fprx-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 June 30, 2018

or

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

For the transition period from                      to                      

Commission File Number: 001-36070

 

Five Prime Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-0038620

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

111 Oyster Point Boulevard

South San Francisco, California 94080

(415) 365-5600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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  

As of August 1, 2018, the number of outstanding shares of the registrant’s common stock was 35,579,111.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION

  

4

 

  

 

Item 1.

  

Unaudited Financial Statements

  

4

 

  

 

  

 

Condensed Balance Sheets as of June 30, 2018 and December 31, 2017

  

4

 

  

 

  

 

Condensed Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017

  

5

 

  

 

  

 

Condensed Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017

  

6

 

  

 

  

 

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

  

7

 

  

 

  

 

Notes to Condensed Financial Statements

  

8

 

  

Item 2.

  

 

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

  

18

 

  

Item 3.

  

 

Quantitative and Qualitative Disclosures About Market Risk

  

28

 

  

Item 4.

  

 

Controls and Procedures

  

28

PART II.

  

 

OTHER INFORMATION

  

29

 

  

Item 1.

  

 

Legal Proceedings

  

29

 

  

Item 1A.

  

 

Risk Factors

  

29

 

  

Item 6.

  

 

Exhibits

  

58

 

Signatures

  

59

In this report, unless otherwise stated or the context otherwise indicates, references to “Five Prime,” “the company,” “we,” “us,” “our” and similar references refer to Five Prime Therapeutics, Inc. The Five Prime logo and RIPPS® are our registered trademarks. This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include statements concerning the following:

 

our estimates regarding our expenses, revenues, anticipated capital requirements and our needs for additional financing;

 

our receipt of future milestone payments or royalties, and the timing of such payments;

 

the ability of us or our partners to timely advance drug candidates into and through clinical data readouts and successful completion of clinical trials;

 

the timing, progress and results of preclinical studies and research and development programs;

 

our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;

 

the implementation, timing and likelihood of success of our plans to develop companion diagnostics for our product candidates;

 

our ability to establish and maintain collaborations and necessary licenses;

 

the implementation of our business model and strategic plans for our business, product candidates and technology;

 

the scope of protection we establish and maintain for intellectual property rights covering our product candidates and technology;

 

the size of patient populations targeted by products we or our partners develop and market adoption of such products by physicians and patients;

 

the timing or likelihood of regulatory filings and approvals for products we or our partners develop;

 

the ability to negotiate adequate reimbursement and pricing for our drug candidates by third parties and government authorities;

 

developments relating to our competitors and our industry; and

 

our expectations regarding licensing, acquisitions and strategic operations.

These forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by such statements. We discuss many of these risks in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements in this report, whether as a result of new information, future events or otherwise, after the date of this report.

We obtained the industry, market and competitive position data in this Quarterly Report on Form 10-Q from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. While we believe that the information in each of these publications, surveys and studies is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal estimates and research are reliable and the market definitions we use are appropriate, such estimates, research and definitions have not been verified by any independent source.

 

 

 

3


 

PART I. FINANCIAL INFORMATION

 

Item 1. Unaudited Financial Statements

FIVE PRIME THERAPEUTICS, INC.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(Unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

52,785

 

 

$

59,790

 

Marketable securities

 

299,981

 

 

 

232,900

 

Receivables from collaborative partners

 

2,711

 

 

 

13,133

 

Prepaid and other current assets

 

7,544

 

 

 

5,367

 

Total current assets

 

363,021

 

 

 

311,190

 

Restricted cash

 

1,543

 

 

 

1,543

 

Property and equipment, net

 

30,026

 

 

 

30,762

 

Other long-term assets

 

2,188

 

 

 

552

 

Total assets

$

396,778

 

 

$

344,047

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,466

 

 

$

2,237

 

Accrued personnel-related expenses

 

5,119

 

 

 

7,156

 

Other accrued liabilities

 

17,932

 

 

 

27,519

 

Deferred revenue, current portion

 

3,350

 

 

 

12,713

 

Deferred rent, current portion

 

1,356

 

 

 

1,356

 

Total current liabilities

 

30,223

 

 

 

50,981

 

Deferred revenue, long-term portion

 

10,806

 

 

 

10,223

 

Deferred rent, long-term portion

 

18,891

 

 

 

17,641

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized, 35,566,516

   issued and 34,450,453 outstanding at June 30, 2018. 28,982,056 issued and

   28,178,639 outstanding at December 31, 2017

 

34

 

 

 

28

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and

   outstanding

 

 

 

 

 

Additional paid-in capital

 

545,885

 

 

 

421,257

 

Accumulated other comprehensive loss

 

(378

)

 

 

(476

)

Accumulated deficit

 

(208,683

)

 

 

(155,607

)

Total stockholders' equity

 

336,858

 

 

 

265,202

 

Total liabilities and stockholders' equity

$

396,778

 

 

$

344,047

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

4


 

FIVE PRIME THERAPEUTICS, INC.

Condensed Statements of Operations

(In thousands, except per share amounts)

 (Unaudited)

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

 

Collaboration revenue

$

7,580

 

 

$

7,822

 

 

 

$

40,066

 

 

$

17,957

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

33,380

 

 

 

41,744

 

 

 

 

76,932

 

 

 

75,504

 

 

General and administrative

 

9,782

 

 

 

9,363

 

 

 

 

20,260

 

 

 

19,849

 

 

Total operating expenses

 

43,162

 

 

 

51,107

 

 

 

 

97,192

 

 

 

95,353

 

 

Loss from operations

 

(35,582

)

 

 

(43,285

)

 

 

 

(57,126

)

 

 

(77,396

)

 

Interest income

 

1,522

 

 

 

702

 

 

 

 

2,681

 

 

 

1,370

 

 

Other loss, net

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

Loss before income tax

 

(34,060

)

 

 

(42,583

)

 

 

 

(54,450

)

 

 

(76,026

)

 

Income tax provision

 

 

 

 

(1,703

)

 

 

 

 

 

 

(1,703

)

 

Net loss

$

(34,060

)

 

$

(44,286

)

 

 

$

(54,450

)

 

$

(77,729

)

 

Basic and diluted net loss per common share

$

(0.99

)

 

$

(1.58

)

 

 

$

(1.63

)

 

$

(2.79

)

 

Weighted-average shares used to compute basic and diluted net loss per common share

 

34,401

 

 

 

27,946

 

 

 

 

33,363

 

 

 

27,813

 

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

5


 

FIVE PRIME THERAPEUTICS, INC.

Condensed Statements of Comprehensive Loss

(In thousands)

 (Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(34,060

)

 

$

(44,286

)

 

$

(54,450

)

 

$

(77,729

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities

 

208

 

 

 

(60

)

 

 

98

 

 

 

(265

)

Comprehensive loss

$

(33,852

)

 

$

(44,346

)

 

$

(54,352

)

 

$

(77,994

)

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

6


 

FIVE PRIME THERAPEUTICS, INC.

Condensed Statements of Cash Flows

(In thousands)

 (Unaudited)

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(54,450

)

 

$

(77,729

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

2,456

 

 

 

1,112

 

Stock-based compensation expense

 

15,255

 

 

 

19,648

 

Amortization of premiums and discounts on marketable securities

 

(336

)

 

 

1,223

 

Loss on disposal of property and equipment

 

5

 

 

 

2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables from collaborative partners

 

10,422

 

 

 

127

 

Income tax receivable

 

 

 

 

4,670

 

Prepaid, other current assets and other long-term assets

 

(3,813

)

 

 

1,363

 

Accounts payable

 

229

 

 

 

987

 

Accrued personnel-related expenses

 

(2,037

)

 

 

(2,580

)

Deferred revenue

 

(7,406

)

 

 

(6,648

)

Deferred rent

 

1,250

 

 

 

1,185

 

Other accrued liabilities

 

(578

)

 

 

(377

)

Net cash used in operating activities

 

(39,003

)

 

 

(57,017

)

Investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(212,147

)

 

 

(220,652

)

Maturities of marketable securities

 

145,500

 

 

 

342,250

 

Purchases of property and equipment

 

(10,733

)

 

 

(2,581

)

Proceeds from disposal of property and equipment

 

 

 

 

12

 

Net cash provided by (used in) investing activities

 

(77,380

)

 

 

119,029

 

Financing activities

 

 

 

 

 

 

 

Proceeds from public offering of common stock, net

 

107,613

 

 

 

 

Proceeds from exercise of stock options

 

2,863

 

 

 

2,230

 

Repurchase of shares to satisfy tax withholding obligations

 

(1,098

)

 

 

(12,186

)

Net cash provided by (used in) financing activities

 

109,378

 

 

 

(9,956

)

Net increase (decrease) in cash and cash equivalents and restricted cash

 

(7,005

)

 

 

52,056

 

Cash, cash equivalents and restricted cash at beginning of period

 

61,333

 

 

 

9,196

 

Cash, cash equivalents and restricted cash at end of period

$

54,328

 

 

$

61,252

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing activities

 

 

 

 

 

 

 

Unpaid property and equipment included in accrued liabilities

$

24

 

 

$

403

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

$

59,790

 

 

$

7,653

 

Restricted cash at beginning of period

 

1,543

 

 

 

1,543

 

Cash, cash equivalents and restricted cash at beginning of period

$

61,333

 

 

$

9,196

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

52,785

 

 

$

59,709

 

Restricted cash at end of period

 

1,543

 

 

 

1,543

 

Cash, cash equivalents and restricted cash at end of period

$

54,328

 

 

$

61,252

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

7


 

FIVE PRIME THERAPEUTICS, INC.

Notes to Condensed Financial Statements

June 30, 2018

 

1.

Description of Business

Five Prime Therapeutics, Inc. (we, us, our, or the company) is a clinical-stage biotechnology company focused on discovering and developing innovative protein therapeutics. We were incorporated in December 2001 in Delaware. Our operations are based in South San Francisco, California and we operate in one segment.

Unaudited Interim Financial Information

The accompanying financial information as of June 30, 2018 is unaudited. The condensed financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that our management considers necessary for the fair statement of the results of operations for the interim periods covered and of our financial condition at the date of the interim balance sheet. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission, or the SEC, on February 27, 2018, as amended by our Annual Report on Form 10-K/A, as filed with the SEC on March 12, 2018, or, collectively, our Annual Report.

2.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

Restricted Cash

Restricted cash consists of a certificate of deposit held by our bank as collateral for a standby letter of credit in the same notional amount by our landlord to secure our obligations under our corporate office and laboratory facility lease that we entered into in December 2016. We are required to maintain this restricted cash balance, the amount of which is subject to reduction starting on January 1, 2023, if certain conditions are met, for the duration of this lease.

Fair Value of Financial Instruments

We determine the fair value of financial and nonfinancial assets and liabilities using the fair value hierarchy, which describes three levels of inputs that may be used to measure fair value, as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We determine the fair value of Level 1 assets using quoted prices in active markets for identical assets. We review trading activity and pricing for Level 2 investments as of each measurement date. Level 2 inputs, which are obtained from various third-party data providers, represent quoted prices for similar assets in active markets and were derived from observable market data, or, if not directly observable, were derived from or corroborated by other observable market data. There were no transfers between Level 1 and Level 2 securities in the periods presented.

In certain cases where there is limited activity or less transparency around inputs to valuation, we classify securities as Level 3 within the valuation hierarchy. We do not have any assets or liabilities measured using Level 3 inputs as of June 30, 2018.

8


 

The following table summarizes our financial instruments that were measured at fair value on a recurring basis by level of input within the fair value hierarchy defined above (in thousands):

 

 

June 30, 2018

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

30,233

 

 

$

30,233

 

 

$

 

 

$

 

U.S. Treasury securities

 

221,458

 

 

 

221,458

 

 

 

 

 

 

 

Agency bonds

 

3,974

 

 

 

3,974

 

 

 

 

 

 

 

Corporate bonds

 

19,917

 

 

 

 

 

 

19,917

 

 

 

 

Commercial paper

 

59,626

 

 

 

 

 

 

59,626

 

 

 

 

Certificate of deposit

 

1,543

 

 

 

 

 

 

1,543

 

 

 

 

Total

$

336,751

 

 

$

255,665

 

 

$

81,086

 

 

$

 

 

 

December 31, 2017

 

 

 

 

 

 

Basis of Fair Value

 

 

 

 

 

 

Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

31,802

 

 

$

31,802

 

 

$

 

 

$

 

U.S. Treasury securities

 

232,900

 

 

 

232,900

 

 

 

 

 

 

 

Certificate of deposit

 

1,543

 

 

 

 

 

 

1,543

 

 

 

 

Total

$

266,245

 

 

$

264,702

 

 

$

1,543

 

 

$

 

 

Revenue Recognition

Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), or Topic 606, using the modified retrospective transition method. Topic 606 provides a unified model to determine how revenue is recognized. We determine revenue recognition for arrangements within the scope of Topic 606 by performing the following five steps: (i) identify the contract; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the company satisfies a performance obligation. 

The terms of our collaborative research and development agreements include upfront and license fees, research funding, milestone and other contingent payments for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of commercialized products. Arrangements that include upfront payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform obligations under these arrangements. We record research funding payable to us as accounts receivable when our right to consideration is unconditional. The event-based milestone and other contingent payments represent variable consideration, and we use the most likely amount method to estimate this variable consideration. Given the high degree of uncertainty around occurrence of these events, we determine the milestone and other contingent amounts to be fully constrained and do not recognize revenue until the uncertainty associated with these payments is resolved. We will recognize revenue from sales-based royalty payments when or as the sales occur. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur.

A performance obligation is a promise in a contract to transfer a distinct good or service and is the unit of accounting in Topic 606. A contract’s transaction price is allocated among each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the applicable performance obligation is satisfied. Under Topic 606, we elected to use the practical expedients permitted related to adoption, which do not require us to disclose certain information regarding our remaining performance obligations as of the end of the reporting period. Topic 606 applies to revenue recognized in accordance with the practical expedient for measuring progress toward satisfaction of a performance obligation, and variable consideration classified as a sales-based or usage-based royalty promised in exchange for a license.

9


 

Net Loss Per Share of Common Stock

We compute basic net loss per common share by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

We excluded the following securities from the calculation of diluted net loss per share as the effect would have been antidilutive (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Options to purchase common stock

 

3,904

 

 

 

3,879

 

 

 

3,967

 

 

 

3,796

 

Restricted stock awards (RSAs)

 

1,015

 

 

 

834

 

 

 

923

 

 

 

940

 

 

 

4,919

 

 

 

4,713

 

 

 

4,890

 

 

 

4,736

 

 

Accounting Pronouncements Adopted in 2018

In May 2014, the Financial Accounting Standards Board, or FASB, issued Topic 606, which supersedes nearly all existing revenue recognition guidance under GAAP. The FASB subsequently issued amendments to Topic 606 that have the same effective date and transition date. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle and, in as a result, more judgment and estimates may be required in the course of the revenue recognition process, including with respect to identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

We adopted Topic 606, effective January 1, 2018, using the modified retrospective transition method, in which the new standard is applied as of the date of initial adoption. We recorded the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. The adoption of the new revenue recognition guidance resulted in a decrease of $1.4 million to deferred revenue and an increase of $1.4 million to retained earnings as of January 1, 2018. Additionally, we determined that the classification between deferred revenue, current portion, and deferred revenue, long-term portion, changed as a result of adoption of Topic 606. We concluded that we will classify deferred revenue for all licensing and collaboration arrangements as deferred revenue, long-term portion, and will reclassify to deferred revenue, current portion, when the remaining term of the estimated performance period is one year or less.

Our adoption of Topic 606 effective January 1, 2018 affected the following financial statement line items:

 

Condensed Statements of Operations

 

Three Months ended June 30, 2018

 

(in thousands, except per share data)

Under Topic 606

 

Under Topic 605

 

Effect of change

 

Collaboration and license revenue

$

7,580

 

$

5,361

 

$

2,219

 

Operating expenses

 

43,162

 

 

43,162

 

 

 

Operating loss

$

(35,582

)

$

(37,801

)

$

2,219

 

Net loss

$

(34,060

)

$

(36,279

)

$

2,219

 

Net loss per share applicable to common stockholders - basic and diluted

$

(0.99

)

$

(1.05

)

$

0.06

 

 

 

Six Months ended June 30, 2018

 

(in thousands, except per share data)

Under Topic 606

 

Under Topic 605

 

Effect of change

 

Collaboration and license revenue

$

40,066

 

$

39,055

 

$

1,011

 

Operating expenses

 

97,192

 

 

97,192

 

 

 

Operating loss

$

(57,126

)

$

(58,137

)

$

1,011

 

Net loss

$

(54,450

)

$

(55,461

)

$

1,011

 

Net loss per share applicable to common stockholders - basic and diluted

$

(1.63

)

$

(1.66

)

$

0.03

 

10


 

Condensed Balance Sheets

 

As of June 30, 2018

 

(in thousands)

Under Topic 606

 

Under Topic 605

 

Effect of change

 

Receivables from collaborative partner

$

2,711

 

$

2,711

 

$

 

Deferred revenue, current portion

 

3,350

 

 

10,567

 

 

(7,217

)

Deferred revenue, long-term portion

 

10,806

 

 

5,974

 

 

4,833

 

Accumulated deficit

 

(208,683

)

 

(211,067

)

 

2,384

 

 

Condensed Statements of Cash Flows

 

Six Months ended June 30, 2018

 

(in thousands)

Under Topic 606

 

Under Topic 605

 

Effect of change

 

Net loss

$

(54,450

)

$

(55,461

)

$

1,011

 

Decrease in deferred revenue in connection with Topic 606 adoption

 

1,373

 

 

 

 

1,373

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

     Receivables from collaborative partner

 

10,422

 

 

10,422

 

 

 

     Deferred revenue

 

(8,779

)

 

(6,396

)

 

(2,384

)

Cash, cash equivalents and restricted cash at beginning of period

 

61,333

 

 

61,333

 

 

 

Cash, cash equivalents and restricted cash at end of period

 

54,328

 

 

54,328

 

 

 

 

In May 2017, FASB issued ASU 2017-09 Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting, or ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting to an equity award if the fair value, vesting conditions, and classification of such award are the same immediately before and after the modification. We adopted the standard, effective January 1, 2018, to be applied prospectively to awards modified on or after the effective date. We did not have any arrangements within the scope of ASU 2017-09 as of the adoption date, and therefore the adoption of ASU 2017-09 had no effect on our financial position, results of operations or liquidity.

In November 2016, FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230) – Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted ASU 2016-18, effective January 1, 2018, to be applied retrospectively and revised the beginning and ending balance of our statement of cash flows to include restricted cash. Other than the change in presentation in the accompanying consolidated statement of cash flows, the adoption of ASU 2016-18 had no effect on our financial position, results of operations or liquidity.

In June 2018, the FASB issued ASU 2018-07 Compensation-Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 expanded the scope of Topic 718, which previously included only share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity–Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. We early adopted ASU 2018-07 in the second quarter of 2018. No adjustment was required as a result of this adoption.

Accounting Pronouncements Not Yet Adopted

In February 2016, FASB issued ASU 2016-02 Leases (Topic 842), or ASU 2016-02, which amends existing guidance to require substantially all leases to be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU 2016-02 will become effective January 1, 2019 and will apply to all annual and interim reporting periods thereafter. Early adoption is permitted. Under ASU 2016-02, agreements executed prior to January 1, 2019 that are currently considered leases are expected to be recognized on the consolidated balance sheet as right-to-use lease assets and lease liabilities. We expect that our recognition of expense on our statement of operations under ASU 2016-02 will be similar to our recognition of expense under the current accounting standard. Further, we expect to recognize lease liabilities and right-of use assets on our balance sheet.

11


 

3.Cash Equivalents and Marketable Securities

The following table summarizes our cash equivalents and marketable securities (in thousands):

 

 

June 30, 2018

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

30,233

 

 

$

 

 

$

 

 

$

30,233

 

U.S. Treasury securities

 

221,846

 

 

 

 

 

 

(388

)

 

 

221,458

 

Agency bonds

 

3,974

 

 

 

 

 

 

 

 

 

3,974

 

Corporate bonds

 

19,920

 

 

 

 

 

 

(3

)

 

 

19,917

 

Commercial paper

 

59,612

 

 

 

14

 

 

 

 

 

 

59,626

 

Total cash equivalents and marketable securities

 

335,585

 

 

 

14

 

 

 

(391

)

 

 

335,208

 

Less: cash equivalents

 

(35,226

)

 

 

(1

)

 

 

 

 

 

(35,227

)

Total marketable securities

$

300,359

 

 

$

13

 

 

$

(391

)

 

$

299,981

 

 

 

December 31, 2017

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market funds

$

31,802

 

 

$

 

 

$

 

 

$

31,802

 

U.S. Treasury securities

 

233,376

 

 

 

 

 

 

(476

)

 

 

232,900

 

Total cash equivalents and marketable securities

 

265,178

 

 

 

 

 

 

(476

)

 

 

264,702

 

Less: cash equivalents

 

(31,802

)

 

 

 

 

 

 

 

 

(31,802

)

Total marketable securities

$

233,376

 

 

$

 

 

$

(476

)

 

$

232,900

 

 

As of June 30, 2018, the amortized cost and estimated fair value of our available-for-sale securities by contractual maturity are shown below (in thousands):

 

 

Amortized

 

 

Estimated

 

 

Cost

 

 

Fair Value

 

Debt securities maturing:

 

 

 

 

 

 

 

In one year or less

$

300,359

 

 

$

299,981

 

Total marketable securities

$

300,359

 

 

$

299,981

 

 

We determined that the gross unrealized losses on our marketable securities as of June 30, 2018 were temporary in nature. We currently do not intend to sell these securities prior to maturity and do not consider these investments to be other-than-temporarily impaired at June 30, 2018. There were no sales of available-for-sale securities in any of the periods presented.

4.

Equity Incentive Plans

The following table summarizes option activity under our equity incentive plans and related information:

 

 

Options Outstanding

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Number of

 

 

Exercise Price

 

 

Contractual

 

 

Shares

 

 

Per Share

 

 

Term (years)

 

Balance at December 31, 2017

 

3,867,645

 

 

$

30.35

 

 

 

 

 

Options granted

 

572,100

 

 

 

18.62

 

 

 

 

 

Options exercised

 

(217,872

)

 

 

9.54

 

 

 

 

 

Options forfeited

 

(192,829

)

 

 

34.38

 

 

 

 

 

Options expired

 

(169,313

)

 

 

35.82

 

 

 

 

 

Balance at June 30, 2018

 

3,859,731

 

 

 

29.35

 

 

7.13

 

Options exercisable at June 30, 2018

 

2,140,598

 

 

 

25.58

 

 

 

5.95

 

 

12


 

We have granted restricted stock awards, or RSAs, some of which are subject to performance conditions. RSAs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting and are not forfeitable once fully vested. We based the fair value of RSAs on the closing sale price of our common stock on the grant date. For awards subject to performance conditions, we recognize stock-based compensation expense using the accelerated attribution recognition method when it is probable that the performance condition will be achieved.

The following table summarizes RSA activity under our 2013 Omnibus Incentive Plan and related information:

 

 

RSAs Outstanding

 

 

 

 

 

 

Weighted-Average

 

 

Number

 

 

Grant-Date

 

 

of Shares

 

 

Fair Value

 

Unvested balance at December 31, 2017

 

803,417

 

 

$

40.24

 

RSAs granted

 

614,900

 

 

 

18.23

 

RSAs vested

 

(165,429

)

 

 

40.63

 

RSAs forfeited

 

(136,825

)

 

 

36.63

 

Unvested balance at June 30, 2018

 

1,116,063

 

 

 

28.50

 

 

 

 

 

 

 

 

 

As of June 30, 2018, there were 1,836,224 shares of common stock available for future issuance under our 2013 Omnibus Incentive Plan.

Stock-Based Compensation

Total stock-based compensation expense recognized was as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

$

4,055

 

 

$

5,930

 

 

$

7,988

 

 

$

11,216

 

General and administrative

 

3,380

 

 

 

3,831

 

 

 

7,267

 

 

 

8,432

 

Total

$

7,435

 

 

$

9,761

 

 

$

15,255

 

 

$

19,648

 

 

We estimated the fair value of stock options using the Black-Scholes option-pricing model based on the date of grant of the applicable stock option with the following assumptions:

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2018

 

2017

 

2018

 

2017

Expected term (years)

6.0-6.3

 

5.5-6.3

 

6.0-6.3

 

5.5-6.3

Expected volatility

69%

 

66%

 

69%-70%

 

66%-68%

Risk-free interest rate

2.8%

 

1.9%

 

2.6-2.8%

 

1.9-2.1%

Expected dividend yield

0%

 

0%

 

0%

 

0%

 

As of June 30, 2018, we had $35.6 million of total unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of 2.7 years. Additionally, we had $24.1 million of total unrecognized compensation expense related to employee and director RSAs that we expect to recognize over a weighted-average period of 2.0 years.

13


 

5.License and Collaboration Arrangements

See Note 9 to the audited consolidated financial statements included in Part V, Item 15 of our Annual Report for information on our license and collaboration agreements.

The following table presents changes during the six months ended June 30, 2018 in the balances of our contract assets, including receivables from collaborative partners, and contract liabilities, including deferred revenue, as compared to what we disclosed in our Annual Report.

 

(in thousands)

Contract Assets

 

Balance at January 1, 2018

$

13,133

 

     Additions

 

32,247

 

     Deductions

 

(42,669

)

Balance at June 30, 2018

$

2,711

 

 

 

 

 

(in thousands)

Contract Liabilities

 

Balance at January 1, 2018

$

21,563

 

     Additions for advanced billings

 

1,756

 

     Deductions for performance obligations satisfied in current period

 

(6,984

)

     Deductions for performance obligations satisfied in the prior periods in connection with

          updates to the measure of progress

 

(2,179

 

)

Balance at June 30, 2018

$

14,156

 

 

Bristol-Myers Squibb Company

Immuno-Oncology Research Collaboration

In March 2014, we entered into a research collaboration and license agreement, or the immuno-oncology research collaboration, with Bristol-Myers Squibb Company, or BMS.

We identified one performance obligation under the immuno-oncology research collaboration with BMS for the research license to access our technology, the exclusive commercial license and research activities. BMS’ options to select additional collaboration targets are not priced at a discount and therefore do not represent performance obligations for which the transaction price would be allocated. The transaction price includes the $20.0 million non-refundable upfront fee, $13.7 million of research funding and $2.4 million of equity premium. We concluded that the transaction price should not include the variable consideration related to maintenance fees and unachieved clinical and regulatory development milestones as this consideration was considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal in revenue in the future. We will recognize any consideration related to sales-based payments (including milestones and royalties) when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized on the later to occur of satisfaction of the performance obligation, or the occurrence of the related sales. We will re-evaluate the transaction price at each reporting period. For the three and six months ended June 30, 2018, no adjustments were made to the transaction price.

Upon adoption of Topic 606, we recognized an additional $0.7 million of revenue, through a decrease to deferred revenue and an increase to beginning retained earnings, based on the difference between the input method currently used under Topic 606 and the ratable recognition method previously used under Topic 605. Under the input method, we recognize revenue on the basis of our efforts or inputs applicable to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs applicable to the satisfaction of that performance obligation. We concluded that we will recognize revenue based on actual costs incurred as a percentage of total budgeted costs as we complete our performance obligation. Revenue allocated to the performance obligation was $1.6 million and $3.2 million, for the three and six months ended June 30, 2018, respectively. Through June 30, 2018, we have recognized $31.8 million of the transaction price as collaboration revenue under the agreement. We will recognize the remaining transaction price of $4.3 million as revenue under the input method over the estimated performance period. 

14


 

License and Collaboration Agreement

In October 2015, we entered into a license and collaboration agreement, or the cabiralizumab collaboration agreement, with BMS. The cabiralizumab collaboration agreement supersedes the clinical trial collaboration agreement we entered into with BMS in November 2014, or the original collaboration agreement. We assessed the two agreements separately as standalone agreements under Topic 606.

Under the original collaboration agreement, we identified one performance obligation for the execution of a Phase 1a/1b clinical trial of cabiralizumab in combination with Opdivo® (nivolumab) and the manufacturing and supply of cabiralizumab. The transaction price consists of the $30.0 million non-refundable upfront fee under the original collaboration agreement. We concluded that the transaction price should include the variable consideration for reimbursements when received as part of the transfer of services.

We used the input method to measure progress toward completion of the performance obligation and concluded that we will recognize revenue based on actual costs incurred by the clinical research organization, or CRO, as a percentage of total budgeted costs as we complete our performance obligation. We will recognize revenue from reimbursements when we have the right to invoice BMS. No adjustment was necessary upon adoption of Topic 606. We recognized $3.9 million and $5.3 million of revenue allocated to the performance obligation for the three and six months ended June 30, 2018, respectively. Total revenue recognized for the three and six months ended June 30, 2018, including progress made toward the performance obligation and reimbursements and excluding milestones, was $4.4 million and $8.9 million, respectively. Through June 30, 2018, we recognized $23.5 million of the transaction price as collaboration revenue under the original collaboration agreement. The remaining transaction price of $6.5 million is recorded in deferred revenue as of June 30, 2018 and will be recognized as revenue under the input method over the estimated performance period.

Under the cabiralizumab collaboration agreement, we identified the following performance obligations: (1) license grant to BMS; and (2) transfer of licensed know-how to BMS. The transaction price consists of the $350.0 million non-refundable up-front fee. We concluded that the transaction price should not yet include milestone payments that may become due as they are fully constrained. We will recognize any consideration related to royalties when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized upon the occurrence of the related sales. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. For the three and six months ended June 30, 2018, no adjustments were made to the transaction price.

The $350.0 million non-refundable upfront fee was fully recognized concurrent with the transfer of the license and know-how in 2015. As such, no adjustment to revenue was necessary under Topic 606. In January 2018, we recognized $25.0 million related to a milestone achieved for the dosing of the first patient in BMS’s randomized Phase 2 clinical trial of cabiralizumab in combination with Opdivo (nivolumab), with and without chemotherapy, as a treatment for patients with second-line pancreatic cancer. For the three months ended June 30, 2018, no milestone payments were triggered under the cabiralizumab collaboration agreement.

Zai Lab China License and Collaboration Agreement

In December 2017, we entered into a license and collaboration agreement, or the China collaboration agreement, with Zai Lab (Shanghai) Co., Ltd., or Zai Lab, pursuant to which we granted Zai Lab an exclusive license to develop and commercialize bemarituzumab in China, Hong Kong, Macau and Taiwan.

In our evaluation of the China collaboration agreement under Topic 606, we identified the following performance obligations: (1) license grant to Zai Lab together with the transfer of licensed know-how, development drug supply and global development activities; (2) commercial drug supply; and (3) development of companion diagnostics. The $5.0 million non-refundable upfront fee, net of value-added tax and other withholdings of $0.8 million, and the $10.0 million of expected reimbursement from Zai Lab for global development activities are included as part of the transaction price. We determined the $10.0 million of expected reimbursements from Zai Lab based on the probability-weighted amounts of a range of possible consideration amounts. We have not included the clinical and regulatory development milestone payments in the transaction price as all such milestone amounts are fully constrained. We will recognize any consideration related to royalties when the related sales occur, as we determined that these amounts relate predominantly to the license granted and therefore will be recognized upon the occurrence of the related sales. Zai Lab’s option to purchase commercial drug supply from us pursuant to a separate commercial supply agreement represents a material right and we will include any additional consideration to us for such supply in the transaction price as Zai’s payment obligations for such supply become due under such commercial supply agreement. We concluded that the reimbursement of costs incurred for the development of companion diagnostics qualifies for the practical expedient under Topic 606, which allows us to recognize revenue in the amount for which we have a right to invoice if our right to consideration is an amount that corresponds directly to the value to Zai of our performance completed to date. We therefore effectively bypass the steps of determining the transaction price and allocating that transaction price to the performance obligation. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. For the three months ended June 30, 2018, there was a $1.7 million increase in the transaction price to $14.2 million from March 31, 2018 of $12.5 million.

15


 

We use the input method to measure progress toward completion of the performance obligation for the license grant, transfer of licensed know-how, development drug supply and global development activities. We concluded that revenue will be recognized based on actual costs incurred by the CRO as a percentage of total budgeted costs as we complete our performance obligation. We will recognize revenue from reimbursements for commercial drug supply pursuant to any commercial supply agreement and for the development of companion diagnostics when we have the right to invoice Zai Lab.

No adjustment was necessary upon adoption of Topic 606. For the three and six months ended June 30, 2018, revenue recognized for the license grant performance obligation was $0.3 million and $0.6 million, respectively. Total revenue recognized for the companion diagnostics development performance obligation was $1.3 million and $2.0 million for the three and six months ended June 30, 2018, respectively. Of the remaining transaction price of $13.6 million, we recorded $4.3 million in deferred revenue, which we will recognize over the estimated performance period for satisfaction of the performance obligations. The remaining $9.3 million of the transaction price will be recorded in deferred revenue when invoiced as we complete global development activities. 

GlaxoSmithKline LLC

Respiratory Diseases and Muscle Diseases Collaborations

In April 2012, we entered into a research collaboration and license agreement, or the respiratory diseases collaboration, with GlaxoSmithKline LLC, or GSK, to identify new therapeutic approaches to treat refractory asthma and chronic obstructive pulmonary disease, or COPD, with a particular focus on identifying novel protein therapeutics and antibody targets. In January 2016, we amended our respiratory diseases collaboration to extend the research term by three months to July 2016 to allow additional validation of the protein targets we discovered and to increase the research funding. In July 2010, we entered into a research collaboration and license agreement, or the muscle diseases collaboration, with GSK, to identify potential drug targets and drug candidates to treat skeletal muscle diseases. We conducted three customized cell-based screens and one in vivo screen of our protein libraries under the muscle diseases collaboration. The research term under the muscle diseases collaboration ended in May 2014 and the agreement terminated in April 2018.

Based on our assessment of the respiratory diseases collaboration and the muscle disease collaboration under Topic 606, we identified one performance obligation under each collaboration for the research license and research activities. The non-refundable upfront fees and the equity premiums are included as part of the transaction prices for each collaboration. We will include the variable consideration for research activities in the transaction prices of the respective collaborations when received as part of the transfer of services. The clinical and regulatory development milestone payments have not been included in the transaction prices, as all such milestone amounts are fully constrained. We will recognize any consideration related to sales-based payments (including milestones royalties) when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized on the later to occur of satisfaction of the performance obligation, or the occurrence of the related sales. Under the respiratory diseases collaboration, additional research funding that GSK has the option to add was also not included in the transaction price. As the muscle diseases collaboration with GSK terminated in April 2018, we are no longer eligible to receive milestone payments or royalties under that collaboration. We will re-evaluate the transaction price for the respiratory diseases collaboration in each reporting period as uncertain events are resolved and other changes in circumstances occur. For the three and six months ended June 30, 2018, no adjustments were made to the transaction prices of the collaborations with GSK.

Under the respiratory diseases collaboration and the muscle diseases collaboration, the non-refundable upfront fees, the equity premiums and the payment for research activities were fully recognized in 2016 and 2014, respectively. As the performance obligations were fully satisfied in prior years, no adjustment to revenue was necessary under Topic 606.

16


 

UCB Fibrosis and CNS Collaboration

In March 2013, we entered into a research collaboration and license agreement, or the fibrosis and CNS collaboration, with UCB Pharma, S.A., or UCB, to identify potential biologics targets and therapeutics in the areas of fibrosis-related immunologic diseases and central nervous system, or CNS, disorders.

Based on our assessment of the fibrosis and CNS collaboration under Topic 606, we identified research activities as our only performance obligation. UCB’s options to select additional collaboration targets and to license exclusive rights to selected targets are not priced at a discount and therefore do not represent performance obligations for which the transaction price would be allocated. The transaction price includes the $6.0 million non-refundable upfront fee, the $6.6 million technology access fee, the $1.0 million reimbursement for reagent costs and the $2.0 million of research funding. We have not included the clinical and regulatory development milestone payments in the transaction price as all such milestone amounts are fully constrained. We will recognize any consideration related to sales-based payments (including milestones and royalties) when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized on the later to occur of satisfaction of the performance obligation, or the occurrence of the related sales. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. For the three and six months ended June 30, 2018, there was no change in the transaction price.

Upon adoption of Topic 606, we recognized an additional $0.6 million of revenue, through a decrease to deferred revenue and an increase to beginning retained earnings, based on the difference between the input method currently used under Topic 606 and the ratable recognition method previously used under Topic 605. We use the input method to measure progress toward completion of the performance obligation and concluded that revenue will be recognized based on actual full time equivalent labor hours expended as a percentage of total budgeted costs. The $0.6 million adjustment recorded upon the adoption of Topic 606 recognized the remainder of the transaction price. In March 2018, UCB triggered a $0.3 million milestone payment to us upon selection of an undisclosed confirmed target for further development. For the three months ended June 30, 2018, no milestone payments were triggered under the fibrosis and CNS collaboration .

17


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations