFR α/β) and fibroblast growth factor receptors (FGFR) 1-3,1 through 3 (FGFR1-3). Lucitanib was originally developed by Clovis and rociletinib,Servier with the hypothesis of activity in FGFR driven tumors; however, data in breast and lung cancer were insufficient to move the program forward. We have received notice from Servier of termination of their rights to lucitanib, resulting in the return of global rights (excluding China) for lucitanib to us later in 2018. We believe that recent data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – provide support for development of lucitanib in combination with a PD-(L)1 inhibitor, and we intend to initiate a study of the combination. We also intend to initiate a study of lucitanib in combination with Rubraca, based on encouraging data of VEGF and PARP inhibitors in combination. Each of these studies is expected to initiate in the first quarter of 2019. We maintain certain development and commercialization rights for lucitanib. Following the termination of the Servier license agreement, we will have global development and commercialization rights (except for China) for lucitanib.
Rociletinib is an oral mutant-selective inhibitor of epidermal growth factor receptor (EGFR)(“EGFR”). While we have stopped enrollment in ongoing trials for each of these candidates,rociletinib, we continue to provide drugsdrug to patients whose clinicians recommend continuing therapy. We maintain certain development and commercialization rights for lucitanib andhave global development and commercialization rights for rociletinib.
We commenced operations in April 2009. To date, we have devoted substantially all of our resources to identifying and in-licensing product candidates, performing development activities with respect to those product candidates and the general and administrative support of these operations. Through SeptemberJune 30, 2017,2018, we have generated $13.6 million in license and milestone revenue related to our collaboration and license agreement with Servier and for the six months ended June 30, 2018 and 2017 have generated $38.5$42.3 million netand $21.7 million, respectively, product revenue related to sales of Rubraca, which we began to commercialize on December 19, 2016. We have principally funded our operations using the net proceeds from the sale of convertible preferred stock, the issuance of convertible promissory notes, public offerings of our common stock and our convertible senior notes offering.
We have never been profitable and, as of SeptemberJune 30, 2017,2018, we had an accumulated deficit of $1,425.6$1,654.0 million. We incurred net losses of $294.5$178.9 million and $278.4$233.8 million for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively. The net loss for the nine months ended September 30, 2017 included a charge of $117.0 million related to a legal settlement. The net loss for the nine months ended September 30, 2016 included a charge of $104.5 million for the impairment of intangible asset and a gain of $24.9 million from a reduction in fair value of contingent purchase consideration. We had cash, cash equivalents and available-for-sale securities totaling $628.0$682.2 million at SeptemberJune 30, 2017.2018.
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We expect to incur significant losses for the foreseeable future, as we incur costs related to commercial activities associated with Rubraca. In January 2017,April 2018, we sold 5,750,0001,837,898 shares of our common stock in a public offering at $41.00$54.41 per share. The net proceeds from the offering were $221.2$93.8 million, after deducting underwriting discounts and commissions and offering expenses. In June 2017,Concurrently, we sold 3,920,454 shares of our common stock in acompleted the public offering at $88.00 per share.of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025. The net proceeds from thethis offering were $324.6$291.0 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds of the offerings for general corporate purposes, including sales and marketing expenses associated with Rubraca in the United States and if approved by the EMA, in Europe, funding of our development programs, selling, general and administrative expenses, acquisition or licensing of additional product candidates or businesses and working capital. Based on our current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund activitiesour operating plan through at least the next 12 months. Until we can generate a sufficient amount of revenue from Rubraca, we expect to finance our operations in part through additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.
26
Product License Agreements
Rucaparib
In June 2011, we entered into a worldwide license agreement with Pfizer, Inc. to obtain exclusive global rights to develop and commercialize rucaparib, a small molecule inhibitor of poly (ADP-ribose) polymerase (“PARP”), used for the treatment of selected solid tumors. The exclusive rights are exclusive even as to Pfizer and include the right to grant sublicenses. Pursuant to the terms of the license agreement, we made a $7.0 million upfront payment to Pfizer and are required to make additional payments to Pfizer for the achievement of certain development and regulatory and sales milestones and royalties on sales as required by the license agreement. Prior to the FDA approval of rucaparib, discussed below, we made milestone payments of $1.4 million, which were recognized as acquired in-process research and development expense.
On August 30, 2016, we entered into a first amendment to the worldwide license agreement with Pfizer, which amends the June 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii) EMA approval of an MAA for 1st Indication in EU, to a date that is 18 months after the date of achievement of such milestones. In the event that we defer such milestone payments, we have agreed to certain higher payments related to the achievement of such milestones.
On December 19, 2016, the FDA approved Rubraca (rucaparib) tablets as monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies, and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. The FDA approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was made in the first quarter of 2017. The FDA approval also resulted in the obligation to pay a $20.0 million milestone payment, for which we have exercised the option to defer payment by agreeing to pay $23.0 million within 18 months after the date of the FDA approval. We paid the $23.0 million milestone payment in June 2018.
On April 6, 2018, the FDA approved our sNDA for Rubraca as maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. This approval resulted in the obligation to pay a $15.0 million milestone payment, which we paid in April 2018.
In May 2018, the European Commission granted a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum based chemotherapy, and who are unable to tolerate further platinum based chemotherapy. This approval resulted in the obligation to pay a $20.0 million milestone payment, which we paid in June 2018.
These milestone payments were recognized as intangible assets and will be amortized over the estimated remaining useful life of Rubraca.
We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize rucaparib and we are responsible for all remaining development and commercialization costs for rucaparib. We are required to make regulatory milestone payments to Pfizer of up to an additional $69.75$31.75 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for rucaparib are met the majority of which relate to annual sales targets of $500.0$250.0 million and above, which, in the aggregate, could amount to total milestone payments of $170.0 million, and tiered royalty payments at a mid-teen percentage rate on our net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize rucaparib.
In April 2012, we entered into a license agreement with AstraZeneca UK Limited to acquire exclusive rights associated with rucaparib under a family of patents and patent applications that claim methods of treating patients with PARP inhibitors in certain indications. The license enables the development and commercialization of rucaparib for the uses claimed by these patents. The FDA approvalAstraZeneca receives royalties on any net sales of rucaparib on December 19, 2016 resulted in a $0.35 millionrucaparib.
2327
Lucitanib
In connection with our acquisition of EOS in November 2013, we gained rights to develop and commercialize lucitanib, an oral, selective tyrosine kinase inhibitor. As further described below, EOS licensed the worldwide rights, excluding China, to develop and commercialize lucitanib from Advenchen Laboratories LLC (“Advenchen”). Subsequently, rights to develop and commercialize lucitanib in markets outside the U.S. and Japan were sublicensed by EOS to Servier in exchange for upfront milestone obligationfees, royalties on sales of lucitanib in the sublicensed territories and research and development funding commitments.
In October 2008, EOS entered into an exclusive license agreement with Advenchen to AstraZeneca as required bydevelop and commercialize lucitanib on a global basis, excluding China. We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, which was paid inwe are required to pay to Advenchen 25% of any consideration, excluding royalties, received pursuant to any sublicense agreements for lucitanib, including the first quarter of 2017. This payment was recognized in intangible assets and will be amortized overagreement with Servier. We are obligated under the estimated remaining useful life of rucaparib. AstraZeneca will also receive royalties on any net sales of rucaparib.
On July 31, 2017, we entered into a Master Clinical Trial Collaboration Agreement with Bristol-Myers Squibb Company (“BMS”). This agreement is a clinical collaboration agreement to evaluate the combination of Bristol-Myers Squibb’s immunotherapy Opdivouse commercially reasonable efforts to develop and Clovis’ Rubraca in pivotal phase 3 clinical trials in:commercialize at least one product candidate containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.
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The collaborationlicense agreement with Advenchen will also includeremain in effect until the expiration of all our royalty obligations to Advenchen, determined on a Phase 2 studyproduct-by-product and country-by-country basis, unless we elect to evaluateterminate the safetyagreement earlier. If we fail to meet our obligations under the agreement and efficacyare unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of Opdivoour rights to lucitanib.
During 2017, we completed the committed on-going development activities related to lucitanib and received full reimbursement of our development costs from Servier. Reimbursements are recorded as a reduction to research and development expense on the Consolidated Statements of Operations. Lucitanib was originally developed by Clovis and Servier with the hypothesis of activity in combination with RubracaFGFR driven tumors; however, data in patients with metastatic castration-resistant prostatebreast and lung cancer (mCRPC). The Opdivo + Rubraca combination with mCRPC will be conducted as an armwere insufficient to move the program forward. We have received notice from Servier of a larger BMS-sponsored study. The planned multi-arm clinical trials will be conductedtermination of their rights to lucitanib, resulting in the U.S., Europe and possibly additional countries. Clovis will be the study sponsor and conducting partyreturn of global rights (excluding China) for the ovarian cancer study and BMS will be the study sponsor and conducting party for the breast and prostate cancer studies.lucitanib to us later in 2018.
We are party to othera product license agreementsagreement for our other drug candidates, lucitanib andcandidate rociletinib (see our 20162017 Form 10-K for additional details).
Financial Operations Overview
Revenue
Product revenue is derived from sales of our product, Rubraca, in the United States. We distribute our product in the U.S. principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently resellsell our products to patients and healthcare providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and other discounts. Revenue is recorded net of estimated rebates, chargebacks, discounts and other deductions as well as estimated product returns (collectively, “sales deductions”“variable considerations”). We only recognize revenue onRevenue from product sales once theare recognized when customers obtain control of our product, is resoldwhich occurs at a point in time, typically upon delivery to the patient or healthcare provider bycustomers. For further discussion of our revenue recognition policy, see Note 2, Summary of Significant Accounting Polices in the specialty distributor or specialty pharmacy provider, therefore reducing the significance of estimates made for product returns.Revenue Recognition section.
Sales Deductions
Estimating sales deductions requires significant judgments about future events and uncertainties, and requires us to rely heavily on assumptions, as well as historical experience. Estimated sales deductions are provided for the following:
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In the three and ninesix months ended SeptemberJune 30, 2017,2018, we recorded net product revenue of $16.8$23.8 million and $38.5$42.3 million, respectively, related to sales of Rubraca, which we began to commercialize on December 19, 2016. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products. Any inability on our part to successfully commercialize Rubraca in the United States and any foreign territories where it may be approved, or any significant delay in such approvals, could have a material adverse impact on our ability to execute upon our business strategy and, ultimately, to generate sufficient revenues from Rubraca to reach or maintain profitability or sustain our anticipated levels of operations.
We supply commercially labeled Rubraca free of charge to eligible patients who qualify due to financial need through our patient assistance program and the majority of these patients are on Medicare. This product is distributed
28
through a separate vendor who administers the program on our behalf. It is not distributed through our specialty distributor and specialty pharmacy network. This product is neither included in the transaction price nor the variable considerations to arrive at product revenue. Manufacturing costs associated with this free product is included in selling, general and administrative expenses. In the three months ended June 30, 2018, the supply of this free drug was approximately 25% of the overall commercial supply or the equivalent of $7.9 million in commercial value. In the six months ended June 30, 2018, the supply of this free drug was approximately 24% of the overall commercial supply or the equivalent of $13.4 million in commercial value. We expect the free product percentage to continue in the mid to high 20-percent range for the remainder of 2018.
Cost of Sales – Product
We recorded product cost of sales from sales of Rubraca in the three and nine months ended September 30, 2017. Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, certain of the manufacturing costs of Rubraca units recognized as revenue during the three and nine months ended September 30, 2017 were expensed prior to the December 19, 2016 FDA approval, and therefore a minimal amount is included in costs of sales during the current period. We expect cost of sales to increase in relation to product revenues as we deplete these inventories and we expect to use the remaining pre-commercialization inventory for product sales during the fourth quarter of 2017.
Cost of Sales – Intangible Asset Amortization
Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.
Research and Development Expenses
Research and development expenses consist of costs incurred for the development of our product candidates and companion diagnostics, which include:
· | license fees and milestone payments related to the acquisition of in-licensed products, which are reported on our Consolidated Statements of Operations as acquired in-process research and development; |
· | employee-related expenses, including salaries, benefits, travel and share-based compensation expense; |
25
· | expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials; |
· | the cost of acquiring, developing and manufacturing clinical trial materials; |
· | costs associated with non-clinical activities and regulatory operations; |
· | market research, disease education and other commercial product planning activities, including the hiring of a U.S. sales and marketing and medical affairs organization in preparation for the commercial launch of rucaparib; and |
· | activities associated with the development of companion diagnostics for our product candidates. |
Research and development costs are expensed as incurred. License fees and milestone payments related to in-licensed products and technology are expensed if it is determined that they have no alternative future use. Costs for certain development activities, such as clinical trials and manufacturing of clinical supply, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors. As a result of the FDA approval of Rubraca and the discontinuation of enrollment in rociletinib, ourOur research and development expenses decreasedincreased in both the three and ninesix months ended SeptemberJune 30, 20172018 compared to the same periodsperiod in the prior year and are expected to decrease for the remainder of 2017 compared to prior year as we continue to commercialize Rubraca and commercialization related expenses are classified as selling, general and administrative expenses and notyear. Our research and development costs.expenses will continue to increase compared to last year due to higher research and development costs for rucaparib.
29
The following table identifies research and development and acquired in-process research and development costs on a program-specific basis for our products under development. Personnel-related costs, depreciation and share-based compensation are not allocated to specific programs, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table below (in thousands):
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| Three months ended September 30, |
| Nine months ended September 30, |
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| Three months ended June 30, |
| Six months ended June 30, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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| (in thousands) |
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| (in thousands) |
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Rucaparib Expenses |
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Research and development |
| $ | 21,828 |
| $ | 25,773 |
| $ | 53,318 |
| $ | 74,709 |
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| $ | 33,049 |
| $ | 16,980 |
| $ | 57,556 |
| $ | 31,490 |
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Acquired in-process research and development |
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| — |
|
| 500 |
|
| — |
|
| 800 |
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Rucaparib Total |
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| 21,828 |
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| 26,273 |
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| 53,318 |
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| 75,509 |
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| 33,049 |
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| 16,980 |
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| 57,556 |
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| 31,490 |
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Lucitanib Expenses |
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Research and development (a) |
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| (222) |
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| 3 |
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| (321) |
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| (211) |
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|
| 218 |
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| (13) |
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| 227 |
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| (99) |
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Lucitanib Total |
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| (222) |
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| 3 |
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| (321) |
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| (211) |
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| 218 |
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| (13) |
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| 227 |
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| (99) |
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Rociletinib Expenses |
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Research and development |
| $ | 1,752 |
| $ | 3,040 |
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| 6,471 |
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| 40,455 |
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| $ | 579 |
| $ | 1,528 |
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| 1,594 |
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| 4,719 |
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Rociletinib Total |
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| 1,752 |
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| 3,040 |
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| 6,471 |
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| 40,455 |
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| 579 |
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| 1,528 |
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| 1,594 |
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| 4,719 |
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Personnel and other expenses |
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| 15,566 |
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| 25,522 |
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| 45,011 |
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| 81,722 |
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| 18,861 |
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| 14,613 |
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| 36,873 |
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| 29,445 |
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Total |
| $ | 38,924 |
| $ | 54,838 |
| $ | 104,479 |
| $ | 197,475 |
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| $ | 52,707 |
| $ | 33,108 |
| $ | 96,250 |
| $ | 65,555 |
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(a)This amount reflects actual costs incurred less amounts due from Servier for reimbursable development expenses pursuant to the collaboration and license agreement described in Note 12, License Agreements to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of salaries and related costs for personnel in executive, commercial, finance, legal, investor relations, human resources, and information technology functions. Other selling, general and administrative expenses include facilities expenses, communication expenses, information technology costs, corporate insurance and professional fees for legal, consulting and accounting services. With the FDA approval of Rubraca on December 19, 2016, all sales and marketing expenses associated with Rubraca are included in selling, general and administrative expenses. We anticipate that ourOur selling, general and administrative expenses will continue to increase in the futurecompared to last year in support of our commercial activities related to Rubraca.Rubraca in the United States and Europe.
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Acquired In-Process Research and Development Expenses
Acquired in-process research and development expenses consist of upfront payments to acquire a new drug compound, as well as subsequent milestone payments. Acquired in-process research and development payments are immediately expensed provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Once regulatory approval is received, payments to acquire rights, and the related milestone payments, are capitalized and the amortization of such assets recorded to intangible asset amortization cost of sales.
Change in Fair Value of Contingent Purchase Consideration
In connection with the acquisition of EOS in November 2013, we also recorded a purchase consideration liability equal to the estimated fair value of future payments that are contingent upon the achievement of various regulatory and sales milestones. Subsequent to the acquisition date, we re-measure contingent consideration arrangements at fair value each reporting period and record changes in fair value of contingent purchase consideration and foreign currency gains (losses) for changes in the foreign currency translation rate on the Consolidated Statements of Operations. Changes in fair value are primarily attributed to new information about the likelihood of achieving such milestones and the passage of time. In the absence of new information, changes in fair value reflect only the passage of time as we progress towards the achievement of future milestones. During the second quarter of 2016, we recorded a $25.5 million reduction in the fair value of the contingent purchase consideration liability due to our and our development partner’s decision to discontinue the development of lucitanib for breast cancer and lung cancer. At September 30, 2017, the contingent purchase consideration liability recorded on the Consolidated Balance Sheets was zero due to the uncertainty of achieving any of the lucitanib regulatory milestones.
Other Income and Expense
Other income and expense is primarily comprised of foreign currency gains and losses resulting from transactions with contract research organizations (“CROs”), investigational sites and contract manufacturers where payments are made in currencies other than the U.S. dollar. Other expense also includes interest expense recognized related to our convertible senior notes.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates and judgments,
30
including those related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a description of our critical accounting policies, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There2017. Other than the change to our revenue recognition policy discussed in Note 2, Summary of Significant Accounting Policies, there have not been any material changes to our critical accounting policies since December 31, 2016.2017.
New Accounting Standards
From time to time, the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through the issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.
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To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, Summary of Significant Accounting Policies, in the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Results of Operations
Comparison of Three Months Ended SeptemberJune 30, 20172018 and 2016:2017:
The following table summarizes the results of our operations for the three months ended SeptemberJune 30, 20172018 and 20162017 (in thousands):
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| Favorable/(Unfavorable) |
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| Three months ended June 30, |
| Favorable/(Unfavorable) |
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| 2016 |
| $ |
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| 2017 |
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Product revenue, net |
| $ | 16,806 |
| $ | — |
| $ | 16,806 |
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| n/a |
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Product revenue |
| $ | 23,757 |
| $ | 14,620 |
| $ | 9,137 |
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| 62 | % | |||||||||||||
Operating expenses: |
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Cost of sales - product |
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| 3,026 |
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| — |
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| (3,026) |
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| n/a |
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| 4,490 |
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| 2,730 |
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| (1,760) |
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| (64) | % |
Cost of sales - intangible asset amortization |
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| 372 |
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| — |
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| (372) |
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| n/a |
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| 709 |
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| 372 |
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| (337) |
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| (91) | % |
Research and development |
|
| 38,924 |
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| 54,338 |
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| 15,414 |
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| 28 | % |
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| 52,707 |
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| 33,108 |
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| (19,599) |
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| (59) | % |
Selling, general and administrative |
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| 35,011 |
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| 9,162 |
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| (25,849) |
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| (282) | % |
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| 44,864 |
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| 36,149 |
|
| (8,715) |
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| (24) | % |
Acquired in-process research and development |
|
| — |
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| 500 |
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| 500 |
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| n/a |
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Total expenses |
|
| 77,333 |
|
| 64,000 |
|
| (13,333) |
|
| (21) | % |
|
| 102,770 |
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| 72,359 |
|
| (30,411) |
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| (42) | % |
Operating loss |
|
| (60,527) |
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| (64,000) |
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| 3,473 |
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| 5 | % |
|
| (79,013) |
|
| (57,739) |
|
| (21,274) |
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| (37) | % |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (2,618) |
|
| (2,108) |
|
| (510) |
|
| (24) | % |
|
| (3,581) |
|
| (2,598) |
|
| (983) |
|
| (38) | % |
Foreign currency loss |
|
| (44) |
|
| (66) |
|
| 22 |
|
| 33 | % | |||||||||||||
Foreign currency (loss) gain |
|
| (104) |
|
| 76 |
|
| (180) |
|
| (237) | % | |||||||||||||
Legal settlement loss |
|
| — |
|
| (117,000) |
|
| 117,000 |
|
| 100 | % | |||||||||||||
SEC settlement costs reserve |
|
| (20,000) |
|
| — |
|
| (20,000) |
|
| (100) | % | |||||||||||||
Other income |
|
| 1,291 |
|
| 252 |
|
| 1,039 |
|
| (412) | % |
|
| 1,475 |
|
| 594 |
|
| 881 |
|
| 148 | % |
Other expense, net |
|
| (1,371) |
|
| (1,922) |
|
| 551 |
|
| 29 | % |
|
| (22,210) |
|
| (118,928) |
|
| 96,718 |
|
| 81 | % |
Loss before income taxes |
|
| (61,898) |
|
| (65,922) |
|
| 4,024 |
|
| 6 | % |
|
| (101,223) |
|
| (176,667) |
|
| 75,444 |
|
| 43 | % |
Income tax benefit |
|
| 1,234 |
|
| 227 |
|
| 1,007 |
|
| (444) | % |
|
| 33 |
|
| 1,281 |
|
| (1,248) |
|
| (97) | % |
Net loss |
| $ | (60,664) |
| $ | (65,695) |
| $ | 5,031 |
|
| 8 | % |
| $ | (101,190) |
| $ | (175,386) |
| $ | 74,196 |
|
| 42 | % |
Product Revenue, Net.Revenue. Product revenue for the three months endedSeptember June 30, 2017 was2018 increased compared to the same period in the prior year primarily due to the recognitioncontinued growth in sales of $16.8 million of net product revenue from the sale of our first commercial product, Rubraca, which was approved for sale in the United States markets and we began shipping on December 19, 2016. RevenueProduct revenue is recorded net of sales deductions variable considerations
31
comprised of rebates, chargebacks and other discounts. Sales deductionsVariable considerations represented approximately 7.4%9.9% and 7.9% of the gross product revenuetransaction price recognized in the three months ended SeptemberJune 30, 2018 and 2017, respectively, and are summarized as follows:
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
| September 30, 2017 |
| ||||
|
| $ |
| % of Gross Sales |
| ||
|
| (in thousands) |
|
|
|
| |
|
|
|
|
|
|
|
|
Gross product revenue |
| $ | 18,144 |
|
| 100.0% |
|
Sales deductions: |
|
|
|
|
|
|
|
Government rebates and chargebacks |
|
| 748 |
|
| 4.1% |
|
Discounts and fees |
|
| 590 |
|
| 3.3% |
|
Total sales deductions |
|
| 1,338 |
|
| 7.4% |
|
Product revenue, net |
| $ | 16,806 |
|
| 92.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Three months ended | ||||||||
|
| June 30, 2018 |
| June 30, 2017 | ||||||||
|
| $ |
| % of Gross Sales |
| $ |
| % of Gross Sales | ||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction price |
| $ | 26,390 |
|
| 100.0% |
| $ | 15,876 |
|
| 100.0% |
Variable considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
Government rebates and chargebacks |
|
| 1,583 |
|
| 5.9% |
|
| 635 |
|
| 4.0% |
Discounts and fees |
|
| 1,050 |
|
| 4.0% |
|
| 621 |
|
| 3.9% |
Total variable considerations |
|
| 2,633 |
|
| 9.9% |
|
| 1,256 |
|
| 7.9% |
Product revenue |
| $ | 23,757 |
|
| 90.1% |
| $ | 14,620 |
|
| 92.1% |
Cost of Sales – Product. Product cost of sales for the three months ended SeptemberJune 30, 20172018 increased compared to the same period in the prior year primarily due to the increase in product revenue. Product cost of $3.0 millionsales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period. Manufacturing costs associated with sales in the quarterthree months ended June 30, 2017 were expensed as incurred based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, and therefore, a minimal amount is included as product cost of sales forsales. These costs increased in the
28
three months ended SeptemberJune 30, 2017. We expect cost of sales to increase in relation to product revenues once2018, as we depletedepleted these inventories duringas of the fourth quarter 2017.
Cost of Sales – Intangible Asset Amortization. In the three months ended SeptemberJune 30, 2018 and 2017, we recognized cost of sales of $0.7 million and $0.4 million, respectively, associated with the amortization of capitalized milestone payments related to the FDA approvalapprovals of Rubraca. Prior toRubraca by the FDA approval onin December 16, 2016 all acquired license and milestone payments were expensed as incurred.April 2018 and by the European Commission in May 2018.
Research and Development Expenses. Research and development expenses decreasedincreased during the three months ended SeptemberJune 30, 20172018 compared to the same period in the prior year primarily due to lowerhigher research and development costs for rucaparib and rociletinib and classification of commercialization related expenses associated with Rubraca in selling, general and administrative expenses rather than research and development expenses. In the three months ended September 30, 2017, Rubraca commercialization costs included in selling, general and administrative expenses were $22.3 million.
rucaparib. Clinical trial costs for rucaparib were relatively flathigher compared to the same quarter a year ago as higher costs from enrollment in ARIEL4, our confirmatory ovarian cancer trials, anddue to increased enrollment in our TRITON2 and TRITON3 studies for prostate cancer. We have increased costs related to our new ATLAS study for bladder cancer were largely offset by lowerand our ATHENA combination study with Bristol-Myers Squibb Company’s immunotherapy OPDIVO for ovarian cancer. In addition, personnel costs forincreased during the ARIEL2 and ARIEL3 studies, which have completed enrollment. Clinical supply and related manufacturing development costs were $4.3 million lower than the third quarter of 2016three months ended June 30, 2018 due to the capitalization of these costs subsequent to the FDA approval of rucaparib. higher headcount.
Clinical trial costs for rociletinib were $2.7$0.9 million lower than the thirdsecond quarter of 20162017 primarily due to the completion of patient enrollment for all of the TIGER studies in non-small cell lung cancer. Clinical supply and related manufacturing development costs were $0.7 million higher than the third quarter of 2016 driven by timing of production to support our clinical studies.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased during the three months ended SeptemberJune 30, 20172018 compared to the same period in the prior year primarily due to classification$3.3 million higher legal expense and $3.6 million higher stock compensation expense.
Interest Expense. Interest expense increased during the three months ended June 30, 2018 compared to the same period in the prior year primarily due to the issuance of commercializationthe 2025 Notes on April 19, 2018.
Legal Settlement Loss. During the second quarter of 2017, we recorded a one-time charge of $117.0 million related expenses associatedto an agreement to resolve a litigation claim against us and certain of our officers.
SEC Settlement Costs Reserve. During the second quarter of 2018, we recorded a one-time charge of $20.0 million related to a preliminary agreement reached with Rubraca in selling, generalthe SEC that, if approved by the SEC and administrative expenses rather than researchthe U.S. District Court where the settlement is filed, would resolve the SEC’s pending investigation. See Note 14, Commitments and development expenses.Contingencies for further information regarding this investigation and other legal proceedings.
2932
Comparison of NineSix Months Ended SeptemberJune 30, 20172018 and 2016:2017:
The following table summarizes the results of our operations for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change |
|
|
|
|
|
|
|
| Change |
| ||||||||
|
| Nine months ended September 30, |
| Favorable/(Unfavorable) |
|
| Six months ended June 30, |
| Favorable/(Unfavorable) |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
|
| 2018 |
| 2017 |
| $ |
| % |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
| $ | 38,471 |
| $ | — |
| $ | 38,471 |
|
| n/a |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Product revenue |
| $ | 42,279 |
| $ | 21,665 |
| $ | 20,614 |
|
| 95 | % | |||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - product |
|
| 6,920 |
|
| — |
|
| (6,920) |
|
| n/a |
|
|
| 8,495 |
|
| 3,893 |
|
| (4,602) |
|
| (118) | % |
Cost of sales - intangible asset amortization |
|
| 1,115 |
|
| — |
|
| (1,115) |
|
| n/a | % |
|
| 1,080 |
|
| 743 |
|
| (337) |
|
| (45) | % |
Research and development |
|
| 104,479 |
|
| 196,675 |
|
| 92,196 |
|
| 47 | % |
|
| 96,250 |
|
| 65,555 |
|
| (30,695) |
|
| (47) | % |
Selling, general and administrative |
|
| 100,384 |
|
| 28,541 |
|
| (71,843) |
|
| (252) | % |
|
| 84,138 |
|
| 65,373 |
|
| (18,765) |
|
| (29) | % |
Acquired in-process research and development |
|
| — |
|
| 800 |
|
| 800 |
|
| n/a |
| |||||||||||||
Impairment of intangible asset |
|
| — |
|
| 104,517 |
|
| 104,517 |
|
| n/a |
| |||||||||||||
Change in fair value of contingent purchase consideration |
|
| — |
|
| (24,936) |
|
| (24,936) |
|
| n/a |
| |||||||||||||
Total expenses |
|
| 212,898 |
|
| 305,597 |
|
| 92,699 |
|
| 30 | % |
|
| 189,963 |
|
| 135,564 |
|
| (54,399) |
|
| (40) | % |
Operating loss |
|
| (174,427) |
|
| (305,597) |
|
| 131,170 |
|
| 42.92 | % |
|
| (147,684) |
|
| (113,899) |
|
| (33,785) |
|
| (30) | % |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (7,796) |
|
| (6,318) |
|
| (1,478) |
|
| (23.39) | % |
|
| (6,216) |
|
| (5,178) |
|
| (1,038) |
|
| (20) | % |
Foreign currency loss |
|
| (127) |
|
| (434) |
|
| 307 |
|
| 70.74 | % |
|
| (185) |
|
| (83) |
|
| (102) |
|
| (123) | % |
Legal settlement loss, net of insurance receivable |
|
| (117,000) |
|
| — |
|
| (117,000) |
|
| n/a |
| |||||||||||||
Legal settlement loss |
|
| (7,975) |
|
| (117,000) |
|
| 109,025 |
|
| 93 | % | |||||||||||||
SEC settlement costs reserve |
|
| (20,000) |
|
| — |
|
| (20,000) |
|
| (100) | % | |||||||||||||
Other income |
|
| 2,237 |
|
| 473 |
|
| 1,764 |
|
| 373 | % |
|
| 2,883 |
|
| 946 |
|
| 1,937 |
|
| 205 | % |
Other expense, net |
|
| (122,686) |
|
| (6,279) |
|
| (116,407) |
|
| (1,853.91) | % |
|
| (31,493) |
|
| (121,315) |
|
| 89,822 |
|
| 74 | % |
Loss before income taxes |
|
| (297,113) |
|
| (311,876) |
|
| 14,763 |
|
| 4.73 | % |
|
| (179,177) |
|
| (235,214) |
|
| 56,037 |
|
| 24 | % |
Income tax benefit |
|
| 2,599 |
|
| 33,467 |
|
| (30,868) |
|
| (92) | % |
|
| 292 |
|
| 1,365 |
|
| (1,073) |
|
| (79) | % |
Net loss |
| $ | (294,514) |
| $ | (278,409) |
| $ | (16,105) |
|
| (6) | % |
| $ | (178,885) |
| $ | (233,849) |
| $ | 54,964 |
|
| 24 | % |
Product Revenue, Net.Revenue. Product revenue for the ninesix months ended SeptemberJune 30, 2017 was2018 increased compared to the same period in the prior year primarily due to the recognitioncontinued growth in sales of $38.5 million of net product revenue from the sale of our first commercial product, Rubraca, which was approved for sale in the United States markets and we began shipping on December 19, 2016. RevenueProduct revenue is recorded net of sales deductionsvariable considerations comprised of rebates, chargebacks and other discounts. Sales deductionsVariable considerations represented approximately 8.2%10.2% and 8.9% of the gross product revenuetransaction price recognized in the ninethree months ended SeptemberJune 30, 2018 and 2017, respectively, and are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended |
|
| Six months ended |
| Six months ended | ||||||||||||
|
| September 30, 2017 |
|
| June 30, 2018 |
| June 30, 2017 | ||||||||||||
|
| $ |
| % of Gross Sales |
|
| $ |
| % of Gross Sales |
| $ |
| % of Gross Sales | ||||||
|
| (in thousands) |
|
|
|
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross product revenue |
| $ | 41,923 |
|
| 100.0% |
|
| $ | 47,091 |
|
| 100.0% |
| $ | 23,778 |
|
| 100.0% |
Sales deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government rebates and chargebacks |
|
| 1,820 |
|
| 4.3% |
|
|
| 2,963 |
|
| 6.3% |
|
| 1,072 |
|
| 4.5% |
Discounts and fees |
|
| 1,632 |
|
| 3.9% |
|
|
| 1,849 |
|
| 3.9% |
|
| 1,041 |
|
| 4.4% |
Total sales deductions |
|
| 3,452 |
|
| 8.2% |
|
|
| 4,812 |
|
| 10.2% |
|
| 2,113 |
|
| 8.9% |
Product revenue, net |
| $ | 38,471 |
|
| 91.8% |
|
| $ | 42,279 |
|
| 89.8% |
| $ | 21,665 |
|
| 91.1% |
Cost of Sales – Product. Product cost of sales for the ninesix months ended SeptemberJune 30, 20172018 increased compared to the same period in the prior year primarily due to the increase in product revenue. Product cost of $6.9 millionsales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period. Manufacturing costs associated with sales in the quartersix months ended June 30, 2017 were expensed as incurred based on our policy to expense costs associated with the manufacture of our
30
products prior to regulatory approval, and therefore, a minimal amount is included as product cost of sales forsales. These costs increased in the ninesix months ended SeptemberJune 30, 2017. We expect cost of sales to increase in relation to product revenues once2018, as we depletedepleted the these inventories duringas of the fourth quarter of 2017.
Cost of Sales – Intangible Asset Amortization. In the ninesix months ended SeptemberJune 30, 2018 and 2017, we recognized cost of sales of $1.1 million and $0.7 million, respectively, associated with the amortization of capitalized milestone
33
payments related to the FDA approvalapprovals of Rubraca. Prior toRubraca by the FDA approval onin December 19, 2016 all acquired license and milestone payments were expensed as incurred.April 2018 and by the European Commission in May 2018.
Research and Development Expenses. Research and development expenses decreasedincreased during the ninesix months ended SeptemberJune 30, 20172018 compared to the same period in the prior year primarily due to lowerhigher research and development costs for rucaparib and rociletinib and classification of commercialization related expenses associated with Rubraca in selling, general and administrative expenses rather than research and development expenses. In the nine months ended September 30, 2017, Rubraca commercialization costs included in selling, general and administrative expenses were $69.3 million.
rucaparib. Clinical trial costs for rucaparib were $1.5 million lowerhigher compared to the same period a year ago asdue to higher costs from increased enrollment in ARIEL4, our confirmatory ovarian cancer trials, and increased enrollment in our TRITON2 and TRITON3 studies for prostate cancer. We have increased costs related to our new ATLAS study for bladder cancer, were largely offset by lowerour ATHENA combination study with Bristol-Myers Squibb Company’s immunotherapy OPDIVO for ovarian cancer and our RUCA-J study for ovarian cancer in Japan. In addition, personnel costs forincreased during the ARIEL2 and ARIEL3 studies, which have completed enrollment. Diagnostic development costs were $4.6 million lower compared to the prior year as the prior year included the costs associated with our collaboration with Foundation Medicine, Inc. to develop a novel companion diagnostic test to identify patients most likely to respond to rucaparib. Finally, clinical supply and related manufacturing development costs were $11.3 million lower than 2016six months ended June 30, 2018 due to the capitalization of these costs subsequent to the FDA approval of rucaparib. higher headcount.
Clinical trial costs for rociletinib were $21.2$3.1 million lower than 2016the six months ended June 30, 2017 primarily due to the completion of patient enrollment for all of the TIGER studies in non-small cell lung cancer. Clinical supply and related manufacturing development costs were $6.5 million lower than 2016 driven by timing of production to support our clinical studies.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased during the ninesix months ended SeptemberJune 30, 20172018 compared to the same period in the prior year primarily due mainly to classificationthe increase of costs associated with building out the European infrastructure in anticipation of commercialization related expenses associated with Rubracathere. In addition, there was an increase of $4.3 million in selling, generallegal expense and administrative expenses rather than research and development expenses.$4.8 million in stock compensation expense.
Impairment of Intangible Asset.Interest Expense. DuringInterest expense increased during the second quarter of 2016, we recorded a $104.5 million impairment chargesix months ended June 30, 2018 compared to the IPR&D intangible asset relating to our lucitanib product candidate. This reductionsame period in the estimated fair value was the result of our and our development partner’s decision to discontinue the development of lucitanib for breast cancer and lung cancer.
Change in Fair Value of Contingent Purchase Consideration. Change in fair value of contingent purchase consideration totaled ($24.9) million for the nine months ended September 30, 2016, which isprior year primarily due to a $25.5 million reduction in the fair valueissuance of the contingent purchase consideration liability we recorded during the second quarter of 2016 due to our and our development partner’s decision to discontinue the development of lucitanib for breast cancer and lung cancer.2025 Notes on April 19, 2018.
Legal Settlement Loss, NetLoss. During the first quarter of Insurance Receivable.2018, we recorded a one-time charge of $8.0 million related to an agreement to resolve a potential litigation claim against us and our officers. During the second quarter of 2017, we recorded a one-time charge of $117.0 million legal settlement loss, netrelated to an agreement to resolve a litigation claim against us and certain of insurance receivableour officers.
SEC Settlement Costs Reserve. During the second quarter of 2018, we recorded a one-time charge of $20.0 million related to a stipulationpreliminary agreement of settlement entered into betweenreached with the Clovis DefendantsSEC that, if approved by the SEC and the Arkin Plaintiffs whereby Clovis will issueU.S. District Court where the plaintiffsettlement is filed, would resolve the SEC’s ongoing investigation. See Note 14, Commitments and participating class members a total consideration comprised of $25.0 millionContingencies for further information regarding this investigation and other legal proceedings.
Other Income. Other income increased during the six months ended June 30, 2018 compared to the same period in cash and the issuance of the Settlement Shares. The cash portion of the consideration is expectedprior year due to be funded by Clovis’ insurance carriers.interest income earned on our available-for-sale securities.
Liquidity and Capital Resources
To date, we have funded our operations through the public offering of our common stock and the private placement of convertible debt securities and preferred stock. In January 2017,April 2018, we sold 5,750,0001,837,898 shares of our common stock in a public offering at $41.00$54.41 per share. The net proceeds from the offering were $221.2$93.8 million, after deducting underwriting discounts and commissions and offering expenses. In June 2017,Concurrently, we sold 3,920,454 shares of our common
31
stock in acompleted the public offering at $88.00 per share.of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025. The net proceeds from thethis offering were $324.6$291.0 million, after deducting underwriting discounts and commissions and offering expenses. At SeptemberJune 30, 2017,2018, we had cash, cash equivalents and available-for-sale securities totaling $628.0$682.2 million.
The following table sets forth the primary sources and uses of cash for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
|
| Six months ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
| $ | (195,326) |
| $ | (212,005) |
|
| $ | (210,844) |
| $ | (149,541) |
|
Net cash provided by investing activities |
|
| 29,469 |
|
| 174,304 |
| |||||||
Net cash used in investing activities |
|
| (172,208) |
|
| (133,864) |
| |||||||
Net cash provided by financing activities |
|
| 560,257 |
|
| 2,602 |
|
|
| 387,382 |
|
| 558,440 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 886 |
|
| 67 |
|
|
| (207) |
|
| 565 |
|
Net increase (decrease) in cash and cash equivalents |
| $ | 395,286 |
| $ | (35,032) |
| |||||||
Net increase in cash and cash equivalents |
| $ | 4,123 |
| $ | 275,600 |
|
34
Operating Activities
Net cash used in operating activities for all periods resulted primarily from our net losses adjusted for non-cash items and changes in components of working capital. Net cash used in operating activities was lowerhigher during the ninesix months ended SeptemberJune 30, 20172018 compared to the same period in the prior year due to a lowerhigher net loss as adjusted for non-cash items partially offset byand increases in the operating assets needed to support the commercialization of Rubraca, most notably related to inventory.
Investing Activities
Net cash used provided byin investing activities for the ninesix months ended SeptemberJune 30, 20172018 includes net purchases of available-for-sale securities of $180.0$115.0 million offset by cash from maturitiesand milestone payments of available-for-sale securities of $213.5$55.0 million. Net cash provided byused in investing activities in the same period in the prior year was mainly the result of maturitiesnet purchases of available-for-sale securities of $175.0$130.0 million in that period.
Financing Activities
Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2018 and 2017 and 2016 includes $14.4$2.6 million and $2.6$12.3 million, respectively, received from employee stock option exercises. In addition, weWe completed the sale of $545.8$93.8 million and $546.2 million of common stock, net of issuance costs, respectively, during the ninesix months ended SeptemberJune 30, 2018 and June 30, 2017. In addition, we issued $291.0 million of convertible senior notes, net of issuance costs during the six months ended June 30, 2018.
Operating Capital Requirements
We expect to incur significant losses for the foreseeable future, as we commercialize Rubraca and expand our selling, general and administrative functions to support the growth in our commercial organization. Additionally, our operating plan for the next 12 monthsremainder of 2018 includes a significant investment in inventory to meet the projected commercial requirements for Rubraca. We receive the active pharmaceutical ingredient in Rubraca from one supplier and we experience long lead times associated with its production. Accordingly, we expect to experience a decrease in our liquidity at the beginning of a production cycle and an increase as the inventory produced is sold through.
As of SeptemberJune 30, 2017,2018, we had cash, cash equivalents and available-for-sale securities totaling $628.0$682.2 million and total current liabilities of $219.4$76.6 million. In January 2017,April 2018, we sold 5,750,0001,837,898 shares of our common stock in a public offering at $41.00$54.41 per share. The net proceeds from the offering were $221.2$93.8 million, after deducting underwriting discounts and commissions and offering expenses. In June 2017,Concurrently, we sold 3,920,454 shares of our common stock in acompleted the public offering at $88.00 per share.of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025. The net proceeds from thethis offering were $324.6$291.0 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds of the offerings for general corporate purposes, including commercial planning and sales and marketing expenses associated with the launch of Rubraca in the United States and if approved by the EMA, in Europe, funding of our development programs, selling, general and administrative expenses, acquisition or licensing of additional product candidates or businesses and working capital. Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.
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2018. These costs reflect our plan to produce additional inventory in advance of the transition to a new manufacturing facility for Rubraca. We will also incur final capital costs for the new manufacturing facility of approximately $8 million in late 2018.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including but not limited to:
· | the number and characteristics of the product candidates, companion diagnostics and indications we pursue; |
· | the achievement of various development, regulatory and commercial milestones resulting in required payments to partners pursuant to the terms of our license agreements; |
· | the scope, progress, results and costs of researching and developing our product candidates and related companion diagnostics and conducting clinical and non-clinical trials; |
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· | the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates and companion diagnostics; |
· | the cost of commercialization activities, including marketing and distribution costs; |
· | the cost of manufacturing any of our product candidates we successfully commercialize; |
· | the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and outcome of such litigation; and |
· | the timing, receipt and amount of sales, if any, of our product candidates. |
Contractual Obligations and Commitments
For a discussion of our contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20162017 Annual Report on Form 10-K. ThereOther than the milestone payment to Pfizer triggered on April 6, 2018 upon the FDA’s approval of our sNDA for Rubraca as maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy, there have not been any material changes to such contractual obligations or potential milestone payments since December 31, 2016.2017. For further information regarding our contractual obligations and commitments, see Note 14, Commitments and Contingencies to our unaudited consolidated financial statements included elsewhere in this report.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. As of SeptemberJune 30, 2017,2018, we had cash, cash equivalents and available-for-sale securities of $628.0$682.2 million, consisting of bank demand deposits, money market funds and U.S. treasury securities. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Our available-for-sale securities are subject to interest rate risk and will decline in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair value of our portfolio.
We contract with contract research organizations, investigational sites and contract manufacturers globally where payments are made in currencies other than the U.S. dollar. In addition, on October 3, 2016, we entered into a Manufacturing and Services Agreement with a Swiss company for the production and supply of the active ingredient for Rubraca. Under the terms of this agreement, payments for the supply of the active ingredient in Rubraca as well as scheduled capital program fee payment toward capital equipment and other costs associated with the construction of a dedicated production train will be made in Swiss francs. Once the production facility is operational, we are obligated to pay a fixed facility fee each quarter for the duration of the agreement, which expires on December 31, 2025.
As of SeptemberJune 30, 2017, $177.52018, $147.8 million of purchase commitments exist under the Swiss Manufacturing and Services Agreement and we are required to remit amounts due in Swiss francs. Due to other variables that may exist, it is difficult to quantify the impact of a particular change in exchange rates. However, we estimate that if the value of the US dollar was to strengthen by 10% compared to the value of Swiss franc as of SeptemberJune 30, 2017,2018, it would decrease the total US dollar purchase commitment under the Swiss Manufacturing and Services Agreement by approximately $16.1$16.0 million. Similarly, a 10% weakening of the US dollar compared to the Swiss franc would increase the total US dollar purchase commitment by approximately $19.7$13.3 million.
While we periodically hold foreign currencies, primarily Euro, Swiss Franc and Pound Sterling, we do not use other financial instruments to hedge our foreign exchange risk. Transactions denominated in currencies other than the functional
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currency are recorded based on exchange rates at the time such transactions arise. As of both SeptemberJune 30, 20172018 and December 31, 2016,2017, approximately 1% of our total liabilities were denominated in currencies other than the functional currency.
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ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. With the participation of our Chief Executive Officer and Principal Financial and Accounting Officer, management performed an evaluation as of SeptemberJune 30, 20172018 of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that, as of SeptemberJune 30, 2017,2018, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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In November and December 2015, four purported shareholder class action complaints were filed in (or later transferred to) the United States District Court for the District of Colorado. The complaints generally alleged that the Company and certain of its officers violated federal securities laws by making allegedly false and misleading statements regarding the progress toward FDA approval and the potential for market success of rociletinib.
On February 18, 2016, the Court consolidated the various actions into a single proceeding (“Medina”), under Case No. 1-15-cv-02546, and appointed M. Arkin (1999) LTD and Arkin Communications LTD (the “Arkin Plaintiffs”) as the lead plaintiffs and Bernstein Litowitz Berger & Grossmann LLP as lead counsel for the putative class.
On May 6, 2016, the Arkin Plaintiffs filed a consolidated complaint (the “Consolidated Complaint”), adding additional defendants, claims, including under the Securities Act of 1933 (the “Securities Act”) relating to a follow-on offering of Clovis securities in July 2015 (the “July 2015 Offering”), and allegations relating to purportedly false and misleading statements concerning the efficacy and safety profile of rociletinib.
The Company defendants, along with underwriters and venture capital investors also named as defendants in the Consolidated Complaint, filed a motion to dismiss on July 27, 2016. On February 9, 2017, the Medina Court issued an opinion and order granting in part and denying in part the Company defendants’ motion to dismiss, granting in part and denying in part the underwriter defendants’ motion to dismiss, and granting the venture capital investor defendants’ motion to dismiss. On February 22, 2017, the Arkin Plaintiffs filed an amended consolidated class action complaint (the “Amended Complaint”), directed solely at re-pleading its Section 12(a) claims against the underwriter defendants.
On June 18, 2017, the Clovis Defendants entered into a stipulation and agreement of settlement with the Arkin Plaintiffs whereby Clovis will issue to the plaintiffs and participating class members a total consideration comprised of $25.0 million in cash and the issuance of 1,472,324 shares of Clovis common stock (the “Settlement Shares”). The cash portion of the consideration was funded by Clovis’ insurance carriers. At September 30, 2017, the liability for the issuance of the shares and cash, including the amount to be reimbursed through insurance proceeds, was recorded to accrued liability for legal settlement on the Consolidated Balance Sheets in the amount of $142.0 million and a receivable of $25.0 million from the insurance carriers on the Consolidated Balance Sheets. Clovis issued the Settlement Shares on November 2, 2017, whereby the issuance of the shares will be recorded in common stock and additional paid-in capital and the accrued liability for legal settlement will be cleared.Rociletinib-Related Litigation
As the settlement agreement isFollowing Clovis’ regulatory announcement in response to the alleged violationNovember 2015 of securities laws by certain of our officers, we have determined that the resulting loss does not relate to activities that areadverse developments in the normal course of our operations and therefore, should not be recognized in operating lossesits ongoing clinical trials for the period. Accordingly, we have recognized the entire expense associated to the settlement agreement in legal settlement loss within the other income (expense), net of insurance receivable on the Consolidated Statements of Operations and Comprehensive Loss.
On July 14, 2017, the Medina Court issued an order preliminarily approving the settlement. On September 21, 2017, counsel for the Arkin Plaintiffs and counsel for the Clovis Defendants executed an amendment to the stipulation and agreement of settlement, which provided, among other things, that in the event that lead counsel sells the Settlement Shares, it will be required to liquidate all Settlement Shares, including shares attributable to the settlement class and those attributable to lead counsel’s court-awarded attorneys’ fees.
On October 26, 2017, the Medina Court entered a judgment approving the class action settlement. The judgment certified the putative class for settlement purpose, found that the settlement is fair, reasonable, and adequate in all respects, and subject to certain exclusions and investor opt-outs, releases claims on behalf of the settlement class that were brought or could have been brought in the Medina action and forever bars and enjoins them from prosecuting such claims. Subject to any appeals, the judgment will become final, under the stipulation and agreement of settlement, within 30 days of entry.
On January 22, 2016, the Electrical Workers Local #357 Pension and Health & Welfare Trusts, a purported shareholder of Clovis, filed a purported class action complaint (the “Electrical Workers Complaint”) againstrociletinib, Clovis and certain of its officers, directors, investorscurrent and underwritersformer executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the Superior CourtDistrict of the State of California, County of San MateoColorado (the “Electrical Workers Court”“Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The Electrical Workers Complaint purports to be asserted on behalf of a class of persons who purchased stock in the July 2015 Offering. The complaint asserted claims under certain provisions
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of the Securities Act relating to the July 2015 Offering based on substantially similar allegations to those asserted in the Medina action. On June 30, 2016, the Electrical Workers Plaintiffs filed an amended complaint adding new allegations (the “Amended Complaint”).open actions currently pending against Clovis are discussed below.
On July 28, 2016, the defendants filed a motion to stay the Electrical Workers action pending resolution of the Medina action and a demurrer to the Amended Complaint. On September 23, 2016, after hearing oral argument, the Electrical Workers Court granted the motion to stay and reserved on issuing a ruling on defendants’ pending demurrer.
The Company believes that the claims asserted in the Electrical Workers Action are released and barred by operation of law through the Medina settlement (discussed above), and accordingly plans to seek dismissal of the Electrical Workers Action on that basis.
On November 10, 2016, Antipodean Domestic Partners (“Antipodean”) filed a complaint (the “Antipodean Complaint”) against Clovis and certain of its officers, directors and underwriters in New York Supreme Court, County of New York. The Antipodean Complaint alleges that the defendants violated certain sections of the Securities Act by making allegedly false statements to Antipodean and in the offering materials for the July 2015 Offering relating to the efficacy of rociletinib, its safety profile, and its prospects for market success. In addition to the Securities Act claims, the Antipodean Complaint also asserts Colorado state law claims and common law claims. Both the state law and common law claims are based on allegedly false and misleading statements regarding rociletinib’s progress toward FDA approval. The Antipodean Complaint seeks compensatory, recessionary, and punitive damages.
On December 15, 2016, the Antipodean Plaintiffs filed an amended complaint (the “Antipodean Amended Complaint”) asserting substantially the same claims against the same defendants and purporting to correct certain details in the original Antipodean Complaint.
On January 31, 2017, Defendantsthe defendants filed a motion to stay the Antipodean action pending resolution of the Medina actionAction in the District of Colorado. Defendants also filed a motion to dismiss the Antipodean Amended Complaint on March 29, 2017.
On March 14, 2017, the Clovis Defendantsdefendants and Antipodean participated in a mediation, which did not result in a settlement.
On August 8,March 29, 2017, the parties participated indefendants filed a scheduled hearing on Defendants’ motion to stay and motion to dismiss beforethe Antipodean Amended Complaint. On August 8, 2017, Justice Masley of the New York Supreme Court, County of New York. AtYork granted the hearing, Justice Masley granted Defendants’defendants’ motion to stay until after the October 26, 2017 hearing in the Medina action.stay. Per the Court’s August 10, 2017 order, Defendants’the defendants’ motion to dismiss iswas held in abeyance and will be deemed submitted on November 1, 2017. On November 1, 2017, the defendants provided a status update to the Court regarding the outcome of the hearing. The update informed the Court that Antipodean had excluded itself from the Medina Settlement, as memorialized in the final judgment entered by the Medina Court.
On April 17, 2018, the parties participated in a Preliminary Conference, following which the Court entered a preliminary conference order, providing for, among other things, an end date for discovery of February 4, 2019.
On May 2, 2018, the Court issued an order denying the defendants’ motion to dismiss. Defendants filed an answer to the Antipodean Amended Complaint on June 6, 2018.
The Company intends to vigorously defend against the allegations in the Antipodean Amended Complaint. However, there can be no assurance that the defense will be successful.
Clovis received a letter dated May 31, 2016 from an alleged owner of its common stock, which purports to set forth a demand for inspection of certain of our books and records pursuant to 8 Del. C. § 220 (the “Macalinao Demand Letter”). Clovis also received a letter dated December 15, 2016 from a second alleged owner of Clovis common stock, which purports to set forth a similar demand for inspectionIn March 2017, two putative shareholders of the Company’s books and records pursuant to 8 Del. C. § 220 (the “McKenry Demand Letter”). Both the Macalinao Demand Letter and McKenry Demand Letter were purportedly made for the purposes of investigating alleged misconduct at the Company, relating to rociletinib. The Company produced certain books and records in response to the Macalinao Demand Letter and McKenry Demand Letter in January and February 2017, respectively.
In March 2017, Macalinao and McKenry (the “Derivative Plaintiffs”), filed shareholder derivative complaints against certain directors and officers of the Company in the Court of Chancery of the State of Delaware. On May 4, 2017, the Macalinao and McKenry actions were consolidated for all purposes in a single proceeding under the caption In re Clovis Oncology, Inc. Derivative Litigation,, Case No, 2017-0222 (the “Consolidated Derivative Action”).
On May 18, 2017, the Derivative Plaintiffs filed a Consolidated Verified Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”). The Consolidated Derivative Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations of the Company’s business operations and prospects, failing to ensure that the TIGER-X clinical trial was being conducted in
36
accordance with applicable rules, regulations and protocols, and engaging in insider trading. The Consolidated Derivative Complaint purported to rely on documents produced by the Company in response to prior demands for inspection of the Company’s books and records served on the Company by each of Macalinao Demand Letter and McKenry Demand Letter.under 8 Del. C. § 220. The Consolidated Derivative Complaint sought, among other things, an award of money damages.
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On July 31, 2017, the defendants filed a motion to dismiss the Consolidated Derivative Complaint. Plaintiffs filed an opposition to the motion to dismiss on August 31, 2017, and the defendants filed a reply in further support of the motion to dismiss on September 26, 2017. No date has been scheduled forOral argument on Defendants’the defendants’ motion to dismiss the Consolidated Derivative Complaint.Complaint has been scheduled for February 4, 2019.
The Company intends to vigorously defend against the allegations in the Consolidated Derivative Complaint, but there can be no assurance that the defense will be successful.
On May 10, 2017, John Solak, a purported shareholder of the Company, filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware (the “Solak Complaint”) against certain directors and an officer of the Company. The Solak Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by adopting a compensation plan that overcompensated the non-employee director defendants, in relation to companies of comparable market capitalization and size. The Solak Complaint also alleged claims of waste of corporate assets and unjust enrichment due to this allegedly wrongful compensation plan. The Solak Complaint sought, among other things, an award of money damages and the imposition of corporate governance reforms.
On September 27, 2017, the Court entered an order extending the defendants’ time to respond to the Solak Complaint to October 31, 2017 based on, among other factors, the fact that the parties are engaged in discussions in an effort to resolve the Solak action. On October 31, 2017, the parties submitted a joint stipulation and proposed order to the Court seeking a further extension of the defendants’ response deadline to November 30, 2017, which order was entered by the Court on November 1, 2017.
The Company intends to vigorously defend against the allegations in the Solak Complaint, if the parties are unable to reach a consensual resolution, but there can be no assurance that the defense will be successful.
On March 20, 2017, a purported shareholder of the Company, filed a shareholder derivative complaint (the “Guo Complaint”) against certain officers and directors of the Company in the United States District Court for the District of Colorado. The Guo Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by either recklessly or with gross negligence approving or permitting misrepresentations of the Company’s business operations and prospects. The Guo Complaint also alleged claims for waste of corporate assets and unjust enrichment. Finally, the Guo Complaint alleged that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act, by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company’s Proxy Statement on Schedule DEF 14A in connection with the 2015 Annual Meeting of Stockholders, held on June 11, 2015. The Guo Complaint sought, among other things, an award of money damages.
On June 19, 2017, the parties filed a joint motion to stay the Guo action pending resolution of the motion to dismiss the Consolidated Derivative Complaint. On June 20, 2017, the court granted the motion to stay.
The Company intends to vigorously defend against the allegations in the Guo Complaint, but there can be no assurance that the defense will be successful.
In addition,As previously disclosed, the Company has received inquiries and requests for information from governmental agencies, including the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice, relating to the Company’s regulatory update announcement in November 2015 that the FDA requested additional clinical data on the efficacy and safety of rociletinib. On April 9, 2018, the Company received a “Wells Notice” letter from the staff of the SEC issued in connection with this investigation. In addition, the Company’s CEO, Patrick Mahaffy, also received a Wells notice. These Wells Notices advised that the staff had made a preliminary determination to recommend to the SEC that it file an action against the Company and Mr. Mahaffy regarding possible violations of the federal securities laws. The Company is continuingand Mr. Mahaffy then submitted Wells Submissions explaining their view that no enforcement action was warranted to cooperatethe SEC staff.
Following these submissions, the Company and Mr. Mahaffy then engaged in discussions with these agenciesthe SEC staff to resolve this matter. The Company has now reached an agreement in principle with respectthe SEC staff to their investigations. settle this matter on negligence-based charges. Pursuant to the proposed settlement, without admitting or denying the SEC’s allegations, the Company would agree to pay a $20.0 million civil penalty, which the Company reserved as a loss contingency on its consolidated balance sheet as of June 30, 2018, and would stipulate to a standard injunction against future violations of those provisions of the federal securities laws. Mr. Mahaffy has separately reached an agreement in principle with the SEC staff on similar negligence-based allegations, to which he would neither admit nor deny, and pay a civil penalty and be similarly enjoined. Mr. Mahaffy will continue to serve as the Company’s Chief Executive Officer and as a member of the Company’s Board of Directors.
The proposed settlement of the Medina action doessettlements would not resolve these inquiries andallege that the Company cannot predict their timing or outcome.
any of its current or former officers engaged in any intentional fraud or misconduct. The proposed settlements are subject to approval by the SEC and will also require approval by the United States District Court where the settlements are ultimately filed. There can be no assurances that the proposed settlements ultimately will be approved on these terms by either the SEC or the court, or when the settlements will be finalized. Once finalized, the settlements will resolve the SEC’s nearly three year investigation into the regulatory approval process of rociletinib.
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Director Compensation Litigation
On May 10, 2017, John Solak, a purported shareholder of the Company, filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware (the “Solak Complaint”) against certain directors and an officer of the Company. The Solak Complaint generally alleged that the defendants breached their fiduciary duties owed to the Company by adopting a compensation plan that overcompensated the non-employee director defendants, in relation to companies of comparable market capitalization and size. The Solak Complaint also alleged claims of waste of corporate assets and unjust enrichment. The Solak Complaint sought, among other things, an award of money damages and the imposition of corporate governance reforms.
On February 26, 2018, the defendants entered into a stipulation of compromise and settlement with plaintiff that was intended to settle the Solak action. On May 30, 2018, the Court approved the stipulation upon the conclusion of a settlement hearing concerning the fairness of the terms of the proposed settlement. In accordance with the terms of the settlement, as incorporated by reference in the Court’s Order and Final Judgment entered on the day of the hearing, the Company presented a new non-employee director compensation policy for shareholder vote at its 2018 annual shareholder meeting. Pursuant to the settlement, the Company is also instituting a number of corporate governance reforms, including, enhanced proxy disclosures, the codification of the Company’s stock ownership guidelines for directors, and enhanced disclosure requirements for certain forms of director compensation. While no cash payments were made to investors as part of the settlement, the court awarded a plaintiff’s fee of $395,000, which the Company paid on June 4, 2018. The settlement contained no admission of wrongdoing.
European Patent Opposition
Two oppositions were filed in the granted European counterpart of the rucaparib camsylate salt/polymorph patent on June 20, 2017. The grounds of opposition related to Rubraca were lack of novelty and lack of inventive step. A preliminary opinion and summons to oral proceedings were issued on April 4, 2018. The oral hearing is scheduled for December 4, 2018. The preliminary opinion provides a non-binding indication of the tribunal’s view. In the preliminary opinion, the tribunal agree with some of our positions and agree with certain objections made by the opponents. As part of the proceeding, we have the opportunity to submit further argument and pursue alternative claims in the form of auxiliary requests. While the ultimate results of patent challenges can be difficult to predict, we believe a number of factors, including a constellation of unexpected properties, support the novelty and non-obviousness of our rucaparib camsylate salt/polymorph composition of matter patent.
Our business faces significant risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the risk factors described under the heading “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, in addition to other information contained in or incorporated by reference into this Quarterly Report on Form 10-Q and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
There have been no material changes to the risk factors included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2016.2017 as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may negatively impact our business.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
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3.1(5) | Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc. |
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3.2(5) | |
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4.1(3) | |
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4.2(8) | |
4.3(16) | |
4.4(16) | |
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10.1*(4) | |
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10.2*(4) | License Agreement, dated as of June 2, 2011, by and between Clovis Oncology, Inc. and Pfizer Inc. |
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10.3+(1) | |
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10.4+(4) | |
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10.5+(1) | Form of Clovis Oncology, Inc. 2009 Equity Incentive Plan Stock Option Agreement. |
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10.6+(4) | Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan Stock Option Agreement. |
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10.7+(3) | |
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10.8+(3) | Employment Agreement, dated as of August 24, 2011, between Clovis Oncology, Inc. and |
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10.12+(1) | |
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| Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Erle T. Mast. |
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| Clovis Oncology, Inc. 2011 Employee Stock Purchase |
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10.31+(15) | |
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| Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan RSU Agreement. |
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21.1 | |
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31.1 | |
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31.2 | |
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32.1 | |
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32.2 | |
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101 | The following materials from Clovis Oncology, Inc.’s Quarterly Report on Form 10-Q for the period ended |
(1) | Filed as an exhibit with the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on June 23, 2011. |
(2) | Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 14, 2013. |
(3) | Filed as an exhibit with Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on August 31, 2011. |
(4) | Filed as an exhibit with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-175080) on October 31, 2011. |
(5) | Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on March 15, 2012. |
(6) | Filed as an exhibit with the Registrant’s Registration Statement on Form S-1 (File No. 333-180293) on March 23, 2012. |
(7) | Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on November 19, 2013. |
(8) | Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on September 9, 2014. |
(9) | Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 1, 2016. |
(10) | Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on May 9, 2016. |
(11) | Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on November 4, 2016. |
(12) | Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 29, 2016. |
(13) | Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 23, 2017. |
(14) | Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on May 4, 2017. |
(15) | Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on July 7, 2017. |
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(16) | Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 19, 2018. |
+ Indicates management contract or compensatory plan.
* Confidential treatment has been granted with respect to portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: | CLOVIS ONCOLOGY, INC. | ||
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| By: |
| /s/ PATRICK J. MAHAFFY |
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| Patrick J. Mahaffy |
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| President and Chief Executive Officer; Director |
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| By: |
| /s/ DANIEL W. MUEHL |
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| Daniel W. Muehl |
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| Senior Vice President of Finance and Principal Financial and Accounting Officer |
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