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CLVS Clovis Oncology

Filed: 6 May 20, 3:12pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020.

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

For the transition period from            to           .

Commission file number: 001-35347

Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

90-0475355

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

5500 Flatiron Parkway, Suite 100

Boulder, Colorado

80301

(Address of principal executive offices)

(Zip Code)

(303625-5000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock par Value $0.001 per share

CLVS

The NASDAQ Global Select Market

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of May 5, 2020 was 76,900,935.

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PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CLOVIS ONCOLOGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

Three months ended March 31, 

    

2020

    

2019

(in thousands, except per share amounts)

Revenues:

Product revenue

$

42,564

$

33,118

Operating expenses:

 

  

 

  

Cost of sales - product

9,096

7,405

Cost of sales - intangible asset amortization

1,212

1,120

Research and development

 

68,221

 

62,031

Selling, general and administrative

 

42,598

 

47,761

Other operating expenses

3,449

Total expenses

 

124,576

 

118,317

Operating loss

 

(82,012)

 

(85,199)

Other income (expense):

 

  

 

  

Interest expense

 

(9,561)

 

(3,590)

Foreign currency loss

 

(877)

 

(192)

Loss on convertible senior notes conversion

(7,791)

Other income

 

841

 

2,400

Other income (expense), net

 

(17,388)

 

(1,382)

Loss before income taxes

 

(99,400)

 

(86,581)

Income tax benefit

 

68

 

160

Net loss

(99,332)

(86,421)

Other comprehensive income (loss):

 

  

  

 

  

Foreign currency translation adjustments, net of tax

 

(103)

  

 

(5)

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

 

78

  

 

75

Other comprehensive (loss) income:

 

(25)

  

 

70

Comprehensive loss

$

(99,357)

$

(86,351)

Loss per basic and diluted common share:

Basic and diluted net loss per common share

$

(1.39)

$

(1.63)

Basic and diluted weighted average common shares outstanding

 

71,662

 

52,891

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CLOVIS ONCOLOGY, INC.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except for share amounts)

March 31, 

December 31, 

    

2020

    

2019

 

ASSETS

 

  

  

Current assets:

 

  

  

Cash and cash equivalents

$

163,309

$

161,833

Accounts receivable, net

25,081

20,562

Inventories, net

30,577

26,519

Available-for-sale securities

 

65,051

 

134,826

Prepaid research and development expenses

 

2,656

 

3,881

Other current assets

 

14,671

 

18,847

Total current assets

 

301,345

 

366,468

Inventories

87,267

98,053

Deposit on inventory

 

24,723

 

12,350

Property and equipment, net

 

14,285

 

15,287

Right-of-use assets, net

26,550

28,141

Intangible assets, net

 

61,708

 

62,920

Goodwill

 

63,074

 

63,074

Other assets

 

22,841

 

23,311

Total assets

$

601,793

$

669,604

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

36,201

$

32,237

Accrued research and development expenses

 

46,573

 

53,214

Lease liabilities

5,389

5,405

Other accrued expenses

 

34,060

 

42,228

Total current liabilities

 

122,223

 

133,084

Long-term lease liabilities - less current portion

27,734

29,479

Convertible senior notes

 

524,905

 

644,751

Borrowings under financing agreement

52,419

34,991

Other long-term liabilities

 

1,506

 

1,556

Total liabilities

 

728,787

 

843,861

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

Common stock, $0.001 par value per share, 200,000,000 shares authorized at March 31, 2020 and December 31, 2019, respectively; 73,496,587 and 54,956,341 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

73

 

55

Additional paid-in capital

 

2,260,671

 

2,114,068

Accumulated other comprehensive loss

 

(44,890)

 

(44,865)

Accumulated deficit

 

(2,342,848)

 

(2,243,515)

Total stockholders' deficit

 

(126,994)

 

(174,257)

Total liabilities and stockholders' equity (deficit)

$

601,793

$

669,604

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CLOVIS ONCOLOGY, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Common Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(in thousands, except for share amounts)

January 1, 2020

54,956,341

$

55

$

2,114,068

$

(44,865)

$

(2,243,515)

$

(174,257)

Exercise of stock options

759

 

 

2

 

 

 

2

Issuance of common stock from vesting of restricted stock units

662,323

Share-based compensation expense

 

 

12,961

 

 

 

12,961

Net unrealized gain on available-for-sale securities

 

 

 

78

 

 

78

Foreign currency translation adjustments

 

 

 

(103)

 

 

(103)

Convertible senior notes conversion

17,877,164

18

133,640

133,658

Net loss

 

 

 

 

(99,332)

 

(99,332)

March 31, 2020

73,496,587

$

73

$

2,260,671

$

(44,890)

$

(2,342,848)

$

(126,994)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Common Stock

Paid-In

Comprehensive

Accumulated

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(in thousands, except for share amounts)

January 1, 2019

52,797,516

$

53

$

2,034,142

$

(44,634)

$

(1,843,092)

$

146,469

Exercise of stock options

83,132

 

 

1,093

 

 

 

1,093

Issuance of common stock from vesting of restricted stock units

113,402

Share-based compensation expense

 

 

13,640

 

 

 

13,640

Net unrealized gain on available-for-sale securities

 

 

 

75

 

 

75

Foreign currency translation adjustments

 

 

 

(5)

 

 

(5)

Net loss

 

 

 

 

(86,421)

 

(86,421)

March 31, 2019

52,994,050

$

53

$

2,048,875

$

(44,564)

$

(1,929,513)

$

74,851

See accompanying Notes to Unaudited Consolidated Financial Statements

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CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Three months ended March 31, 

 

    

2020

    

2019

 

 

 

Operating activities

  

 

  

Net loss

$

(99,332)

$

(86,421)

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

 

 

  

Share-based compensation expense

 

12,961

 

13,640

Depreciation and amortization

 

2,130

 

1,722

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

 

(140)

 

(129)

Amortization of debt issuance costs

 

786

 

645

Write-off of debt issuance costs related to convertible senior notes conversion

3,555

Loss on convertible senior notes conversion

7,791

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

(4,519)

(3,205)

Inventory

6,839

(23,936)

Prepaid and accrued research and development expenses

 

(5,559)

 

3,437

Deposit on inventory

 

(12,373)

 

Other operating assets and liabilities

 

5,198

 

(4,901)

Accounts payable

 

4,016

 

5,389

Other accrued expenses

 

(3,847)

 

(4,692)

Net cash used in operating activities

 

(82,494)

 

(98,451)

Investing activities

 

  

 

  

Purchases of property and equipment

 

(34)

 

(1,231)

Purchases of available-for-sale securities

 

(9,962)

 

(138,415)

Sales of available-for-sale securities

79,803

153,500

Acquired in-process research and development - milestone payment

 

 

(15,000)

Net cash provided by (used in) investing activities

 

69,807

 

(1,146)

Financing activities

 

  

 

  

Proceeds from sale of common stock, net of issuance costs

163,901

Payment of convertible senior notes

(164,443)

Proceeds from borrowings under financing agreement

15,592

Proceeds from the exercise of stock options and employee stock purchases

 

2

 

1,093

Payments on finance leases

(357)

Payments on other long-term liabilities

(51)

Net cash provided by financing activities

 

14,644

 

1,093

Effect of exchange rate changes on cash and cash equivalents

 

(481)

 

(64)

Increase (decrease) in cash and cash equivalents

 

1,476

 

(98,568)

Cash and cash equivalents at beginning of period

 

161,833

 

221,876

Cash and cash equivalents at end of period

$

163,309

$

123,308

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

4,131

$

3,594

Non-cash investing and financing activities:

 

  

 

  

Vesting of restricted stock units

$

5,461

$

3,277

See accompanying Notes to Unaudited Consolidated Financial Statements.

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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 additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that require them, 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 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 1 segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities and since 2016 we have also marketed and sold products.

Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is marketed in the United States for 2 indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial indication received approval from the United States Food and Drug Administration (“FDA”) in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with 2 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 approval in this second, broader and earlier-line indication on a priority review timeline was 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. We hold worldwide rights to Rubraca.

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 2 or more prior lines of platinum-based chemotherapy, and who are unable to tolerate further platinum-based chemotherapy. This conditional approval requires the completion of certain confirmatory post marketing commitments. In January 2019, the European Commission granted a variation to the marketing authorization to include 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. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, we have launched Rubraca in each of Germany, United Kingdom, Italy, France and Spain.

In November 2019, we submitted the supplemental New Drug Application (“sNDA”) for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. On January 15, 2020, we announced that the FDA accepted the sNDA and granted priority review status to the application with a Prescription Drug User Fee Act (“PDUFA”) date of May 15, 2020. We are actively preparing for the launch of Rubraca in prostate cancer in the U.S., which we will commence upon receipt of FDA approval.

In addition to Rubraca, we have a second product candidate currently in clinical development. Lucitanib is an investigational, 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”). We believe that data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol-Myers Squibb Company (“BMS”). Encouraging data of VEGF and PARP inhibitors in combination also supports the evaluation of lucitanib combined with Rubraca. Thus, currently enrolling Phase 1b/2 combination studies involving

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lucitanib consist of the Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in advanced solid tumors and gynecologic cancers and an arm of the Clovis-sponsored SEASTAR study evaluating lucitanib in combination with Rubraca in advanced solid tumors and ovarian cancer. We hold the global (excluding China) development and commercialization rights for lucitanib.

In September 2019, we entered into a license and collaboration agreement with 3B Pharmaceuticals GmbH (“3BP”) to develop a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast-activating protein alpha (“FAP”).

Following completion of preclinical work to support an investigational new drug application (“IND”) for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286, we plan to conduct global clinical trials. We anticipate submitting the IND in the second half of 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent. We hold U.S. and global rights to FAP-2286, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. We also have agreed with 3BP to collaborate on a discovery program directed to up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

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 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, 2019 (“2019 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 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 revenue 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.

Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

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In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2016-13 as of January 1, 2020. Upon the adoption of ASU 2016-13 on January 1, 2020, we are required to determine whether a decline in the fair value below the amortized cost basis (i.e., impairment) of an available-for-sale debt is security is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in accumulated other comprehensive loss, net of applicable taxes. When evaluating an impairment, entities may not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist. We applied this impairment model for available-for-sale debt securities as of January 1, 2020 and 0 impairment was recognized upon adoption. In addition, 0 impairment was recognized for the three months ended March 31, 2020. We recognized a minimal allowance for credit losses related to our accounts receivable at March 31, 2020. The adoption of ASU 2016-13 did not materially impact our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted ASU 2018-02 as of January 1, 2020 and there was no material impact on our consolidated financial statements and related disclosures.

Revenue Recognition

We are currently approved to sell Rubraca in the United States and Europe markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and 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 recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns 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). Where 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.

Government Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program, the Medicare coverage gap program, the Tricare health program and various European National Health Service, Sick Fund and Clawback programs. 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

9

establishment of a current liability which is included in accrued expenses on the Consolidated Balance Sheets. Our rebate estimates are based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on the expected utilization from historical data we have accumulated since the Rubraca product launch.

GPO and Payor Rebates. We contract with various private payor organizations and group purchasing organizations (“GPO”), primarily insurance companies, pharmacy benefit managers and hospitals, for the payment of rebates with respect to utilization of our products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service (“PHS”) 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 the discounted price paid to 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 product that is six months beyond the 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.

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.

Accounts Receivable

As a result of the adoption of ASU 2016-13, we recognized a minimal allowance for credit losses related to our accounts receivable at March 31, 2020. We provide an allowance for doubtful accounts based on experience and specifically identified risks. Accounts receivable are carried at fair value and charged off against the allowance for doubtful accounts when we determine that recovery is unlikely and we cease collection efforts.

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Inventory

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. Inventories include active pharmaceutical ingredient (“API”), contract manufacturing costs and overhead allocations. 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 regularly analyze our inventory levels for excess quantities and obsolescence (expiration), taking into account factors such as historical and anticipated future sales compared to quantities on hand and the remaining shelf-life of Rubraca. Rubraca finished goods have a shelf-life of four years from the date of manufacture. We expect to sell the finished goods prior to expiration. The API currently has a shelf-life of four years from the date of manufacture but can be retested at an immaterial cost with no expected reduction in potency, thereby extending its shelf-life as needed. We expect to consume substantially all of the API over a period of approximately eight years based on our long-range sales projections of Rubraca.

We 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. Expired inventory would be disposed of and the related costs would be written off as cost of product revenue. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories. Long-term inventories primarily consist of API.

API is currently produced by Lonza. 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. In addition, we currently manufacture Rubraca finished goods with a single third-party manufacturer. The disruption or termination of the supply of API or the disruption or termination of the manufacturing of our commercial products could have a material adverse effect on our business, financial position and results of operations. API that is written off due to damage and certain costs related to our dedicated production train at Lonza are included in Other Operating Expenses in the Consolidated Statements of Operations and Comprehensive Loss.

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 2019 Form 10-K.

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 and U.S. treasury securities. We do not have Level 1 liabilities.

Level 2:

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

Level 3:

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

11

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

    

Balance

    

Level 1

    

Level 2

    

Level 3

 

March 31, 2020

Assets:

Money market

$

112,529

$

112,529

$

$

U.S. treasury securities

 

65,051

 

 

65,051

 

Total assets at fair value

$

177,580

$

112,529

$

65,051

$

December 31, 2019

Assets:

Money market

$

61,882

$

61,882

$

$

U.S. treasury securities

 

189,736

 

54,910

 

134,826

 

Total assets at fair value

$

251,618

$

116,792

$

134,826

$

There were 0 liabilities that were measured at fair value on a recurring basis as of March 31, 2020. There were 0 transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three months ended March 31, 2020.

Financial instruments not recorded at fair value include our convertible senior notes. At March 31, 2020, the carrying amount of the 2021 Notes was $96.5 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $87.2 million. At March 31, 2020, the carrying amount of the 2024 Notes was $135.1 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $145.5 million. At March 31, 2020 the carrying amount of the 2025 Notes was $293.3 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $185.1 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 10, Long-term Debt for discussion of the convertible senior notes. The carrying amounts of accounts payable and accrued expenses approximate their fair value due to their short-term maturities.

4. Available-for-Sale Securities

As of March 31, 2020, available-for-sale securities consisted of the following (in thousands):

    

    

    

Gross

    

Gross

    

Aggregate

 

Amortized

Unrealized

Unrealized

Fair

 

Cost

Gains

Losses

Value

 

U.S. treasury securities

$

64,966

$

85

$

$

65,051

As of December 31, 2019, available-for-sale securities consisted of the following (in thousands):

    

    

    

Gross

    

Gross

    

Aggregate

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. treasury securities

$

134,826

$

$

$

134,826

As of March 31, 2020, there were 0 available-for-sale securities that have been in a continuous unrealized loss position.

As of March 31, 2020, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):

    

Amortized

    

Fair

 

Cost

Value

 

Due in one year or less

$

64,966

$

65,051

Due in one year to two years

 

 

Total

$

64,966

$

65,051

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5. Inventories

The following table presents current and long-term inventories as of March 31, 2020 and December 31, 2019:

March 31, 

December 31,

    

2020

    

2019

Work-in-process

 

$

98,255

 

$

104,139

Finished goods, net

 

19,589

 

20,433

Total inventories

 

$

117,844

 

$

124,572

At March 31, 2020, we had $30.6 million of current inventory and $87.3 million of long-term inventory. In addition, we had $24.7 million long-term deposit on inventory, which consists of advanced intermediate, which is the inventory prior to conversion to API.

6. Other Current Assets

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

March 31, 

December 31, 

    

2020

    

2019

 

Prepaid insurance

$

2,681

$

505

Prepaid IT

867

698

Prepaid expenses - other

 

4,190

 

3,371

Value-added tax ("VAT") receivable

5,915

11,920

Receivable - other

 

915

 

2,176

Other

 

103

 

177

Total

$

14,671

$

18,847

7. Intangible Assets and Goodwill

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

March 31, 

December 31,

2020

    

2019

Intangible asset - milestones

$

71,850

$

71,850

Accumulated amortization

 

(10,142)

 

(8,930)

Total intangible asset, net

$

61,708

$

62,920

The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031 in Europe and 2035 in the U.S.

We recorded amortization expense of $1.2 million and $1.1 million related to capitalized milestone payments during the three months ended March 31, 2020 and March 31, 2019, respectively. Amortization expense is included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.

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

2020

$

3,635

2021

4,847

2022

4,847

2023

4,847

2024

4,847

Thereafter

38,685

$

61,708

13

8. Other Accrued Expenses

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

March 31, 

December 31, 

    

2020

    

2019

 

Accrued personnel costs

$

10,248

$

16,915

Accrued interest payable

 

2,688

 

5,903

Income tax payable

765

3,505

Accrued corporate legal fees and professional services

146

310

Accrued royalties

6,472

6,038

Accrued variable considerations

9,657

5,748

Purchase of API received not yet invoiced

38

Accrued expenses - other

 

4,046

 

3,809

Total

$

34,060

$

42,228

9. Lease

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values assigned to the lease components and non-lease components.

Our facilities operating leases have lease components, non-lease components and non-components, which we have separated because the non-lease components and non-components have variable lease payments and are excluded from the measurement of the lease liabilities. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

We lease all of our office facilities in the U.S. and Europe. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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We have a finance lease for certain equipment at the dedicated production train at Lonza, our non-exclusive manufacturer of the Rubraca API.

The components of lease expense and related cash flows were as follows (in thousands):

Three months ended March 31, 

Three months ended March 31, 

    

2020

    

2019

Lease cost

Finance lease cost:

Amortization of right-of-use assets

$

474

$

356

Interest on lease liabilities

 

215

 

184

Operating lease cost

 

1,126

 

1,149

Short-term lease cost

 

106

 

49

Variable lease cost

598

725

Total lease cost

$

2,519

$

2,463

Operating cash flows from finance leases

$

215

$

184

Operating cash flows from operating leases

$

1,126

$

1,149

Financing cash flows from finance leases

$

357

$

250

The weighted-average remaining lease term and weighted-average discount rate were as follows:

    

March 31, 2020

    

March 31, 2019

Weighted-average remaining lease term (years)

Operating leases

6.8

6.9

Finance leases

5.8

6.8

Weighted-average discount rate

Operating leases

8%

8%

Finance leases

8%

8%

Future minimum commitments due under these lease agreements as of March 31, 2020 are as follows (in thousands):

Operating Leases

Finance Leases

Total

2020 (remaining nine months)

 

4,279

 

1,715

 

5,994

2021

 

5,628

 

2,287

 

7,915

2022

 

3,387

 

2,287

 

5,674

2023

 

2,948

 

2,287

 

5,235

2024

2,900

2,287

5,187

Thereafter

 

10,655

 

2,287

 

12,942

Present value adjustment

(7,187)

(2,637)

(9,824)

Present value of lease payments

$

22,610

$

10,513

$

33,123

15

10. Long-term Debt

The following is a summary of our convertible senior notes at March 31, 2020:

Principal Amount

Interest Rate

(in thousands)

Due Date

2021 Notes

2.50%

$

97,188

September 15, 2021

2024 Notes

4.50%

 

138,858

August 1, 2024

2025 Notes

1.25%

 

300,000

May 1, 2025

Total

$

536,046

2021 Notes

In September 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “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. 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 2 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, of which $2.0 million of unamortized debt issuance costs were derecognized in connection with the repurchase of the 2021 Notes. The remaining 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 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.

In August 2019, we entered into privately negotiated transactions with a limited number of holders to repurchase $190.3 million aggregate principal amount of our outstanding 2021 Notes for an aggregate repurchase price of $171.8

16

million, including accrued interest. This repurchase resulted in the recognition of $18.5 million gain on extinguishment of debt.

In April 2020, we entered into a privately negotiated exchange agreement with a holder (“Holder”) of our 2021 Notes, pursuant to which we issued to such Holder of the 2021 Notes approximately $36.1 million in aggregate principal amount (the “Additional 2024 Notes”) of our currently outstanding 2024 Notes in exchange for approximately $32.8 million in aggregate principal of 2021 Notes held by such Holder (the “Exchange Transaction”). We did not receive any cash proceeds from the Exchange Transaction.

As of May 5, 2020, $64.4 million in aggregate principal amount of our 2021 Notes remain outstanding.

2024 Notes

In August 2019, we completed a private placement to qualified institutional buyers of $263.0 million aggregate principal amount of 4.50% convertible senior notes due 2024 (the “2024 Notes”) resulting in net proceeds of $254.9 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 2024 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 2024 Notes are senior unsecured obligations and bear interest at a rate of 4.50% per year, payable semi-annually in arrears on February 1 and August 1 of each year. The 2024 Notes will mature on August 1, 2024, unless earlier repurchased or converted.

Holders may convert all or any portion of the 2024 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 137.2213 shares per $1,000 in principal amount of 2024 Notes, equivalent to a conversion price of approximately $7.29 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 2024 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

We will not have the right to redeem the 2024 Notes prior to their maturity. If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2024 Notes, holders may require us to repurchase for cash all or any portion of the 2024 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. No sinking fund is provided for the 2024 Notes.

The 2024 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to all of our liabilities that are not so subordinated, including the 2021 Notes and 2025 Notes; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness, including our borrowing under the TPG financing agreement; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

In connection with the issuance of the 2024 Notes, we incurred $8.0 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 2024 Notes using the effective interest method. We determined the expected life of the debt was equal to the five-year term of the 2024 Notes.

As of March 31, 2020 and December 31, 2019, the balance of unamortized debt issuance costs related to the 2021 Notes, 2025 Notes and 2024 Notes was $11.1 million and $15.4 million, respectively.

In January 2020, we completed a registered direct offering of an aggregate 17,777,679 shares of our common stock at a price of $9.25 per share to a limited number of holders of our 2024 Notes. We used the proceeds of the share offering to repurchase from such holders an aggregate of $123.4 million principal amount of 2024 Notes in privately negotiated transactions. In addition, we paid customary fees and expenses in connection with the transactions. Following

17

these transactions and at March 31, 2020, an aggregate $138.9 million principal amount of 2024 Notes remained outstanding, $3.6 million of unamortized debt issuance costs were derecognized and we recognized a $7.8 million loss.

In April 2020, we entered into a privately negotiated exchange agreement with a holder (“Holder”) of our 2021 Notes, pursuant to which we issued to such Holder of the 2021 Notes approximately $36.1 million in aggregate principal amount (the “Additional 2024 Notes”) of our currently outstanding 2024 Notes in exchange for approximately $32.8 million in aggregate principal of 2021 Notes held by such Holder (the “Exchange Transaction”). We did not receive any cash proceeds from the Exchange Transaction.

The Additional 2024 Notes issued in the Exchange Transaction were issued as Additional Notes under that certain Indenture, dated as of August 13, 2019 (the “Indenture”), by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, and have substantially identical terms to our currently outstanding 2024 Notes, except that the Additional 2024 Notes will accrue interest from February 1, 2020 and the initial interest payment date on the Additional 2024 Notes will be August 1, 2020. The Holder paid to the Company accrued interest on the Additional 2024 Notes from February 1, 2020 to and including April 20, 2020. The Additional 2024 Notes will be treated as a single series of securities with the currently outstanding 2024 Notes.

In May 2020, $24.3 million in principal amount of 2024 Notes were converted into 3,331,047 shares of our common stock at the conversion rate of 137.2213 shares per $1,000 in principal amount of 2024 Notes.

As of May 5, 2020, $150.6 million aggregate principal amount of our 2024 Notes remain outstanding.

2025 Notes

In April 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 $290.9 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 2 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.

18

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 $9.1 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.

TPG Financing Agreement

On May 1, 2019, we entered into a financing agreement (the “Financing Agreement”) with certain affiliates of TPG Sixth Street Partners, LLC (“TPG”) in which we plan to borrow from TPG amounts required to reimburse our actual costs and expenses incurred during each fiscal quarter (limited to agreed budgeted amounts), as such expenses are incurred, related to the ATHENA clinical trial, in an aggregate amount of up to $175 million (the amount actually borrowed, the “Borrowed Amount”). ATHENA is our largest clinical trial, with a planned target enrollment of 1,000 patients across more than 270 sites in at least 25 countries. The Clovis-sponsored phase 3 ATHENA study in advanced ovarian cancer is the first-line maintenance treatment setting evaluating Rubraca plus nivolumab (PD-1 inhibitor), Rubraca, nivolumab and a placebo in newly-diagnosed patients who have completed platinum-based chemotherapy. This study initiated in the second quarter of 2018 and is currently enrolling patients.

We expect to incur borrowings under the Financing Agreement on a quarterly basis, beginning with such expenses incurred during the quarter ended March 31, 2019 and ending generally on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the date of completion of all activities under the ATHENA Trial Clinical Study Protocol, (iii) the date on which we pay the Discharge Amount (as defined in the Financing Agreement), (iv) the date of the occurrence of a change of control of us (or a sale of all or substantially all of our assets related to Rubraca) or our receipt of notice of certain breaches by us of our obligations under material in-license agreements related to Rubraca and (v) September 30, 2022.

We are obligated to repay on a quarterly basis, beginning on the earliest to occur of (i) the termination of the ATHENA Trial, (ii) the approval by the FDA of an update to the label portion of the Rubraca new drug application (“NDA”) to include in such label the treatment of an indication resulting from the ATHENA Trial, (iii) the date on which we determine that the results of the ATHENA Trial are insufficient to achieve such an expansion of the Rubraca label to cover an indication based on the ATHENA Trial and (iv) September 30, 2022 (the “Repayment Start Date”).

9.75% (which rate may be increased incrementally up to approximately 10.25% in the event the Borrowed Amount exceeds $166.5 million) of the direct Rubraca net sales recorded by us and our subsidiaries worldwide and our future out-licensees in the United States, if any, during such quarter;

19.5% of any royalty payments received by us and our subsidiaries during such quarter based on the sales of Rubraca by our future out-licensees outside the United States, if any; and

19.5% of any other amounts received by us and our subsidiaries in connection with any other commercialization arrangement for Rubraca, including any upfront and milestone payments and proceeds of infringement claims (which payments are not subject to the caps described below).

Quarterly payments are capped at $8.5 million, unless the label portion of the Rubraca NDA is expanded by the FDA to include such label the treatment of an indication resulting from the ATHENA Trial, in which case the quarterly payment is capped at $13.5 million. In the event the aggregate Borrowed Amount exceeds $166.5 million, such quarterly limits will be incrementally increased to a maximum of approximately $8.94 million and $14.19 million, respectively. The maximum amount required to be repaid under the agreement is 2 times the aggregate Borrowed Amount, which may be $350 million in the event we borrow the full $175 million under the Financing Agreement.

In the event we have not made payments on or before December 30, 2025 equal to at least the Borrowed Amount, we are required to make a lump sum payment in an amount equal to such Borrowed Amount less the aggregate of all

19

prior quarterly payments described above. All other payments are contingent on the performance of Rubraca. There is no final maturity date on the Financing Agreement.

Our obligations under the Financing Agreement will be secured under a Pledge and Security agreement by a first priority security interest in all of our assets related to Rubraca, including intellectual property rights and a pledge of the equity of our wholly owned subsidiaries, Clovis Oncology UK Limited and Clovis Oncology Ireland Limited. In addition, the obligations will initially be guaranteed by Clovis Oncology UK Limited and Clovis Oncology Ireland Limited, secured by a first priority security interest in all the assets of those subsidiaries.

Pursuant to the Financing Agreement, we have agreed to certain limitations on our operations, including limitations on making certain restricted junior payments, including payment of dividends, limitation on liens and certain limitations on the ability of our non-guarantor subsidiaries to own certain assets related to Rubraca and to incur indebtedness.

We may terminate the Financing Agreement at any time by paying the lenders an amount (the “Discharge Amount”) equal to the sum of (a) (A) the greater of (x) the Borrowed Amount plus (i) if such date is during calendar year 2019, $35 million or (ii) if such date is during calendar year 2020 or thereafter, $50 million and (y) (i) if such date is prior to the Repayment Start Date, 1.75 times the Borrowed Amount or (ii) if such date is after the Repayment Start Date, 2.00 times the Borrowed Amount minus (B) the aggregate amount of all quarterly payments previously paid to the lenders plus (b) all other obligations which have accrued but which have not been paid under the loan documents, including expense reimbursement.

In the event of (i) a change of control of us, we must pay the Discharge Amount to the lenders and (ii) an event of default under the Financing Agreement (which includes, among other events, breaches or defaults under or terminations of our material in-license agreements related to Rubraca and defaults under our other material indebtedness), the lenders have the right to declare the Discharge Amount to be immediately due and payable.

For the three months ended March 31, 2020, we recorded $52.4 million as a long-term liability on the Consolidated Balance Sheets and future quarterly draws will be recorded as a long-term liability on the Consolidated Balance Sheets. In connection with the transaction, we incurred $1.8 million of debt issuance costs. The debt issuance costs are presented as a deduction from the TPG financing liability on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the Financing Agreement using the straight-line method. As of March 31, 2020, the balance of unamortized debt issuance costs was $1.6 million.

For the three months ended March 31, 2020, we used an effective interest rate of 14.5%. For subsequent periods, we will use the prospective method whereby a new effective interest rate is determined based on the revised estimate of remaining cash flows. The new rate is the discount rate that equates the present value of the revised estimate of remaining cash flows with the carrying amount of the debt, and it will be used to recognize interest expense for the remaining periods. Under this method, the effective interest rate is not constant, and any change in expected cash flows is recognized prospectively as an adjustment to the effective yield.

The following table sets forth total interest expense recognized during the three months ended March 31, 2020 and 2019 (in thousands):

Three months ended March 31, 

    

2020

    

2019

 

Interest on convertible notes

$

3,183

$

2,734

Amortization of debt issuance costs

 

786

 

645

Debt issuance cost derecognized related to 2024 Notes

3,555

Interest on finance lease

215

184

Interest on borrowings under financing agreement

1,791

Other interest

31

27

Total interest expense

$

9,561

$

3,590

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11. Stockholders’ Equity

Common Stock

The holders of common stock are entitled to 1 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 March 31, 2020 and 2019, as follows (in thousands):

Foreign Currency

Unrealized

Total Accumulated

 

Translation Adjustments

(Losses) Gains

Other Comprehensive Loss

 

2020

2019

2020

2019

2020

2019

Balance at January 1,

$

(44,732)

$

(44,460)

$

(133)

$

(174)

$

(44,865)

$

(44,634)

Other comprehensive (loss) income

(103)

(5)

78

75

(25)

70

Total before tax

(44,835)

(44,465)

(55)

(99)

(44,890)

(44,564)

Tax effect

 

 

 

Balance at March 31, 

$

(44,835)

$

(44,465)

$

(55)

$

(99)

$

(44,890)

$

(44,564)

There were 0 reclassifications out of accumulated other comprehensive loss in each of the three months ended March 31, 2020 and 2019.

12. 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 months ended March 31, 2020 and 2019 was recognized in the accompanying Consolidated Statements of Operations and Comprehensive Loss as follows (in thousands):

Three months ended March 31, 

 

    

2020

    

2019

 

 

Research and development

$

6,925

$

6,611

Selling, general and administrative

 

6,036

 

7,029

Total share-based compensation expense

$

12,961

$

13,640

We did not recognize a tax benefit related to share-based compensation expense during the three months ended March 31, 2020 and 2019, as we maintain net operating loss carryforwards and have established a valuation allowance against the entire net deferred tax asset as of March 31, 2020.

21

Stock Options

The following table summarizes the activity relating to our options to purchase common stock for the three months ended March 31, 2020:

    

    

    

Weighted

    

 

Weighted

Average

Aggregate

 

Average

Remaining

Intrinsic

 

Number of

Exercise

Contractual

Value

 

Options

Price

Term (Years)

(Thousands)

 

Outstanding at December 31, 2019

6,287,025

$

42.24

 

  

 

  

Granted

471,250

8.49

 

  

 

  

Exercised

(759)

3.14

 

  

 

  

Forfeited

(198,760)

49.86

 

  

 

  

Outstanding at March 31, 2020

6,558,756

$

39.58

 

6.1

$

731

Vested and expected to vest at March 31, 2020

6,412,785

$

39.84

 

6.0

$

704

Vested and exercisable at March 31, 2020

4,808,471

$

44.68

 

5.1

$

387

The aggregate intrinsic value in the table above represents the pretax intrinsic value, based on our closing stock price of $6.36 as of March 31, 2020, 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 months ended March 31, 2020 and 2019 (in thousands, except per share amounts):

Three months ended March 31, 

   

2020

   

2019

 

Weighted-average grant date fair value per share

$

6.55

$

18.83

Intrinsic value of options exercised

$

4

$

765

Cash received from stock option exercises

$

2

$

1,094

As of March 31, 2020, the unrecognized share-based compensation expense related to unvested options, adjusted for expected forfeitures, was $32.3 million and the estimated weighted-average remaining vesting period was 1.9 years.

Restricted Stock

The following table summarizes the activity relating to our unvested restricted stock units (“RSUs”) for the three months ended March 31, 2020:

    

    

 

Weighted

 

Average

 

Number of

Grant Date

 

Units

Fair Value

 

Unvested at December 31, 2019

2,171,347

$

28.37

Granted

2,368,303

 

8.29

Vested

(662,323)

 

27.19

Forfeited

(111,943)

 

25.04

Unvested at March 31, 2020

3,765,384

$

16.04

Expected to vest after March 31, 2020

3,569,090

$

15.45

As of March 31, 2020, the unrecognized share-based compensation expense related to unvested RSUs, adjusted for expected forfeitures, was $57.0 million and the estimated weighted-average remaining vesting period was 2.5 years.

22

13. License Agreements

Rucaparib

In June 2011, we entered into a license agreement with Pfizer, Inc. (“Pfizer”) to obtain the exclusive global rights to develop and commercialize Rubraca. 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 Rubraca, 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 the EU, to a date that is 18 months after the date of achievement of such milestones.

On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in an obligation to pay a $20.0 million milestone payment, for which we 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, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.

In May 2018, Rubraca received its initial European Commission marketing authorization. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.

In January 2019, Rubraca received a second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.

In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.

These milestone payments were recognized as intangible assets and are 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 Rubraca and we are responsible for all ongoing development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $16.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. We will be required to make a milestone payment to Pfizer related to our expected PDUFA date of May 15, 2020 for our sNDA for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $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 net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.

The license agreement with Pfizer will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to Pfizer, determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Pfizer can terminate the agreement, resulting in a loss of our rights to Rubraca and an obligation to assign or license to Pfizer any intellectual property rights or other rights we may have in Rubraca, including our regulatory filings, regulatory approvals, patents and trademarks for Rubraca.

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In April 2012, we entered into a license agreement with AstraZeneca to acquire exclusive rights associated with Rubraca 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 Rubraca for the uses claimed by these patents. AstraZeneca also receives royalties on net sales of Rubraca.

Lucitanib

In October 2008, Ethical Oncology Science, S.p.A. (“EOS”) (now known as Clovis Oncology Italy S.r.l.) entered into an exclusive license agreement with Advenchen Laboratories LLC (“Advenchen”) to develop 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, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.

 

The license agreement with Advenchen will remain in effect until the expiration of all of our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.

FAP Program

In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement in September 2019, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense.

Pursuant to the terms of the FAP agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.

We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.

In February 2020, we finalized the terms of a drug discovery collaboration agreement with 3BP to identify up to 3 additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we will obtain global rights for any resulting product candidates. We are responsible for the costs of all preclinical and clinical development activities conducted under the discovery program, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the discovery and preclinical development phase for each collaboration target. The

24

discovery collaboration agreement was effective December 31, 2019, for which we incurred a $2.1 million technology access fee, which we accrued and recognized as a research and development expense.

Pursuant to the terms of the discovery collaboration agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP a 6% royalty on net sales of License Products (as defined in the agreement), based on the volume of quarterly net sales achieved.

We are obligated under the discovery collaboration agreement to use diligent efforts to develop and commercialize the product candidates, if any, that result from the discovery program, and we are responsible for all clinical development and commercialization costs. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights.

Pursuant to terms of each of our product license agreements, we will pay royalties to our licensors on sales, if any, of the respective products.

14. 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, 2025 Notes and 2024 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.

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 months ended March 31, 

    

2020

    

2019

 

Common shares under option plans

4,061

5,123

Convertible senior notes

24,563

8,584

Total potential dilutive shares

28,624

13,707

15. Commitments and Contingencies

Royalty and License Fee Commitments

We have entered into certain license agreements, as identified in Note 13, 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.

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 a 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

25

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 March 31, 2020, $76.7 million of purchase commitments exist under the Agreement.

At the time we entered into the Agreement, we evaluated the Agreement as a whole and bifurcated into lease and non-lease components, which consisted of an operating lease of warehouse space, capital lease of equipment, purchase of leasehold improvements and manufacturing costs based upon the relative fair values of each of the deliverables. During October 2018, the production train was placed into service and we recorded the various components of 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.

Rociletinib-Related Litigation

Following Clovis’ regulatory announcement in November 2015 of adverse developments in its ongoing clinical trials for rociletinib, Clovis and certain of its current and former executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the District of Colorado (the “Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The remaining actions are discussed below.

   

In March 2017, 2 putative shareholders of the Company, 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 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 motion to dismiss on September 26, 2017.

While the motion to dismiss remained pending, on November 19, 2018, Plaintiffs filed a motion for leave to file a supplemental consolidated complaint, and on November 20, 2018, the Court granted that motion. On November 27, 2018, Plaintiffs filed their supplemental complaint (the “Supplemental Derivative Complaint”), which adds allegations concerning the Company’s, Mr. Mahaffy’s and Mr. Mast’s settlements with the United States Securities and Exchange Commission. Pursuant to a briefing schedule entered by the Court, the defendants filed a supplemental motion to dismiss the Supplemental Derivative Complaint on February 6, 2019; plaintiffs filed an opposition brief on February 22, 2019; and the defendants filed a reply brief on March 5, 2019. The Court held oral arguments on the defendants’ motions to dismiss on June 19, 2019. At the oral arguments, the Court ordered the parties to submit supplemental letter briefs on the motion to dismiss.

 

On October 1, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Chancery Court, issued a Memorandum Opinion granting in part and denying in part defendants’ motions to dismiss. The Supplemental Derivative Complaint was dismissed as to Plaintiffs’ derivative claims for unjust enrichment and insider trading. The Court allowed Plaintiffs’ remaining derivative claim for breach of fiduciary duty to proceed. Defendants filed an answer to the Supplemental Derivative Complaint on December 27, 2019.

26

On December 17, 2019, the parties participated in a mediation, which did not result in a settlement. On December 22, 2019, the Company’s board of directors formed a Special Litigation Committee (the “SLC”) to conduct an investigation of the claims asserted in the Supplemental Derivative Complaint. On February 18, 2020, the SLC moved to stay all proceedings in the Consolidated Derivative Action pending completion of its investigation. Plaintiffs filed their opposition to the motion to stay on March 3, 2020 and the SLC filed its reply on March 13, 2020. Oral argument on the motion to stay has been scheduled for May 12, 2020.

While the SLC’s investigation remains ongoing, the Company does not believe this litigation will have a material impact on its financial position or results of operations.

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. Based on the October 1, 2019 ruling in the Consolidated Derivative Action, on October 22, 2019, the court lifted the stay. The parties participated in a scheduling conference on December 9, 2019, following which the court set the dates for pre-trial conference and trial for March 2, 2021 and March 29, 2021, respectively. On December 23, 2019, the plaintiff filed an amended complaint, and on February 7, 2020, the plaintiff filed a second amended complaint. On February 28, 2020, the defendants moved to dismiss the second amended Guo complaint. The plaintiff filed an opposition to the motion to dismiss on March 20, 2020 and the defendants filed their reply on April 3, 2020.

The Company intends to vigorously defend against the allegations in the second amended Guo complaint, but there can be no assurance that the defense will be successful.

European Patent Opposition

Oppositions were filed in the granted European counterparts of 2 patents in the rucaparib camsylate salt/polymorph patent family. An opposition of European patent 2534153 was filed by 2 opponents on June 20, 2017. The European Patent Office’s Opposition Division held an oral hearing on December 4, 2018, during which it upheld claims, narrowed from the originally granted patent, to certain crystalline forms of rucaparib camsylate, including, but not limited to, rucaparib S-camsylate Form A, the crystalline form in Rubraca. Clovis and 1 opponent, Hexal, appealed the written decision of the European Opposition Division and filed reply appeal briefs in early November 2019. An opposition of European patent 3150610, a divisional patent of European patent 2534153, was filed on April 30, 2020. The divisional patent includes claims directed to use of rucaparib camsylate in a method of inhibiting PARP activity or treating cancer. The grounds of opposition for the divisional patent were lack of novelty, lack of inventive step, added subject matter, and insufficient disclosure – similar grounds on which the parent patent was opposed. It is common for an opponent to raise these grounds in an opposition. During examination, the European Patent Office considers all of these grounds and considered the application to comply with the applicable law when granting the patent. In particular, the novelty and inventive step challenges to the divisional patent are based on prior art references (or closely related disclosures) that were cited by the European patent examiner during prosecution of the application. As part of the proceeding, we have the opportunity to submit further arguments 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 properties of Rubraca, support the patentability of this rucaparib camsylate use patent. We believe a successful challenge of all claims relevant to Rubraca would be difficult. No date for response has yet been set by the European Patent Office and it will be at least September 2020 before a response is due. 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.

27

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, the market acceptance and commercial viability of our approved product, the development of our sales and marketing capabilities, the performance of our clinical trial partners, third party manufacturers and our diagnostic partners, 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, including our ability to confirm clinical benefit of our approved product through confirmatory trials and other post-marketing requirements, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, expectations regarding sales of our products, our results of operations, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate, including our competition 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 supplemented by the risk factors set forth herein, 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. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on From 10-Q, Current Reports on Form 8-K and our website.

Clovis Oncology®, the Clovis logo and Rubraca® are trademarks of Clovis Oncology, Inc. in the United States and in other selected countries. All other brand names or trademarks appearing in this report are the property of their respective holders. Unless the context requires otherwise, references in this report to “Clovis,” the “Company,” “we,” “us” and “our” refer to Clovis Oncology, Inc., together with its consolidated subsidiaries.

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, for those indications that require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.

Our marketed product Rubraca, an oral small molecule inhibitor of poly ADP-ribose polymerase (“PARP”), is marketed in the United States for two indications specific to recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. The initial indication received approval from the FDA in December 2016 and covers the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic)-associated epithelial 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

28

ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The approval in this second, broader and earlier-line indication on a priority review timeline was 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. We hold worldwide rights to Rubraca.

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 conditional approval requires the completion of certain confirmatory post marketing commitments. In January 2019, the European Commission granted a variation to the marketing authorization to include 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. With this approval, Rubraca is now authorized in the EU for certain patients in the recurrent ovarian cancer maintenance setting regardless of their BRCA mutation status. Following successful reimbursement negotiations, we have launched Rubraca in each of Germany, United Kingdom, Italy, France and Spain.

In November 2019, we submitted the supplemental New Drug Application (“sNDA”) for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. On January 15, 2020, we announced that the FDA accepted the sNDA and granted priority review status to the application with a PDUFA date of May 15, 2020. We are actively preparing for the launch of Rubraca in prostate cancer in the U.S., which we will commence upon receipt of FDA approval.

In addition to Rubraca, we have a second product candidate currently in clinical development. Lucitanib is an investigational, 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”). We believe that data for a drug similar to lucitanib that inhibits these same pathways – when combined with a PD-1 inhibitor – represent a scientific rationale for development of lucitanib in combination with a PD-1 inhibitor, and in February 2019, lucitanib was added to our clinical collaboration with Bristol-Myers Squibb Company (“BMS”). Encouraging data of VEGF and PARP inhibitors in combination also supports the evaluation of lucitanib combined with Rubraca. Thus, currently enrolling Phase 1b/2 combination studies involving lucitanib consist of the Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in advanced solid tumors and gynecologic cancers and an arm of the Clovis-sponsored SEASTAR study evaluating lucitanib in combination with Rubraca in advanced solid tumors and ovarian cancer. We hold the global (excluding China) development and commercialization rights for lucitanib.

In September 2019, we entered into a license and collaboration agreement with 3BP to develop a peptide-targeted radionuclide therapy (“PTRT”) and imaging agent targeting fibroblast-activating protein alpha (“FAP”). FAP is highly expressed by cancer-associated fibroblasts found in a majority of tumor types, potentially making it a suitable target across a wide array of solid tumors. PTRT is an emerging class of drugs and it involves the injection of a small amount of radioactive material – a radionuclide – that is combined with a cancer-targeting peptide for use as a targeted radiopharmaceutical. The targeting peptide is able to recognize and bind to specific receptors on the cancer cell, such as antigens and cell receptors. When used in a targeted radiopharmaceutical, the peptide is designed to attach to cancer cells, and the intended result is to deliver a high dose of radiation to the tumor while sparing normal tissue because of its rapid systemic clearance. In order for the targeted radiopharmaceutical to be safe and efficacious, it must rapidly attach to cancer cells or in close vicinity to the cancer cells, be retained in or at the tumor site for a sufficient period of time that the radionuclide can have activity on the cancer cells, have minimal attachment to non-cancer cells and then be rapidly cleared from the body.

Following completion of preclinical work to support an IND application for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286, we plan to conduct global clinical trials. We anticipate submitting the IND in the second half of 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent. We hold U.S. and global rights to FAP-2286, excluding Europe (inclusive of Russia, Turkey and Israel), where 3BP retains rights. We also have agreed with 3BP to collaborate on a discovery program directed to up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.

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

29

candidates and the general and administrative support of these operations. For the three months ended March 31, 2020 and 2019, we have generated $42.6 million and $33.1 million, respectively, in product revenue related to sales of Rubraca.

We have never been profitable and, as of March 31, 2020, we had an accumulated deficit of $2,342.8 million. We incurred net losses of $99.3 million and $86.4 million for the three months ended March 31, 2020 and 2019, respectively. We had cash, cash equivalents and available-for-sale securities totaling $228.4 million at March 31, 2020.

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, convertible senior notes offerings and our financing agreement related to our ATHENA trial. We expect to incur significant losses for the foreseeable future, as we incur costs related to commercial activities associated with Rubraca. Based on our current estimates, we believe that our cash, cash equivalents and available-for-sale securities will allow us to fund activities 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.

License Agreements

Rucaparib

In June 2011, we entered into a license agreement with Pfizer to obtain the exclusive global rights to develop and commercialize Rubraca. 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 Rubraca, 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 the EU, to a date that is 18 months after the date of achievement of such milestones.

On December 19, 2016, Rubraca received its initial FDA approval. This approval resulted in a $0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in an obligation to pay a $20.0 million milestone payment, for which we 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, Rubraca received a second FDA approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in April 2018.

In May 2018, Rubraca received its initial European Commission marketing authorization. This approval resulted in an obligation to pay a $20.0 million milestone payment, which we paid in June 2018.

In January 2019, Rubraca received a second European Commission approval. This approval resulted in an obligation to pay a $15.0 million milestone payment, which we paid in February 2019.

In June 2019, we paid a $0.75 million milestone payment due to the launch of Rubraca as maintenance therapy in Germany in March 2019.

These milestone payments were recognized as intangible assets and are 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 Rubraca and we are responsible for all ongoing development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional $16.0 million in aggregate if

30

specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. We will be required to make a milestone payment to Pfizer related to our expected PDUFA date of May 15, 2020 for our sNDA for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of $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 net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca.

The license agreement with Pfizer will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to Pfizer, determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Pfizer can terminate the agreement, resulting in a loss of our rights to Rubraca and an obligation to assign or license to Pfizer any intellectual property rights or other rights we may have in Rubraca, including our regulatory filings, regulatory approvals, patents and trademarks for Rubraca.

In April 2012, we entered into a license agreement with AstraZeneca to acquire exclusive rights associated with Rubraca 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 Rubraca for the uses claimed by these patents. AstraZeneca also receives royalties on net sales of Rubraca.

Lucitanib

In October 2008, Clovis Oncology Italy S.r.l. entered into an exclusive license agreement with Advenchen to develop 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, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib.

The license agreement with Advenchen will remain in effect until the expiration of all of our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib.

FAP Program

In September 2019, we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement in September 2019, we made a $9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense.

Pursuant to the terms of the FAP agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant.

We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to

31

3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan.

In February 2020, we finalized the terms of a drug discovery collaboration agreement with 3BP to identify up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we will obtain global rights for any resulting product candidates. We are responsible for the costs of all preclinical and clinical development activities conducted under the discovery program, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the discovery and preclinical development phase for each collaboration target. The discovery collaboration agreement was effective December 31, 2019, for which we incurred a $2.1 million technology access fee, which we accrued and recognized as a research and development expense.

Pursuant to the terms of the discovery collaboration agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP a 6% royalty on net sales of License Products (as defined in the agreement), based on the volume of quarterly net sales achieved.

We are obligated under the discovery collaboration agreement to use diligent efforts to develop and commercialize the product candidates, if any, that result from the discovery program, and we are responsible for all clinical development and commercialization costs. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights.

Pursuant to terms of each of our product license agreements, we will pay royalties to our licensors on sales, if any, of the respective products.

Financial Operations Overview

Revenue

Product revenue is derived from sales of our product, Rubraca, in the United States and Europe. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell 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, “variable considerations”). Revenue from product sales are recognized when customers obtain control of our product, which occurs at a point in time, typically upon delivery to the customers. For further discussion of our revenue recognition policy, see Note 2, Summary of Significant Accounting Polices in the Revenue Recognition section.

In the three months ended March 31, 2020, we recorded product revenue of $42.6 million related to sales of Rubraca. 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, Europe 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 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. For the three months ended March 31, 2020, the supply of this free drug was approximately 12% of the overall commercial supply or the equivalent of $5.6 million in commercial value.

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Our product revenues through the quarter ended March 31, 2020 were not impacted by the effects of the coronavirus (COVID-19) pandemic. However, the effects of the COVID-19 pandemic are difficult to assess or predict and we may see some impact on near-term revenues. As a result of the COVID-19 pandemic, our sales force has had physical access to hospitals, clinics, doctors and pharmacies curtailed, which may have a material adverse effect on our future sales as this is the primary means by which we sell product. While digital tools are available to our field employees to facilitate remote meetings with healthcare providers, we cannot ensure that these methods will be effective. Additionally, patients who might be currently using Rubraca, or might otherwise be eligible to use our products, may be unable to meet with their healthcare providers in person, which may reduce the number of prescription refills or new patient starts, affecting our revenues from Rubraca both in our currently approved ovarian cancer indications, as well as impacting our anticipated launch in BRCA-mutant metastatic castration-resistant prostate cancer, if approved.

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.

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 and Comprehensive Loss as acquired in-process research and development;
employee-related expenses, including salaries, benefits, travel and share-based compensation expense;
expenses incurred under agreements with contract research organizations (“CROs”) 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 sales and marketing and medical affairs organization in preparation for commercial launch of Rubraca; 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. Our research and development expenses increased in the three months ended March 31, 2020 compared to the same period in the prior year. We expect research and development costs to be lower in the full year 2021 compared to full year 2020.

Although we did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the three months ended March 31, 2020, we could see disruption during the remainder of 2020 and into 2021. Since March 31, 2020, we have seen a slight decrease in the rate of enrollment in ATHENA, our largest clinical trial. For the BMS-sponsored Phase 1/2 study CheckMate 79X, which is planned to evaluate multiple combinations of nivolumab with other therapies, including an arm with lucitanib in patients with second-line non-small cell lung cancer, start up activities are proceeding per regulatory guidelines for clinical trial conduct during COVID-19. Additionally, we may slow or delay enrollment in certain trials to manage expenses.

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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):

Three months ended March 31, 

    

2020

    

2019

 

Rucaparib Expenses

Research and development

 

$

41,730

$

38,152

Rucaparib Total

 

41,730

 

38,152

FAP Expenses

Research and development

 

$

995

$

FAP Total

 

995

 

Lucitanib Expenses

Research and development

 

1,496

 

320

Lucitanib Total

 

1,496

 

320

Rociletinib Expenses

Research and development

68

351

Rociletinib Total

 

68

 

351

Personnel and other expenses

 

23,932

 

23,208

Total

$

68,221

$

62,031

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 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. As a result of the COVID-19 pandemic, our sales force has had physical access to hospitals, clinics, doctors and pharmacies curtailed, which may decrease sales and marketing expenses during the remainder of 2020 and possibly extending to 2021. In addition, due to increased travel restrictions, quarantines, “work-at-home” and “shelter-in-place” orders and extended shutdown of certain non-essential business in the United States, and European and Asia-Pacific countries, in-person conferences and meetings requiring travel will decrease resulting in a decrease of our selling, general and administrative expenses.

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.

Other Income and Expense

Other income and expense is primarily comprised of foreign currency gains and losses resulting from transactions with CROs, investigative 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, revenue and related disclosures. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue, intangible asset impairment, clinical trial accruals and share-based compensation

34

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, 2019. Other than the adoption of the new credit losses standard discussed in Note 2, Summary of Significant Accounting Policies, there have not been any material changes to our critical accounting policies since December 31, 2019.

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.

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 March 31, 2020 and 2019:

The following table summarizes the results of our operations for the three months ended March 31, 2020 and 2019 (in thousands):

Change

Three months ended March 31, 

Favorable/(Unfavorable)

    

2020

    

2019

    

$

    

%

 

Revenues:

 

 

 

Product revenue

$

42,564

$

33,118

$

9,446

29

%

Operating expenses:

 

 

 

Cost of sales - product

9,096

7,405

(1,691)

(23)

%

Cost of sales - intangible asset amortization

1,212

1,120

(92)

(8)

%

Research and development

 

68,221

 

62,031

 

(6,190)

(10)

%

Selling, general and administrative

 

42,598

 

47,761

 

5,163

11

%

Other operating expenses

3,449

(3,449)

(100)

%

Total expenses

 

124,576

 

118,317

 

(6,259)

(5)

%

Operating loss

 

(82,012)

 

(85,199)

 

3,187

4

%

Other income (expense):

 

 

 

Interest expense

 

(9,561)

 

(3,590)

 

(5,971)

(166)

%

Foreign currency loss

 

(877)

 

(192)

 

(685)

(357)

%

Loss on convertible senior notes conversion

(7,791)

(7,791)

(100)

%

Other income

 

841

 

2,400

 

(1,559)

(65)

%

Other income (expense), net

 

(17,388)

 

(1,382)

 

(16,006)

(1,158)

%

Loss before income taxes

 

(99,400)

 

(86,581)

 

(12,819)

(15)

%

Income tax benefit

 

68

 

160

 

(92)

(58)

%

Net loss

 

$

(99,332)

 

$

(86,421)

 

$

(12,911)

(15)

%

Product Revenue. Product revenue for the three months ended March 31, 2020 increased compared to the same period in the prior year primarily due to continued growth in sales of Rubraca, which is approved for sale in the United States and Europe markets. Following successful reimbursement negotiations, we have launched Rubraca in each of Germany, United Kingdom, Italy, France and Spain. Product revenue is recorded net of variable considerations comprised of rebates, chargebacks and other discounts. Product revenue for the three months ended March 31, 2020 was $39.3 million in the United States and $3.3 million outside of the United States. Variable considerations represented

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22.6% and 14.0% of the transaction price recognized in the three months ended March 31, 2020 and 2019, respectively. This increase is primarily due to coverage gap rebates and PHS chargebacks and our launch of Rubraca in Europe. In addition, beginning in January 2020, we began providing payor rebates, which represented approximately 4% of the total variable considerations for the three months ended March 31, 2020. Amounts are summarized as follows:

Three months ended

Three months ended

    

March 31, 2020

March 31, 2019

$

    

% of Gross Sales

$

    

% of Gross Sales

(in thousands)

(in thousands)

Transaction price

 

$

54,963

100.0%

$

38,530

100.0%

Variable considerations:

Government rebates and chargebacks

 

8,583

15.6%

3,388

8.8%

Discounts and fees

3,816

6.9%

2,024

5.3%

Total variable considerations

 

12,399

22.6%

5,412

14.0%

Product revenue

 

$

42,564

77.4%

$

33,118

86.0%

Cost of Sales – Product. Product cost of sales for the three months ended March 31, 2020 increased compared to the same period in the prior year primarily due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.

Cost of Sales – Intangible Asset Amortization. In the three months ended March 31, 2020 and 2019, we recognized cost of sales of $1.2 million and $1.1 million, respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and the European Commission.

Research and Development Expenses. Research and development expenses increased during the three months ended March 31, 2020 compared to the same period in the prior year primarily due to higher research and development costs for Rubraca. We have increased costs related to our ATHENA combination study with Bristol-Myers Squibb Company’s immunotherapy OPDIVO for ovarian cancer.

Clinical trial costs for lucitanib were $1.2 million higher than the three months ended March 31, 2019 primarily due to increase enrollment in our Phase 1b/2 studies. In addition, we incurred $1.0 million for FAP-2286 as we have begun to pursue a clinical development program in multiple tumor types.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased during the three months ended March 31, 2020 compared to the same period in the prior year primarily due to decreased commercialization activities for Rubraca and the decrease in costs associated with European commercialization. This includes a decrease of $4.8 million in marketing costs.

Other Operating Expenses. During the three months ended March 31, 2020, we recognized other operating expenses related to our dedicated production train at Lonza.

Interest Expense. Interest expense increased during the three months ended March 31, 2020 compared to the same period in the prior year primarily due to the issuance of the 2024 Notes in August 2019 and the May 2019 financing agreement related to our ATHENA trial. In addition, our convertible senior notes conversion resulted in the write off of $3.6 million of unamortized debt issuance costs, which was recorded as interest expense.

Loss on Convertible Senior Notes Conversion. In January 2020, we completed a registered direct offering of an aggregate 17,777,679 shares of our common stock at a price of $9.25 per share to a limited number of holders of our 2024 Notes. We used the proceeds of the share offering to repurchase from such holders an aggregate of $123.4 million principal amount of 2024 Notes in privately negotiated transactions. In addition, we paid customary fees and expenses in connection with the transactions. This transaction resulted in a loss of $7.8 million for the three months ended March 31, 2020.

Other Income. Other income decreased during the three months ended March 31, 2020 compared to the same period in the prior year due to interest income earned on our available-for-sale securities.

36

Liquidity and Capital Resources

To date, 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, convertible senior notes offering and our financing agreement related to our ATHENA trial. At March 31, 2020, we had cash, cash equivalents and available-for-sale securities totaling $228.4 million.

The following table sets forth the primary sources and uses of cash for the three months ended March 31, 2020 and 2019 (in thousands):

Three months ended March 31, 

    

2020

    

2019

 

Net cash used in operating activities

$

(82,494)

$

(98,451)

Net cash provided by (used in) investing activities

 

69,807

 

(1,146)

Net cash provided by financing activities

 

14,644

 

1,093

Effect of exchange rate changes on cash and cash equivalents

 

(481)

 

(64)

Net increase (decrease) in cash and cash equivalents

$

1,476

$

(98,568)

Operating Activities

Net cash used in operating activities 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 lower during the three months ended March 31, 2020 compared to the same period in the prior year primarily due to a higher net loss, decreased by the non-cash write-off of debt issuance costs and loss related to the convertible senior notes conversion. In addition, there was a reduction in payments made for inventory during the quarter.

Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2020 included sales of available-for-sale securities of $79.8 million partially offset by purchases of available-for-sale securities of $10.0 million. Net cash used in investing activities in the same period in the prior year included purchases of available-for-sale securities of $138.4 million and a milestone payment of $15.0 million, offset by cash from sales of available-for-sale securities of $153.5 million.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2020 included proceeds of $163.9 million from the issuance of common stock, offset by the payment of our 2024 Notes. In addition, we had $15.6 million proceeds from borrowings under our financing agreement.

Operating Capital Requirements

In the United States, Rubraca is approved by the FDA for two indications for patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. In the EU, Rubraca is approved by the EMA for two indications for patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer. 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.

As of March 31, 2020, we had cash, cash equivalents and available-for-sale securities totaling $228.4 million and total current liabilities of $122.2 million.

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;

37

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.

The trading prices for our common stock and of other biopharmaceutical companies have been highly volatile as a result of the coronavirus pandemic. As a result of this volatility and uncertainties regarding future impact of COVID-19 on our business and operations, we may face difficulties raising capital or which may be on unfavorable terms. In April 2020, we entered into a privately negotiated exchange agreement with a holder (“Holder”) of our 2021 Notes, pursuant to which we issued to such Holder of the 2021 Notes approximately $36.1 million in aggregate principal amount (the “Additional 2024 Notes”) of our currently outstanding 2024 Notes in exchange for approximately $32.8 million in aggregate principal of 2021 Notes held by such Holder (the “Exchange Transaction”). We did not receive any cash proceeds from the Exchange Transaction. In May 2020, $24.3 million in principal amount of 2024 Notes were converted into 3,331,047 shares of our common stock at the conversion rate of 137.2213 shares per $1,000 in principal amount of 2024 Notes. 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.

Impact of COVID-19 Pandemic

Our product revenues through the quarter ended March 31, 2020 were not impacted by the effects of the coronavirus pandemic. However, the effects of the COVID-19 pandemic are difficult to assess or predict and we may see some impact on near-term revenues. As a result of the COVID-19 pandemic, our sales force has had physical access to hospitals, clinics, doctors and pharmacies curtailed, which may have a material adverse effect on our future sales as this is the primary means by which we sell product. Our European launches in Italy, Spain and France occurred in an environment in which our field-based personnel in those countries have not been allowed to visit hospitals since as early as late February. This curtailment of physical access may also decrease sales and marketing expenses during the remainder of 2020 and possibly extending to 2021. In addition, due to increased travel restrictions, quarantines, “work-at-home” and “shelter-in-place” orders and extended shutdown of certain non-essential business in the United States, and European and Asia-Pacific countries, in-person conferences and meetings requiring travel will decrease, resulting in a decrease of our selling, general and administrative expenses. We believe that we have sufficient supply of Rubraca and our product candidates to continue our commercial and clinical operations as planned.

Although we did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the three months ended March 31, 2020, we may see disruption during the remainder of 2020 and into 2021. For example, new patient recruitment in certain clinical studies may be affected and the conduct of clinical trials may vary by geography as some regions are more adversely affected. Since March 31, 2020, we have seen a slight decrease in the rate of enrollment in ATHENA, our largest clinical trial, although we continue to anticipate completing enrollment before the end of the second quarter of 2020. For the BMS-sponsored Phase 1/2 study CheckMate 79X, which is planned to evaluate multiple combinations of nivolumab with other therapies, including an arm with lucitanib in patients with second-line non-small cell lung cancer, start up activities are proceeding per regulatory guidelines for clinical trial conduct during COVID-19. Additionally, we may slow or delay enrollment in certain trials to manage expenses.

On March 18, 2020, the Families First Coronavirus Response Act (“FFCR Act”), and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. We are currently evaluating the impact of this legislation, but at present do not expect that the income tax provisions would result in a material cash benefit to us. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the Tax Cuts and Jobs Act) remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could impact us.

The trading prices for our common stock and of other biopharmaceutical companies have been highly volatile as a result of the coronavirus pandemic. As a result of this volatility and uncertainties regarding future impact of COVID-19

38

on our business and operations, we may face difficulties raising capital or may only be able to raise capital on unfavorable terms.

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 2019 Annual Report on Form 10-K. For further information regarding our contractual obligations and commitments, see Note 15, 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 March 31, 2020, we had cash, cash equivalents and available-for-sale securities of $228.4 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, investigative 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 Lonza, a Swiss company, for the long-term manufacture and supply of the API 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 train became operational in October 2018, we became obligated to pay a fixed facility fee each quarter for the duration of the agreement, which expires on December 31, 2025.

As of March 31, 2020, $76.7 million of purchase commitments exist under the Manufacturing and Services Agreement, which includes the fixed facility fee noted above, 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 March 31, 2020, it would decrease the total US dollar purchase commitment under the Manufacturing and Services Agreement by $11.9 million. Similarly, a 10% weakening of the US dollar compared to the Swiss franc would increase the total US dollar purchase commitment by $2.5 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 currency are recorded based on exchange rates at the time such transactions arise. As of March 31, 2020 and December 31, 2019, approximately 3% and 4%, respectively, of our total liabilities were denominated in currencies other than the functional currency.

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 Chief Finance 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 Chief Finance Officer, management performed an evaluation as of March 31, 2020 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

39

Executive Officer and Chief Finance Officer concluded that, as of March 31, 2020, 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 March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

40

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Rociletinib-Related Litigation

Following Clovis’ regulatory announcement in November 2015 of adverse developments in its ongoing clinical trials for rociletinib, Clovis and certain of its current and former executives were named in various securities lawsuits, the largest of which was a putative class action lawsuit in the District of Colorado (the “Medina Action”) which was settled on October 26, 2017 (the “Medina Settlement”). The remaining actions are discussed below.

   

In March 2017, two putative shareholders of the Company, 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 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 motion to dismiss on September 26, 2017.

While the motion to dismiss remained pending, on November 19, 2018, Plaintiffs filed a motion for leave to file a supplemental consolidated complaint, and on November 20, 2018, the Court granted that motion. On November 27, 2018, Plaintiffs filed their supplemental complaint (the “Supplemental Derivative Complaint”), which adds allegations concerning the Company’s, Mr. Mahaffy’s and Mr. Mast’s settlements with the United States Securities and Exchange Commission. Pursuant to a briefing schedule entered by the Court, the defendants filed a supplemental motion to dismiss the Supplemental Derivative Complaint on February 6, 2019; plaintiffs filed an opposition brief on February 22, 2019; and the defendants filed a reply brief on March 5, 2019. The Court held oral arguments on the defendants’ motions to dismiss on June 19, 2019. At the oral arguments, the Court ordered the parties to submit supplemental letter briefs on the motion to dismiss.

 

On October 1, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Chancery Court, issued a Memorandum Opinion granting in part and denying in part defendants’ motions to dismiss. The Supplemental Derivative Complaint was dismissed as to Plaintiffs’ derivative claims for unjust enrichment and insider trading. The Court allowed Plaintiffs’ remaining derivative claim for breach of fiduciary duty to proceed. Defendants filed an answer to the Supplemental Derivative Complaint on December 27, 2019.

On December 17, 2019, the parties participated in a mediation, which did not result in a settlement. On December 22, 2019, the Company’s board of directors formed a Special Litigation Committee (the “SLC”) to conduct an investigation of the claims asserted in the Supplemental Derivative Complaint. On February 18, 2020, the SLC moved to stay all proceedings in the Consolidated Derivative Action pending completion of its investigation. Plaintiffs filed their opposition to the motion to stay on March 3, 2020 and the SLC filed its reply on March 13, 2020. Oral argument on the motion to stay has been scheduled for May 12, 2020.

While the SLC’s investigation remains ongoing, the Company does not believe this litigation will have a material impact on its financial position or results of operations.

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

41

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. Based on the October 1, 2019 ruling in the Consolidated Derivative Action, on October 22, 2019, the court lifted the stay. The parties participated in a scheduling conference on December 9, 2019, following which the court set the dates for pre-trial conference and trial for March 2, 2021 and March 29, 2021, respectively. On December 23, 2019, the plaintiff filed an amended complaint, and on February 7, 2020, the plaintiff filed a second amended complaint. On February 28, 2020, the defendants moved to dismiss the second amended Guo complaint. The plaintiff filed an opposition to the motion to dismiss on March 20, 2020 and the defendants filed their reply on April 3, 2020.

The Company intends to vigorously defend against the allegations in the second amended Guo complaint, but there can be no assurance that the defense will be successful.

   

European Patent Opposition

Oppositions were filed in the granted European counterparts of two patents in the rucaparib camsylate salt/polymorph patent family. An opposition of European patent 2534153 was filed by two opponents on June 20, 2017. The European Patent Office’s Opposition Division held an oral hearing on December 4, 2018, during which it upheld claims, narrowed from the originally granted patent, to certain crystalline forms of rucaparib camsylate, including, but not limited to, rucaparib S-camsylate Form A, the crystalline form in Rubraca. Clovis and one opponent, Hexal, appealed the written decision of the European Opposition Division and filed reply appeal briefs in early November 2019. An opposition of European patent 3150610, a divisional patent of European patent 2534153, was filed on April 30, 2020. The divisional patent includes claims directed to use of rucaparib camsylate in a method of inhibiting PARP activity or treating cancer. The grounds of opposition for the divisional patent were lack of novelty, lack of inventive step, added subject matter, and insufficient disclosure – similar grounds on which the parent patent was opposed. It is common for an opponent to raise these grounds in an opposition. During examination, the European Patent Office considers all of these grounds and considered the application to comply with the applicable law when granting the patent. In particular, the novelty and inventive step challenges to the divisional patent are based on prior art references (or closely related disclosures) that were cited by the European patent examiner during prosecution of the application. As part of the proceeding, we have the opportunity to submit further arguments 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 properties of Rubraca, support the patentability of this rucaparib camsylate use patent. We believe a successful challenge of all claims relevant to Rubraca would be difficult. No date for response has yet been set by the European Patent Office and it will be at least September 2020 before a response is due. 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.

ITEM 1A.

RISK FACTORS

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, 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 were no material changes to the risk factors included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2019, other than as highlighted below in connection with the COVID-19 pandemic.

42

Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may negatively impact our business.

The outbreak of the coronavirus (COVID-19) could materially adversely affect our business.

On January 30, 2020, the World Health Organization (the “WHO”) declared that the recent novel coronavirus disease (COVID-19) outbreak was a public health emergency of international concern, and on March 11, 2020 the WHO declared the COVID-19 outbreak a pandemic. This has resulted in increased travel restrictions, quarantines, “work-at-home” and “shelter-in-place” orders and extended shutdown of certain non-essential businesses in the United States, and European and Asia-Pacific countries, including countries in which we commercialize Rubraca and countries in which we have planned or active clinical trials. With a continuing rise in the number of cases of the coronavirus in the United States and throughout Europe, these restrictions, quarantines, shutdowns and other disruption to businesses globally have also increased. The effects of the coronavirus are difficult to assess or predict and we anticipate that the outbreak will likely have a significant impact on our business.

The outbreak of COVID-19 has had a major impact on the financial markets, the global economy or the economies of particular countries or regions. Specifically, the COVID-19 outbreak could result in reduced operations of third-party manufacturers upon whom we rely, disrupt our supply chain, or otherwise limit our ability to obtain sufficient materials to manufacture Rubraca and our product candidates. While we believe that we have sufficient supply of Rubraca and our product candidates to continue our commercial and clinical operations as planned, Rubraca and our product candidates, or materials contained therein, come from facilities located in areas impacted by COVID-19 or that may be impacted, as the COVID-19 outbreak or its disruption worsens. If any third party in our supply or distribution chain for materials or finished product are adversely impacted by restrictions resulting from the COVID-19 outbreak, including staffing shortages, production slowdowns and disruptions in delivery systems, our supply chain may be disrupted, limiting our ability to manufacture and distribute Rubraca for commercial sales and our product candidates for our clinical trials and research and development operations. There is no guarantee that the recent COVID-19, or any potential future, outbreak would not impact our future supply chain, which could have a material adverse impact on our clinical trial plans and business operations. 

Our sales force has had physical access to hospitals, clinics, doctors and pharmacies curtailed, which may have a material adverse effect on our future sales. While digital tools are available to our field employees to facilitate remote meetings with healthcare providers, we cannot ensure that these methods will be effective. Additionally, patients who might be currently using Rubraca, or might otherwise be eligible to use our products, may be unable to meet with their healthcare providers in person, which may reduce the number of prescription refills or new patient starts, affecting our revenues from Rubraca both in our currently approved ovarian cancer indications, as well as impacting our anticipated launch in BRCA-mutant metastatic castration-resistant prostate cancer, if approved.

Furthermore, our clinical trials may be affected by the COVID-19 outbreak. Although we did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the three months ended March 31, 2020, we could see material disruption during the remainder of 2020 and into 2021. Since March 31, 2020, we have seen a slight decrease in the rate of enrollment in ATHENA, our largest clinical trial. For the BMS-sponsored Phase 1/2 study CheckMate 79X, which is planned to evaluate multiple combinations of nivolumab with other therapies, including an arm with lucitanib in patients with second-line non-small cell lung cancer, start up activities are proceeding per regulatory guidelines for clinical trial conduct during COVID-19. As the outbreak persists in countries in which we conduct or plan to conduct our clinical trials, activities such as site initiation, patient enrollment, trial data collection, and site monitoring visits may be delayed or stalled due to travel and access restrictions, diversion of healthcare resources toward the COVID-19 outbreak, which we have already started to see in certain of our trial sites, patient or staff unwillingness to visit hospitals and clinics and participate in our trials, or quarantines and other restrictions that may impede patient or staff movement and study drug availability at trial sites, interrupt healthcare services or otherwise prevent patient compliance with clinical trial protocols. Additionally, we may slow or delay enrollment in certain trials to manage expenses.

In addition, COVID-19 could affect our employees, our agents and their employees or the employees of companies with which we do business, thereby disrupting our business operations. We have implemented work-at-home policies and may experience limitations in employee resources. Our increased reliance on personnel working from home may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. In addition, this could increase our cyber security risk, create data accessibility concerns, and make us more susceptible to communication

43

disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, manufacturing sites, research or clinical trial sites and other important agencies and contractors.

On March 18, 2020, the Families First Coronavirus Response Act (“FFCR Act”), and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. We are currently evaluating the impact of this legislation, but at present do not expect that the income tax provisions would result in a material cash benefit to us. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the Tax Cuts and Jobs Act) remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could impact us.

The trading prices for our common stock and of other biopharmaceutical companies have been highly volatile as a result of the coronavirus pandemic. As a result, we may face difficulties raising capital or which may be on unfavorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common stock. A number of governments in places where we have operations have adopted stimulus programs to assist businesses effected by COVID-19, including by facilitating lending arrangements. We may access these loan programs for additional working capital although there can be no guarantee that we will obtain any such loans and we do not currently know the terms of such loan programs.

The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of the coronavirus COVID-19 could have a material impact on the losses we experience. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

INDEX TO EXHIBITS

o

Exhibit

Number

Exhibit Description

3.1(5)

Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc.

3.2(19)

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Clovis Oncology, Inc.

3.3(5)

Amended and Restated Bylaws of Clovis Oncology, Inc.

44

3.4(22)

Amendment No. 1 to the Amended and Restated Bylaws of Clovis Oncology, Inc.

4.1(3)

Form of Common Stock Certificate of Clovis Oncology, Inc.

4.2(7)

Indenture dated as of September 9, 2014, by and between the Company and The Bank of New York Mellon Trust Company, N.A.

4.3(14)

Indenture dated as of April 19, 2018, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee

4.4(14)

First Supplemental Indenture dated as of April 19, 2018, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A.

4.5(20)

Indenture dated as of August 13, 2019, by and between Clovis Oncology, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee

4.6 (21)

Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

10.1*(4)

License Agreement, dated as of June 2, 2011, by and between Clovis Oncology, Inc. and Pfizer Inc.

10.2+(1)

Clovis Oncology, Inc. 2009 Equity Incentive Plan.

10.3+(4)

Clovis Oncology, Inc. 2011 Stock Incentive Plan.

10.4+(1)

Form of Clovis Oncology, Inc. 2009 Equity Incentive Plan Stock Option Agreement.

10.5+(4)

Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan Stock Option Agreement.

10.6+(3)

Employment Agreement, dated as of August 24, 2011, by and between Clovis Oncology, Inc. and Patrick J. Mahaffy.

10.7+(3)

Employment Agreement, dated as of August 24, 2011, by and between Clovis Oncology, Inc. and Gillian C. Ivers-Read.

10.8+(1)

Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Paul Klingenstein.

10.9+(1)

Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and James C. Blair.

10.10+(1)

Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Edward J. McKinley.

10.11+(1)

Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Thorlef Spickschen.

10.12+(1)

Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and M. James Barrett.

10.13+(1)

Indemnification Agreement, dated as of May 15, 2009, between Clovis Oncology, Inc. and Brian G. Atwood.

45

10.14+(1)

Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Patrick J. Mahaffy.

10.15+(1)

Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Erle T. Mast.

10.16+(1)

Indemnification Agreement, dated as of May 12, 2009, between Clovis Oncology, Inc. and Gillian C. Ivers-Read.

10.17+(15)

Clovis Oncology, Inc. 2011 Employee Stock Purchase Plan, as amended.

10.18+(4)

Clovis Oncology, Inc. 2011 Cash Bonus Plan.

10.19+(2)

Indemnification Agreement, dated as of June 13, 2013, between Clovis Oncology, Inc. and Ginger L. Graham.

10.20+(2)

Indemnification Agreement, dated as of June 13, 2013, between Clovis Oncology, Inc. and Keith Flaherty.

10.21(6)

Stock Purchase Agreement, dated as of November 19, 2013, by and among the Company, EOS, the Sellers listed on Exhibit A thereto and Sofinnova Capital V FCPR, acting in its capacity as the Sellers’ Representative.

10.22*(6)

Development and Commercialization Agreement, dated as of October 24, 2008, by and between Advenchen Laboratories LLC and Ethical Oncology Science S.P.A., as amended by the First Amendment, dated as of April 13, 2010 and the Second Amendment, dated as of July 30, 2012.

10.23+(10)

Indemnification Agreement, effective as of August 3, 2015, between Clovis Oncology, Inc. and Lindsey Rolfe.

10.24+(17)

Amended and Restated Employment Agreement, dated as of February 27, 2019, by and between Clovis Oncology, Inc. and Clovis Oncology UK Limited and Dr. Lindsey Rolfe.

10.25+(8)

Indemnification Agreement, dated as of February 17, 2016, between Clovis Oncology, Inc. and Daniel W. Muehl.

10.26+(13)

Employment Agreement, dated as of July 6, 2017, by and between Clovis Oncology, Inc. and Daniel W. Muehl.

10.27*(9)

First Amendment to License Agreement, between Clovis Oncology, Inc. and Pfizer Inc., dated as of August 30, 2016.

10.28+(11)

Form of Clovis Oncology, Inc. 2011 Stock Incentive Plan RSU Agreement.

10.29*(11)

Manufacturing Services Agreement, by and between Clovis Oncology, Inc. and Lonza Ltd, dated as of October 3, 2016.

10.30*(12)

Strata Trial Collaboration Agreement, by and between Clovis Oncology, Inc. and Strata Oncology, Inc., dated as of January 30, 2017

46

10.31+(16)

Indemnification Agreement, dated as of October 11, 2018, between Clovis Oncology, Inc. and Robert W. Azelby.

10.32+(16)

Indemnification Agreement, dated as of October 11, 2018, between Clovis Oncology, Inc. and Richard A. Fair.

10.33+(17)

Employment Agreement, dated as of July 6, 2017, by and between Clovis Oncology, Inc. and Paul Gross.

10.34+(17)

Indemnification Agreement, dated as of September 9, 2016, by and between Clovis Oncology, Inc. and Paul Gross.

10.35(18)

Financing Agreement, dated as of May 1, 2019 among Clovis Oncology, Inc., certain subsidiaries of its subsidiaries named therein, as Guarantors, the Lenders from time to time party thereto, and the Administrative Agent party thereto.

10.36(18)

Pledge and Security Agreement, dated as of May 1, 2019 among each of the Grantors party thereto and the Administrative Agent party thereto.

21.1(15)

List of Subsidiaries of Clovis Oncology, Inc.

31.1

Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

Certification of principal executive officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of principal financial officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following materials from Clovis Oncology, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) the Consolidated Statements of Operations and Comprehensive Loss, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flows and (v) Notes to Unaudited Consolidated Financial Statements.

104

The cover page from Clovis Oncology, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 is formatted in iXBRL.

(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 Current Report on Form 8-K (File No. 001-35347) on November 19, 2013.
(7)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on September 9, 2014.
(8)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 1, 2016.

47

(9)Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on November 4, 2016.
(10)Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 29, 2016.
(11)Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 23, 2017.
(12)Filed as an exhibit with the Registrant’s Quarterly Report on Form 10-Q on May 4, 2017.
(13)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on July 7, 2017.
(14)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 19, 2018.
(15)Filed as an exhibit with the Registrant’s Current Report on Form 10-Q on August 2, 2018.
(16)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on October 12, 2018.
(17)Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 28, 2019.
(18)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on May 2, 2019.
(19)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on June 6, 2019.
(20)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on August 13, 2019.
(21)Filed as an exhibit with the Registrant’s Annual Report on Form 10-K on February 26, 2020.
(22)Filed as an exhibit with the Registrant’s Current Report on Form 8-K (File No. 001-35347) on April 16, 2020.

+     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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SIGNATURES

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.

Date: May 6, 2020

CLOVIS ONCOLOGY, INC.

 

By:

  

/s/ PATRICK J. MAHAFFY

 

Patrick J. Mahaffy

 

President and Chief Executive Officer; Director

 

By:

  

/s/ DANIEL W. MUEHL

 

Daniel W. Muehl

 

Executive Vice President and Chief Finance Officer

49