ITEM 1. BUSINESS
Overview
We are a commercial-stage biopharmaceutical company devoted to providing transformative therapies to people bravely facing cancer. Our primary focus is to develop treatments for solid tumors using various approaches, including small molecules and immuno-oncology antibodies, as monotherapies or in combinations. We have in-licensed and are developing several oncology-related product candidates, and we have entered into several research collaborations with third parties for the discovery of new candidates. We have also entered into arrangements with other companies for the development and commercialization of certain of our product candidates in specific indications and/or geographies.
To date, we have received regulatory approvals for the following products, which are currently marketed and sold in the U.S. and in certain countries in Europe:
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The U.S. Food and Drug Administration, or FDA, approved ZEJULA® (niraparib) in March 2017 for the maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The European Commission, or EC, approved ZEJULA in November 2017 as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.
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VARUBI® (rolapitant) is a potent and long-acting neurokinin-1, or NK-1, receptor antagonist for the prevention of chemotherapy induced nausea and vomiting, or CINV. The FDA approved VARUBI in oral formulation in September 2015 for use in combination with other antiemetic agents in adults for the prevention of delayed (24 to 120 hours after chemotherapy administration) nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy. The EC approved VARUBY®, the brand name of oral rolapitant in Europe, in April 2017 for the prevention of delayed nausea and vomiting associated with highly and moderately emetogenic chemotherapy in adults. The FDA approved the intravenous, or IV, formulation of VARUBI in October 2017. In January 2018, after post-marketing reports of side effects experienced following the commercial introduction of VARUBI IV, we updated the VARUBI IV package insert, including modifications to the contraindications, warnings and precautions, and adverse reactions sections, and issued a “Dear Healthcare Professional Letter” to healthcare providers to highlight the updates. In February 2018, we determined that we would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.
Development Programs
Niraparib
Niraparib is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor. Based on research related to PARP inhibitors generally, we believe niraparib may also be active in the treatment of several tumor types. We are conducting several ongoing clinical trials evaluating niraparib for the treatment of various tumor types, as a monotherapy and in combination with other therapeutics, including our own immuno-oncology assets. We expect to initiate additional clinical trials of niraparib during 2018. We are also collaborating with various other organizations to evaluate niraparib in combination with other therapeutics for the treatment of various cancers.
Immuno-Oncology
Pursuant to our collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, we are developing several antibodies for immuno-oncology targets. The antibodies and related development activities are summarized as follows:
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TSR-042 (anti-PD-1): We initiated a Phase 1, dose escalation study of TSR-042 in March 2016. We have also initiated expansion cohorts in patients with advanced solid tumors, including non-small cell lung cancer, or NSCLC, endometrial cancer and metastatic microsatellite instability-high, or MSI-H, tumors. We plan to pursue an accelerated registration path for TSR-042 in metastatic MSI-H tumors.
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TSR-022 (anti-TIM-3): We initiated a Phase 1, dose escalation study of TSR-022 in July 2016, evaluating TSR-022 as a monotherapy and in combination with TSR-042 in multiple tumor types.
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TSR-033 (anti-LAG-3): We initiated a Phase 1, dose escalation study of TSR-033 in August 2017 in multiple tumor types. We plan to initiate a combination trial of TSR-033 plus TSR-042 in 2018.
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We have initiated pre-clinical research for TSR-075, our bi-specific anti-PD-1/LAG-3 candidate.
In addition, we are evaluating our immuno-oncology anti-tumor agents in combination studies with niraparib and other anti-tumor agents. We have also entered into agreements with other third parties for the discovery of other potential oncology product candidates. In addition to potential candidates arising from such agreements, we intend to continue to leverage the experience and competencies of our senior management team to identify, acquire, develop and commercialize cancer therapeutics, including those that are potentially safer and more effective than existing treatments.
Upon successful development and regulatory approval of any of our product candidates, we intend to pursue commercialization of them in key product markets. At this time, we intend to focus on commercializing our products directly in North America and Europe, and in partnership with established companies in other key markets.
Our Strategy
Our strategy is to leverage the experience and competencies of our management team to identify, acquire and develop promising drug candidates and to commercialize cancer therapeutics that are potentially improvements over existing treatments.
Key components of our strategy include:
 Continue the Clinical Development of and Successfully Commercialize Niraparib for the Treatment of Cancers that are Susceptible to PARP Inhibition. We are evaluating niraparib in several clinical trials in ovarian cancer with the goal of expanding the currently approved indication, and in other cancers. We plan to initiate further clinical trials during 2018. We are also evaluating niraparib in combination studies with our immuno-oncology anti-tumor agents, and with other therapeutics.
 Advance Potential Immuno-Oncology Antibody Product Candidates. Under our collaboration and exclusive license agreement with AnaptysBio, we received exclusive rights to monospecific antibody product candidates targeting PD-1, TIM-3 and LAG-3, and certain bi-specific antibody product candidates. We have clinical trials ongoing for each monospecific antibody, as monotherapies and in combinations. We have initiated pre-clinical research for TSR-075, our bi-specific anti-PD-1/LAG-3 candidate. In addition, we are evaluating our immuno-oncology candidates in combination studies with niraparib and other anti-tumor agents.
 In-license or Acquire Additional Product Candidates to Create a Balanced Product Portfolio. We intend to in-license or acquire additional product candidates across various stages of development. While we do not have, nor do we intend to establish, our own drug discovery capabilities, we have entered into multiple research collaborations for the discovery of new product candidates. We intend to focus on product candidates that we believe are differentiated from existing cancer therapeutics and that have well-defined, and potentially expeditious, clinical and regulatory pathways. Our objective is to build a portfolio of cancer therapeutics that is balanced by stage of development, resource requirements and development risk.
 Build Global Capabilities to Maximize the Value of Our Product Candidates. We have obtained exclusive worldwide rights to all of our current product candidates. We intend for our product candidates to be developed and commercialized globally, by us in key markets and in collaboration with other companies for other geographies. We are collaborating with other companies with regard to selected indications or geographical areas for our in-licensed product candidates. We will also seek to acquire global rights for product candidates we acquire or in-license in the future.
Overview of the Market for Cancer Therapeutics and Oncology Supportive Care Products
Cancer is a group of diseases characterized by uncontrolled growth and spread of abnormal cells. In January 2018, the American Cancer Society projected that there will be an estimated 1.7 million new cancer cases diagnosed and 609,640 cancer deaths in the United States in 2018. Current treatments for cancer include surgery, radiation therapy, chemotherapy, hormone therapy, targeted therapy and immunotherapy. The IQVIA Institute for Human Data Science reported in 2017 that total global spending on oncology medicines, including therapeutic treatments and supportive care, reached $113 billion in 2016.
Many marketed products and product candidates for treating cancer patients that are currently being developed by biopharmaceutical companies are cytotoxic chemotherapies that exert their anti-tumor effect on cancer generally through nonspecific damage to cellular components with the goal of causing cancer cell malfunction and cell death. Other products and product candidates alter cell metabolism or internal repair mechanisms leading to the demise of the cancer cell.
More recently, targeted anti-cancer agents have been designed by scientists to inhibit the action of specific molecules within cancer cells that are driving the aberrant growth responsible for tumor development. Some of these targeted agents are developed in conjunction with companion diagnostic tests that are used by clinicians to determine if a patient’s cancerous tumor contains these specific molecules and is, therefore, more likely to respond to a particular targeted therapy. Recent advances in cancer immunology have led to the development and availability of effective immunotherapies for the treatment of certain cancers. We have acquired product candidates for which we believe diagnostics or specific clinical criteria may allow us to identify cancer patients who will be more likely to be responsive to treatment. In the future, our preference will be to in-license or acquire cancer therapeutics that can be developed in a targeted patient population selected for those who may respond to the drug candidate. We expect that the characteristics of these compounds will permit us to design clinical trials that, if successful, may allow us to achieve clinical outcomes that will support regulatory approval for targeted patient groups and reimbursement by healthcare payors due to attractive risk/benefit metrics in the targeted population.
Treatment centers (such as hospitals and community cancer centers) and the healthcare professionals who treat cancer patients (physicians, nurse practitioners, physician assistants, nurses and pharmacists) utilize various combinations of cancer therapeutics and oncology supportive care products to extend and improve the quality of life of these patients.
All of these approaches may be associated with various side effects experienced by cancer patients that result from the treatments having an adverse impact on normal functioning cells and organ systems. Some of the more common side effects of cancer therapy include nausea, vomiting or emesis, infections, fatigue and diarrhea. Supportive care products are frequently prescribed or administered to cancer patients to prevent or treat these side effects thereby allowing the patients to continue to receive potentially life prolonging cancer therapies.
Our strategy is aligned with these trends in cancer care; that is, to acquire, in-license and develop product candidates and to commercialize products that selectively treat cancers.
Our Product Candidates
Niraparib
Key Characteristics of Niraparib
Based on nonclinical and clinical data, we believe niraparib may have advantages as a treatment for certain cancers, including:
niraparib concentrations are higher in the tumor relative to plasma, deliver potent inhibition of PARP and demonstrated tumor growth inhibition in tumor models;
favorable pharmacokinetic properties in humans;
reduction of PARP activity in human subjects;
dosage formulation amenable to further clinical and commercial development;
clinical activity with once daily oral administration as a monotherapy; and
tolerability in a Phase 1 combination trial with full doses of another chemotherapy agent, temozolomide, and a biologically active dose of niraparib.
Based upon these key characteristics, we believe that niraparib has the potential to be effective in patients with several tumor types.
Immuno-Oncology
Background
Antibodies to immune checkpoint receptors have demonstrated promise in the treatment of tumors, including metastatic melanoma, renal cell carcinoma and NSCLC. Although the normal function of immune checkpoint receptors is to maintain immune homeostasis, they are co-opted by certain tumors to evade immune surveillance. PD-1, TIM-3 and LAG-3 are each checkpoint regulators that modulate the function of the immune system via different mechanisms and, when activated and interacting with their respective ligands, may limit the ability of the immune system to respond effectively to tumors. By blocking the interaction of PD-1, TIM-3 and LAG-3 with their respective ligands, antibodies targeting these checkpoint regulators aim to restore immune anti-cancer function in patients across a variety of tumor types. We believe that therapeutic antibodies selected from our collaboration with AnaptysBio could form the basis of a strategic platform that will potentially enable us to develop novel monotherapy and combination-based approaches with immuno-oncology and other anti-cancer agents in a variety of new tumor indications, both with our existing product candidates and potentially with new candidates we either in-license or access through collaborative transactions with others.
Anti-PD-1 Antibodies
Programmed cell death protein 1 (PD-1, CD279) is a well-validated target for tumor immunotherapy. PD-1 operates as a negative regulator of T-cell function and interacts with two ligands, PD-L1 and PD-L2. Many tumor types up-regulate PD-L1 on the cell surface as a means of modulating the host immune system and avoiding anti-tumor responses. Antibodies to PD-1 have now been studied in a number of clinical trials in several tumor types. Anti-tumor responses of long duration have been noted, which may be further promoted through combination therapy with additional immuno-regulatory therapeutics. Anti-PD-1 antibodies are now approved in multiple tumor types including, but not limited to, melanoma, NSCLC, bladder and renal carcinoma.
Anti-TIM-3 Antibodies
T-cell immunoglobulin domain and mucin domain-3 (TIM-3), initially identified on activated Th1 cells, has been shown to be a negative regulator of the immune response. Blockade of TIM-3 promotes T-cell mediated anti-tumor immunity and has anti-tumor activity in a range of mouse tumor models. Combinations of TIM-3 blockade with other immunotherapeutic agents such as TSR-042, anti-CD137 antibodies and others, can be additive or synergistic in increasing anti-tumor effects. TIM-3 expression has been associated with a number of different tumor types, including melanoma, NSCLC and renal cancer, and additionally, expression of intratumoral TIM-3 has been shown to correlate with poor prognosis across a range of tumor types, including NSCLC, cervical, and gastric cancers. Blockade of TIM-3 is also of interest in promoting increased immunity to a number of chronic viral diseases. TIM-3 has also been shown to interact with a number of ligands, including galectin-9, phosphatidylserine and HMGB1, although which of these, if any, are relevant in regulation of anti-tumor responses is not clear at present.
Anti-LAG-3 and Bi-Specific Anti-PD-1/LAG-3 Antibodies
Lymphocyte-activation gene-3 (LAG-3) is a CD4-related transmembrane protein expressed on activated T-cells and regulatory T-cells. Following T-cell activation and up-regulation of LAG-3, LAG-3 binds major histocompatibility complex, or MHC, class II molecules and results in down-regulation of the immune response. Affinity of LAG-3 for MHC class II is higher than that of CD4, allowing for potent dampening of T-cell activation via direct blocking of the interaction as well as direct signaling. Blockade of LAG-3 promotes T-cell mediated anti-tumor immunity and has anti-tumor activity in a range of mouse tumor models. Simultaneous blockade of LAG-3 with PD-1 appears to be synergistic with enhanced anti-tumor effects. In addition, we have selected a bi-specific antibody to PD-1 and LAG-3 as a potential clinical candidate.
Clinical Development
Our current clinical development program includes the following trials:
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QUADRA is a Phase 2, potential registration trial of niraparib for the treatment of patients with ovarian cancer who have received three or four regimens of therapy. Enrollment in this trial is now complete.
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PRIMA is a Phase 3 clinical trial of niraparib in the first-line maintenance setting in ovarian cancer patients. This study includes patients who have responded to first-line platinum chemotherapy.
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OVARIO is a Phase 2 trial of niraparib in combination with bevacizumab in patients with first-line ovarian cancer.
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AVANOVA is an investigator-sponsored collaboration with the Nordic Society of Gynaecological Oncology (in collaboration with the European Network for Gynaecological Oncological Trial groups) in their Phase 1/2 trial, evaluating niraparib plus bevacizumab against bevacizumab alone, in ovarian cancer patients.
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TOPACIO is a Phase 2 trial conducted in collaboration with Merck Sharp & Dohme Corp., a subsidiary of Merck, or Merck, to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® (pembrolizumab) in patients with triple negative breast cancer and patients with ovarian cancer. In June 2017, we announced that initial data demonstrated a disease control rate of 69% in patients with platinum-resistant ovarian cancer.
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GARNET is a Phase 1 dose escalation and cohort expansion study of TSR-042 in patients with advanced solid tumors, including NSCLC, endometrial cancer and metastatic MSI-H tumors.
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AMBER is Phase 1 dose escalation and cohort expansion study evaluating TSR-022, as a monotherapy and in combination with TSR-042, in patients with advanced solid tumors.
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CITRINO is a Phase 1 dose escalation trial of TSR-033.
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Phase 2 studies of niraparib in combination with TSR-042 in ovarian cancer and in NSCLC.
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Pursuant to our collaboration with Janssen Biotech, Inc., or Janssen, Janssen is conducting clinical trials of niraparib for the treatment of prostate cancer.
In March 2017, following an interim analysis of data by the independent data monitoring committee, we ceased enrollment in our BRAVO study (assessing niraparib in patients with breast cancer who are germline BRCA mutation carriers) after a determination that it is unlikely to produce data that is interpretable and therefore suitable for registration in this indication.
We expect our future clinical development of our current product portfolio to include a Phase 3 study of niraparib in combination with TSR-042 in first-line ovarian cancer, and a combination study of TSR-033 with TSR-042.
Licensing Agreements
License for Rolapitant
In December 2010, we entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell rolapitant. Under the OPKO license, we are obligated to use commercially reasonable efforts to conduct all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant.
Under the terms of the OPKO license, upon signing of the agreement, we paid OPKO $6.0 million and issued to OPKO convertible preferred stock, then valued at $0.6 million, which has since been converted to common stock. We have made all development milestone payments to OPKO, totaling $30.0 million, based on achieving specified regulatory milestones in the U.S. and Europe. In addition, for each of the development programs under the OPKO license, we are required to make
milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved. We pay OPKO tiered royalties on annual net sales achieved in the U.S. and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens. The royalty rate on annual net sales outside of the United States and Europe is slightly above the single digits. We will pay royalties on rolapitant until the later of (i) the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable, and (ii) 12 years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis. If we elect to develop and commercialize rolapitant in Japan through a third-party licensee, we will share equally with OPKO all amounts we receive in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions.
The license with OPKO will remain in force until the expiration of the royalty term in each country, unless OPKO has cause to terminate the license earlier for our material breach of the license or bankruptcy. We have a right to terminate the license at any time during the term for any reason on three months’ written notice to OPKO.
License for Niraparib
In May 2012, we entered into a license agreement with Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib for all therapeutic and prophylactic uses in humans. Under the Merck license, we are obligated to use diligent efforts to develop and commercialize a licensed product. In April 2016, we entered into an amendment to the license agreement with Merck in connection with the entry into our collaboration agreement with Janssen to develop and commercialize niraparib in prostate cancer patients. Under the terms of the amendment, Merck agreed to waive or modify certain rights, including co-promotion, exclusivity, commercialization and diligence, solely with respect to products in prostate cancer developed or commercialized by Janssen.
Under the terms of the license agreement, we made an up-front payment to Merck of $7.0 million in June 2012. We are required to make milestone payments to Merck of up to an aggregate of $57.0 million in U.S. and European development and regulatory milestones for the first indication, up to an aggregate of $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. We have made $52.2 million in milestone payments to date. We also pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis. We are responsible for all activities necessary to develop and commercialize niraparib.
The license with Merck will remain in effect until the expiration of the royalty term in such country, unless terminated earlier by the mutual agreement of the parties or due to the material breach or bankruptcy of a party. In addition, beginning upon completion of the first Phase 2 clinical trial of a licensed product candidate, we may terminate the license without cause by giving 180 days written notice.
In October 2012, we also entered into two license agreements with AstraZeneca UK Limited, having aggregate up-front payments of $0.4 million. These agreements provide us with the exclusive right to certain methods of treating patients with PARP inhibitors solely with respect to niraparib. Under certain circumstances, we may be required to make milestone and royalty payments to AstraZeneca UK Limited based on the achievement of certain development and regulatory milestone events with regard to niraparib, and on net sales of niraparib.
License for Immuno-Oncology Platform
In March 2014, we entered into a collaboration and exclusive license agreement with AnaptysBio, a therapeutic antibody company. We executed an amendment in November 2014 to add an additional bi-specific antibody product candidate. We entered into another amendment in February 2016 to extend the term of the initial discovery period and our and AnaptysBio’s associated activities under the agreement. Under the terms of the agreement, we possess an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of certain specified immunotherapy antibodies. Specifically, we received exclusive rights to monospecific antibody product candidates targeting PD-1 (TSR-042), TIM-3 (TSR-022), LAG-3 (TSR-033) and certain bi-specific antibody product candidates, including TSR-075, a bi-specific anti-PD-1/LAG-3 candidate. Under the agreement, AnaptysBio was responsible for performing initial discovery and development of therapeutic antibodies against immune checkpoint proteins, with the goal of generating immunotherapy antibodies for use in
the treatment of cancer. We were required to reimburse AnaptysBio for specified costs incurred by AnaptysBio for these activities, which are now complete. We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of four development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program.
Under the terms of this agreement, we made up-front, non-creditable and non-refundable cash payments of $19.0 million to AnaptysBio. For each of the four development programs, we are required to make milestone payments to AnaptysBio of up to an aggregate of $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications. We have made $21.0 million in development milestone payments to date. We will also be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on worldwide annual net sales, and additional commercial milestone payments if specified levels of annual net sales of a product are attained.
This agreement expires on the earliest date after which no further payments are due to AnaptysBio, unless earlier terminated. Either party may terminate the agreement in the event of an uncured material breach by the other party. We may terminate the agreement at any time upon 90 days prior written notice to AnaptysBio.
Competition
While we believe that our development experience and scientific knowledge provide us with competitive advantages, our industry is highly competitive and subject to rapid and significant technological change. Compared to TESARO, many of our competitors may have significantly greater financial, technical and human resource capabilities. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. We may also face competition from smaller pharmaceutical and biotechnology companies, including specialty pharmaceutical companies and generic drug companies, academic institutions, government agencies and research institutions and others.
The acquisition or licensing of pharmaceutical products is also very competitive, and numerous other companies, including more established companies, have acknowledged strategies to in-license or acquire products. Other companies taking similar or different approaches to product acquisitions, including more established companies, may have competitive advantages.
Our commercial opportunity could be reduced or eliminated if our competitors develop or market products or other novel technologies that are more effective, safer or less costly than any that will be commercialized by us, or obtain regulatory approval for their products more rapidly than we may obtain approval for ours. Our success will be based in part on our ability to identify, develop, and manage a portfolio of drugs that are safer and more effective in the treatment and support of cancer patients.
Niraparib Competition
In addition to ZEJULA, there are currently two other commercially available PARP inhibitors. AstraZeneca Plc’s LYNPARZATM (olaparib) was approved in December 2014 by the FDA for use in ovarian cancer patients with a germline BRCA mutation who have been treated with three or more prior lines of chemotherapy, and in August 2017 for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy. LYNPARZA was also approved by the EC following a positive opinion by the European Medicines Agency, or EMA, for use as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed BRCA-mutated (germline and/or somatic) high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy. LYNPARZA was also approved in patients with deleterious or suspected deleterious germline BRCA-mutated, human epidermal growth factor receptor 2 (HER2)-negative metastatic breast cancer who have previously been treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting. In February 2018, LYNPARZA received a positive opinion from the EMA’s Committee for Medicinal Products for Human Use, or CHMP, for a new tablet formulation and a broad maintenance label, which is expected to lead to an EC marketing authorization in the near future. In July 2017, AstraZeneca and Merck announced a global oncology collaboration to co-develop and co-commercialize LYNPARZA for multiple cancer types. Clovis Oncology, Inc.’s RUBRACATM (rucaparib) was approved in December 2016 by the FDA for use as a monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated with advanced ovarian cancer who have been treated
with two or more chemotherapies. RUBRACA is currently under FDA review for maintenance treatment following complete or partial response to platinum-based chemotherapy, and is under EMA review as a third-line treatment in advanced ovarian cancer patients with a deleterious BRCA-mutation. In February 2018, the CHMP communicated a positive trend vote (meaning more voted yes than no) for RUBRACA to be authorized for the treatment of a subpopulation of platinum-sensitive ovarian cancer patients who also harbor a BRCA mutation. A final vote will occur at the CHMP’s March 2018 meeting. We believe the additional products in clinical development targeting the PARP pathway consist of: Pfizer’s talazoparib (MDV3800) and AbbVie’s veliparib (ABT-888), both currently in Phase 3 clinical trials; and AbbVie’s ABT-767, BeiGene/EMD Serono (Merck KGaA)’s pamiparib (BGB-290), Checkpoint Therapeutics’ CK-102 (formerly CEP-9722) and Hengrui’s fluzoparib, each currently in Phase 1 clinical trials. Both LYNPARZA and rucaparib have received “orphan drug designation” from the EMA, which provides certain benefits including market exclusivity for up to ten years in the approved indication post-approval.
In addition to other PARP inhibitors, ZEJULA also competes with AVASTINTM (bevacizumab), Roche’s angiogenesis inhibitor. AVASTIN is FDA- and EMA-approved in combination with chemotherapy for the treatment of recurrent ovarian cancer following platinum-containing chemotherapy (platinum-sensitive and platinum-resistant) and has been approved by the EMA, in combination with chemotherapy, for front-line treatment. In the U.S., it is currently under FDA review for the front-line setting.
Rolapitant Competition
In addition to VARUBI, there are currently three other commercially available branded NK-1 receptor antagonists and two approved generic NK-1 receptor antagonists. Oral aprepitant and its IV pro-drug fosaprepitant, which are both known by the brand name EMEND®, are marketed by Merck. IV aprepitant, known by the brand name CINVANTITM, is marketed by Heron Therapeutics. We believe the IV formulation of EMEND accounted for a significant majority of all EMEND usage in the U.S. in 2017. A combination of netupitant and palonosetron, known by the brand name AKYNZEO®, is marketed by Helsinn Healthcare, or Helsinn, as a combination of NK-1 and 5-HT3 receptor antagonists. Helsinn introduced AKYNZEO in capsule form in October 2014, and has an IV formulation under FDA review. Sandoz launched a generic version of oral aprepitant in late 2016, which competes with oral VARUBI. Glenmark Pharmaceuticals USA also has an FDA-approved generic aprepitant.
Immuno-Oncology Competition
We are aware of several companies that have antibody-based products on the market or in clinical development that are directed at the same biological targets as some of our immuno-oncology programs. There are currently two anti-PD-1 antibody products being marketed. OPDIVO® (nivolumab), marketed by Bristol-Myers Squibb, is approved in a number of indications as a monotherapy or in combination with other products, including various forms of metastatic melanoma, metastatic NSCLC, advanced renal cell carcinoma, classical Hodgkin lymphoma, or cHL, recurrent or metastatic squamous cell carcinoma of the head and neck, or HNSCC, locally advanced or metastatic urothelial carcinoma, microsatellite instability-high, or MSI-H, or mismatch repair deficient, or dMMR, metastatic colorectal cancer, and hepatocellular carcinoma. KEYTRUDA, marketed by Merck, is approved in a number of indications, including various forms of unresectable or metastatic melanoma, metastatic NSCLC, metastatic nonsquamous NSCLC in the front line setting, recurrent or metastatic HNSCC, refractory cHL, locally advanced or metastatic urothelial carcinoma, unresectable or metastatic MSI-H or dMMR solid tumors (which includes colorectal cancer), and recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma.
There are currently three approved anti-PD-L1 antibodies. Roche’s anti-PD-L1 antibody TECENTRIQ® (atezolizumab) is approved in patients with various forms of locally advanced or metastatic urothelial carcinoma or metastatic NSCLC. AstraZeneca’s IMFINZI® (durvalumab) was approved in 2017 for patients with various forms of locally advanced or metastatic urothelial carcinoma. BAVENCIO® (avelumab, co-marketed by Merck KGa and Pfizer) was approved in 2017 for adults and pediatric patients 12 years and older with metastatic Merkel cell carcinoma and for patients with various forms of locally advanced or metastatic urothelial carcinoma. We are aware of several companies that are developing or co-developing anti-PDL-1 and/or anti-PD-1 modulators for various indications, including Novartis, Regeneron/Sanofi, Eli Lilly, Incyte, Boehringer Ingelheim, Celgene/BeiGene, Incyte/Macrogenics, Agenus, CytomX, Symhogen, Checkpoint Therapeutics, and Janssen/Johnson & Johnson.
There are currently no anti-TIM-3 antibody products or anti-LAG-3 antibody products being marketed. We are aware that two companies, Novartis and Eli Lilly, have anti-TIM-3 modulator antibodies in Phase 1/2 clinical development for
various oncology indications. We are also aware of several companies that have anti-LAG-3 modulators in development for various oncology indications, including Bristol-Myers Squibb, which has an anti-LAG-3 antibody in Phase 2 clinical development; Novartis, which has an anti-LAG-3 antibody in Phase 1/2 and Phase 2 clinical development; and Merck, Boehringer Ingelheim and Regeneron Pharmaceuticals, each of which has an anti-LAG-3 antibody in Phase 1 clinical development. We are also aware of several other companies with immuno-oncology antibodies or programs in the preclinical or research phase.
For more information on the market for cancer therapeutics and oncology supportive care products, our competitors and the products that may compete with our product candidates, see “-Overview of the Market for Cancer Therapeutics and Oncology Supportive Care Products”, “-Our Product Candidates-Niraparib” and “-Our Product Candidates- Immuno-Oncology.”
Commercial Operations
Our U.S.-based commercial operations team consists of approximately 190 employees. Our European commercial operations team consists of approximately 55 employees in nine countries including those at our international headquarters office in Zug, Switzerland. The commercial infrastructure includes a targeted, oncology sales force to establish relationships with a focused group of oncologists, oncology nurses and pharmacists. Personnel in sales management, internal sales training, sales operations, marketing, marketing operations and distribution support the sales force. Additionally, the sales, marketing and market access teams manage relationships with key accounts such as managed care organizations, group purchasing organizations, hospital systems, oncology group networks, and government accounts. To further develop our commercial infrastructure in the event that any other product candidates receive regulatory approval, we expect to invest significant financial and management resources, much of which will be committed at the risk that any such product candidate may not be approved by any regulatory agency.
Government Regulation
As a biopharmaceutical company that operates in the United States, we are subject to extensive regulation by the FDA and other federal, state, and local regulatory agencies. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and the Public Health Service Act, or PHSA, and their implementing regulations set forth, among other things, requirements for the testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record keeping, reporting, distribution, import, export, advertising and promotion of our products and product candidates. Although the discussion below focuses on regulation in the United States, we develop and market our products in other countries, including throughout Europe. Generally, our activities in other countries will be subject to regulation that, although similar in nature and scope in some respects to that imposed in the United States, includes important differences. Additionally, some significant aspects of regulation in the European Union, or the EU, are addressed in a centralized way through the EMA and the EC, but the specific regulation of EU Member States remains essential in many respects for certain types of authorization processes, pricing and reimbursement and promotional activities.
Development and Approval
Under the FDC Act, FDA approval of an NDA is required before any new drug can be marketed in the United States. Under the PHSA, FDA licensure of a biologics license application, or BLA, is required before a biologic can be marketed in the United States. NDAs and BLAs require extensive studies and submission of a large amount of data by the applicant.
Preclinical Testing. Before testing any compound in human subjects in the United States, a company must generate extensive preclinical data. Preclinical testing generally includes laboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological studies in several animal species to assess the quality and safety of the product. Animal studies must be performed in compliance with the FDA’s Good Laboratory Practice, or GLP, regulations and the U.S. Department of Agriculture’s Animal Welfare Act.
IND Application. Human clinical trials in the United States cannot commence until an IND application is submitted and becomes effective. A company must submit preclinical testing results to the FDA as part of the IND, and the FDA must evaluate whether there is an adequate basis for testing the drug in initial clinical studies in human volunteers. Unless the FDA raises concerns, the IND becomes effective 30 days following its receipt by the FDA. Once human clinical trials have commenced, the FDA may stop the clinical trials by placing them on “clinical hold” because of concerns about the safety of the product being tested, or for other reasons.
Clinical Trials. Clinical trials involve the administration of the drug to healthy human volunteers or to patients, under the supervision of a qualified investigator. The conduct of clinical trials is subject to extensive regulation, including compliance with the FDA’s bioresearch monitoring regulations and Good Clinical Practice, or GCP, requirements, which establish standards for conducting, recording data from, and reporting the results of, clinical trials, and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, and well-being of study participants are protected. Clinical trials must be conducted under protocols that detail the study objectives, parameters for monitoring safety, and the efficacy criteria, if any, to be evaluated. Each protocol is reviewed by the FDA as part of the IND. In addition, each clinical trial must be reviewed and approved by, and conducted under the auspices of, an institutional review board, or IRB. Companies sponsoring the clinical trials, investigators, and IRBs also must comply with applicable regulations and guidelines for obtaining informed consent from the study subjects, following the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting of adverse events. Foreign studies conducted under an IND must meet the same requirements that apply to studies being conducted in the United States. Data from a foreign study not conducted under an IND may be submitted in support of an NDA or BLA if the study was conducted in accordance with GCP and the FDA is able to validate the data.
A study sponsor is required to publicly post certain details about active clinical trials and clinical trial results on government or independent websites (e.g., http://clinicaltrials.gov). Human clinical trials typically are conducted in three sequential phases, although the phases may overlap with one another:
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Phase 1 clinical trials include the initial administration of the investigational drug to humans, typically to a small group of healthy human subjects, but occasionally to a group of patients with the targeted disease or disorder. Phase 1 clinical trials generally are intended to determine the metabolism and pharmacologic actions of the drug, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.
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Phase 2 clinical trials generally are controlled studies that involve a relatively small sample of the intended patient population, and are designed to develop data regarding the product’s effectiveness, to determine dose response and the optimal dose range, and to gather additional information relating to safety and potential adverse effects.
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Phase 3 clinical trials are conducted after preliminary evidence of effectiveness has been obtained, and are intended to gather the additional information about safety and effectiveness necessary to evaluate the drug’s overall risk-benefit profile, and to provide a basis for physician labeling. Generally, Phase 3 clinical development programs consist of expanded, large-scale studies of patients with the target disease or disorder to obtain statistical evidence of the efficacy and safety of the drug at the proposed dosing regimen, or the safety, purity, and potency of a biological product.
The sponsoring company, the FDA, or the IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Further, success in early-stage clinical trials does not assure success in later-stage clinical trials. Data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or prevent regulatory approval.
NDA/BLA Submission and Review. After completing clinical testing of an investigational drug or biologic, a sponsor must prepare and submit an NDA or BLA for review and approval by the FDA. The NDA is a comprehensive, multi-volume application that includes, among other things, the results of preclinical and clinical studies, information about the drug’s composition, and the sponsor’s plans for manufacturing, packaging, and labeling the drug. For certain candidates, such as immunotherapeutic antibodies, this information is submitted in a BLA. When an NDA or BLA is submitted, the FDA conducts a preliminary review to determine whether the application is sufficiently complete to be accepted for filing. If it is not, the FDA may refuse to file the application and request additional information, in which case the application must be resubmitted with the supplemental information, and review of the application is delayed.
FDA performance goals generally provide for action on an application within 12 months of submission, but that deadline is extended in certain circumstances. Moreover, the review process is often significantly extended by FDA requests for additional information or clarification. The FDA also has programs intended to expedite the development and review of new drugs intended to address unmet medical needs for serious or life-threatening conditions. Through priority review designation, for example, the FDA can expedite the target action date to eight months from application submission, if the agency finds that a drug is intended to treat a serious condition and, if approved, would provide a significant improvement in
safety or effectiveness. Another example is fast-track designation, which the FDA may grant to a drug that is intended to treat a serious condition and that demonstrates the potential to address an unmet medical need. Under the fast track program, the FDA allows a sponsor to submit completed portions of an NDA on a rolling basis, rather than requiring the entire application to be submitted before review begins. Product candidates with fast-track designation also may be eligible for more frequent meetings or correspondence with the agency during the development process.
As part of its review, the FDA may refer an NDA or BLA to an advisory committee for evaluation and a recommendation as to whether the application should be approved. Although the FDA is not bound by the recommendation of an advisory committee, the agency usually has followed such recommendations. The FDA may determine that a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to ensure that the benefits of a new product outweigh its risks, and the product can therefore be approved. A REMS may include various elements, ranging from a medication guide or patient package insert to limitations on who may prescribe or dispense the drug, depending on what the FDA considers necessary for the safe use of the drug. Under the Pediatric Research Equity Act, certain applications for approval must include an assessment, generally based on clinical study data, of the safety and effectiveness of the subject drug or biological product in relevant pediatric populations.
After review of an NDA or BLA, the FDA may decide to not approve the application or issue a complete response letter outlining the deficiencies in the submission. The complete response letter also may request additional information, including additional preclinical or clinical data. Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet the standards for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than the sponsor. Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials. Additionally, as a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug or require post-approval commitments, including the completion within a specified time period of additional clinical studies, which often are referred to as “Phase 4” or “post-marketing” studies.
Post-approval modifications to the drug or biologic product, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsor to develop additional data or conduct additional preclinical or clinical trials, to be submitted in a new or supplemental NDA or BLA, which would require FDA approval.
Post-Approval Regulation
Once approved, products are subject to continuing regulation by the FDA. If ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market, the FDA may at any time withdraw product approval or take actions that would limit or suspend marketing. Additionally, the FDA may require post-marketing studies or clinical trials if new safety information develops.
Good Manufacturing Practices. Companies engaged in manufacturing drug products or their components must comply with applicable current Good Manufacturing Practice, or cGMP, requirements and product-specific regulations enforced by the FDA and other regulatory agencies. Compliance with cGMP includes adhering to requirements relating to organization and training of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, quality control and quality assurance, packaging and labeling controls, holding and distribution, laboratory controls, and records and reports. The FDA regulates and inspects equipment, facilities, and processes used in manufacturing pharmaceutical or biologic products, prior to approval. If, after receiving approval, a company makes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA or BLA), additional regulatory review and approval may be required. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. Failure to comply with applicable cGMP requirements and conditions of product approval may lead the FDA to seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure or recall of products, and criminal prosecution. Although we periodically monitor the FDA compliance of our third-party manufacturers, we cannot be certain that our present or future third-party manufacturers will consistently comply with cGMP and other applicable FDA regulatory requirements.
Advertising and Promotion. The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs and biologics through, among other things, standards and regulations for direct-to-consumer advertising, advertising and promotion to healthcare professionals, communications regarding unapproved uses, industry-sponsored
scientific and educational activities, and promotional activities involving the Internet. A product cannot be commercially promoted before it is approved. After approval, product promotion can include only those claims relating to safety and effectiveness that are consistent with the labeling approved by the FDA. Healthcare providers are permitted to prescribe drugs and biologics for “off-label” uses-that is, uses not approved by the FDA and therefore not described in the product’s labeling-because the FDA does not regulate the practice of medicine. However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off-label uses. Broadly speaking, a manufacturer may not promote a drug or biologic for off-label use, but under certain conditions may engage in non-promotional, balanced, scientific communication regarding off-label use. Failure to comply with applicable FDA requirements and restrictions in this area may subject a company to adverse publicity and enforcement action by the FDA, the Department of Justice, or the Office of Inspector General of the Department of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug or biological products.
Other Requirements. In addition, companies that manufacture or distribute drug or biological products or that hold approved NDAs or BLAs must comply with other regulatory requirements, including submitting annual reports, reporting information about adverse drug experiences, and maintaining certain records.
Hatch-Waxman Act
The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, establishes two abbreviated approval pathways for pharmaceutical products that are in some way follow-on versions of already approved products.
Generic Drugs. A generic version of an approved drug is approved by means of an abbreviated new drug application, or ANDA, by which the sponsor demonstrates that the proposed product is the same as the approved, brand-name drug, which is referred to as the “reference listed drug,” or RLD. Generally, an ANDA must contain data and information showing that the proposed generic product and RLD (1) have the same active ingredient, in the same strength and dosage form, to be delivered via the same route of administration, (2) are intended for the same uses, and (3) are bioequivalent. This is instead of independently demonstrating the proposed product’s safety and effectiveness, which are inferred from the fact that the product is the same as the RLD, which the FDA previously found to be safe and effective.
505(b)(2) NDAs. If a product is similar, but not identical, to an already approved product, it may be submitted for approval via an NDA under Section 505(b)(2) of the FDC Act. Unlike an ANDA, this does not excuse the sponsor from demonstrating the proposed product’s safety and effectiveness. Rather, the sponsor is permitted to rely to some degree on the FDA’s finding that the RLD is safe and effective, and must submit its own product-specific data of safety and effectiveness to an extent necessary because of the differences between the products.
RLD Patents. An NDA sponsor must identify to the FDA patents that claim the drug substance or drug product or a method of using the drug. When the drug is approved, those patents are among the information about the product that is listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations, which is referred to as the Orange Book. The sponsor of an ANDA or 505(b)(2) application seeking to rely on an approved product as the RLD must make one of several certifications regarding each listed patent. A “Paragraph III” certification is the sponsor’s statement that it will wait for the patent to expire before obtaining approval for its product. A “Paragraph IV” certification is an assertion that the patent does not block approval of the later product, either because the patent is invalid or unenforceable or because the patent, even if valid, is not infringed by the new product.
Regulatory Exclusivities. The Hatch-Waxman Act provides periods of regulatory exclusivity for products that would serve as RLDs for an ANDA or 505(b)(2) application. If a product is a “new chemical entity,” or NCE-generally meaning that the active moiety has never before been approved in any drug-there is a period of five years from the product’s approval during which the FDA may not accept for filing any ANDA or 505(b)(2) application for a drug with the same active moiety. An ANDA or 505(b)(2) application may be submitted after four years, however, if its sponsor makes a Paragraph IV certification.
A product that is not an NCE may qualify for a three-year period of exclusivity if the NDA contains new clinical data, derived from studies conducted by or for the sponsor, that were necessary for approval. In that instance, the exclusivity period does not preclude filing or review of the ANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD. Additionally, the exclusivity
applies only to the conditions of approval that required submission of the clinical data. For example, if an NDA is submitted for a product that is not an NCE, but that seeks approval for a new indication, and clinical data were required to demonstrate the safety or effectiveness of the product for that use, the FDA will not finally approve an ANDA or 505(b)(2) application for another product with that active moiety for that use until the expiration of the applicable three-year period.
Once the FDA accepts for filing an ANDA or 505(b)(2) application containing a Paragraph IV certification, the applicant must within 20 days provide notice to the RLD NDA holder and patent owner that the application has been submitted, and provide the factual and legal basis for the applicant’s assertion that the patent is invalid or not infringed. If the NDA holder or patent owner files suit against the ANDA or 505(b)(2) applicant for patent infringement within 45 days of receiving the Paragraph IV notice, the FDA is prohibited from approving the ANDA or 505(b)(2) application for a period of 30 months or the resolution of the underlying suit, whichever is earlier. If the RLD has NCE exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval. The FDA may approve the proposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed or if the court shortens the period because the parties have failed to cooperate in expediting the litigation. At present, each of rolapitant and niraparib is an NCE with five-year NCE exclusivity.
Patent Term Restoration. A portion of the patent term lost during product development and FDA review of an NDA or BLA is restored if approval of the application is the first permitted commercial marketing of a drug containing the active ingredient. The patent term restoration period is generally one-half the time between the effective date of the IND or the date of patent grant (whichever is later) and the date of submission of the NDA or BLA, plus the time between the date of submission of the NDA or BLA and the date of FDA approval of the product. The maximum period of restoration is five years, and the patent cannot be extended to more than 14 years from the date of FDA approval of the product. Only one patent claiming each approved product is eligible for restoration and the patent holder must apply for restoration within 60 days of approval. The U.S. Patent and Trademark Office, or the USPTO, in consultation with the FDA, reviews and approves the application for patent term restoration. When any of our products is approved, we intend to seek patent term restoration for an applicable patent when it is appropriate. At present, we anticipate that rolapitant and niraparib will qualify for patent term restoration. We have applied for patent term restoration for rolapitant and niraparib.
The Biologics Price Competition and Innovation Act
The Biologics Price Competition and Innovation Act, or BPCI Act, authorizes the FDA to license a biological product that is biosimilar to an FDA-licensed biologic through an abbreviated pathway. The BPCI Act establishes criteria for determining that a product is biosimilar to an already-licensed biologic, or reference product, and establishes a process by which an abbreviated BLA for a biosimilar product is submitted, reviewed and approved. The BPCI Act provides periods of exclusivity that protect a reference product from biosimilars competition. Under the BPCI Act, the FDA may not accept a biosimilar application for review until four years after the date of first licensure of the reference product, and the biosimilar may not be licensed until at least 12 years after the reference product’s approval. Additionally, the BPCI Act establishes procedures by which the biosimilar applicant provides information about its application and product to the reference product sponsor, and by which information about potentially relevant patents may be shared and litigation over patents may proceed in advance of approval. The BPCI Act also provides a period of exclusivity for the first biosimilar determined by the FDA to be interchangeable with the reference product.
We anticipate that the contours of the BPCI Act will continue to be defined as the statute is implemented over a period of years. This likely will be accomplished by a variety of means, including decisions related to the statute by the relevant federal courts, FDA issuance of guidance documents, and FDA decisions in the course of considering specific applications. The FDA has to date issued various guidance documents and other materials indicating the agency’s thinking regarding a number of issues implicated by the BPCI Act. Additionally, the FDA’s approval of several biosimilar applications in recent years has helped define the agency’s approach to certain issues.
America Invents Act
As part of the passage of the America Invents Act in 2011, new post-grant review proceedings were added to U.S. patent law. Among these procedures are post-grant reviews and inter partes reviews, which allow any member of the public to file a petition with the USPTO seeking to review the patentability of one or more claims in an issued U.S. patent. Post-grant review proceedings are conducted before Administrative Patent Judges in the USPTO using a lower standard of proof than used in Federal District Court. In addition, the challenged patents are not accorded a presumption of validity as they are in Federal District Court.
Other Exclusivities
Pediatric Exclusivity. Section 505A of the FDC Act provides for six months of additional exclusivity and patent protection if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data does not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection that cover the drug are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve an ANDA or 505(b)(2) application with reference to RLD owing to regulatory exclusivity or listed patents. The BPCI Act incorporates by reference many provisions of Section 505A of the FDC Act, such that if pediatric studies for a biological product fairly respond to a written request from the FDA, are completed in a timely fashion, and otherwise comply with applicable requirements, the 12-year exclusivity period will be deemed to be 12 and a half years, and the four year period will be deemed to be four and a half years. However, six-month pediatric exclusivity does not attach to patents for a biological product under the BPCI Act. When any of our products is approved, we anticipate seeking pediatric exclusivity when it is appropriate.
Orphan Drug Exclusivity. The Orphan Drug Act provides incentives for the development of drugs and biological products intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals in the United States. If a sponsor demonstrates that a drug or biologic is intended to treat a rare disease or condition, the FDA grants orphan drug designation to the product for that use. The benefits of orphan drug designation include research and development tax credits and exemption from user fees. A drug or biologic that is approved for the orphan drug designated indication is granted seven years of orphan drug exclusivity. During that period, the FDA generally may not approve any other application for the same product for the same indication, although there are exceptions, most notably when the later product is shown to be clinically superior to the product with exclusivity. We intend to seek orphan drug designation and exclusivity for our products whenever it is available.
21st Century Cures Act
In December 2016, the United States Congress passed the 21st Century Cures Act, or the Cures Act, which includes a number of provisions designed to speed development of innovative therapies, provide funding authorization to the National Institutes of Health, or NIH, and provide funding for certain oncology-directed research. Because the Cures Act was enacted recently, it is difficult to know whether or how it will directly affect our business. However, it also includes a provision which requires us to post our policies on the availability of certain expanded access programs. In addition, the Cures Act includes provisions that may be beneficial to us in the future, including a requirement that the FDA assess and publish guidance on the use of novel clinical trial designs, the use of real world evidence in applications, the availability of summary level review for supplemental applications for certain indications, and the qualification of drug development tools. Because these provisions allow the FDA several years to develop these policies, their effects on us, if any, could be delayed.
The Cures Act also authorizes $1.8 billion in funding for the “Cancer Moonshot” initiative. The Cancer Moonshot initiative’s strategic goals encourage inter-agency cooperation and fund research and innovation to catalyze new scientific breakthroughs, bring new therapies to patients, and strengthen prevention and diagnosis. This initiative aims to stimulate drug development through the creation of a public-private partnership with 20 to 30 pharmaceutical and biotechnology companies to expedite cancer researchers’ access to investigational agents and approved drugs. This partnership is designed to permit researchers to obtain drugs and other technologies from a preapproved “formulary” list without having to negotiate with each company for individual research projects. We will continue to monitor these developments to assess their potential impacts on our business.
Foreign Regulation
In addition to laws and regulations in the United States, we are subject to a variety of laws and regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products.
Whether or not we obtain FDA approval for a product, we must obtain the requisite marketing authorizations from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of a product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application, or CTA, much like an IND, prior to the commencement of clinical trials. In the EU, for example, a CTA must be submitted to the national health authority of each EU Member State in which the clinical trial is to be conducted and to an independent ethics committee, much like the FDA and an IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.
The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases in EU Member States, for example, the clinical trials must be conducted in accordance with GCP, applicable regulatory requirements, and ethical principles that have their origin in the Declaration of Helsinki.
In the EU, a marketing authorization for a medicinal product can be obtained through a centralized, mutual recognition, decentralized procedure, or national procedure (single EU Member State). In accordance with the centralized procedure, the applicant can submit a single application for marketing authorization to the EMA that will provide a positive opinion regarding the application if it meets certain quality, safety, and efficacy requirements. Following the opinion of the EMA, the EC makes a final decision to grant a centralized marketing authorization that permits the marketing of a product in all 28 EU Member States and three of the four European Free Trade Association, or EFTA, States, Iceland, Liechtenstein and Norway. The centralized procedure is mandatory for certain medicinal products, including orphan medicinal products, medicinal products derived from certain biotechnological processes, advanced therapy medicinal products and certain other medicinal products containing a new active substance for the treatment of certain diseases, and optional for certain other products, including medicinal products that are a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interest of public or animal health. Under the centralized procedure in the EU, the maximum timeframe for the evaluation of a marketing authorization application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP). Accelerated evaluation may be granted by the CHMP in exceptional cases. These are defined as circumstances in which a medicinal product is expected to be of a “major public health interest”. Three cumulative criteria must be fulfilled in such circumstances: the seriousness of the disease, such as heavy disabling or life-threatening diseases, to be treated; the absence or insufficiency of an appropriate alternative therapeutic approach; and anticipation of high therapeutic benefit. In these circumstances, the EMA ensures that the opinion of the CHMP is given within 150 days.
Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separate application to, and leads to separate approval by, the competent authorities of each EU Member State in which the product is to be marketed. This application is identical to the application that would be submitted to the EMA for authorization through the centralized procedure. The reference EU Member State prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. The resulting assessment report is submitted to the concerned EU Member States who, within 90 days of receipt, must decide whether to approve the assessment report and related materials. If a concerned EU Member State cannot approve the assessment report and related materials due to concerns relating to a potential serious risk to public health, disputed elements may be referred to the EC, whose decision is binding on all EU Member States.
The mutual recognition procedure similarly is based on the acceptance by the competent authorities of the EU Member States of the marketing authorization of a medicinal product by the competent authorities of other EU Member States. The holder of a national marketing authorization may submit an application to the competent authority of an EU Member State requesting that this authority recognize the marketing authorization delivered by the competent authority of another EU Member State.
A medicinal product may be granted an orphan designation in the EU if: (i) it would be used to treat or prevent a life-threatening or chronically debilitating condition and either affects no more than five in 10,000 people in the EU or for economic reasons would be unlikely to be developed without incentives; and (ii) no satisfactory method of diagnosis, prevention or treatment of the condition concerned exists, or, if such a method exists, the medicinal product would be of
significant benefit to those affected by the condition. The application for orphan designation must be submitted to the EMA and approved prior to market authorization. Once authorized, orphan medicinal products are entitled to ten years of market exclusivity. During this ten-year period, with limited exceptions, neither the competent authorities of the EU Member States, the EMA, nor the EC are permitted to accept applications or grant marketing authorization for other similar medicinal products with the same therapeutic indication. However, marketing authorization may be granted to a similar medicinal product with the same orphan indication during that period with the consent of the holder of the marketing authorization or if the manufacturer of the product is unable to supply sufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if the latter product is safer, more effective or otherwise clinically superior to the original product. The period of market exclusivity may be reduced to six years if it can be demonstrated on the basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity.
Once an applicant receives marketing authorization in an EU Member State, through any application route, the applicant is then required to engage in pricing discussions and negotiations with a separate pricing authority in that country. The legislators, policymakers and healthcare insurance funds in the EU Member States continue to propose and implement cost-containing measures to keep healthcare costs down, due in part to the attention being paid to health care cost containment and other austerity measures in the EU. Certain of these changes could impose limitations on the prices pharmaceutical companies are able to charge for their products. The amounts of reimbursement available from governmental agencies or third-party payors for these products may increase the tax obligations on pharmaceutical companies such as ours, or may facilitate the introduction of generic competition with respect to our products. Furthermore, an increasing number of EU Member States and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory. Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere. In addition, the ongoing budgetary difficulties faced by a number of EU Member States, including Greece and Spain, have led and may continue to lead to substantial delays in payment and payment partially with government bonds rather than cash for medicinal products, which could negatively impact our revenues and profitability. Moreover, in order to obtain reimbursement of our medicinal products in some countries, including some EU Member States, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies. There can be no assurance that our medicinal products will obtain favorable reimbursement status in any country.
The sole legal instrument at the EU level governing the pricing and reimbursement of medicinal products is Council Directive 89/105/EEC, or the Transparency Directive. The aim of this directive is to ensure that pricing and reimbursement mechanisms established in the EU Member States are transparent and objective, do not hinder the free movement and trade of medicinal products in the EU and do not hinder, prevent or distort competition on the market. The Transparency Directive does not provide any guidance concerning the specific criteria on the basis of which pricing and reimbursement decisions are to be made in individual EU Member States. Neither does it have any direct consequence for pricing nor reimbursement levels in individual EU Member States. The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal products for human use. Certain individual EU Member States adopt policies according to which a specific price or level of reimbursement is approved for the medicinal product. Others adopt a system of reference pricing, basing the price or reimbursement level in their territories either on the pricing and reimbursement levels in other countries or on the pricing and reimbursement levels of medicinal products intended for the same therapeutic indication. Further, some EU Member States impose direct or indirect controls on the profitability of the company placing the medicinal product on the market.
Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some EU Member States. These EU Member States include the United Kingdom, France, Germany, Ireland, Italy and Sweden. The HTA process in European Economic Area, or EEA, countries is governed by the national laws of these countries. HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcare system. Those elements of medicinal products are compared with other treatment options available on the market.
The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual EU Member States. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product vary between EU Member States.
In 2011, Directive 2011/24/EU was adopted at the EU level. This directive concerns the application of patients’ rights in cross-border healthcare. This directive is intended to establish rules for facilitating access to safe and high-quality cross-border healthcare in the EU. Pursuant to this directive, a voluntary network of national authorities or bodies responsible for HTA in the individual EU Member States was established. The purpose of the network is to facilitate and support the exchange of scientific information concerning HTAs. This may lead to harmonization of the criteria taken into account in the conduct of HTAs between EU Member States and in pricing and reimbursement decisions and may negatively affect price in at least some EU Member States.
In the EU, the advertising and promotion of our products will also be subject to EU Member States’ laws concerning promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, as well as other EU Member State legislation that may apply to the advertising and promotion of medicinal products. These laws require that promotional materials and advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of the medicinal product. It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product. Promotion of a medicinal product that does not comply with the SmPC is considered to constitute off-label promotion. The off-label promotion of medicinal products is prohibited in the EU. The applicable laws at the EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment. These laws may further limit or restrict communications concerning the advertising and promotion of our products to the general public and may also impose limitations on our promotional activities with healthcare professionals.
Failure to comply with the EU Member State laws implementing the Community Code on medicinal products, and EU rules governing the promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, with the EU Member State laws that apply to the promotion of medicinal products, statutory health insurance, bribery and anti-corruption or with other applicable regulatory requirements can result in enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.
Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU Member States. The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is prohibited in the EU. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of the EU Member States. One example is the UK Bribery Act of 2010, or the UK Bribery Act. This act applies to any company incorporated in or “carrying on business” in the UK, irrespective of where in the world the alleged bribery activity occurs. This act could have implications for our interactions with physicians in and outside the UK. Violation of these laws could result in substantial fines and imprisonment.
The national laws of certain EU Member States require payments made to physicians to be publicly disclosed. Moreover, the European Federation of Pharmaceutical Industries and Associations, or EFPIA, Code on disclosure of transfers of value from pharmaceutical companies to healthcare professionals and healthcare organizations imposes a general obligation on members of the EFPIA or related national industry bodies to disclose transfers of value to healthcare professionals. In addition, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the competent authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States.
For other countries outside of the EU, such as countries in Eastern Europe, Central and South America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCP, applicable regulatory requirements, and ethical principles that have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, warning letters or untitled letters, injunctions, civil, administrative, or criminal penalties, monetary fines or imprisonment, suspension or withdrawal of regulatory approvals, suspension of ongoing clinical studies, refusal to approve pending
applications or supplements to applications filed by us, suspension or the imposition of restrictions on operations, product recalls, the refusal to permit the import or export of our products or the seizure or detention of products.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any products for which we have or may obtain regulatory approval. Sales of ZEJULA, VARUBI, and any of our other product candidates will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government healthcare programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all FDA-approved products for a particular indication.
In order to secure coverage and reimbursement for ZEJULA, VARUBI, or any other product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in product development.
In the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as the basis for reimbursement rates, such as average sales price, or ASP, average manufacturer price, or AMP, and actual acquisition cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare and Medicaid Services, or CMS, surveys and publishes retail pharmacy acquisition cost information in the form of National Average Drug Acquisition Cost, or NADAC, files to provide state Medicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates. It may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products for which we receive regulatory approval.
Our participation in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990 and under multiple subsequent amendments of that law, including the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together the ACA, requires us to pay a rebate for each unit of drug reimbursed by Medicaid. The amount of the “basic” portion of the rebate for each product is set by law as the larger of: (i) 23.1% of quarterly AMP, or (ii) the difference between quarterly AMP and the quarterly best price available from us to any commercial or non-governmental customer, or Best Price. AMP must be reported on a monthly and quarterly basis and Best Price is reported on a quarterly basis only. In addition, the rebate also includes the “additional” portion, which adjusts the overall rebate amount upward as an “inflation penalty” when the drug’s latest quarter’s AMP exceeds the drug’s AMP from the first full quarter of sales after launch, adjusted for increases in the Consumer Price Index-Urban. The upward adjustment in the rebate amount per unit is equal to the excess amount of the current AMP over the inflation-adjusted AMP from the first full quarter of sales. The rebate amount is required to be recomputed each quarter based on our report to CMS of current quarterly AMP and Best Price for our drug. The terms of our participation in the program impose a requirement for us to report revisions to AMP or Best Price within a period not to exceed 12 quarters from the quarter in which the data was originally due. Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision. The ACA and subsequent legislation also changed the definition of AMP. In February 2016, final guidance and regulations were issued by the federal government clarifying these and certain other ACA changes and which relate to the calculation of AMP and the related rebate liability for pharmaceutical products.
Federal law also requires that a company that participates in the Medicaid rebate program report ASP information each quarter to CMS for certain categories of drugs that are paid under Part B of the Medicare program. Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS. CMS uses these submissions to determine payment rates for drugs under Medicare Part B and the resulting Medicare payment rate.
Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. Subsequent legislation extended the 2% reduction, on average, to 2027. This
may cause Medicare Part D plans to seek lower prices from manufacturers. Other legislative or regulatory cost containment provisions, as described below, could have a similar effect.
The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort. Government healthcare programs and other third-party payors are increasingly challenging the prices charged for medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit. The U.S. government, state legislatures and foreign governments also have shown significant interest in implementing cost-containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. Certain states have enacted legislation with the goal of controlling prices on branded prescription drugs and placing restrictions on price increases, the effect of which is unknown. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for products such as ZEJULA, VARUBI, and any other product candidates that we are developing and could adversely affect our net revenues and operating results.
The marketability of ZEJULA, VARUBI, and any other products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time.
In the United States, most outpatient prescription drugs may be covered under Medicare Part D. Medicare Part D is a voluntary prescription drug benefit, through which Medicare beneficiaries may enroll in prescription drug plans offered by private entities for coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans provided for under Medicare Part C.
Coverage and reimbursement for covered outpatient drugs under Part D are not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Although Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, they have some flexibility to establish those categories and classes and are not required to cover all of the drugs in each category or class. Medicare Part D prescription drug plans may use formularies to limit the number of drugs that will be covered in any therapeutic class and/or impose differential cost sharing or other utilization management techniques.
The availability of coverage under Medicare Part D may increase demand for ZEJULA and VARUBI and for products for which we receive marketing approval. However, in order for the products that we market to be included on the formularies of Part D prescription drug plans, we likely will have to offer pricing that is lower than the prices we might otherwise obtain. Changes to Medicare Part D that give plans more freedom to limit coverage or manage utilization, and/or other cost reduction initiatives in the program could decrease the coverage and price that we receive for any approved products and could seriously harm our business.
In the physician office setting, Medicare Part B generally pays for covered drugs, which would include VARUBI IV and in limited circumstances could also include the oral formulation, at a rate of 106% of the drug’s ASP. ASP is defined by statute based on sales and price concession data, including rebates and chargebacks, for a defined period of time and manufacturers submit the required information to CMS on a quarterly basis. Prior to the quarter in which the payment rate will go into effect, CMS calculates and publishes the ASP-based payment rate. Under this methodology, payment rates change on a quarterly basis, and significant downward fluctuations in ASP, and therefore reimbursement rates, could negatively impact sales of a product. Because the ASP-based payment rate is defined by statute, changes to Medicare payment methodologies generally require a legislative change. While the statute requires Medicare Part B payments for most drugs furnished in the physician office setting to be at 106% of ASP, the statute does not have a similar requirement for hospital outpatient departments. For that setting, the Medicare payment for many covered Part B drugs also is at 106% of ASP, provided that the product exceeds a per day cost threshold. For those products that do not meet the threshold, as is true for many oral anti-emetic products, there is no separate payment for the drug when furnished in a hospital outpatient department. For those products that meet the threshold, the current 106% of ASP payment rate could be changed by CMS in future years through regulations,
without any intervening legislation. The 106% of ASP payment rates for the physician office and hospital outpatient settings are subject to the 2% sequestration cuts mandated by federal statute as described above.
Further, the ACA substantially changes the way healthcare is financed by both governmental and private insurers, and contains provisions that may reduce the profitability of drug products. The ACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. The ACA expanded manufacturers’ rebate liability under the Medicaid program from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well, increased the minimum Medicaid rebate due for most innovator drugs in general from 15.1% of AMP to 23.1% of AMP, and capped the total rebate amount for innovator drugs at 100% of AMP. The ACA and subsequent legislation also changed the definition of AMP. CMS regulations to implement the changes to the Medicaid drug rebate program under the ACA became effective on April 1, 2016.
The ACA requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government. Each such manufacturer is required to pay a prorated share of the branded prescription drug fee of $4.1 billion in 2018 and $2.8 billion in each year thereafter, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. The ACA also expanded the Public Health Service’s 340B Drug Pricing Program, or the 340B program (described below), to include additional types of covered entities. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners, and a number of provisions have only recently become effective. It appears likely that the ACA will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs. Legislative changes to the ACA, including a possible repeal of the statute, remain possible under the Trump Administration. Certain changes, such as the removal of the ACA’s individual health insurance mandate, have already been made by Congress via the enactment of the Tax Cuts and Jobs Act of 2017, and the effects of such legislative changes to the ACA are unknown. Even if we obtain favorable coverage and reimbursement status for ZEJULA, VARUBI, or any other products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
We participate in the 340B program. Federal law requires that any company that participates in the Medicaid rebate program also participate in the 340B program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. In addition, in order to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal grantees and agencies, a manufacturer also must participate in the Department of Veterans Affairs Federal Supply Schedule, or FSS, pricing program, established by Section 603 of the Veterans Health Care Act of 1992. Under this program, the manufacturer is obligated to make products available for procurement on an FSS contract and charge a price to four federal agencies-the Department of Veterans Affairs, the Department of Defense, the Public Health Service and the Coast Guard-that is at least 24% less than the Non-Federal Average Manufacturing Price, or non-FAMP, for the prior fiscal year. The requirements under the 340B and FSS programs could reduce the revenue we may generate from ZEJULA, VARUBI, and any other products that we commercialize in the future and could adversely affect our business and operating results.
Fraud and Abuse Laws
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback and false claims statutes.
The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical and biological products, including certain
discounts, or engaging consultants as speakers or consultants, may be subject to scrutiny if they do not fit squarely within the exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs.
The federal civil False Claims Act prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds, or knowingly making, using, or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the federal False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government health care programs and providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have faced enforcement actions for causing false claims to be submitted because of the company’s marketing the product for unapproved, and thus non-reimbursable, uses. Federal enforcement agencies also have showed increased interest in pharmaceutical companies’ product and patient assistance programs, including reimbursement and co-pay support services, and a number of investigations into these programs have resulted in significant civil and criminal settlements. In addition, the ACA amended federal law to provide that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Criminal prosecution is possible for making or presenting a false or fictitious or fraudulent claim to the federal government.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created several new federal crimes, including healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
The majority of states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.
The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain manufacturers of drugs, devices, biologics and medical supplies to engage in extensive tracking of payments and other transfers of value to physicians and teaching hospitals, including physician ownership and investment interests, and public reporting of such data. Pharmaceutical and biological manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to track such payments, and must submit a report on or before the 90th day of each calendar year disclosing reportable payments made in the previous calendar year.
In addition, the U.S. Foreign Corrupt Practices Act, or the FCPA, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any official of another country, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in that capacity. In many other countries, healthcare providers who prescribe pharmaceuticals are employed by government entities, and the purchasers of pharmaceuticals are government entities. Our dealings with these prescribers and purchasers may be subject to the FCPA.
Other countries, including a number of EU Member States, have laws of similar application, including anti-bribery or anti-corruption laws such as the UK Bribery Act. The UK Bribery Act prohibits giving, offering, or promising bribes to any person, as well as requesting, agreeing to receive, or accepting bribes from any person. Under the UK Bribery Act, a company that carries on a business or part of a business in the United Kingdom may be held liable for bribes given, offered or promised to any person in any country by employees or other persons associated with the company in order to obtain or retain business or
a business advantage for the company. Liability under the UK Bribery Act is strict, but a defense of having in place adequate procedures designed to prevent bribery is available.
Because of the breadth of these various fraud and abuse laws, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have material adverse effects on our business, financial condition and results of operations. In the event governmental authorities conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations, they may impose sanctions under these laws, which are potentially significant and may include civil monetary penalties, damages, exclusion of an entity or individual from participation in government health care programs, criminal fines and imprisonment, as well as the potential curtailment or restructuring of our operations. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our financial condition and divert the attention of our management from operating our business.
Patents and Proprietary Rights
We have in-licensed and continue to develop several patent portfolios, including for our rolapitant, niraparib, and immunotherapeutic antibodies programs.
Our NK-1 receptor antagonist portfolio, which relates to rolapitant, consists of patent families currently being prosecuted or maintained, including applications and patents directed to compositions of matter, formulations (including oral and IV), solid forms, methods of treatment (including both delayed and acute onset nausea and/or vomiting and timing of administration in relation to chemotherapy) and methods of preparing rolapitant. Rolapitant is a NK-1 receptor antagonist being developed for the prevention of chemotherapy induced nausea and/or vomiting. The portfolio for rolapitant consists of a number of issued U.S. patents and issued non-U.S. patents across the families.
Our PARP inhibitor portfolio includes patent families relating to niraparib. The patent families in-licensed from Merck are being prosecuted or maintained by Merck in consultation with us. Our patent families relating to niraparib include applications and patents directed to compositions of matter, methods of treatment (including treatment of cancer and other diseases), particular salts of niraparib, niraparib formulations, and methods of preparing niraparib. The Merck portfolio for niraparib comprises of a number of issued United States and non-United States patents.
Our immunotherapeutic antibodies portfolios presently consist of patent and patent applications pending in multiple jurisdictions, which cover particular antibodies and binding fragments thereof to identified targets of interest, as well as their use individually and in combination. We have rights to all patents owned or controlled by our collaborator, AnaptysBio, to the extent that they claim the manufacture, composition, or use of an antagonist antibody developed under the program.
Intellectual Property Protection Strategy
We seek and intend to continue seeking patent protection whenever available for any patentable aspects of our existing products or product candidates and related technology or any new products or product candidates we acquire in the future. Where our intellectual property is not protectable by patents, we seek to protect it through other means, including maintenance of trade secrets and careful protection of our proprietary information. Our license from Merck for niraparib requires Merck to, subject to certain exceptions, prosecute and maintain, upon consultation with us, its patent rights as they relate to the licensed compounds. If Merck decides to cease prosecution of the licensed patent rights, we have the right to take over such prosecution activities. Our license from OPKO for rolapitant grants us the right to control all prosecution and maintenance activities for the licensed compounds, at our sole discretion.
The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Consequently, we do not know whether any of the product candidates we in-license or acquire will be protectable or remain protected by enforceable patents. We cannot predict whether the patent applications we are pursuing will issue as patents in any particular jurisdiction, and furthermore, we cannot determine whether the claims of any issued patents will provide sufficient proprietary protection to protect us from competitors, or will be challenged, circumvented or invalidated by third parties. Even where we succeed in obtaining patents covering our products, third parties may challenge or seek to invalidate or circumvent our patents.
As part of the passage of the America Invents Act in 2011, new post-grant review proceedings were added to U.S. patent law. Post-grant reviews and inter partes reviews allow any member of the public to file a petition with the USPTO seeking to review the patentability of one or more claims in an issued U.S. patent. Post-grant review procedures are conducted before Administrative Patent Judges in the USPTO using a lower standard of proof than used in Federal District Court. In addition, the challenged patents are not accorded a presumption of validity as they are in Federal District Court. The patents covering our products may become involved in such post-grant review proceedings in the U.S. and/or in other jurisdictions (such as oppositions in the European Patent Office) that challenge the patentability of our patents. Such proceedings could result in a finding of unpatentability or invalidity of our patents. They could also result in substantial cost, even if the eventual outcome is favorable to us.
Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for at least 18 months from their earliest filing date, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. In March 2013, the United States transitioned to a ‘first to file’ system in which the first inventor to file a patent application will be entitled to the patent. Previously, in the United States, the first to make the claimed invention was entitled to the patent. For patents or patent applications not subject to the ‘first to file’ system, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention.
Although we control issued patents covering a number of different attributes of our products, and pending applications on others, there can be no assurance that any issued patents would be held valid by a court of competent jurisdiction. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using specific compounds or technology. To the extent prudent, we intend to bring litigation against third parties that we believe are infringing our patents.
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in granting a patent, or may be shortened if a patent is terminally disclaimed over another patent.
In the United States, the term of a patent that covers an FDA-approved drug or biological product may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during drug development and the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug or biologic is under development and regulatory review. A patent term cannot be extended beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Patent term extension is available only if the approval of the product represents the first permitted commercial marketing of the active ingredient. Similar provisions are available in the EU and other non-U.S. jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our products receive FDA approval, we expect to apply for patent term extensions on patents covering those products. We intend to seek patent term adjustments and extensions to any of our issued patents in any jurisdiction where these are available; however, there is no guarantee that the applicable authorities, including the FDA and the USPTO in the United States, will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such adjustments or extensions. We have applied for patent term extension for rolapitant and niraparib in the United States.
To protect our rights to any of our issued patents and proprietary information, we may need to litigate against infringing third parties, or avail ourselves of the courts or participate in hearings to determine the scope and validity of those patents or other proprietary rights. These types of proceedings are often costly and could be time-consuming to us, and we cannot be certain that the deciding authorities will rule in our favor. An unfavorable decision could result in the invalidation or a limitation in the scope of our patents or forfeiture of the rights associated with our patents or pending patent applications. Any such decision could result in our key technologies not being protectable, allowing third parties to use our technology without being required to pay us licensing fees, or may compel us to license needed technologies from third parties to avoid infringing third-party patent and proprietary rights. Such a decision could even result in the invalidation or a limitation in the scope of our patents or could cause us to lose our rights under existing issued patents or not to have rights granted under our pending patent applications.
We also rely on trade secret protection for our confidential and proprietary information. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees and consultants, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.
While the expiration of a composition of matter patent may result in a loss of market exclusivity for the covered pharmaceutical product, that is not always the case. Market exclusivity may continue to be derived from, among other things: (i) patents relating to the use of the product; (ii) patents on processes to make the product; (iii) patents on intermediates of the active ingredient of such product; and (iv) patents relating to novel compositions and formulations. The effect of composition of matter patent expiration on market exclusivity also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, and the complexities and economics of the process for manufacture of the active ingredient of the product.
PARP Inhibitor
We have an exclusive, worldwide license from Merck to a portfolio of patents related to niraparib, an inhibitor of poly (ADP-ribose) polymerase. Our portfolio, including patent families in-licensed from Merck, includes patent families related to niraparib comprising patent and patent applications claiming compounds, certain salt forms, methods of use, formulations, and processes to make niraparib.
A United States patent claiming the composition of matter of niraparib has been granted and, with patent term adjustment, has a patent term until at least March 2030. Corresponding patent applications and issued patents in multiple foreign jurisdictions have similar claims and have a patent term until at least January 2028. Additional patent families claiming certain compounds, salt forms, methods of use, formulations, and processes to make niraparib have been filed in the United States and multiple foreign jurisdictions and, if granted, will have patent terms until at least 2027 to 2038.
Many jurisdictions also grant patent term extensions, typically up to five years, for post-issuance regulatory delay. In the United States, only one patent may be extended per approved product. We have applied for patent term extension for niraparib in the United States, and we believe that patent term extension under the Hatch-Waxman Act could be available to extend our patent exclusivity for niraparib’s composition of matter up to March 2031 in the United States. With respect to Europe, we intend to file supplementary protection certificates (which are issued on a country-by-country basis) in available countries. We believe that supplementary protection certificates could be available to extend our patent exclusivity for niraparib in each European country in which a patent is issued and in which supplementary protection certificates are available, with the period of extension depending on the timing of our first approval. In general, supplementary protection certificates are available up to a maximum of five years and, if granted, any available supplementary protection certificate extension will be capped at fifteen years from the first approval. There is no guarantee that any extension will be granted in either the United States or Europe, and even if granted, the extension may be less than the maximum allowable extension.
NK-1 Receptor Antagonists
We have an exclusive, worldwide license from OPKO to a portfolio of patents related to rolapitant, including issued claims covering the composition of matter and certain formulations and methods of use.
A United States Patent claiming the composition of matter of rolapitant has been granted and, with the patent term adjustment, has a patent term until at least December 2023. Corresponding applications and issued patents in multiple foreign jurisdictions have similar composition of matter claims. In foreign jurisdictions, this family of patents and/or applications has a patent term until at least December 2022. A United States patent claiming methods of treating nausea and/or emesis comprising administering an intravenous formulation of rolapitant has been granted and, with patent term adjustment, expires in July 2032. Corresponding applications and issued patents in multiple foreign jurisdictions have similar claims directed to
methods of treating nausea and/or emesis comprising administering an intravenous formulation of rolapitant and have patent terms until at least 2030.
We have applied for patent term extension for rolapitant in the United States, and we believe that patent term extension under the Hatch-Waxman Act could be available to extend our patent exclusivity for rolapitant up to August 2028 in the United States. With respect to Europe, we believe that supplementary protection certificates could be available to extend our patent exclusivity for rolapitant in each European country in which a patent is issued and in which supplementary protection certificates are available, with the period of extension depending on the timing of our first approval. We have filed for supplementary protection certificates in available European countries based upon our EC approval. If granted, the supplementary protection certificates could extend our patent exclusivity for rolapitant’s composition of matter to December 2027. There is no guarantee that the maximum allowable extension (generally 15 years) will be granted in either the United States or Europe, and any extension granted may be shorter than this, or not granted at all.
Our license also includes additional patent families related to rolapitant, comprising patent and patent applications claiming certain compounds, forms, formulations, methods of use, and processes to make rolapitant. These patent families have patent terms until at least 2027 to 2030, including patent term adjustment in certain patents.
Immuno-Oncology
Pursuant to our collaboration and exclusive license agreement with AnaptysBio, we have ownership and/or exclusive worldwide license rights in patent filings relating to certain antibodies that bind to PD-1, LAG-3, and/or TIM-3 developed by AnaptysBio. Our immuno-oncology portfolio comprises patent filings covering composition of matter for the relevant antibodies and binding fragments thereof, as well as their use individually and in combination; additional filings are contemplated as research and development continues.
A patent has issued from the relevant patent filings, and any patents granted from the patent filings will be expected to have terms that extend into the mid to late 2030s. Ultimate expiration dates, which may differ by jurisdiction, may depend on, for example, patent term adjustments or patent term extensions available for patent office and/or regulatory delays, payment of annuities and/or maintenance fees, and/or terminal disclaimers of related cases.
Manufacturing
We contract with third parties for the manufacture of ZEJULA and VARUBI, and for the manufacture of our product candidates for preclinical studies and clinical trials, and we intend to continue to do so in the future. We currently work with one contract manufacturing organization, or CMO, for the production of VARUBI drug substance used for oral drug product and VARUBI IV, and one other CMO for the commercial production of oral drug product. We currently work with one CMO for the production of VARUBI IV drug product for our commercial needs. We currently work with two CMOs for the production of ZEJULA drug substance, and one other CMO for niraparib drug product supply, for our clinical and commercial needs. We contract with one CMO for the manufacture of TSR-042, TSR-022, TSR-033 and other antibody products, and may contract with additional CMOs that have biologics capabilities. For each of our product candidates, we may elect to pursue relationships with other CMOs for manufacturing clinical supplies for later-stage trials and for commercialization. We do not own or operate manufacturing facilities for the production of clinical quantities of our product candidates. We currently have no plans to build our own clinical or commercial scale manufacturing capabilities. To meet our projected needs for clinical supplies to support our activities through regulatory approval and commercial manufacturing, the CMOs with which we currently work will need to increase scale of production or we will need to secure alternate suppliers. We have not currently qualified alternate suppliers in the event the current CMOs we utilize are unable to scale production. We have personnel with pharmaceutical development and manufacturing experience who are responsible for the relationships with our CMOs.
Employees
As of December 31, 2017, we had 715 full-time employees, 150 of whom hold Ph.D. or M.D. degrees. Of these full-time employees, 272 were directly engaged in development activities, 232 were engaged in selling, marketing and related activities, 72 in medical affairs, with the remainder serving in primarily general and administrative and commercial support capacities. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Research and Development
We have dedicated a significant portion of our resources to our efforts to develop our product candidates. We incurred research and development expenses, including acquired in-process research and development, of $157.4 million, $254.1 million and $318.7 million during the years ended December 31, 2015, 2016 and 2017, respectively. We anticipate that a significant portion of our operating expenses will continue to be related to research and development in 2018 as we continue to advance our product candidates through clinical development.
Available Information
Our internet website address is http://www.tesarobio.com. Through our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission, or the SEC. These materials can be accessed through the “Investors” section of our website. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. Paper copies of our SEC reports are available free of charge upon request in writing to Investor Relations, TESARO, Inc., 1000 Winter Street, Waltham, MA 02451. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
We currently operate in one segment. For additional information regarding our financial results, including our comprehensive loss, revenues and assets, refer to Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following discussion of risk factors, in its entirety, in addition to the other information contained in this Annual Report on Form 10-K, including the information in our financial statements and the related notes, and the other filings we make with the Securities and Exchange Commission. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks, or other events that we do not currently anticipate or that we currently deem immaterial, may have a material adverse effect on our business, prospects, financial condition and results of operations.
Risks Related to Our Financial Position and Capital Needs
We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.
We are a biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development and commercialization is highly speculative because, among other things, it entails substantial up-front capital expenditures and significant risk that product candidates will fail to gain regulatory approval or approved products will fail to become commercially successful. We have recognized limited revenue from product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2010. We reported a net loss of $496.1 million for the year ended December 31, 2017 and had an accumulated deficit of $1.5 billion as of December 31, 2017.
Although we have obtained approval from regulatory authorities and launched ZEJULA® (niraparib) in the U.S. and European Union, or the EU, VARUBI® (rolapitant) IV and tablets in the United States and VARUBY® (rolapitant) tablets in the EU, we expect to continue to incur losses for the foreseeable future. These losses may increase as we continue to invest in product development and commercialization activities for our products and continue our development of, and seek regulatory approvals for, all of our product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in large part, on the rate of future growth of our expenses, and our ability to generate and continue to grow revenues from our products and any product candidates. Because of the numerous risks and uncertainties associated with product development, including the risk that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict with certainty the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.
We have recognized limited revenues from sales of our products, and we may never become profitable.
To date, we have recognized limited product revenues from sales of ZEJULA and VARUBI/VARUBY, and we have not generated any revenues from sales of any other product candidates. Our ability to continue to generate revenue and become profitable depends upon our ability to successfully commercialize our products, including ZEJULA, and our other product candidates, including niraparib in additional indications as both a monotherapy and in combination with other assets, including our own immuno-oncology assets. Even if we are able to successfully achieve regulatory approval for additional product candidates, we do not know when any of those product candidates will generate revenue for us, if at all.
In addition, because of the numerous risks and uncertainties associated with product development, including the risk that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict with certainty the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. Even if we are able to obtain approval for our product candidates, we anticipate incurring significant costs associated with commercializing these products.
Even if we are able to generate revenues from the sale of our current and future products, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.
We may require additional capital to fund our operations, and if we fail to obtain necessary financing, we may be unable to successfully complete the development and commercialization of our product candidates.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to advance the development of our product candidates, including niraparib as a monotherapy and in combination with other therapeutics, and our immuno-oncology assets, and to continue to commercialize ZEJULA and VARUBI/VARUBY. We also may spend substantial amounts for any additional product candidates that we may acquire or in-license in the future. We may require additional capital for these and other needs. If additional capital is needed and not obtained on a timely basis, we would be required to change our current operating plans to reduce our future expenses.
Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity or debt offerings and facilities, including potentially an additional draw under our existing term loan agreement, and we may seek additional capital through arrangements with strategic partners or from other sources. Additional capital may not be available to us on reasonable terms, if at all. If we are unable to raise additional needed capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products or product candidates and/or other areas of our business. Raising additional funds through the issuance of equity or debt securities could result in dilution to our existing stockholders, increased fixed payment obligations, or both. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is based on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both short and long-term, will depend on many factors, including:
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our ability to generate sufficient revenues from sales of ZEJULA and, if approved, our other product candidates;
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the cost of continuing to expand our development and commercial capabilities for our products and our product candidates, both in the U.S. and in certain foreign markets, including Europe;
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the outcome, timing and cost of regulatory approvals by the U.S. Food and Drug Administration, or FDA, and comparable foreign regulatory authorities and the potential that the FDA or comparable foreign regulatory authorities may require that we perform more studies than those that we currently expect;
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the initiation, progress, timing, costs and results of clinical trials for our current product candidates and any future product candidates we may in-license;
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the cost and timing of preclinical and clinical development and manufacturing activities associated with our immuno-oncology antibody product candidates;
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our obligations to make milestone payments, royalty payments, or both under our in-licensing agreements;
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the cost of in-licensing or acquiring additional product candidates;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights that we own or control;
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the amount and timing of potential conversion requests, if any, and interest expense associated with our 3.00% convertible senior notes due October 1, 2021, or the Convertible Notes; and
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our need to repay amounts due under our loan agreement dated November 21, 2017, or the Loan Agreement.
Servicing our debt will require significant amounts of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled payments of the principal of, to pay interest on, to pay any cash due upon conversion of, or to refinance, our indebtedness, including the Convertible Notes and borrowings under the Loan Agreement, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Risks Related to Our Business and Industry
Our current business plan relies heavily on our ability to successfully commercialize ZEJULA. Our products may not achieve market acceptance or be commercially successful.
Our ability to successfully commercialize our current products and product candidates, including ZEJULA as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets, is critical to the execution of our business strategy. Our products and product candidates may not achieve market acceptance among physicians, patients, and third-party payors, and may not be commercially successful. The degree of market acceptance and commercial success of our approved products and our product candidates, including ZEJULA as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets, if approved, will depend on a number of factors, including the following:
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the acceptance of our products by patients and the medical community and the availability, perceived advantages and relative cost, safety and efficacy of alternative and competing treatments;
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the effectiveness of our marketing, sales and distribution strategy and operations;
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the ability of our third-party manufacturers to manufacture sufficient commercial supplies of our products, to remain in good standing with regulatory agencies, and to develop, validate and maintain commercially viable manufacturing processes that are, to the extent required, compliant with current good manufacturing practice, or cGMP, regulations;
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the degree to which the approved labeling supports promotional initiatives for commercial success;
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the availability of reimbursement from managed care plans and other third-party payors and the willingness and ability of patients to pay for our products;
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a continued acceptable safety profile of our products and product candidates;
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any new or unexpected results from additional clinical trials or further analysis of clinical data of completed clinical trials by us or our competitors;
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our ability to enforce our intellectual property rights;
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our ability to avoid third-party patent interference or patent infringement claims; and
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our ability to maintain compliance with all applicable regulatory requirements.
As many of these factors are beyond our control, we cannot assure you that we will ever be able to generate meaningful revenue through product sales. Any inability on our part to successfully commercialize our products in the United States or any foreign territories where they 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 our future business prospects.
Our future success is dependent primarily on our ability to obtain regulatory approvals for and successfully commercialize our product candidates, including additional indications for niraparib as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets.
The success of our business depends heavily upon our ability to develop and commercialize product candidates. We have recognized only limited product revenue from sales of ZEJULA and VARUBI/VARUBY, and our only later clinical-stage programs include niraparib as a monotherapy and in combination with other therapeutics, including our own immuno-oncology assets.
We cannot commercialize product candidates, including niraparib in additional indications as a monotherapy or in combination with other therapeutics, in the United States without first obtaining regulatory approval from the FDA. Similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. Before obtaining regulatory approvals for the commercial sale of any product candidate, including any combination, for a target indication, we must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical studies, and, with respect to approval in the United States, to the satisfaction of the FDA, that the product candidate or combination is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. The process to develop, obtain regulatory approval for and commercialize product candidates is long, complex and costly both inside and outside of the United States. Even if a product candidate or combination were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations, including use restrictions for certain patient populations; warnings, precautions or contraindications; or burdensome post-approval study or risk management requirements.
Despite the results reported in clinical trials for niraparib, we do not know whether the clinical trials we are continuing to conduct or may in the future conduct will demonstrate adequate efficacy and safety to result in regulatory approval for niraparib in any additional indications, as a monotherapy or in combination with other assets, or in any particular jurisdiction or jurisdictions other than those for which niraparib has already been approved. If we do not obtain regulatory approvals for niraparib in the various additional indications and/or combinations for which it is being developed, or do not obtain such approvals in a timely manner, it would negatively affect our ability to generate revenue in the future, our ability to become profitable, and our growth prospects.
We face substantial competition for our marketed products, ZEJULA and VARUBI/VARUBY, which could limit our ability to generate significant product sales.
The development and commercialization of new drug products is highly competitive. Many of our competitors are more established companies and may therefore have competitive advantages due to their size, cash flows, and institutional experience. We may be unable to compete successfully against these more established companies.
There are a number of large pharmaceutical and biotechnology companies that market and sell products or are pursuing the development of products that compete or we expect will compete with ZEJULA. There are currently two commercially available PARP inhibitors other than ZEJULA. AstraZeneca Plc’s LYNPARZATM (olaparib) was initially approved by the FDA for use by ovarian cancer patients with a germline BRCA mutation, and was granted a new approval in August 2017 by the FDA for use as a maintenance treatment for recurrent, epithelial ovarian, fallopian tube or primary peritoneal adult cancer who are in response to platinum-based chemotherapy, regardless of BRCA status. In February 2018, LYNPARZA received a positive opinion from the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, for a new tablet formulation and a broad maintenance label, which is expected to lead to an EC marketing authorization in the near future. In addition, Clovis Oncology, Inc.’s RUBRACATM (rucaparib) was approved in December 2016 by the FDA for use as a monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies. Clovis has filed with the FDA for expanded approval of RUBRACA as a second-line and later maintenance treatment for all women with ovarian cancer who have responded to their latest treatment with platinum chemotherapy, regardless of BRCA status, and has filed for initial approval with the European Commission as a third-line treatment in advanced ovarian cancer patients with a deleterious BRCA-mutation. In February 2018, the CHMP communicated a positive trend vote (meaning more voted yes than no) for RUBRACA to be authorized for the treatment of a subpopulation of platinum-sensitive ovarian cancer patients who also harbor a BRCA mutation. A final vote will occur at the CHMP’s March 2018 meeting. We believe there are also several additional products in clinical development targeting the PARP pathway, as detailed in Part I, Item 1, “Business - Competition”. Both LYNPARZA and rucaparib have received “orphan drug designation” from the EMA, which provides certain benefits including market exclusivity for up to ten years in the approved indication post-approval. In addition to other PARP inhibitors, ZEJULA also competes with AVASTINTM (bevacizumab), Roche’s angiogenesis inhibitor. AVASTIN is FDA- and EMA-approved in combination with chemotherapy for the treatment of recurrent ovarian cancer following platinum-containing chemotherapy (platinum-sensitive and platinum-resistant) and has been
approved by the EMA, in combination with chemotherapy, for front-line treatment. In the U.S., it is currently under FDA review for the front-line setting.
We also face substantial competition with respect to oral and IV formulations of VARUBI and with respect to VARUBY. VARUBI/VARUBY competes with EMEND, an NK-1 receptor antagonist marketed by Merck, as well as AKYNZEO, an oral combination NK-1 receptor antagonist and 5-HT3 receptor antagonist (netupitant plus ALOXI (palonosetron HCl)) that is marketed by Helsinn Healthcare, and Sandoz’s generic version of aprepitant. Additionally, Heron Therapeutics recently received FDA approval, and launched marketing of, its aprepitant IV formulation product, CINVANTITM. VARUBI/VARUBY would face additional competition if additional generics are introduced to the market, or other products are developed and approved, for the treatment and prevention of CINV, or if an IV formulation of AKYNZEO is developed.
We are aware of several companies that have antibody-based products on the market or in clinical development that are directed at the same biological targets as some of our immuno-oncology programs. There are currently two anti-PD-1 antibody products and three anti-PD-L1 antibody products being marketed. OPDIVO® (nivolumab, marketed by Bristol-Myers Squibb) is approved in a number of indications as a monotherapy or in combination with other products; KEYTRUDA® (pembrolizumab, marketed by Merck) is approved in a number of indications; TECENTRIQ® (atezolizumab, marketed by Roche) is approved in patients with various forms of locally advanced or metastatic urothelial carcinoma or metastatic NSCLC; IMFINZI® (durvalumab, marketed by AstraZeneca) was approved in 2017 for patients with various forms of locally advanced or metastatic urothelial carcinoma; and BAVENCIO® (avelumab, co-marketed by Merck KGa and Pfizer) was approved in 2017 for adults and pediatric patients 12 years and older with metastatic Merkel cell carcinoma and for patients with various forms of locally advanced or metastatic urothelial carcinoma. Although there are currently no anti-TIM-3 antibody products or anti-LAG-3 antibody products being marketed, we are aware that two companies, Novartis and Eli Lilly, have anti-TIM-3 modulator antibodies in Phase 1/2 clinical development for various indications. We are also aware of several companies that have anti-LAG-3 modulators in development for various indications, including Bristol-Myers Squibb, which has an anti-LAG-3 antibody in Phase 2 clinical development; Novartis, which has an anti-LAG-3 antibody in Phase 1/2 and Phase 2 clinical development; and Merck, Boehringer Ingelheim and Regeneron Pharmaceuticals, each of which has an anti-LAG-3 antibody in Phase 1 clinical development.
For further detail on the specific competition that VARUBI/VARUBY, ZEJULA and our immuno-oncology antibody product candidates face, see Part I, Item 1, “Business - Competition”.
Many of the approved drugs with which our products or product candidates may compete are well-established therapies or products and are widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. Any of our product candidates that are approved may be priced at a significant premium over competitive generic products.
Our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more widely used and less costly than ours, and may also be more successful than us in manufacturing and marketing their products.
Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.
Even after regulatory approval is obtained, products are still subject to ongoing requirements of the FDA and comparable foreign regulatory authorities, including requirements related to manufacturing, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information.
In addition, manufacturers of drug and biological products and their facilities are subject to continual review and periodic inspections by the FDA, other regulatory authorities or comparable foreign regulatory authorities for compliance with cGMP requirements. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with a facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.
If we, our approved products or product candidates, or the manufacturing facilities for our approved products or product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
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issue warning letters or untitled letters;
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mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
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require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend, vary or withdraw regulatory approval;
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suspend any ongoing clinical studies;
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refuse to approve pending applications or supplements to applications filed by us;
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suspend or impose restrictions on operations, including costly new manufacturing requirements; and/or
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seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue.
Advertising and promotion of our products and any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Department of Health and Human Services Office of Inspector General, or the HHS OIG, state attorneys general, members of Congress, and the public. Violations of applicable advertising and promotion laws and regulations, including promotion of our products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA. Advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by comparable foreign regulatory authorities. In the United States, engaging in impermissible promotion of approved products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. Advertising and promotion of our products are similarly subject to close scrutiny in the EU.
Because the results of preclinical testing or clinical studies are not necessarily predictive of future results, product candidates we advance into clinical trials may not have favorable results in later clinical trials or receive regulatory approval for any particular use, if at all.
Success in preclinical testing or human clinical studies does not ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational drug, or the safety, purity, and potency of an investigational biological product for any particular use, or at all. A number of companies in the pharmaceutical and biotechnology industries, including many with greater resources and experience than us, have suffered significant setbacks in clinical trials, even after seeing promising results in prior clinical trials. For example, we do not know whether the clinical trials we are currently conducting or may in the future conduct will demonstrate adequate efficacy and safety, or safety to result in regulatory approval for ZEJULA in additional indications as a monotherapy or in combination with other therapeutics, including our own immuno-oncology assets. If we do not obtain regulatory approval for our product candidates, or do not obtain such approval in a timely manner or for anticipated patient populations, it would negatively affect our ability to generate significant revenue and our growth prospects.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. We have various ongoing clinical trials related to our development
programs for ZEJULA and our various immuno-oncology assets including in various combinations with each other and other assets. We may experience delays in our ongoing or future clinical trials, and we do not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned, or be completed on schedule, if at all. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, including the rate of patient enrollment, and other factors, such as:
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delay or failure in reaching agreement with the FDA or comparable foreign regulatory authorities on a trial design that we are able to execute;
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delay or failure in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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delay or failure in obtaining institutional review board, or IRB, approval or the approval of other reviewing entities, including comparable foreign entities, to conduct a clinical trial at each site;
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withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the inability of a site to participate due to prior engagement in other clinical trial programs, including some that may be for the same indication;
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delay or failure in recruiting and enrolling suitable subjects and having subjects complete a trial or return for post-treatment follow-up;
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ambiguous or negative interim results, or results that are inconsistent with earlier results;
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feedback from the FDA, an IRB, a data safety monitoring board, or comparable foreign entities; or results from earlier stage or concurrent preclinical and clinical studies, that might require modification to the protocol for a given study;
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unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;
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failure to demonstrate a benefit from using a drug or biologic;
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manufacturing issues, including problems with manufacturing or obtaining from third parties sufficient quantities of raw materials, active pharmaceutical ingredients or product candidates for use in clinical trials; and
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changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
If we experience delays in the completion of, or the termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA and comparable foreign regulatory authorities for a product candidate is unpredictable, but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Although we have obtained FDA and EMA regulatory approval for ZEJULA and VARUBI/VARUBY, we may not ever obtain regulatory approval for our current product
candidates or any other product candidates, including ZEJULA in additional indications, as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets.
The FDA or comparable foreign regulatory authorities may require more information, including additional preclinical or clinical data or trials, to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that is not desirable for the successful commercialization of that product candidate. In addition, if our product candidate produces undesirable side effects or safety issues, the FDA may require the establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or a comparable foreign regulatory authority may require the establishment of similar strategies, that may, for instance, restrict distribution of our product or otherwise impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm the commercial prospects of our product candidates, including ZEJULA in additional indications, as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets.
Certain of our product candidates, including ZEJULA in additional indications, as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets, could be approved or deemed approvable by the FDA or equivalent foreign regulatory authorities only in combination with a diagnostic test for certain uses, which could increase the risk that the product candidate does not receive approval by the relevant regulatory authorities, or receives approval under conditions that adversely impact the commercial potential of the product candidate.
Certain clinical trials that we have conducted in the past, are currently conducting, or may in the future conduct for certain of our therapeutic product candidates, such as ZEJULA, included or may include the use of a diagnostic test to help identify patients who may be more likely to respond to the product candidate for certain uses.
If the FDA or any equivalent foreign regulatory authority determines that any of our product candidates can be approved for use only with an approved companion diagnostic test, we may have difficulty receiving regulatory approval for such product candidate in those uses if the relevant diagnostic test is not also cleared or approved for use by the applicable regulatory authority. Diagnostic tests, including companion diagnostics, are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and require separate regulatory clearance or approval prior to commercialization. We do not develop diagnostic tests internally. We are therefore dependent on the sustained cooperation and effort of third-party collaborators in developing and obtaining approval for these tests. For example, the diagnostic tests that are being utilized in our completed and ongoing ZEJULA clinical studies are owned and administered by a third party. If clearance or approval of these diagnostic tests is required by the FDA or equivalent foreign regulatory authorities, this third party may encounter difficulties in obtaining clearance or approval for the applicable tests, or may fail to support the clinical development of ZEJULA in additional indications as a monotherapy or in combination with other therapeutics, including our immuno-oncology assets, as we expect, or may fail to keep the test on the market even if it is cleared or approved. Any such delay or failure could delay or prevent approval or adoption in additional indications of ZEJULA, or other products we may later acquire with similar characteristics.
In addition, if any product candidate is approved in a particular indication for use only in connection with such a companion diagnostic test by the FDA or any comparable foreign regulatory agencies, the commercial opportunity for such product candidate may be more limited, and we may have difficulty achieving adoption of the product candidate, if the diagnostic test is not commercially available or if the diagnostic test is restricted in its use by payors or other market forces.
Any one of our products or product candidates may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval, limit its commercial viability, or result in significant negative consequences following any marketing approval.
The safety profile of our products will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If we, the FDA or comparable foreign regulatory authorities become aware of new safety information about any of our products or product candidates after approval, we or those authorities may issue labeling changes, or the authorities may require the establishment of a REMS, or similar strategy, impose restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, in January 2018, after post-marketing events of anaphylaxis, anaphylactic shock, and other serious hypersensitivity reactions, some requiring hospitalization were reported to us following the commercial launch of VARUBI IV, we updated the package insert for the IV formulation of VARUBI in collaboration with the FDA to include certain warnings
and precautions with respect to these events. We also issued what is commonly referred to as a “Dear Healthcare Professional Letter” in connection with the updates to the package insert to inform healthcare providers of these changes. In February 2018, we determined that we would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.
Undesirable side effects caused by any of our products or product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials, could result in a more restrictive label, or could result in the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. Drug-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete a clinical trial, and could result in potential product liability claims. Such side effects, such as those experienced with VARUBI IV following the commercial introduction of the product, could also materially limit the commercial potential for such product, especially if competing products are not associated with similar side effects. Any of these occurrences may harm our ability to generate revenues from the affected product and adversely affect our business, financial condition and prospects.
Additionally, if we or others identify undesirable side effects caused by our marketed products, such as those we have observed with VARUBI IV, a number of potentially significant negative consequences could result, including:
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we may suspend marketing of such product;
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we may be obliged to conduct a product recall or product withdrawal;
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regulatory authorities may withdraw approvals of such product;
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regulatory authorities may require additional warnings on the label for such product;
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we may be required to develop a REMS for such product or, if a REMS is already in place, to incorporate additional requirements under the REMS, or to develop a similar strategy as required by a comparable foreign regulatory authority;
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we may be required to conduct additional post-market studies;
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we may record significant inventory impairment charges to write down the value of inventories to estimated net realizable value;
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we may experience significant product returns;
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we could be sued and held liable for harm caused to subjects or patients; or
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our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product or product candidate, and could significantly harm our ability to generate revenues from sales of such product and our business, results of operations and prospects.
Failure to obtain regulatory approval in international jurisdictions would prevent our product candidates from being marketed abroad.
In order to market and sell any of our product candidates in Europe or any other foreign jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or our licensees may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in
any market. If we are unable to obtain approval of any of our product candidates by regulatory authorities in Europe or other foreign territories, the commercial prospects of that product candidate may be diminished and our business prospects could be adversely impacted.
Our products and any product candidates we are able to commercialize may become subject to unfavorable pricing regulations, third-party reimbursement practices or pricing pressure due to healthcare reform initiatives, which could harm our business.
Our ability to successfully market and commercialize our current and future products will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. If these third-party payors do not sufficiently cover and reimburse the cost of our products and related procedures or services or these products are considered too costly for general use, physicians may prescribe them less frequently, adversely affecting our future revenues and profitability.
The Medicare program and certain government pricing programs, including the Medicaid drug rebate program, the Public Health Service’s 340B Drug Pricing Program, or the 340B program, and the pricing program under Section 603 of the Veterans Health Care Act of 1992, or the VHCA, impact the revenues we may derive from current and future products that we may commercialize. Any future legislation or regulatory actions altering these programs or imposing new compliance requirements could have a significant adverse effect on our business. Any such measures could indirectly impact demand for pharmaceutical products because they can cause payors and providers to apply heightened scrutiny and/or austerity actions to their entire operations, including pharmacy budgets.
Also, the trend toward managed health care in the U.S., as well as the implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together the ACA, and the concurrent growth of organizations such as managed care organizations, accountable care organizations and integrated delivery networks, may result in increased pricing pressures for pharmaceutical products, including any products that may be offered by us in the future. Moreover, legislative and regulatory changes to the ACA, including a possible repeal, remain possible under the Trump Administration. Certain changes, such as the removal of the ACA’s individual health insurance mandate, have already been made by Congress via the enactment of the Tax Cuts and Jobs Act of 2017, and the effects of such legislative changes to the ACA are unknown. In addition, third-party payors are increasingly making patients responsible for a higher percentage of the total cost of drugs in the outpatient setting. This can lower the demand for our products if the increased patient cost sharing obligations are more than they can afford. We are unable to predict what changes in legislation or regulation relating to the health care industry or third-party coverage and reimbursement, including possible repeal of the ACA, may be enacted in the future or what effect such legislation or regulation would have on our business.
There may be significant delays in obtaining coverage and reimbursement our products, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacturing, selling and distribution costs. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may only be temporary.
If we fail to comply with our reporting and payment obligations under U.S. governmental pricing and contracting programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We are required to calculate and report certain pricing data to the U.S. federal government in connection with federal drug pricing programs as a pre-condition to: (i) the availability of federal funds to pay for our products under Medicaid and Medicare Part B; and (ii) procurement of our products by the Department of Veterans Affairs, or the VA, and by covered entities under the 340B program. Pharmaceutical manufacturers have been prosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete pricing information to the government. The rules governing the calculation of certain reported prices are highly complex. Although it is our intention to maintain and follow strict procedures to ensure the maximum possible integrity for our federal price calculations, the process for making the required calculations involves subjective judgments and the risk of errors always exists, which creates the potential for exposure under the false claims laws. We cannot assure you that our pricing submissions will not be found to be incomplete or incorrect. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.
The Medicaid rebate amount for each manufacturer is computed each quarter based on the manufacturer’s submission to the Centers for Medicare and Medicaid Services, or CMS, of its current average manufacturer price, or AMP, and, in the case of innovator products like ZEJULA and VARUBI, best price figures, for the quarter. If we become aware that our AMP or best price reporting for a prior quarter was incorrect, or has changed, we are obligated to resubmit the corrected data, increasing our costs for complying with the laws and regulations governing the Medicaid drug rebate program. Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the ceiling price at which we would be required to offer our products to certain covered entities, such as safety-net providers, under the 340B program.
We are liable for errors associated with our submission of average sales price, or ASP, pricing data under Medicare Part B. In addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted false AMP, ASP, or best price information to the government, we may be liable for significant civil monetary penalties. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in the Medicaid program and receive federal payments under Medicaid or Medicare Part B for our covered outpatient drugs.
To be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased by certain federal agencies and certain federal grantees, we also must participate in the VA FSS pricing program. To participate, we are required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs” available at pricing that is based on a weighted average wholesaler price known as the Non-FAMP. Knowing provision of false information in connection with a Non-FAMP filing or failure to make necessary disclosures and/or to identify contract overcharges can subject us to substantial penalties for each item of false information as well as allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, transparency and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, specialty distributors, specialty pharmacies, physicians and third-party payors play a primary role in the distribution, recommendation and prescription of any pharmaceutical product for which we obtain marketing approval. Our arrangements with third-party payors and customers are governed by applicable federal and state healthcare laws and regulations, including the following:
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the federal healthcare Anti-Kickback Statute;
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the federal civil False Claims Act;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act;
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the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program;
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analogous state laws and regulations, such as state anti-kickback and false claims laws; and
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similar restrictions imposed on the promotion and marketing of medicinal products in Europe and other foreign territories, including restrictions prohibiting the promotion of a compound prior to its approval.
The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or pharmaceutical company may fail to comply fully with one or more of these requirements. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of
significant resources and generate negative publicity, which could harm our financial condition and divert resources and the attention of our management from operating our business.
Our ability to successfully commercialize our products and generate revenues outside of the U.S. depends heavily on the availability of adequate pricing and reimbursement from government and other third-party payors.
Outside the U.S., certain countries, including a number of EU Member States and other European countries, set prices and reimbursement for pharmaceutical products, or medicinal products as they are commonly referred to in the EU, with limited participation from the marketing authorization holders. We cannot be sure that such prices and reimbursement will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or reimbursement levels that are not commercially attractive for us or our collaborators, our revenues from sales by us or our collaborators, and the potential profitability and commercial viability of our drug products, in those countries would be negatively affected. An increasing number of countries are taking initiatives to attempt to reduce large budget deficits by focusing cost-cutting efforts on pharmaceuticals for their state-run health care systems. These international price control efforts have impacted all regions of the world, but have been most drastic in the EU.
Additionally, some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of the product in that particular country.
If we breach the license agreements for our products or product candidates, we could lose the ability to continue the development and commercialization of our product candidates.
If we fail to meet our obligations under our agreements with our licensors, including Merck, OPKO and AnaptysBio, our licensors have the right to terminate our exclusive licenses and re-obtain the licensed technology as well as aspects of any intellectual property controlled by us and developed during the period the agreements were in force that relate to the licensed technology. This means that our licensors could effectively take control of the development and commercialization of our products and product candidates after an uncured, material breach of our license agreements by us. This would also generally be the case if we voluntarily terminated the agreements. While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all. Any uncured, material breach under the licenses could result in our loss of exclusive rights and may lead to a complete termination of our product development and any commercialization efforts for the applicable product or product candidate.
We may not be successful in obtaining necessary rights to additional product candidates for our development pipeline through acquisitions and in-licenses.
We generally do not intend to develop product candidates from our own original research. Our business model is predicated, in part, on our ability to successfully identify and acquire or in-license product candidates for the treatment and support of cancer patients. However, we may be unable to acquire or in-license any product candidates from third parties for various reasons, including because we are focusing on a specific area of care, and we may be unable to identify product candidates that we believe are an appropriate strategic fit for our company.
The in-licensing and acquisition of product candidates is a competitive area, and many more established companies are also pursuing strategies to in-license or acquire product candidates that we may consider attractive. These established companies may have a competitive advantage over us due to their size, financial resources and greater clinical development and commercialization capabilities. Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to in-license or acquire the relevant product candidate on terms that would allow us to generate an appropriate return on our investment.
In addition, we expect that competition for the in-licensing or acquisition of product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing prices. If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition and prospects for growth could suffer.
Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure in connection with the commercialization of ZEJULA, VARUBI/VARUBY, and any of our current or future product candidates and in connection with the testing of our product candidates in human clinical trials. Product liability claims may be brought against us by patients, healthcare providers or others using, administering or selling our products, or subjects enrolled in our clinical trials. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities and financial and reputational harm, regardless of merit or eventual outcome, including:
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significant costs to defend the related litigation;
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substantial monetary awards to patients or trial subjects;
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loss of revenue; and
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diversion of management and scientific resources from our business operations.
We currently hold what we believe to be a commercially reasonable amount of product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could consume significant amounts of our cash and adversely affect our business.
We market our products in certain countries and territories outside of the United States, including Europe, and are subject to the risks of doing business outside of the United States, but we have limited experience operating internationally.
We only recently initiated our operations outside of the United States, including the addition of international employees in the EU and other European countries. Because we market ZEJULA, VARUBY, and if approved, our other product candidates, outside of the United States, we will need to continue to grow our international operations over the next several years. Accordingly, our business is subject to risks associated with doing business outside of the United States, including our own limited experience operating internationally, the cost and time required to develop an international sales, marketing and distribution organization, changes in a specific country’s or region’s political, cultural or economic condition, unexpected changes in foreign laws and regulations, inadequate intellectual property protection in foreign countries, difficulty of effective enforcement of contractual provisions in local jurisdictions, and significant adverse changes in foreign currency exchange rates.
In addition to FDA and related regulatory requirements in the U.S. and abroad, we are subject to extensive additional federal, state and foreign anti-bribery regulation, which include the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and similar laws in other countries outside of the U.S. We have developed and implemented a corporate compliance program based on what we believe are current best practices in the pharmaceutical industry for companies similar to ours, but we cannot guarantee that we, our employees, our consultants or our third-party contractors are or will be in compliance with all federal, state and foreign regulations regarding bribery and corruption. Moreover, our partners and third-party contractors located outside the U.S. may have inadequate compliance programs or may fail to respect the laws and guidance of the territories in which they operate. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could also have an adverse effect on our business, financial condition and results of operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or tax liabilities may be limited. We have completed several financings since our inception, which we believe have resulted in a change in control as defined by IRC Section 382. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to
limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Taxing authorities could challenge our historical and future tax positions or our allocation of taxable income among our subsidiaries, and tax laws to which we are subject could change in a manner adverse to us.
We operate through various subsidiaries in a number of countries throughout the world. Consequently, we are subject to tax laws, treaties, and regulations in the countries in which we operate, and these laws and treaties are subject to interpretation. We have taken, and will continue to take, tax positions based on our interpretation of such tax laws. Our transfer pricing arrangements are not generally binding on applicable tax authorities. The price charged for products, services, or the royalty rates and other amounts paid for intellectual property rights, could be challenged by the various tax authorities, resulting in additional tax liability, interest, and/or penalties. There can be no assurance that a taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. If we are assessed with additional taxes, this may result in a material adverse effect on our results of operations and/or financial condition. For further discussion related to income taxes, refer to Note 10, “Income Taxes,” in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, in this Annual Report on Form 10-K.
Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse fluctuations in our reported results of operations or affect how we conduct our business.
A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future. The change to existing rules, future changes, if any, or the need for us to modify a current tax or accounting position may adversely affect our reported financial results or the way we conduct our business.
We will need to continue to grow the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2017, we had 715 full-time employees compared to 446 at the end of 2016. As our development and commercialization plans and strategies for our existing products and product candidates continue to develop, we will need to continue to add managerial, operational, sales, marketing, financial and other resources. The management, personnel and systems that we currently have in place may not be adequate to support our recent or future growth. Such growth will impose significant added responsibilities on members of management.
As our operations expand, we will need to manage additional relationships with various strategic partners, suppliers and other third parties in both the United States and in foreign territories, including Europe. Our future financial performance and our ability to commercialize our current and future products and product candidates and to compete effectively will depend, in part, on our ability to manage our growth effectively. To that end, we must be able to manage our development and commercialization efforts effectively and hire, train and integrate additional management, administrative, sales, and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.
If we are unable to attract and retain highly qualified personnel, we may not be able to grow effectively.
Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. Because of the specialized scientific nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. Our ability to compete and grow depends in large part upon the continued service of our senior management team, including our co-founders, Leon O. Moulder, Jr., our Chief Executive Officer, and Mary Lynne Hedley, Ph.D., our President and Chief Operating Officer. The loss of one or more of our senior executive officers could be detrimental to us if we cannot recruit suitable replacements in a timely manner. The competition for qualified personnel in the biopharmaceutical field is intense and as a result, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel. Although we have letter agreements with our key executives, these agreements are at will and do not prevent them from terminating their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees.
In addition to in-licensing or acquiring product candidates, we may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our financial condition and operating results.
From time to time, we evaluate acquisition opportunities and may, in the future, make acquisitions of, or investments in, companies that we believe have products or capabilities that are a strategic or commercial fit with our current product candidates and business or otherwise offer opportunities for our company. In connection with these acquisitions or investments, we may issue stock that would dilute our stockholders’ percentage of ownership, incur debt and assume liabilities, incur amortization expenses related to intangible assets, or incur large and immediate write-offs. We may be unable to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive position, that it will not be viewed negatively by customers, financial markets or investors, or that we can effectively integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.
Our business and operations would suffer in the event of system failures.
Despite the implementation of security measures, our internal computer systems, and those of our collaborators, our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs and business operations. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts for our product candidates and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed or our commercial operations could be impacted.
Our failure to comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.
We are subject to U.S. data protection laws and regulations (i.e., laws and regulations that address privacy and data security) at both the federal and state levels. The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data security issues which may affect our business. Numerous federal and state laws and regulations, including state security breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection, use, disclosure and protection of health-related and other personal information. Failure to comply with such laws and regulations could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation, and/or adverse publicity that could negatively affect our business. Finally, a data breach affecting sensitive personal information, including health information, could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.
EU Member States, Switzerland and other countries have also adopted data protection laws and regulations, which impose significant compliance obligations and impose substantial fines for breaches of the data protection rules. Data protection authorities from the different EU Member States may interpret the various laws and regulations differently and impose additional requirements, which add to the complexity of processing personal data in the EU. The various laws and regulations will increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the new data protection rules. Our failure to comply with these laws, or changes in the way in which these laws are implemented, could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.
The results of the United Kingdom’s referendum on withdrawal from the EU may have a negative effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom, or the UK, elected to withdraw from the EU in a national referendum. The UK government initiated the formal withdrawal procedure on March 29, 2017. The procedure involves a two-year negotiation period in which the UK and the EU must agree to terms of the UK’s withdrawal and arrangements for the UK’s future relationship with the EU. This negotiation period could be extended by a unanimous decision of the European Council, in agreement with the UK. The referendum has created significant uncertainty about the future relationship between
the UK and the EU, including with respect to the laws and regulations that will apply as the UK determines which EU laws to replace or replicate in the event of a withdrawal. From a regulatory perspective, the UK’s withdrawal could bear significant complexity and risks. A basic requirement related to the grant of a marketing authorization for a medicinal product in the EU is that the applicant is established in the EU. Following the withdrawal of the UK from the EU, marketing authorizations previously granted to applicants established in the UK may no longer be valid. We currently hold the European marketing authorizations for both ZEJULA and VARUBY through a subsidiary in the UK.
Depending upon the exact terms of the UK’s withdrawal, the scope of a marketing authorization for a medicinal product granted by the European Commission pursuant to the centralized procedure might not, in the future, include the UK. In these circumstances, an authorization granted by competent UK authorities would be required to place medicinal products on the UK market. In addition, the laws and regulations that will apply after the UK withdraws from the EU would affect the manufacturing sites that hold a certification issued by the UK competent authorities. Our capability to rely on these manufacturing sites for products intended for the EU market would also depend upon the exact terms of the UK withdrawal.
The referendum has also given rise to calls for the governments of other EU Member States to consider withdrawal from the EU. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could significantly increase the complexity of our activities in the EU and in the UK, could depress our economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common stock.
We derive, and may continue to derive, a substantial amount of our product revenue from a limited number of customers and the loss of one or more of these customers or a decline in revenue from one or more of these customers could have an adverse impact on our results of operations and financial condition.
In the U.S., we currently sell our products principally to a limited number of specialty distributors and specialty pharmacy providers and therefore a significant portion of our net product revenue is generated by a small number of customers. Three customers accounted for 93% of our net product revenue during 2017 and two customers accounted for 80% of our accounts receivable balance at December 31, 2017. The loss of, material reduction in sales volume to, or a significant adverse change in our relationship with any of our key wholesalers or customers could have a material adverse effect on our revenue in any given period and may result in significant annual or quarterly revenue fluctuations.
Wholesaler and distributor buying patterns and other factors may cause our quarterly results to fluctuate, and these fluctuations may adversely affect our short-term results.
Our results of operations, including, in particular, net product revenues, may vary from period to period due to a variety of factors, including the buying patterns of our U.S. wholesalers and distributors, which vary from quarter to quarter. In the event wholesalers and distributors with which we do business determine to limit their purchases, product sales could be adversely affected. For example, in advance of an anticipated price increase or a reduction in expected rebates or discounts, customers may order product in larger than normal quantities, which could cause product sales of to be lower in subsequent quarters than they would have been otherwise. Further, any changes in purchasing patterns, inventory levels, increases in returns, delays in purchasing products or delays in payment for products by one of our wholesalers or distributors could also have a negative impact on our revenue and results of operations.
Risks Related to Our Dependence on Third Parties
We have no manufacturing facilities, and we are dependent on a limited number of third-party manufacturers for the manufacture and supply of ZEJULA, VARUBI (oral and IV), VARUBY and our product candidates, including our immuno-oncology assets. If we experience problems with any of these third parties, the manufacturing of our products or our product candidates could be delayed, which could harm our ability to generate revenues from our approved products, our ability to obtain regulatory approval for our product candidates, and our results of operations.
We do not own or operate facilities for the manufacture of our products or product candidates. Our ability to successfully develop and commercialize our products and our product candidates will require us to establish large scale manufacturing capabilities through our contract manufacturing organizations, or CMOs. We currently have no plans to build our own clinical or commercial scale manufacturing capabilities. We currently work with two CMOs for the production of
ZEJULA drug substance, and one other CMO, for ZEJULA drug product supply, for our clinical and commercial needs. We currently work with one CMO for the production of rolapitant drug substance used for VARUBI (oral and IV) and VARUBY, one CMO for commercial production of VARUBI (oral) and VARUBY, and one other CMO for commercial production of VARUBI IV.
As our drug development pipeline matures and we continue to commercialize ZEJULA and VARUBI/VARUBY and, if approved, our other product candidates, including our immuno-oncology assets, we will have a greater need for both clinical study supply and commercial manufacturing capacity. We have limited experience manufacturing pharmaceutical products on a commercial scale, and some of our suppliers will need to continue to increase their scale of production to meet our projected needs for commercial manufacturing. Manufacturing commercial quantities of our products to meet our projections may require our third-party manufacturers to invest substantial additional funds to increase capacity and to hire and retain additional personnel who have applicable large-scale commercial manufacturing experience. Our third-party manufacturers may not successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all. Because of the complex nature of our compounds, our manufacturers may not be able to manufacture our compounds at an acceptable cost or in sufficient quantities or in a timely manner necessary to make commercially successful products, or may require us to pay significant costs, including for capital improvements to their facilities. If our contract manufacturers or other third parties fail to deliver our products for commercial sale on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend commercialization of our current products or other potential future products.
For development of our immuno-oncology antibody product candidates, we currently work with one CMO for the production of biologics. For each of our product candidates, we may elect to pursue arrangements with other CMOs for manufacturing clinical supplies for later-stage trials and for commercialization. We have not yet qualified alternate suppliers in the event the current CMOs we utilize are unable to scale production, or if we otherwise experience any problems with them. If we are unable to arrange for alternative third-party manufacturing sources, or to do so on commercially reasonable terms or in a timely manner, we may not be able to complete development of our product candidates, or market or distribute them.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and similar foreign authorities require that our product candidates and approved products be manufactured according to cGMP and similar foreign standards. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates. In addition, such failure could be the basis for the FDA or an equivalent foreign regulatory authority to issue a warning or untitled letter, withdraw approvals previously granted to us for our products or product candidates, or take other regulatory or legal action, including recall or seizure, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction, or imposition of civil and criminal penalties.
Any significant disruption in our supplier relationships could harm our business. We source key materials from third parties, either directly through agreements with suppliers or indirectly through our manufacturers who have agreements with suppliers. For example, we source key raw materials for ZEJULA drug substance from one supplier. Such suppliers may not sell these key materials to us or our manufacturers at the times we need them or on commercially reasonable terms. In certain cases, we do not have any control over the process or timing of the acquisition of these key materials by our manufacturers. Any significant delay in the supply of a product or product candidate or its key materials for an ongoing clinical study could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these key materials for products or product candidates after regulatory approval, the commercial launch of our product candidates could be delayed or there could be a shortage in supply, which would impair our ability to generate revenues from the sale of our products and product candidates.
We rely on third parties to conduct preclinical and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for, or commercialize, our product candidates, and our business could be substantially harmed.
We have relied upon and plan to continue to rely upon third-parties, including CROs, to execute, monitor, and manage data for our ongoing preclinical and clinical programs. We rely on these parties for execution of our preclinical and clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on collaborators and CROs does not relieve us of our regulatory responsibilities. We also rely on these third parties to assist in conducting our preclinical studies in accordance with good laboratory practices and Animal Welfare Act requirements. We and our collaborators and CROs are required to comply with good clinical practices, or GCP, which are regulations and guidelines enforced by the FDA, the competent authorities of the member countries of the EEA, and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our collaborators or CROs fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials complies with GCP requirements. Failure to comply with these regulations may require us to repeat preclinical and clinical trials, which would delay the regulatory approval process and our ability to generate and grow revenues.
The individuals at our third-party collaborators and CROs who conduct work on our behalf are not our employees, and except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical, nonclinical and preclinical programs. If our collaborators and CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our preclinical and clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.
Because we have relied and plan to continue to rely on third parties for the foregoing preclinical and clinical functions, our internal capacity to perform these functions is limited. Switching or adding additional CROs involves additional cost, requires management time and focus, and could result in substantial delays in our development programs. Identifying, qualifying and managing the performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. In addition, there is a natural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the original provider. If any of our relationships with our third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property rights, our competitive position could be harmed, and we could be required to incur significant expenses to enforce our rights.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patents, including those patent rights licensed to us by third parties, are highly uncertain.
The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States. The rights already granted under any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficient, our
competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected. Further, under our agreement with Merck for niraparib, Merck is responsible, subject to certain exceptions, for prosecuting the licensed patents, and we are reliant on them to do so in a diligent fashion, subject to our right to review and approve their prosecution activities. If Merck fails to conduct such activities diligently, does not take approved actions, or otherwise fails to adequately protect our licensed patent rights, we may not obtain or maintain broad proprietary protection for niraparib.
With respect to patent rights, we do not know whether any of the pending patent applications for any of our products or product candidates will result in the issuance of patents that protect our technology or products, or whether they will effectively prevent others from commercializing competitive technologies and products. Although we have a number of issued patents that we own or that we license under our licensing agreements covering our technology, our pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Further, our licensors, including Merck with respect to the licensed niraparib patents, may be responsible, subject to certain exceptions, for prosecuting the patents covering our products, and we are reliant on them to do so in a diligent fashion, subject to our right to review and approve their prosecution activities. If they fail to conduct such activities diligently, do not take approved actions, or otherwise fail to adequately protect our licensed patent rights, we may not obtain or maintain broad proprietary protection for our products. Further, the examination process may require us or our licensors (where applicable) to narrow the claims, which may limit the scope of patent protection that may be obtained. As the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that we own or have licensed from third parties may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in the loss of patent protection, the narrowing of claims in such patents, or the invalidity or unenforceability of such patents, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection for our technology and products. Protecting against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult and, may in some cases not be possible. In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.
The patent prosecution process is expensive and time-consuming, and we or our licensors (where applicable) may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Further, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms where they are available in any countries where we are prosecuting patents. This includes in the United States under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, which permits a patent term extension of up to five years beyond the expiration of the patent. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and these foreign laws may also be subject to change. Publications of discoveries in the scientific literature lag behind actual discoveries, and patent applications in the United States and other jurisdictions typically are not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.
Previously, in the United States, assuming the other requirements for patentability are met, the first to make the claimed invention was entitled to the patent. Outside the United States, the first to file a patent application is entitled to the patent. In March 2013, the United States transitioned to a ‘first to file’ system in which the first inventor to file a patent application will be entitled to the patent. Under either the previous or current system, third parties will be allowed to submit prior art prior to the issuance of a patent by the U.S. Patent and Trademark Office, or the USPTO, and may become involved in opposition, derivation, reexamination, post-grant review proceedings or interference proceedings challenging our patent rights or the patent rights of others. For example, in March 2017, Teva Pharmaceutical Industries Ltd. filed an opposition in the EPO seeking revocation of European Patent No. 20046464, or the ‘464 patent, covering the crystalline hydrochloride sale of
rolapitant, the active ingredient in VARUBY. The natural term of the ‘464 patent is set to expire in April 2027. In December 2017, the Opposition Division of the EPO issued a summons to attend oral proceedings on this case, which are scheduled for June 2018. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position with respect to third parties.
We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To counter infringement or unauthorized use, litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. This can be expensive and time consuming. Many of our current and potential competitors have the ability to dedicate substantially greater resources to defend their intellectual property rights than we can. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly. In the U.S., the Hatch-Waxman Act provides generic companies valuable incentives to seek to invalidate patents for human pharmaceutical products approved under an NDA. As a result, it is likely that our U.S. patents covering approved drugs such as ZEJULA and VARUBI will be challenged in Hatch-Waxman litigation and administrative proceedings, and may not be upheld. We may face generic manufacturer challenges to our patents outside the U.S. as well. The entry of generic competitors typically results in a rapid decline in sales.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates, and to use our proprietary technologies without infringing the proprietary rights of third parties. The patent landscape for our products and product candidates is continuously evolving due in part to the fact that patent applications in the United States and many other jurisdictions are maintained in secrecy for at least 18 months following their earliest filing date. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the USPTO. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. For example, we are aware of third-party patents that contain claims potentially relevant to certain therapeutic uses of immune checkpoint inhibitors, and we are also aware of ongoing litigation involving third parties in the area, in each case which could impact the development of the various assets in our immuno-oncology portfolio. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and commercializing our products and technology, which could impact the profitability of our products. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding or litigation, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the
outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.
Risks Related to Ownership of Our Common Stock
The price of our stock has been, and may continue to be, volatile, and you could lose all or part of your investment.
The trading price of our common stock is highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. From January 1, 2016 through December 31, 2017, the price of our common stock on the NASDAQ Global Select Market ranged from $29.51 per share to $192.94 per share. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, these factors include:
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the success of competitive products or technologies;
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regulatory actions with respect to our products or our competitors’ products;
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actual or anticipated changes in our product revenue growth rate relative to our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
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results of clinical trials of our product candidates or those of our competitors;
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regulatory or legal developments in the United States and other countries;
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developments or disputes concerning patent applications, issued patents or other proprietary rights;
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the recruitment or departure of key personnel;
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the level of expenses related to any of our product candidates or clinical development programs;
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the results of our efforts to in-license or acquire additional product candidates or products;
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
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variations in our financial results or those of companies that are perceived to be similar to us;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
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announcement or expectation of additional financing efforts;
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sales of our common stock by us, our insiders or our other stockholders;
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changes in the structure of healthcare payment systems;
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market conditions in the pharmaceutical and biotechnology sectors;
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the publication of inaccurate or unfavorable research about us, end of coverage, or failure to publish reports regularly on us, in each case by any securities or industry analysts who publish research on us; and
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general economic, industry and market conditions.
In addition, the stock market in general, and the NASDAQ Global Select Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in these Risk Factors, could have a dramatic and material adverse impact on the market price of our common stock.
Forecasting sales of ZEJULA, VARUBI/VARUBY, and if approved our other product candidates, may be difficult, and if our revenue projections are inaccurate, our business may be harmed and our stock price may decline.
Our sales of ZEJULA and VARUBI/VARUBY are difficult to forecast, and we expect sales of any future products would also be difficult to forecast. Factors that increase the difficulty of forecasting sales of each of our current and future products include the following:
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the cost and availability of reimbursement for the product;
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treatment guidelines issued by government and non-government agencies;
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the timing of market entry relative to competitive products;
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the availability of alternative therapies;
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the price of the product relative to alternative therapies, including generic versions of products that compete with our product;
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the rates of returns and rebates;
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uncertainty about the pace of acceptance of the product;
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the ability of our third-party manufacturers to manufacture and deliver the product in commercially sufficient quantities;
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the ability of our third-party distributors and wholesalers to process orders in a timely manner and satisfy their obligations to us;
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the extent and success of our marketing efforts; and
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potential side effects or unfavorable publicity concerning our product or similar products.
The extent to which any of these or other factors individually or in the aggregate may impact future sales of our products is uncertain and difficult to predict. Our management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results. If our revenues from product sales are lower than we anticipate, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in revenue would have a direct impact on our expected cash flow, our stock price and on our business generally. Furthermore, to the extent that any projections we disclosed publicly regarding future product sales or our financial performance are incorrect, including as a result of the challenges in forecasting such sales, our stock price could be adversely affected, and we could be subject to an increased risk of litigation. In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.
An adverse determination in any securities class action lawsuit against us could have a material adverse effect on us.
A putative class action complaint was filed on January 17, 2018 in the United States District Court for the District of Massachusetts, entitled Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086. The complaint alleges that we and our Chief Executive Officer and our Chief Financial Officer violated certain federal securities laws, specifically under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 10b-5 thereunder. The plaintiff seeks unspecified damages on behalf of a purported class of purchasers of our common stock between March 14,
2016 and January 12, 2018. We believe that the allegations contained in the complaint are without merit and intend to defend the case vigorously. However, whether or not the plaintiff's claims are successful, this type of litigation is often expensive and diverts management's attention and resources, which could adversely affect the operation of our business. If we are ultimately required to pay significant defense costs, damages or settlement amounts, such payments could adversely affect our operations.
We may be the target of similar litigation in the future. Any future litigation could result in substantial costs and divert our management's attention and resources, which could cause serious harm to our business, operating results and financial condition. We maintain liability insurance; however, if any costs or expenses associated with this or any other litigation exceed our insurance coverage, we may be forced to bear some or all of these costs and expenses directly, which could be substantial.
Our principal stockholders and management own a significant percentage of our stock and are collectively able to exert significant influence over matters subject to stockholder approval.
Our executive officers, directors and their respective affiliates beneficially owned approximately 29.7% of our voting stock as of December 31, 2017. This group of stockholders has the potential ability to control us through their ownership position. Acting together, these stockholders may be able to influence the outcomes of certain matters requiring stockholder approval. For example, this group may be able to influence elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.
If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. We are required, under Section 404 of the Sarbanes-Oxley Act, to furnish an annual report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.
Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts. We have limited experience complying with Section 404, and if in the future we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. Furthermore, we cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. For example, in 2017, we began to implement an enterprise resource planning, or ERP system, which automated many of our internal controls over financial reporting. Because the ERP is a new system and we have no prior experience with it, there is an increased risk that one or more of our financial controls may fail. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the NASDAQ, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
As of December 31, 2017, we had 54,464,039 shares of common stock outstanding. Sales of a substantial number of shares of our common stock or other securities in the public market or in private placements could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Of these outstanding shares, 16,187,911 are currently held by directors, executive officers and other parties that may be deemed to be their affiliates and are available for sale subject to volume limitations and other restrictions under securities laws. We also have registered shares of common stock that we may issue under our equity compensation plans. These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.
Furthermore, certain persons who were stockholders prior to our initial public offering are entitled to registration rights under the Securities Act of 1933, or the Securities Act, with respect to shares they hold, which includes 12,727,272 shares held by our directors, executive officers and other parties that may be deemed to be their affiliates. Registration of these shares under the Securities Act would result in such shares becoming freely tradable without restrictions under the Securities Act, except with respect to shares purchased by affiliates. Any sales of shares by these stockholders could have a material adverse effect on the trading price of our common stock.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. We design our disclosure controls and procedures to reasonably assure that information we are required to disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosure due to error or fraud may occur and we may not detect them.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We may need additional capital in the future to continue our planned operations. To raise capital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These future issuances of common stock or common stock-related securities, together with the exercise of outstanding stock options, the vesting of outstanding restricted stock units, and any additional shares issued in connection with acquisitions, if any, may result in material dilution to our investors. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to those of holders of our common stock.
Pursuant to our equity incentive plans, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and other employees and service providers, including officers, employees and service providers of our subsidiaries and affiliates. As of December 31, 2017, there were 1,810,240 shares of our common stock reserved for issuance under our 2012 Omnibus Incentive Plan and 198,433 shares of our common stock available for future grant under our 2015 Non-Employee Director Stock Incentive Plan. Future stock option grants and issuances of common stock under our equity plans may have an adverse effect on the market price of our common stock.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. These provisions include:
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authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
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prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
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eliminating the ability of stockholders to call a special meeting of stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Risks Related to Our Indebtedness
Despite our current debt levels, we may still incur additional debt. If we incur substantial additional debt, these higher levels of debt may affect our ability to pay the principal of and interest on the Convertible Notes and our borrowings under the Loan Agreement.
In addition to our obligations to make payments on our existing indebtedness as discussed above, we and our subsidiaries may be able to incur substantial additional debt in the future, some of which may be secured debt. The indenture governing the Convertible Notes and the Loan Agreement allow us to incur additional indebtedness, subject to certain limitations, and do not restrict our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on the Convertible Notes or our Loan Agreement, or to make payments under the indenture governing the Convertible Notes in connection with any fundamental change or pay any cash due upon conversion.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of notes will be entitled to convert their notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required
under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.
Pursuant to Accounting Standards Codification Subtopic 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital caption of stockholders’ equity on our consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We will report greater losses in our financial statements because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.
To the extent we issue shares of our common stock to satisfy all or a portion of our conversion obligation, conversions of the Convertible Notes may dilute the ownership interest of our existing stockholders.
Upon conversion of the Convertible Notes, we have the option to pay or deliver, as the case may be, either cash, shares of our common stock, or a combination of cash and shares of our common stock. To the extent we issue shares of our common stock to satisfy all or a portion of our conversion obligation, the conversion of some or all of the Convertible Notes will dilute the ownership interests of our existing stockholders. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could depress the price of our common stock.
The fundamental change purchase feature of the Convertible Notes may delay or prevent an otherwise beneficial attempt to take over our Company.
The terms of the Convertible Notes require us to offer to purchase the Convertible Notes for cash in the event of a fundamental change. A non-stock takeover of our Company may trigger the requirement that we purchase the Convertible Notes. This feature may have the effect of delaying or preventing a takeover of our Company that would otherwise be beneficial to investors.
The terms of our Loan Agreement place restrictions on our operating flexibility.
The terms of our Loan Agreement contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on our ability to transfer currently owned U.S. intellectual property rights related to ZEJULA and VARUBI (the collateral under the Loan Agreement), incur additional indebtedness, incur additional liens and security interests on the collateral granted under the Loan Agreement, pay or make dividends, share repurchases and other distributions, and prepay subordinated indebtedness (other than the Convertible Notes). These terms may restrict our ability to operate our business in the manner we deem most effective or desirable, and may restrict our ability to fund our operations.
Nonpayment of principal, interest and other amounts, failure to comply with covenants, the occurrence of a material adverse change in our ability to perform our obligations, the rendering of judgments or orders or the acceleration or payment default by us in respect of other indebtedness in excess of $10 million, or bankruptcy could constitute an event of default that, if continued beyond the cure period, would allow the Collateral Agent, at the request of the lenders holding a majority of the outstanding principal amount under the Loan Agreement, to stop advancing money or extending credit for our benefit under the Loan Agreement and to declare all of our obligations under the Loan Agreement immediately due and payable, either of which would harm our business.
Our ability to comply with the various terms and conditions in the future may be affected by events beyond our control, including prevailing economic, financial and industry conditions.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2017, our principal offices were located in a facility in Waltham, Massachusetts, where we leased office space totaling approximately 260,000 square feet, which we use primarily for corporate functions. The terms of the leases under which we lease this space continue through June 30, 2020 for a majority of the space and December 18, 2022 for the remainder of the space. We also lease office space in several locations throughout Europe. We believe our facilities are adequate for our current needs. If we determine that additional or new facilities are needed in the future, we believe that sufficient options would be available to us on commercially reasonable terms.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
A putative class action complaint was filed by a putative stockholder on January 17, 2018 in the United States District Court for the District of Massachusetts, entitled Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086. The complaint alleges that we and our Chief Executive Officer and our Chief Financial Officer violated certain federal securities laws, specifically under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, by making false and/or misleading statements about and/or failing to disclose information regarding certain side effects of VARUBI. The plaintiff seeks unspecified damages on behalf of a purported class of purchasers of our common stock between March 14, 2016 and January 12, 2018. The Court has not set a trial date for this matter. We believe that the allegations contained in the complaint are without merit and intend to defend the case vigorously. We have not recorded an estimated liability associated with this legal proceeding as we do not believe that such a liability is probable.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
We are not an operator, and have no subsidiary that is an operator, of a coal or other mine.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock is traded on the NASDAQ Global Select Market under the symbol “TSRO.” The following table sets forth, for the periods indicated, the high and low intraday sales prices of our common stock as reported on the NASDAQ Global Select Market.
On February 22, 2018, the last reported sale price of our common stock was $60.89 per share. As of the close of business on February 22, 2018, there were approximately 31 holders of record of our common stock. Because many of the common shares are registered in “nominee” or “street” names, we believe that the total number of beneficial owners is considerably higher.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.
Performance Graph (1)
The following graph presents a comparison from December 31, 2012 through December 31, 2017 of cumulative total return on assumed investment of $100.00 in cash in our common stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the NASDAQ Biotechnology Index assume reinvestment of dividends.
(1)
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed incorporated by reference into any filing of TESARO, Inc. under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth certain of our selected historical financial data at the dates and for the periods indicated. The selected historical statement of operations data presented below for the years ended December 31, 2015 (as revised), 2016 (as revised), and 2017 and the historical balance sheet data as of December 31, 2016 (as revised) and 2017, have been derived from our audited consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. The historical statement of operations data for the years ended December 31, 2013 and 2014 and the historical balance sheet data as of December 31, 2013, 2014 and 2015 (as revised) have been derived from financial statements not included in this Annual Report on Form 10-K. All financial information presented has been consolidated and reflects the operations of TESARO, Inc. and its wholly-owned subsidiaries. Our historical results are not necessarily indicative of results expected in any future period. The selected historical financial data presented in the table below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto, which are included elsewhere in this Annual Report on Form 10-K. The selected historical financial information in this section is not intended to replace our consolidated financial statements and the related notes thereto.
(1)
Statement of operations data for the years ended December 31, 2015 and 2016 have been revised to reflect our adoption of Financial Accounting Standards Board Accounting Standards Update, or ASU, No. 2014-09 effective January 1, 2017, with full retrospective application to January 1, 2015. This ASU creates a new Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, replacing previous revenue guidance.
(2)
Total operating expenses for the year ended December 31, 2017 include a $16.7 million write-down of VARUBI inventories. For additional details, see “Results of Operations - Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 - Cost of Sales - Product” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
(3)
Balance sheet data as of December 31, 2015 and 2016 have been revised to reflect our adoption of ASU No. 2014-09 effective January 1, 2017, with full retrospective application to January 1, 2015.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a commercial-stage biopharmaceutical company devoted to providing transformative therapies to people bravely facing cancer. Our primary focus is to develop treatments for solid tumors using various approaches, including small molecules and immuno-oncology antibodies, as monotherapies or in combinations. We have in-licensed and are developing several oncology-related product candidates, and we have entered into several research collaborations with third parties for the discovery of new candidates. We have also entered into arrangements with other companies for the development and commercialization of certain of our product candidates in specific indications and/or geographies. Our two currently marketed products, ZEJULA® (niraparib) and VARUBI®/VARUBY® (rolapitant), are approved in both the U.S. and the European Union, or EU.
The U.S. Food and Drug Administration, or FDA, approved ZEJULA in March 2017 for the maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The European Commission, or EC, approved ZEJULA in November 2017 as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy. We have in-licensed exclusive rights to niraparib from Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., or Merck.
VARUBI is approved in the U.S. in oral and intravenous, or IV, formulations for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy. The EC approved VARUBY (oral formulation), which is the brand name in Europe, in the EU in April 2017 for the prevention of delayed nausea and vomiting associated with highly and moderately emetogenic chemotherapy in adults. We have in-licensed exclusive rights to rolapitant from OPKO Health, Inc., or OPKO.
The FDA approved the IV formulation of VARUBI in October 2017, and we commenced sales of the product in November 2017. In January 2018, we updated the VARUBI IV package insert, including modifications to the contraindications, warnings and precautions, and adverse reactions sections. In February 2018, we determined that we would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.
Research and Development
Our current development programs include:
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Niraparib is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor. Based on research related to PARP inhibitors generally, we believe niraparib may also be active in the treatment of several tumor types. We have several ongoing clinical trials evaluating niraparib for the treatment of various tumor types, as a monotherapy and in combination with other therapeutics, including our own immuno-oncology assets. We expect to initiate additional clinical trials during 2018. We are also collaborating with various other organizations to evaluate niraparib in combination with other therapeutics for the treatment of various cancers. In March 2017, following an interim analysis of data by the independent data monitoring committee, we ceased enrollment in our BRAVO study (assessing niraparib in patients with breast cancer who are germline BRCA mutation carriers) after a determination that it is unlikely to produce data that is interpretable and therefore suitable for registration in this indication.
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Immuno-Oncology: Pursuant to our collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, we are developing several antibodies for immuno-oncology targets. TSR-042, which targets PD-1, TSR-022, which targets TIM-3, and TSR-033, which targets LAG-3, are currently in Phase 1 studies. We are conducting pre-clinical research for TSR-075, a bi-specific antibody candidate targeting PD-1/LAG-3. We are also evaluating our immuno-oncology anti-tumor agents in pre-clinical and clinical combination studies with niraparib and other anti-tumor agents.
We are also engaged in other research and mid- and early-stage development programs, including via third-party collaborations for the discovery, development and commercialization of therapies for various cancers, including the following:
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Janssen Biotech, Inc., or Janssen: Under our global prostate cancer collaboration and license agreement with Janssen, we granted Janssen licenses under certain patent rights and know-how relating to niraparib, for prostate cancer worldwide, except for Japan.
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Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda: This agreement includes the clinical development and commercialization of niraparib for the treatment of all tumor types in Japan, and all tumor types excluding prostate cancer in South Korea, Taiwan, Russia and Australia.
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Zai Lab (Shanghai) Co., Ltd., or Zai Lab: We have granted Zai Lab an exclusive license to develop and commercialize niraparib for the territories of China, Hong Kong and Macao, or the China Territories, except for prostate cancer. This agreement also provides us with the right of first refusal with respect to licenses for two novel, discovery-stage immuno-oncology programs from Zai Lab.
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Merck Sharp & Dohme B.V., a subsidiary of Merck: We have a research agreement with Merck Sharp & Dohme B.V. to perform the TOPACIO trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® (pembrolizumab) in patients with triple negative breast cancer and patients with ovarian cancer. Enrollment of the TOPACIO trial is complete in both cohorts, and in June 2017, we announced that initial data from this trial demonstrated a disease control rate of 69% in patients with platinum-resistant ovarian cancer.
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Jiangsu Hengrui Medicine Co., Ltd., or Hengrui: We have granted Hengrui a license of rights to develop, manufacture and commercialize rolapitant in the China Territories.
For further discussion of license and collaboration agreements, see Note 14, “License and Collaboration Agreements”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
License Agreements
Our in-license agreements with Merck, OPKO and AnaptysBio are summarized below.
Rolapitant. In December 2010, we entered into a license agreement with OPKO to obtain exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant. We have made all development milestone payments to OPKO, totaling $30.0 million, based on achieving specified regulatory milestones in the U.S. and Europe. In addition, for each of the development programs under the OPKO license, we are required to make milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved. We pay OPKO tiered royalties on annual net sales achieved in the U.S. and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens. The royalty rate on annual net sales outside of the U.S. and Europe is slightly above the single digits. We will pay royalties on rolapitant until the later of (i) the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable, and (ii) 12 years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis. Under certain circumstances, we are also required to pay OPKO an annual minimum royalty of $2.5 million in each of the first five full calendar years of commercial sales of VARUBI/VARUBY. If we elect to develop and commercialize rolapitant in Japan through a third-party licensee, we will share equally with OPKO all amounts we receive in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions. We are responsible for all activities necessary to develop and commercialize rolapitant.
Niraparib. In May 2012, we entered into a license agreement with Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib for all therapeutic and prophylactic uses in humans. We are required to make milestone payments to Merck of up to an aggregate of $57.0 million in U.S. and European development and regulatory milestones for the first indication, up to an aggregate of $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. We have made $52.2 million in milestone payments to date. We also pay Merck tiered royalties at percentage rates in the low teens based on
worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis. We are responsible for all activities necessary to develop and commercialize niraparib.
Immuno-Oncology Platform. In March 2014, we entered into a collaboration and exclusive license agreement (later amended) with AnaptysBio, a therapeutic antibody company. Under the terms of this agreement, we possess an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of immunotherapy antibody product candidates targeting PD-1, TIM-3 and LAG-3, and certain bi-specific antibody product candidates. We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of four development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program.
AnaptysBio was responsible for performing initial discovery and development of therapeutic antibodies against immune checkpoint proteins, with the goal of generating immunotherapy antibodies for use in the treatment of cancer. We were required to reimburse AnaptysBio for specified costs incurred by AnaptysBio for these activities, which are now complete. For each of the four development programs, we are required to make milestone payments to AnaptysBio of up to an aggregate of $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications. We have made $21.0 million in development milestone payments to date. We will also be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on worldwide annual net sales, and additional commercial milestone payments if specified levels of annual net sales of a product are attained.
Financial Operations Overview
We have incurred losses every year since inception in 2010. We expect to incur losses for the foreseeable future, and these losses may increase as we continue to invest in product development and commercialization activities for our products and continue our development of, and seek regulatory approvals for, all of our product candidates, including commercial initiatives for ZEJULA and VARUBI/VARUBY, growing our commercial infrastructure, developing niraparib and our immuno-oncology platform, expanding our international operations, and incur increased interest expenses. Because of the numerous risks and uncertainties associated with product development and regulatory actions, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.
Revenue
Product revenue is currently derived from sales of our two commercial products, ZEJULA and VARUBI/VARUBY, in the United States and Europe. License, collaboration and other revenues relate to our license agreements with Janssen, Takeda, Zai Lab and Hengrui. For further discussion of our revenue recognition policy, see “Critical Accounting Policies and Significant Judgments and Estimates” below. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products, including any of our products and product candidates that we have in-licensed (rolapitant, niraparib, and products potentially resulting from our immuno-oncology collaborations) or other products or product candidates that we may in-license or acquire in the future.
We adopted new revenue accounting guidance during 2017 (Accounting Standards Codification Topic 606, Revenues from Contracts with Customers, or Topic 606) that impacts the amount and timing of our revenue recognition, and resulted in revisions of revenues previously recognized in our published financial statements. For further discussion, see Note 13, “Revenue Recognition”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K. The references “revised” and “as revised” used herein refer to revisions of data for the years ended December 31, 2015 and 2016, as a result of our adoption of the new revenue guidance with full retrospective application to January 1, 2015.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
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employee-related expenses, including salaries, bonuses, benefits, travel and stock-based compensation expense;
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fees and expenses incurred under agreements with contract research organizations, investigative sites, research consortia and other entities in connection with the conduct of clinical trials and preclinical studies and related services, such as administrative, data management, laboratory and biostatistics services;
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the cost of acquiring, developing and manufacturing active pharmaceutical ingredients for product candidates that have not received regulatory approval, clinical trial materials and other research and development materials;
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pre-commercial license fees and milestone payments related to the acquisition of in-licensed product candidates, which are reported on our statements of operations as acquired in-process research and development;
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fees and costs related to regulatory filings and activities;
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facilities, depreciation and other expenses, which include direct and allocated expenses for rent, utilities, maintenance of facilities, insurance and other supplies; and
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other costs associated with clinical, preclinical, discovery and other research activities.
Research and development costs are expensed as incurred. License fees and development milestone payments related to in-licensed products and technology are expensed as acquired in-process research and development if it is determined at that point that they have no established alternative future use. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations and information provided to us by our vendors.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and manufacturing costs. We expect that our total future research and development costs will continue to increase over current levels, depending on the progress of our clinical development programs. We also anticipate increasing costs associated with our collaborations, manufacturing activities, and potential development milestone payments. Factors we expect to drive such increases include: continuing our currently ongoing clinical trials and initiating new trials for niraparib, immuno-oncology candidates and other potential product candidates; continuing manufacturing development and validation, and initiating additional investigative and collaborative studies related to niraparib; incurring increased discovery, development and manufacturing-related expenses associated with our immuno-oncology platform; conducting regulatory activities; incurring potential milestone obligations; incurring expenses associated with non-clinical research and our research collaborations; leasing additional facility space; and hiring additional personnel.
We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our currently unapproved product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates, and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as based on an assessment of each product candidate’s commercial potential. If we experience delays in the completion of, or the termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our future ability to generate product revenues from any of these product candidates will be delayed or jeopardized. These occurrences would harm our business, financial condition and prospects, perhaps significantly, which would require us to alter our current operation plan and potentially delay, scale back, or discontinue the development or commercialization of one or more programs and/or other areas of the business in order to reduce our future expenses and continue to fund our remaining operations.
The following table presents research and development expenses and acquired in-process research and development expenses on a program-specific basis for our in-licensed products and product candidates for the years ended December 31, 2015, 2016 and 2017, respectively (in thousands).
For further discussion of the changes in our research and development expenses with respect to the year ended December 31, 2017 and the corresponding period of 2016, see “Results of Operations - Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 - Research and Development Expenses” below.
Personnel-related costs, depreciation and stock-based compensation are not allocated to any programs, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of salaries and related costs, including stock-based compensation, for our commercial personnel, including our field sales force, certain medical education professionals and other commercial support personnel, as well as personnel in executive and other administrative or non-research and development functions. Other selling, general and administrative expenses include certain facility-related costs, information technology costs, pre-commercial and commercial consulting, advertising, market research, and other activities necessary to prepare for and support product launches, and professional fees for legal, patent review, consulting and accounting services.
We anticipate that our selling, general and administrative expenses will continue to increase in the future in support of our commercial and pre-commercial activities related to ZEJULA and VARUBI/VARUBY and potential other products, and continued research and development activities, as well as the continued costs of operating as a public multinational company. These increases will likely include increased costs related to the hiring of additional personnel, executing marketing and promotional programs, hiring consultants, leasing of additional facility space, enhancing information technology systems, and legal and other professional fees, among other expenses.
Other Income and Expense
Other income and expense consists primarily of interest expense related to our debt instruments and interest income earned on cash and cash equivalents. A portion of the interest expense is non-cash expense relating to accretion of debt discounts and amortization of issuance costs.
Results of Operations
Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016
Product Revenue. Net product revenue relates to sales of ZEJULA and VARUBI in the U.S., and limited sales of ZEJULA and VARUBY in Europe. We distribute our products principally through a limited number of specialty distributors and through the specialty pharmacy channel. For further discussion regarding our revenue recognition policy, see the “Critical Accounting Policies and Significant Judgments and Estimates” section below and Note 2, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K. The following table presents net product revenues by product for the years ended December 31, 2016 and 2017, respectively (in thousands).
n/m = not meaningful
We began to recognize revenues on sales of ZEJULA in the U.S. in the second quarter of 2017, and in Europe late in the fourth quarter of 2017. For net product revenues for the year ended December 31, 2017, the average net sales price per unit to us (after accounting for fees, rebates, chargebacks, and other discounts or reserves, or, the gross-to-net adjustment) was approximately 89% of the Wholesale Acquisition Cost, or WAC, which is the gross list price at which our direct customers purchase each unit.
We launched the IV formulation of VARUBI in the U.S. in November 2017. We offered significant launch discounts to our customers, which resulted in large purchases by several of our customers in the first few weeks of the launch. In January 2018, after post-marketing reports of side effects experienced following the commercial introduction of VARUBI IV, we updated the VARUBI IV package insert, including modifications to the contraindications, warnings and precautions, and adverse reactions sections, and issued a “Dear Healthcare Professional Letter” to healthcare providers to highlight the updates. As a result, we expect the vast majority of VARUBI IV units shipped to our customers in 2017 to be returned in 2018. Due to the resulting significant reserve for returns, VARUBI IV net product revenue of $0.5 million (net of returns reserve of $24.8 million) was significantly lower than the gross revenue value of units that we shipped to customers during the fourth quarter of 2017. In addition, we have recorded a write-down of VARUBI inventories, as further described below in “Cost of Sales - Product”.
We began to recognize revenues on sales of VARUBI in the U.S. in the fourth quarter of 2015, and on sales of VARUBY in Europe in the second quarter of 2017. The increase in VARUBI net product revenues was due to higher unit sales volumes and price increases, partially offset by higher discounts, rebates and chargebacks. For VARUBI net product revenues for the years ended December 31, 2016 and 2017, the average net sales prices per unit to us were approximately 55% and 25% of WAC, respectively. The percentage for the year ended December 31, 2017 was impacted by the significant returns reserve for VARUBI IV.
License, Collaboration and Other Revenues. License revenue of $52.8 million for the year ended December 31, 2016 (as revised) relates primarily to our license agreements with Janssen and Zai Lab, and includes up-front license payments and shipments of materials to our collaborators. License revenue of $102.6 million for the year ended December 31, 2017 relates primarily to the $100.0 million up-front payment we received under our license agreement with Takeda.
Cost of Sales - Product. Cost of sales of $1.2 million for the year ended December 31, 2016 (as revised) consists primarily of costs associated with the manufacturing of VARUBI and royalties owed to our licensor for VARUBI sales, as well as costs of product provided under our sampling and other commercial programs and certain period costs. Cost of sales of $41.1 million for the year ended December 31, 2017 includes ZEJULA manufacturing costs and royalties, and to a lesser extent, VARUBI manufacturing costs and royalties from sales. The amount also includes a $16.7 million in lower of cost or market write-down for excess and obsolete VARUBI inventories. In addition, a $1.6 million loss on firm purchase commitments was also recorded as a component of cost of sales within the period. Due to the update to the VARUBI IV package insert described above, we lowered our internal forecasts of future sales of VARUBI IV, and performed an analysis of the recoverability of our VARUBI inventories. As a result of this analysis, we concluded that a significant portion of our VARUBI inventories was unlikely to be utilized in future product sales prior to expiration, and thus recorded the write-down as a component of cost of product sales. We accrued a $1.8 million royalty obligation as of December 31, 2016 related to the contractual minimum royalty commitment, and this amount was capitalized in the ‘other assets’ caption on the consolidated balance sheet, as we had concluded at the time that the shortfall would likely be recoverable through future years’ sales. Due to the revised forecast of future VARUBI sales described above, we concluded the royalty shortfall amount would no longer be recoverable through future years’ sales, and wrote off $2.0 million as a component of cost of product sales.
Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, certain of the costs of ZEJULA and VARUBI units recognized as revenue during the years ended December 31, 2016 and 2017 were expensed prior to the respective initial regulatory approval dates, and therefore are not included in cost of sales during the respective years. We expect cost of sales for both products to increase in relation to net product revenues as we deplete these inventories.
Cost of Sales - Intangible Asset Amortization. The amounts of $1.9 million and $6.2 million for the years ended December 31, 2016 and 2017, respectively, consist of amortization of intangible assets recorded as a result of post-approval milestones paid to licensors. The increase was primarily due to $49.7 million of new milestone assets recorded in the year ended December 31, 2017 related to ZEJULA and VARUBY regulatory approvals.
Research and Development Expenses. Research and development expenses were $235.1 million for the year ended December 31, 2016, compared to $308.7 million for the year ended December 31, 2017, an increase of $73.6 million. Significant factors resulting in this increase include:
·
an increase of $44.8 million in personnel and other costs (excluding stock-based compensation), primarily related to increased research and development headcount supporting the growth of our development activities;
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an increase of $41.2 million in costs associated with our immuno-oncology platform due to increased costs related to the TSR-042 and TSR-022 clinical trials, biologics manufacturing and non-clinical and other immuno-oncology program research activities;
·
a decrease of $16.4 million in costs associated with the niraparib program, primarily related to manufacturing costs, due to our policy of expensing such costs prior to regulatory approval and capitalizing such costs thereafter; and
·
a decrease of $7.0 million in costs associated with rolapitant, primarily due to lower costs relating to rolapitant IV development activities.
In addition, stock-based compensation expense included in research and development expenses increased by $11.0 million, primarily related to increased awards of restricted stock units, or RSUs, employee stock options and higher grant-date fair values of those awards.
Inventory-related costs of $18.5 million incurred prior to FDA approval of ZEJULA were recorded as research and development expenses in our consolidated statements of operations and comprehensive loss in prior years. We expect to use the remaining pre-commercialization inventory and materials for future product sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $158.6 million for the year ended December 31, 2016, compared to $336.8 million for the year ended December 31, 2017, an increase of $178.2 million. This was primarily due to increases of: $64.0 million in salaries, benefits and other personnel-related costs (excluding stock-based compensation), primarily due to the hiring of sales, marketing, medical affairs and other support personnel associated with the commercialization of ZEJULA and VARUBI/VARUBY, and hiring to support our international operations; $82.1 million in professional and consulting fees and other expenses to support corporate operational, international and commercialization activities; and $31.0 million in stock-based compensation expense.
Acquired In-Process Research and Development Expenses. We recorded $18.9 million in acquired in-process research and development expenses for the year ended December 31, 2016, of which $9.0 million related to our immuno-oncology platform and $9.9 million related to the niraparib program. We recorded $10.0 million in acquired in-process research and development expenses for the year ended December 31, 2017, comprised of three milestones related to our immuno-oncology platform.
Other Income (Expense), Net. Other income (expense) is primarily comprised of interest expense related to our 3.00% convertible senior notes due October 1, 2021, or the Convertible Notes, and our term loan, and our interest income earned on cash and cash equivalents. Interest expense increased by $3.3 million due to the accretion of the debt discount on the Convertible Notes, which is a component of interest expense, and the use of the effective interest method therefor, and due to interest on the first tranche of the term loan, which we drew in December 2017. Interest income increased by $2.7 million during the year ended December 31, 2017, primarily due to higher balances of interest-bearing cash equivalents.
Provision for Income Taxes. Provision for income taxes of $1.5 million for the year ended December 31, 2016 consisted of $0.2 million of current income tax expense, primarily for subsidiary operations in foreign tax jurisdictions, $1.4 million of China withholding taxes on the up-front license payment we received from Zai Lab, and $0.1 million of foreign deferred tax benefit. Provision for income taxes of $1.3 million for the year ended December 31, 2017 consisted of $1.2 million of current income tax expense, primarily for subsidiary operations in foreign tax jurisdictions, and $0.1 million of foreign deferred tax expense.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act, was signed into law, resulting in significant changes to the U.S. corporate income tax system. These changes include a reduction of the federal statutory rate from 35% to 21%, reduction of certain tax credits, limitations on deductibility of interest expense and executive compensation, and limitations on the use of net operating loss carryforwards. The Tax Act also transitions U.S. international taxation from a worldwide system to a territorial system and includes provisions to prevent base erosion on foreign earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to current U.S. taxation. These changes are generally effective beginning in 2018.
For additional details regarding the Tax Act, see Note 10, “Income Taxes”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015
n/m = not meaningful
Product Revenue. We recorded $2.0 million and $5.2 million in product revenue for the years ended December 31, 2015 and 2016 (both as revised), respectively. These amounts relate to U.S. sales of VARUBI, and the increase was primarily related to the timing of launch, as we began shipping VARUBI in the U.S. in November 2015. For net product revenues for the years ended December 31, 2015 and 2016, the average net sales prices per unit to us were approximately 62% and 55% of WAC, respectively.
License, Collaboration and Other Revenues. License revenue of $2.0 million for the year ended December 31, 2015 (as revised) relates to our license agreement with Hengrui. License revenue of $52.8 million for the year ended December 31, 2016 (as revised) relates primarily to our license agreements with Janssen and Zai Lab, and includes up-front license payments and shipments of materials to our collaborators.
Cost of Sales - Product. Cost of sales of $0.1 million and $1.2 million for the years ended December 31, 2015 and 2016 (both as revised), respectively, consists primarily of costs associated with the manufacturing of VARUBI and royalties owed to our licensor for VARUBI sales, as well as costs of product provided under our sampling and other commercial programs and certain period costs. Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, certain of the costs of VARUBI units recognized as revenue during both years were expensed prior to the September 2015 FDA approval, and therefore are not included in cost of sales during both years. We expect cost of sales to increase in relation to net product revenues as we deplete these inventories.
Cost of Sales - Intangible Asset Amortization. The amounts of $0.3 million and $1.9 million for the years ended December 31, 2015 and 2016, respectively, consist of amortization of the intangible asset recorded in 2015 as a result of the $15.0 million milestone owed upon the first commercial sale of VARUBI.
Research and Development Expenses. Research and development expenses were $155.4 million for the year ended December 31, 2015 compared to $235.1 million for the year ended December 31, 2016, an increase of $79.7 million. Significant factors resulting in this increase include:
·
an increase of $43.8 million in costs associated with the niraparib program, primarily comprised of increased costs related to ongoing or new clinical trials, manufacturing development and regulatory activities;
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an increase of $24.8 million in personnel and other costs (excluding stock-based compensation), primarily related to increased research and development headcount supporting the growth of our development activities;
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an increase of $14.3 million in costs associated with our immuno-oncology platform due to increased costs related to biologics manufacturing and non-clinical research activities; and
·
a decrease of $9.2 million in costs associated with rolapitant, primarily due to lower costs relating to rolapitant IV development activities.
In addition, stock-based compensation expense included in research and development expenses increased by $8.7 million, primarily related to increased awards of employee stock options and higher grant-date fair values of those awards.
VARUBI-related inventory costs of $5.1 million incurred prior to FDA approval were recorded as research and development expenses in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2015. We expect to use the remaining pre-commercialization inventory and materials for future sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $78.7 million for the year ended December 31, 2015, compared to $158.6 million for the year ended December 31, 2016, an increase of $79.9 million. This was primarily due to increases of: $36.2 million in salaries, benefits and other personnel-related costs (excluding stock-based compensation), primarily due to the hiring of sales, marketing, medical affairs and other support personnel associated with the commercialization of VARUBI and pre-commercial ZEJULA activities, and hiring to support our international operations; $30.6 million in professional and consulting fees and other expenses to support corporate operational, international and commercialization activities; and $14.0 million in stock-based compensation expense.
Acquired In-Process Research and Development Expenses. We recorded $2.0 million in acquired in-process research and development expenses for the year ended December 31, 2015, comprised of two $1.0 million milestones related to our immuno-oncology platform. We recorded $18.9 million in acquired in-process research and development expenses for the year ended December 31, 2016, of which $9.0 million related to our immuno-oncology platform and $9.9 million related to the niraparib program.
Other Income (Expense), Net. Other income (expense) is primarily comprised of interest expense related to our Convertible Notes, and interest income earned on cash and cash equivalents. Interest income increased by $1.4 million during the year ended December 31, 2016, primarily due to higher balances of interest-bearing cash equivalents. Interest expense increased by $1.1 million due to the accretion of the debt discount, which is a component of interest expense, and the use of the effective interest method.
Provision for Income Taxes. Provision for income taxes of $1.5 million for the year ended December 31, 2016 consisted of $0.2 million of current income tax expense, which relates primarily to subsidiary operations in foreign tax jurisdictions, $1.4 million of China withholding taxes on the up-front license payment we received from Zai Lab, and $0.1 million of foreign deferred tax benefit. We recorded no provision for income taxes for the year ended December 31, 2015.
Liquidity and Capital Resources
As of December 31, 2017, our principal source of liquidity was cash and cash equivalents, which totaled $643.1 million. Our net losses were $247.7 million, $374.2 million, and $496.1 million for the years ended December 31, 2015 (as revised), 2016 (as revised) and 2017, respectively. We expect to incur significant expenses and operating losses for the foreseeable future.
Sources of Liquidity
Since our inception in 2010, we have funded our operations primarily through public offerings of our common stock, the private placement of our equity securities, the issuance of convertible notes and a term loan financing. From inception through December 31, 2017, we received $1.4 billion in proceeds, net of underwriting discounts and commissions and offering expenses, from public offerings and private placements of common stock and private placements of convertible preferred stock. In September 2014, we issued $201.3 million aggregate principal amount of Convertible Notes, with net proceeds of $194.7
million, and we used $20.8 million of the proceeds from this transaction to enter into capped call option transactions associated with the Convertible Notes.
In November 2017, we entered into a loan agreement, or the Loan Agreement, with BioPharma Credit PLC, as collateral agent and a lender, and BioPharma Credit Investments IV Sub LP, as a lender. The Loan Agreement provides for a senior secured term loan facility of up to $500.0 million to be funded in two tranches: (i) a Tranche A Loan in an aggregate principal amount of $300.0 million, or the Tranche A Loan, funded in December 2017; and (ii) a Tranche B Loan in an aggregate principal amount of up to $200.0 million, or the Tranche B Loan, and together with the Tranche A Loan, the Term Loans, to be funded at our option no earlier than June 30, 2018 and no later than December 20, 2018, with no less than 90 days notice. We received $293.6 million in net proceeds from the Tranche A Loan in December 2017. Additional information regarding the Convertible Notes and the Term Loans is included in Note 7, “Debt”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
We have also received up-front license fees totaling $151.0 million to date from licensees pursuant to our out-license agreements for niraparib and rolapitant.
Cash Flows
The following table presents a summary of the primary sources and uses of cash for the years ended December 31, 2015, 2016 and 2017 (in thousands):
Operating Activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. The significant increases in cash used in operating activities for the years ended December 31, 2016 and 2017 were primarily due to increased external research and development expenses as we continued to progress the niraparib development program and the immuno-oncology platform, and increased internal and external expenses related to pre-commercial and other commercial activities related to the approvals and launches of ZEJULA and VARUBI. Higher costs associated with increased employee headcount related to expanded development and commercial activities also contributed to the increase in cash used in operating activities. These factors were partially offset by lower external development costs associated with our rolapitant program, and for the year ended December 31, 2017, lower external development costs related to niraparib. Purchases of ZEJULA and VARUBI inventories also contributed to the increases in cash used in operating activities for the years ended December 31, 2016 and 2017. Non-cash charges for the year ended December 31, 2017 also include a $16.7 million write-down of VARUBI inventories. There were no inventory write-downs for the years ended December 31, 2015 or 2016.
Amounts recorded in the consolidated statements of operations and comprehensive loss as “Acquired in-process research and development” are included in the consolidated statements of cash flows as adjustments to reconcile net loss to net cash used in operating activities because these amounts are charged to expense as incurred in the respective periods, but the cash payments relating to these expenses are classified as investing activities in the consolidated statements of cash flows, as described below.
Investing Activities. Cash used in investing activities primarily consisted of the following amounts relating to the acquisition of product candidate licenses and milestone payments, which were recorded as acquired in-process research and development expense as incurred, except as noted:
·
for the year ended December 31, 2015, a $15.0 million commercial milestone payment related to VARUBI (recorded as an intangible asset), and $2.0 million in milestone payments for the immuno-oncology platform;
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for the year ended December 31, 2016, $9.0 million in milestone payments for the immuno-oncology platform and $9.9 million for the niraparib program; and
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for the year ended December 31, 2017, $49.7 million in commercial milestones related to ZEJULA and VARUBI (recorded as intangible assets), and $10.0 million in milestone payments for the immuno-oncology platform.
Cash used in investing activities for the years ended December 31, 2015, 2016 and 2017 also included the use of $2.3 million, $2.9 million, and $6.0 million, respectively, for purchases of property and equipment.
Financing Activities. Cash provided by financing activities primarily consisted of the following amounts raised in issuances of equity and debt instruments:
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for the year ended December 31, 2015, net cash proceeds of $179.8 million from a follow-on offering of common stock;
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for the year ended December 31, 2016, net cash proceeds of $838.1 million from offerings of our common stock, consisting of: $155.0 million from a private placement of common stock; $50.0 million from a private sale of common stock to Johnson & Johnson Innovation - JJDC, Inc.; and $408.9 million and $224.2 million, respectively, from follow-on public offerings of common stock in July 2016 and November 2016; and
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for the year ended December 31, 2017, net cash proceeds of $293.6 million from our draw of $300.0 million in aggregate principal under our Loan Agreement.
Cash provided by financing activities during the years ended December 31, 2015, 2016 and 2017 also included $7.9 million, $28.8 million and $29.7 million, respectively, in proceeds from exercises of stock options under our 2010 Stock Incentive Plan and 2012 Omnibus Incentive Plan, and issuances of common stock under our 2012 Employee Stock Purchase Plan.
Operating Capital Requirements
We expect to incur significant expenses and operating losses for the foreseeable future. Overall, we expect operating expenses to continue to increase over current levels as we incur increased costs related to: (i) our ongoing U.S. and international commercialization and pre-commercial activities including executing related marketing and promotional programs for the commercialization of ZEJULA; (ii) the advancement of clinical trial and other development and regulatory activities under our current development programs including niraparib, TSR-042, TSR-022 and TSR-033; (iii) activities under our research collaborations; (iv) costs related to expanding our international operations; and (v) other research and development activities and potential future collaborative or in-licensed development programs. If we obtain regulatory approval for any of our product candidates in addition to our current product approvals, or in anticipation of obtaining regulatory approval, we expect that we will incur significant additional commercialization expenses related to product sales, marketing, manufacturing and distribution. We also expect to incur increasing selling, general and administrative costs associated with our anticipated growth and continuing operation as a multinational public company, and we will continue to incur substantial interest expense related to our outstanding debt. The actual amount of many of these expenditures will depend on numerous factors, including the timing of expenses and the timing and progress of our clinical trial activity and commercialization efforts for our products and product candidates.
We may require additional capital for the continuing commercialization of our products, further development and potential commercialization of our product candidates, and cash interest obligations related to our outstanding debt. In addition, future license payments or milestone payments could cause our total operating expenses and cash usage to fluctuate. For example, upon the U.S. and EU approvals of ZEJULA in 2017, we made milestone payments totaling $39.5 million to Merck. We may also need additional funds to pursue our strategy of in-licensing or acquiring additional product candidates, and to meet our obligations to repay the principal of our Term Loans when due and to repay the Convertible Notes at maturity or, at our election, upon conversion. We are subject to the risks inherent to the development of new biopharmaceutical products, and to global expansion, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business and cause increased uses of cash.
We will need to generate significant revenues to achieve profitability, and we may never do so. Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private
equity or debt offerings and facilities, including potentially an additional draw under the Loan Agreement, and we may seek additional capital through arrangements with strategic partners or from other sources. Additional capital may not be available to us on reasonable terms, if at all. If we are unable to raise additional needed capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products or product candidates and/or other areas of our business. Raising additional funds through the issuance of equity or debt securities could result in dilution to our existing stockholders, increased fixed payment obligations, or both. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.
We believe our currently available funds and the cash we expect to generate from product sales will be sufficient to fund our existing cash flow requirements and our operations at their currently planned levels through at least the 12 months following the filing of this Annual Report on Form 10-K. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both short and long-term, will depend on many factors, including:
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our ability to generate sufficient revenues from sales of ZEJULA and, if approved, our other product candidates;
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the cost of continuing to expand our development and commercial capabilities for our products and our product candidates, both in the U.S. and in certain foreign markets, including Europe;
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the outcome, timing and cost of regulatory approvals by the FDA and comparable foreign regulatory authorities and the potential that the FDA or comparable foreign regulatory authorities may require that we perform more studies than those that we currently expect;
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the initiation, progress, timing, costs and results of clinical trials for our current product candidates and any future product candidates we may in-license;
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the cost and timing of completion of commercial-scale outsourced manufacturing activities;
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the cost and timing of clinical development activities for niraparib;
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the cost and timing of preclinical and clinical development and manufacturing activities associated with our immuno-oncology antibody product candidates;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights that we own or control;
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the cost of acquiring or in-licensing global rights for additional product candidates;
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the amount and timing of potential conversion requests, if any, and interest expense associated with our Convertible Notes; and
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our need to repay amounts due under the Loan Agreement.
If we lack sufficient capital to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2017 (in thousands):
(a)
See Note 7, “Debt”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K for additional information. Amounts include both principal and interest.
Purchase and Other Commitments
Purchase commitments in the table above relate to agreements with certain vendors for the provision of services, including services related to commercial manufacturing, data management, clinical operation support and diagnostic development for which we are not contractually able to terminate for convenience and avoid any and all future obligations to the vendors. Certain agreements provide for termination rights subject to termination fees. Under such agreements, we are contractually obligated to make certain minimum payments to the vendors, mainly to reimburse the vendor for unrecoverable outlays incurred prior to cancellation. The exact amounts of such obligations are dependent on the timing of termination and the exact terms of the relevant agreement and cannot be estimated with reasonable accuracy. In the table above, we have included our estimated commitments under such agreements as of December 31, 2017, assuming we do not terminate these agreements. These amounts do not represent our entire anticipated purchases in the future, but generally represent only our estimate of those items for which we have a contractual commitment to pay. The actual amounts we pay in the future to the vendors under such agreements may be less than the amounts shown in the table above.
Purchase commitments also include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Such obligations are related principally to inventory purchase orders based on our current manufacturing needs and require significant lead times to be fulfilled by our vendors. Purchase commitments exclude agreements that are cancelable without penalty, including open purchase orders that represent authorizations to purchase rather than legally binding agreements. Other commitments relate principally to milestone payments under certain licensing and collaboration agreements that we are obligated to pay even if we terminate such license agreements. Our license agreement with OPKO requires us to pay OPKO tiered royalties on annual net of rolapitant sales achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens. Under certain circumstances, we are also required to pay OPKO an annual minimum royalty of $2.5 million in each of the first five full calendar years of commercial sales of VARUBI/VARUBY.
As of December 31, 2017, we had several ongoing clinical studies in various clinical trial stages. Our most significant clinical trial expenditures are made to clinical research organizations, or CROs. Due to cancellation rights included in our contractual agreements with our CROs, we have not included any amounts related to our CRO contracts in the contractual obligations table above (other than those described in the preceding paragraphs).
Our collaboration agreement with Myriad Genetics, Inc. allows us to terminate the agreement with proper written notice. However, we are required to pay any remaining unpaid milestones up to $1.0 million, which are included in the table above in the “Less than 1 year” column.
Operating and Facility Lease Obligations
Operating lease obligations in the table above relate to operating leases for office facilities. We lease approximately 260,000 square feet of office space in Waltham, Massachusetts under a non-cancelable operating lease agreement that
commenced April 1, 2013 and continues through June 30, 2020 and an indenture of lease that commenced December 18, 2017 and continues through December 18, 2022. We also lease office space in several locations throughout Europe.
Product Licenses
In addition to the amounts set forth in the table above, we have certain obligations under licensing agreements with third parties that are contingent upon achieving various development, regulatory and commercial milestones. Pursuant to our license agreement with OPKO for the development and commercialization of rolapitant, we have made all development milestone payments, totaling $30.0 million, based on achieving specified regulatory milestones in the U.S. and Europe. We are required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved. Pursuant to our license agreement with Merck for the development and commercialization of niraparib, we are required to make milestone payments to Merck of up to an aggregate of $57.0 million in development and regulatory milestones for the first indication, up to an aggregate of $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. We have made $52.2 million in milestone payments to Merck to date. Pursuant to our collaboration and exclusive license agreement with AnaptysBio, as amended, our commitments to reimburse AnaptysBio for specified costs incurred in its initial discovery and development activities are now complete. For each of our four development programs, we are required to make milestone payments to AnaptysBio of up to an aggregate of $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications. We have made $21.0 million in development milestone payments to date. We also will be required to make commercial milestone payments if specified levels of annual net sales of a product are attained. Finally, pursuant to the terms of each of these license agreements, upon commencement of commercial sales of a product, if any, we are required to pay royalties to our licensors on net sales of the respective products.
Technology Licenses
In October 2012, we entered into two license agreements with AstraZeneca UK Limited, under which we made aggregate up-front payments of $0.4 million. These agreements provide us with the exclusive right to certain methods of treating patients with PARP inhibitors solely with respect to niraparib. Under certain circumstances, we may be required to make milestone and royalty payments to AstraZeneca UK Limited based on the achievement of certain development and regulatory milestone events with regard to niraparib, and on net sales of niraparib. We have not included any amounts related to these agreements in the table above. We have made related milestone payments totaling $1.5 million through December 31, 2017.
Off-Balance Sheet Arrangements
As of December 31, 2017, we did not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s 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, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued research and development expenses, net product revenue, stock-based compensation expense and intangible assets. 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. In making estimates and judgments, management employs critical accounting policies.
While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
Effective January 1, 2017, we adopted Topic 606 using the full retrospective transition method. Under this method, we revised our consolidated financial statements for the years ended December 31, 2015 and 2016, and applicable interim periods within those years, as if Topic 606 had been effective for those periods. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and identify, as a performance obligation, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Revenue, Net
We sell our products principally to a limited number of specialty distributors and specialty pharmacy providers in the U.S. and the EU, or collectively, our Customers. These Customers subsequently resell our products to health care providers and patients. In addition to distribution agreements with Customers, we enter into arrangements with health care providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products.
Revenues from product sales are recognized when the Customer obtains control of our product, which occurs at a point in time, typically upon delivery to the Customer. When we perform shipping and handling activities after the transfer of control to the Customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues. 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 discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our Customers, health care providers, payors and other indirect customers relating to our product sales. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances: We generally provide Customers with discounts that include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from certain Customers. To the extent the services received are distinct from our sale of products to the Customer, these payments are classified in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Product Returns: Consistent with industry practice, we generally offer Customers a limited right of return based on the product’s expiration date for product that has been purchased from us, which lapses upon shipment to a patient. We estimate the amount of our product sales that may be returned by our Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using available industry data and our own historical sales information, including our visibility into the inventory remaining in the distribution channel.
Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and we generally issue credits for such amounts within a few weeks of the Customer’s notification to us of the resale. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that Customers have claimed but for which we have not yet issued a credit.
Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at period end.
Payor Rebates: We contract with various private payor organizations, primarily insurance companies and pharmacy benefit managers, 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.
Other Incentives: Other incentives that we offer include voluntary patient assistance programs such as co-pay assistance. Co-pay assistance programs are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in in the distribution channel inventories at period end.
To date, our sources of product revenue have been U.S. sales of ZEJULA and VARUBI, and limited sales of ZEJULA and VARUBY in Europe. The following table summarizes activity in each of the product revenue allowance and reserve categories for the years ended December 31, 2015 (as revised), 2016 (as revised) and 2017 (in thousands):
The provision for returns related to sales for the year ended December 31, 2017 was primarily related to VARUBI IV, as further described above, in “Results of Operations - Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 - Product Revenue”.
License, Collaboration and Other Revenues
We enter into out-licensing agreements that are within the scope of Topic 606, under which we license certain of our product candidates’ rights to third parties. The terms of these arrangements typically include payment of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services that we provide through our contract manufacturers; and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
Licenses of Intellectual Property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Milestone Payments: At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the
licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the licensee exercises these options, any payments are recorded in license, collaboration and other revenues when the licensee obtains control of the goods, which is upon delivery.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our out-license arrangements.
We receive payments from our licensees based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
·
CROs in connection with clinical studies;
·
investigative sites in connection with clinical studies;
·
vendors related to product manufacturing, development and distribution of clinical supplies;
·
collaborator entities in connection with our collaboration agreements; and
·
vendors in connection with preclinical development activities.
We record expenses related to clinical studies and manufacturing development activities based on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing vendors that conduct and manage these activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of subjects, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrued or prepaid expense balance accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services
performed differ from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.
Stock-Based Compensation
We recognize compensation costs related to stock options, RSUs, and restricted stock awards granted to employees based on the estimated fair value of the awards on the date of grant. Following the consummation of our initial public offering, stock option, RSUs and restricted stock award fair values are determined utilizing the quoted market price of our common stock. For awards with performance conditions, the related compensation cost is recognized as an expense, starting when the milestone becomes probable of being met, over the remaining performance period. Described below is the methodology we utilize in measuring stock-based compensation expense.
We apply the fair value recognition provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 718, Compensation - Stock Compensation. Determining the amount of stock-based compensation to be recorded requires us to estimate the fair value of a stock-based award as of its grant date. Stock-based compensation expense is recognized ratably over the requisite service period, which in most cases is the vesting period of the award. Estimating the fair value of stock-based awards requires us to make subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. This valuation methodology requires us to make assumptions regarding the expected volatility of our common stock, the expected term of the stock option, the risk-free interest rate for a period that approximates the expected term of the stock option, and our expected dividend yield. Prior to June 2012, we were a privately-held company with a limited operating history and accordingly we utilized data from representative peer companies to estimate expected stock price volatility from our inception to our initial public offering. We selected peer companies from the biopharmaceutical industry with similar characteristics as us, including stage of product development, market capitalization and therapeutic focus. Since our initial public offering in June 2012, we have continued to use volatility data from a representative peer group, blended with our own actual volatility, to estimate expected stock price volatility, due to the limited public trading history of our common stock. To determine the expected term assumption, we use the simplified method as prescribed by U.S. Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 107, Share-Based Payment, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each stock option is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.
The following table presents the assumptions used in estimating the grant-date fair values of stock options granted during the years ended December 31, 2015, 2016 and 2017:
Stock-based compensation expense totaled $25.9 million, $48.5 million, and $90.4 million, respectively, for the years ended December 31, 2015, 2016 and 2017. We expect stock-based compensation expense to increase in future periods primarily due to recent and expected increases in headcount and related equity award grants.
Inventory
We value our inventories at the lower of cost or net realizable value, on a first-in, first-out, or FIFO, basis. Prior to the regulatory approval of our product candidates, we incur expenses for the manufacture of drug product that could potentially be available to support the commercial launch of our products. Until the first reporting period when regulatory approval has been received or is otherwise considered probable, we record all such costs as research and development expense. Inventory used in clinical trials is also expensed as research and development expense, when selected for such use.
After we begin capitalizing inventories, we perform an assessment of the recoverability of capitalized inventory during each reporting period, and write down any excess and obsolete inventory to its net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of product sales in the consolidated statements of operations and comprehensive loss. The determination of whether inventory
costs will be realizable requires the use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.
In-Process Research and Development
As part of our business strategy, we may in-license the rights to develop and commercialize product candidates. For each in-license transaction we evaluate whether we have acquired processes or activities along with inputs that would be sufficient to constitute a “business” as defined under GAAP. A “business” as defined under GAAP consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set of activities to qualify as a business. When we determine that we have not acquired sufficient processes or activities to constitute a business, any up-front payments, as well as pre-commercial milestone payments, are immediately expensed as acquired in-process research and development in the period in which they are incurred. Milestone payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized over the estimated remaining useful life of the related product.
Intangible Assets
We maintain definite-lived intangible assets related to certain capitalized milestones. These assets are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used. Amortization expense is recorded as a component of cost of sales in the consolidated statements of operations and comprehensive loss.
We assess our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, may include actions by regulatory authorities with respect to us or our competitors, the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value. Due to the update to the VARUBI IV package insert described above, we lowered our internal forecasts of future sales, and performed an analysis of the recoverability for the capitalized milestone payments (intangible assets) associated with the VARUBI/VARUBY product. As of December 31, 2017, our expected non-discounted future cash flows indicated that the carrying amounts were recoverable.
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. As of December 31, 2016 and 2017, we had cash and cash equivalents of $785.9 million and $643.1 million, respectively, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates, particularly because our investments are in short-term securities, and by changes in the London Interbank Offered Rate, or LIBOR, because of the floating rates of interest under the Loan Agreement. Our investment securities are also subject to interest rate risk and may fall in value if market interest rates increase.
As of December 31, 2017, we had outstanding borrowings under the Loan Agreement totaling $300.0 million. These borrowings bear interest at a rate equal to the LIBOR rate, plus an applicable margin of 8% per annum (with the LIBOR rate subject to a floor of 1% and a cap equal to the LIBOR rate as of the Tranche A closing date under the Loan Agreement plus 1.5%). As such, a hypothetical 1% increase in the LIBOR rate would result in a corresponding change in interest expense over a one-year period of approximately $3.0 million. See Note 7, “Debt”, in the Notes to Consolidated Financial Statements included in Part II, Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TESARO, Inc.
Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of TESARO, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TESARO, Inc. (the Company) as of December 31, 2016 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2016 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for revenue in 2017 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10, 2016-12, 2016-20 and 2017-14.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010.
Boston, Massachusetts
February 28, 2018
TESARO, Inc.
Consolidated Balance Sheets
(all amounts in 000’s, except share and per share data)
See accompanying notes to consolidated financial statements.
TESARO, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(all amounts in 000’s, except per share data)
See accompanying notes to consolidated financial statements.
			 		
TESARO, Inc.
Consolidated Statements of Stockholders’ Equity
(all amounts in 000’s, except share data)
See accompanying notes to consolidated financial statements.
			 		
TESARO, Inc.
Consolidated Statements of Cash Flows
(all amounts in 000’s)
See accompanying notes to consolidated financial statements.
TESARO, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business
The Company
TESARO, Inc., or the Company or TESARO, was incorporated in Delaware and commenced operations in 2010. Headquartered in Waltham, Massachusetts, TESARO is a commercial-stage biopharmaceutical company devoted to providing transformative therapies to people bravely facing cancer. The Company’s primary focus is to develop treatments for solid tumors using various approaches, including small molecules and immuno-oncology antibodies, as monotherapies or in combinations. The Company has in-licensed and is developing several oncology-related product candidates, and has entered into several research collaborations with third parties for the discovery of new candidates. The Company operates in one segment. The Company is subject to a number of risks, including dependence on key individuals, regulatory and manufacturing risks, the need to develop additional commercially viable products, risks associated with competitors, many of which are larger and better capitalized, risks related to intellectual property, and the need to obtain adequate additional financing to fund the development and potential commercialization of its product candidates and further its in-licensing and acquisition activities.
The Company’s two currently marketed products, ZEJULA® and VARUBI®/VARUBY®, are approved in both the U.S. and the European Union, or EU. ZEJULA is approved as a maintenance treatment of adults with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. VARUBI/VARUBY is approved for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy. As further described in Note 17, “Subsequent Events”, the Company has determined that it will cease marketing and distribution of the intravenous, or IV, formulation of VARUBI and intends to pursue strategic alternatives for the VARUBI brand.
Liquidity
The Company has incurred significant operating losses since inception and has relied on its ability to fund its operations through private and public equity and debt financings, and to a lesser extent through product sales and license and collaboration arrangements. Management expects operating losses and negative operating cash flows to continue for the foreseeable future. As the Company continues to incur losses, the transition to profitability is dependent upon the successful development, approval, and commercialization of its products and product candidates and the achievement of a level of revenues adequate to support its cost structure. The Company believes that its currently available funds in addition to cash generated from sales of its products will be sufficient to fund the Company’s operations through at least the next 12 months from the issuance of this Annual Report on Form 10-K. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or GAAP.
See “New Accounting Pronouncements - Recently Adopted” below for a discussion of certain revisions to prior period financial statements made in connection with the Company’s adoption of new revenue recognition guidance retroactive to January 1, 2015.
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing safer and more effective oncology-focused therapeutics.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, other comprehensive loss and the related disclosures. Significant estimates in these consolidated financial statements include estimates made in connection with accrued research and development expenses, stock-based compensation expense, revenue, valuation of convertible notes, inventory, intangible assets and related amortization. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Concentrations of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. The Company maintains its cash and cash equivalent balances primarily in the form of money market fund accounts with financial institutions that management believes are creditworthy. The Company’s investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk. The Company has no financial instruments with off-balance-sheet risk of loss.
The Company also is subject to credit risk from its accounts receivable related to its product sales, collaborators and licenses. As part of its credit management policy, the Company performs ongoing credit evaluations of its customers, and the Company has not required collateral from any customer. The Company has not recorded any allowances for doubtful accounts at either December 31, 2016 or 2017.
Foreign Currency
A subsidiary’s functional currency is the currency of the primary economic environment in which the subsidiary operates; normally, that is the currency of the environment in which a subsidiary primarily generates and expends cash. In making the determination of the appropriate functional currency for a subsidiary, the Company considers cash flow indicators, local market indicators, financing indicators and the subsidiary’s relationship with both the parent company and other subsidiaries. For subsidiaries that are primarily a direct and integral component or extension of the parent entity’s operations, the U.S. dollar is the functional currency.
For each foreign subsidiary with a functional currency other than the U.S. dollar, assets and liabilities are translated at current exchange rates at the balance sheet date. Revenue and expense items are translated at average foreign exchange rates for the period. Adjustments resulting from the translation of the financial statements of these subsidiaries into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive loss, a separate component of stockholders’ equity. For foreign subsidiaries with the U.S. dollar as the functional currency, monetary assets and liabilities are re-measured into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are re-measured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average exchange rates prevailing during each period.
Consolidated realized and unrealized foreign currency transaction gains and losses are recorded in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss. Consolidated realized and unrealized foreign currency transaction losses were negligible for the year ended December 31, 2015, and were $0.2 million and $0.5 million for the years ended December 31, 2016 and 2017, respectively.
Revenue Recognition
Effective January 1, 2017, the Company adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, using the full retrospective transition method. Under this method, the Company has revised its consolidated financial statements for the years ended December 31, 2015 and 2016, and applicable interim periods within those years, as if Topic 606 had been effective for those periods. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for net product revenue and license, collaboration and other revenues, see Note 13, “Revenue Recognition”.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with original or remaining maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits and money market funds that invest primarily in certificates of deposit, commercial paper and U.S. government and U.S. government agency obligations. Cash equivalents are reported at fair value.
Restricted Cash
Restricted cash consists of cash balances held as collateral for the Company’s employee credit card programs.
Fair Value of Financial Instruments
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of investment credit quality. The hierarchy defines three levels of valuation inputs:
Level 1 inputs
Quoted prices in active markets for identical assets or liabilities
Level 2 inputs
Observable inputs other than Level 1 inputs, including quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active
Level 3 inputs
Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability
The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value at December 31, 2016 and 2017 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
The carrying amounts of accounts payable and accrued expenses approximate their fair values due to their short-term maturities.
In September 2014, the Company issued $201.3 million aggregate principal amount of 3.00% convertible senior notes due October 1, 2021, or the Convertible Notes. Interest is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2015. As of December 31, 2017, the carrying value of the Convertible Notes was $143.4 million, net of unamortized discount and debt issuance costs and the fair value of the principal amount was $499.1 million. As of December 31, 2017, the carrying value of the Company’s borrowing under its term loan agreement approximated its fair value, considering the short period of time since the December 6, 2017 borrowing date. The Convertible Notes and the term loan agreement are discussed in more detail in Note 7, “Debt.”
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the economic life of the asset or the remaining lease term, whichever is shorter. Maintenance and repairs are expensed as incurred. The following estimated useful lives were used to depreciate the Company’s assets:
Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.
The Company reviews long-lived assets when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparison of an asset’s book value to the estimated undiscounted future net cash flows that the asset is expected to generate. If the estimated future undiscounted net cash flows are less than the book value, the asset is considered to be impaired, and the impairment loss to be recognized in income is measured as the amount by which the book value of the asset exceeds its fair value, which is measured based on the estimated discounted future net cash flows that the asset is expected to generate.
Research and Development Expenses
Research and development costs are charged to expense as incurred and include:
·
employee-related expenses, including salaries, bonuses, benefits, travel and stock-based compensation expense;
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fees and expenses incurred under agreements with contract research organizations, investigative sites, research consortia and other entities in connection with the conduct of clinical trials and preclinical studies and related services, such as administrative, data management, laboratory and biostatistics services;
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the cost of acquiring, developing and manufacturing active pharmaceutical ingredients for product candidates that have not received regulatory approval, clinical trial materials and other research and development materials;
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fees and costs related to regulatory filings and activities;
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pre-commercial license fees and milestone payments related to the acquisition of in-licensed product candidates, which are reported on the statements of operations as acquired in-process research and development;
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facilities, depreciation and other expenses, which include direct and allocated expenses for rent, utilities, maintenance of facilities, insurance and other supplies; and
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other costs associated with clinical, preclinical, discovery and other research activities.
Costs for certain development activities, such as clinical trials and manufacturing development activities, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to the Company by its vendors on their actual costs incurred or level of effort expended. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the consolidated balance sheets as prepaid or accrued research and development expenses. Certain clinical development costs incurred by the Company with respect to its niraparib program are reimbursed as part of a collaborative research agreement with Merck Sharp & Dohme B.V., a subsidiary of Merck & Co., Inc., or Merck. Cost-sharing amounts received by the Company are recorded as a reduction to research and development expenses.
Acquired In-Process Research and Development Expense
The Company has acquired the rights to develop and commercialize new product candidates. Up-front payments that relate to the acquisition of a new drug compound, as well as pre-commercial milestone payments, are immediately expensed as acquired in-process research and development in the period in which they are incurred, provided that the new drug compound did not also include processes or activities that would constitute a “business” as defined under GAAP, the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no established alternative future use. Milestone payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized over the estimated remaining useful life of the related product. Royalties owed on sales of the products licensed pursuant to the agreements are expensed in the period the related revenues are recognized.
Advertising Expenses
The costs of advertising are expensed as incurred and included in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss. For the years ended December 31, 2015, 2016 and 2017, advertising expenses totaled $3.6 million, $9.2 million, and $21.1 million, respectively.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss includes foreign currency translation adjustments and unrealized gains and losses on pension obligations. The following table presents changes in the components of accumulated other comprehensive loss (in thousands):
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of
assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, resulting in significant changes to the U.S. corporate income tax system. For additional details regarding this act, see Note 10, “Income Taxes”.
Stock-Based Compensation Expense
Stock-based compensation is recognized as expense for each stock-based award based on its estimated fair value. The Company determines the fair value of each stock option award at its grant date using the Black-Scholes option pricing model. The Company determines the fair value of each restricted stock unit, or RSU, at its grant date based on the closing market price of the Company’s common stock on that date. The value of the award is recognized as expense on a straight-line basis over the requisite service period and is adjusted for pre-vesting forfeitures in the period in which the forfeitures occur. For stock awards that have a performance condition, the Company recognizes compensation expense based on its assessment of the probability that the performance condition will be achieved, using an accelerated attribution model, over the explicit or implicit service period.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. Prior to the regulatory approval of its product candidates, the Company incurs expenses for the manufacture of drug product that could potentially be available to support the commercial launch of its products. Until the first reporting period when regulatory approval has been received or is otherwise considered probable, the Company records all such costs as research and development expense. Inventory used in clinical trials is also expensed as research and development expense, when selected for such use. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventory to its net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of product sales in the consolidated statements of operations and comprehensive loss. The determination of whether inventory costs will be realizable requires the use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.
Intangible Assets
The Company maintains definite-lived intangible assets related to milestone payments made to third parties subsequent to regulatory approval for acquired and in-licensed product candidates. These assets are amortized over their remaining useful lives, which are generally estimated to be the remaining patent life. If the Company’s estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used. Intangible assets are amortized using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when future revenues cannot be reasonably estimated, with a cumulative catch-up of amortization expense for milestone payments that do not result in additional intellectual property rights and/or incremental cash flows. Amortization expense is recorded as a component of cost of sales in the consolidated statements of operations and comprehensive loss.
The Company assesses its intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value.
Net Loss Per Share
Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock
equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, Employee Stock Purchase Plan awards, unvested RSUs, and shares issuable upon conversion of the Convertible Notes, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
The following table presents amounts that were excluded from the calculation of diluted net loss per share, due to their anti-dilutive effect (in thousands):
In September 2014, the Company issued Convertible Notes, which provide in certain situations for the conversion of the outstanding principal amount of the Convertible Notes into shares of the Company’s common stock at a predefined conversion rate. See Note 7, “Debt”, for additional information. In conjunction with the issuance of the Convertible Notes, the Company entered into capped call option transactions, or Capped Calls, with certain counterparties. The Capped Calls are expected generally to reduce the potential dilution, and/or offset, to an extent, the cash payments the Company may choose to make in excess of the principal amount, upon conversion of the Convertible Notes.
As provided by the terms of the indenture underlying the Convertible Notes, the Company has a choice to settle the conversion obligation for the Convertible Notes in cash, shares or any combination of the two. The Company currently intends to settle the par value of the Convertible Notes in cash and any excess conversion premium in shares. Accordingly, the par value of the Convertible Notes will not be included in the calculation of diluted income per share, but the dilutive effect of the conversion premium will be considered in the calculation of diluted net income per share using the treasury stock method. The Convertible Notes were convertible as of December 31, 2015, 2016 and 2017. The share figures in the table above represent the estimated incremental shares that would be issued, after the consideration of the Capped Calls, assuming conversion of all of the outstanding Convertible Notes as of the respective balance sheet date.
New Accounting Pronouncements - Recently Adopted
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts with Customers. In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. The Company adopted this new standard on January 1, 2017 using the full retrospective transition method, and has elected to use the following practical expedients that are permitted under the rules of the adoption, which have been applied consistently to all contracts within all reporting periods presented:
·
For completed contracts that had variable consideration, the Company has used the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. Therefore, the Company did not need to estimate its discounts, returns, chargebacks, rebates, co-pay assistance and other allowances on product sales made in the comparative reporting periods.
·
For all reporting periods presented before January 1, 2017, the Company has not disclosed the amount of the transaction price allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue.
Impact of Adoption
The Company, as a result of adopting Topic 606 on January 1, 2017, has revised its comparative financial statements for the prior years as if Topic 606 had been effective for those periods. As a result, the following financial statement line items for the years ended December 31, 2015 and 2016 were affected.
The most significant change above relates to the Company’s license, collaboration and other revenues and the impact of the potential payment to Zai Lab (Shanghai) Co., Ltd., or Zai Lab, upon exercise of the option to co-market niraparib in China, Hong Kong and Macao, or the China Territories. Under Topic 605, even though the Company believed the probability was remote that this option would be exercised, the Company had concluded that the contract price was not fixed or determinable under the revenue recognition criteria and accordingly no revenue had been previously recognized. Therefore, the upfront, non-refundable license fee of $15.0 million received by the Company in the fourth quarter of 2016 was deferred and recorded as a customer deposit as of December 31, 2016. Upon its adoption of Topic 606, the Company determined the probability was remote that it would exercise the option and accordingly, the potential future payments to Zai Lab had no impact on the transaction price. Further, the Company evaluated this option to co-market niraparib under Topic 606 and concluded that this option was not a repurchase right and accordingly recognized revenue in 2016 for the transaction price received as and when the performance obligations under this agreement were satisfied by the Company. In February 2018, the Company and Zai Lab entered into an amendment to the Collaboration, Development and License agreement between the parties, eliminating the Company’s co-marketing right. This amendment had no impact on the Company’s accounting conclusions under Topic 606. For further discussion of the adoption of this standard, see Note 13, “Revenue Recognition” and Note 14, “License and Collaboration Agreements”.
In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business. To be considered a business (instead of an asset), an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present (including for early stage companies that have not generated outputs). To be a business without outputs, there will now need to be an organized workforce. The new guidance narrows the definition of the term “outputs” to be consistent with how it is described in Topic 606. Under the final definition, an output is the result of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income, such as dividends and interest. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company has elected to early adopt this ASU effective January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, although this guidance could impact its accounting conclusions for certain future transactions, such as in-licensing agreements.
New Accounting Pronouncements - Recently Issued
In February 2016, the FASB issued ASU No. 2016-02, a comprehensive new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees and requires lessees to recognize a lease liability and a right-of-use asset for most leases. The new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard must be applied using a modified retrospective transition approach that requires application of the new guidance for all periods presented. The Company is currently in the process of evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, which is intended to simplify and clarify how certain transactions are classified in the statement of cash flows, and to reduce diversity in practice for such transactions. This ASU addresses eight specific issues regarding classification of cash flows. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company believes that the adoption of this guidance will not have a significant impact on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, which removes the prohibition in ASC Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. As a result, the income tax consequences from the intra-entity transfer of an asset, other than inventory, and associated changes to deferred taxes will be recognized when the transfer occurs. This standard is effective for the Company on January 1, 2018. The Company plans to adopt this new standard using the modified retrospective method, through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company believes that the adoption of this guidance will not have a significant impact on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a retrospective transition method to each period presented. The Company believes that the adoption of this guidance will not have a significant impact on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or classification of the award is not the same immediately before and after a change to the terms and conditions of the award. This ASU is effective on a prospective basis beginning on January 1, 2018, with early adoption permitted. The Company does not expect this new guidance to have a material impact on its consolidated financial statements and related disclosures.
3. Inventories
The following table presents inventories (in thousands):
Inventories are related to the Company’s approved products, ZEJULA and VARUBI. During the year ended December 31, 2017, the Company recorded a $16.7 million in lower of cost or market write-downs for excess and obsolete VARUBI inventories. In addition, a $1.6 million loss on firm purchase commitments was also recorded within the period. These charges resulted from the Company’s revision of its forecast of future sales of VARUBI, which in turn was related to the Company’s update to the VARUBI IV package insert in January 2018. The aggregate of $18.3 million in lower of cost or market write-downs and losses on firm purchase commitments affected the Company’s net loss per share applicable to
common stockholders (basic and diluted) by $(0.34) for the year ended December 31, 2017. If future sales of ZEJULA or VARUBI are lower than expected, the Company may be required to record further write-downs of the value of such inventories. Inventory write-downs and losses on purchase commitments are recorded as components of cost of sales in the consolidated statements of operations and comprehensive loss.
4. Intangible Assets
The following table presents intangible assets (in thousands):
The increase in acquired and in-licensed rights as of December 31, 2017 was due to a milestone of $25.0 million paid to Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., or Merck, which was incurred upon the FDA approval of ZEJULA on March 27, 2017, a milestone of $10.0 million paid to OPKO Health, Inc., which was incurred upon the first commercial sale of VARUBY in Europe in May 2017, and a milestone of $14.7 million paid to Merck, which was incurred upon the approval of ZEJULA in Europe.
The Company recorded $0.3 million, $1.9 million and $6.2 million, respectively, in amortization expense related to intangible assets during the years ended December 31, 2015, 2016 and 2017. Estimated future amortization expense for intangible assets as of December 31, 2017 is as follows (in thousands):
5. Property and Equipment
The following table presents property and equipment, at cost, and related accumulated depreciation (in thousands):
Total depreciation expense amounted to $0.8 million, $1.3 million and $3.4 million for the years ended December 31, 2015, 2016 and 2017, respectively.
6. Accrued Expenses
The following table presents the components of accrued expenses (in thousands):
7. Debt
Our outstanding debt obligations consisted of the following (in thousands):
Convertible Notes
On September 29, 2014, in a registered underwritten public offering, the Company completed the issuance of $201.3 million aggregate principal amount of Convertible Notes. The Company received net proceeds of $194.7 million from the sale of the Convertible Notes, after deducting discounts, commissions and other expenses of $6.6 million. In conjunction with the sale of the Convertible Notes, the Company used $20.8 million of the net proceeds to enter into separate Capped Calls, as described below.
The Convertible Notes are governed by the terms of a Senior Debt Securities Indenture, as supplemented by the First Supplemental Indenture relating to the Convertible Notes, collectively the Indenture, between the Company and U.S. Bank National Association, as trustee. The Convertible Notes bear interest at a rate of 3.00% per annum, payable semi-annually on April 1 and October 1, beginning from April 1, 2015, and will be convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Convertible Notes will mature on October 1, 2021, unless earlier converted or repurchased in accordance with their terms. Prior to the close of business on the business day immediately preceding April 1, 2021, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods as discussed below, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The initial conversion price of the Convertible Notes is approximately $35.13 per share of common stock at an initial conversion rate of 28.4627 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which represents a premium of approximately 35% over the last reported sale price of the Company’s common stock on September 23, 2014.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends. At any time prior to the close of business on the business day immediately preceding April 1, 2021, holders may convert their Convertible Notes at their option only under the following circumstances:
(1)
during any calendar quarter commencing after the calendar quarter ending on December 31, 2014 (and only during such calendar quarter), if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day
of the immediately preceding calendar quarter in which the conversion occurs is greater than 130% of the conversion price on each applicable trading day;
(2)
during the five business day period after any ten consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Company’s common stock and the conversion rate on each such trading day; or
(3)
upon the occurrence of specified corporate events.
On or after April 1, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
If a make-whole adjustment event, as described in the Indenture, occurs and a holder elects to convert its Convertible Notes in connection with such make-whole adjustment event, such holder may be entitled to an increase in the conversion rate as described in the Indenture.
The Company may not redeem the Convertible Notes prior to the maturity date and no “sinking fund” is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest.
The Indenture does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
The terms of the Indenture provide the Company with the option to settle the Convertible Notes in cash, common stock, or a combination of cash and common stock. As a result, in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options, the Company separately accounts for the liability and equity components of the Convertible Notes by allocating the principal between the liability component and the embedded conversion option, or equity component. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied interest rate, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Convertible Notes, which resulted in a fair value of the liability component of $113.4 million upon issuance, calculated as the present value of implied future payments based on the $201.3 million aggregate principal amount. The equity component of the Convertible Notes was recognized as a debt discount, recorded in additional paid-in capital, and represents the difference between the aggregate principal of the Convertible Notes and the fair value of the Convertible Notes without conversion option on their issuance date. The debt discount is amortized to interest expense using the effective interest method over seven years, or the life of the Convertible Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The Company’s outstanding convertible note balances at December 31, 2017 consisted of the following (in thousands):
In connection with the issuance of the Convertible Notes, the Company incurred issuance costs, primarily consisting of underwriting, legal and other professional fees, which the Company allocated to the liability and equity components in a manner consistent with the allocation of the principal, as described above. Of the total $6.6 million of debt issuance costs, $2.9 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and $3.7 million were
allocated to the liability component and recorded as a reduction in the carrying amount of the convertible note. The portion allocated to the liability component is amortized to interest expense over the expected life of the Convertible Notes using the effective interest method.
The Company determined the expected life of the debt was equal to the seven year contractual term of the Convertible Notes. As of December 31, 2017, the carrying value of the Convertible Notes was $143.4 million and the fair value of the Convertible Notes approximated $499.1 million. The effective interest rate on the liability component is 12.9%. The following table sets forth total interest expense recognized related to the Convertible Notes during the years ended December 31, 2016 and 2017 (in thousands):
The Company has evaluated the Indenture for derivatives pursuant to ASC Topic 815, Derivatives and Hedging, and identified an embedded derivative that requires bifurcation as the feature is not clearly and closely related to the host instrument. The embedded derivative is a default provision, which could require additional interest payments. The Company has determined that the fair value of this embedded derivative was nominal as of December 31, 2017.
In conjunction with the offering of the Convertible Notes, the Company entered into privately-negotiated Capped Calls with certain counterparties. Each Capped Call is an integrated instrument consisting of a call option on the Company’s common stock purchased by the Company from the counterparties with an exercise price equal to the conversion price of $35.13 per share for the underlying number of shares and a cap component that incorporates a cap price of $45.54 per share. The cap component is economically equivalent to a call option sold by the Company to the counterparties for the underlying number of shares with an exercise price of $45.54 per share. As an integrated instrument, the settlement of the Capped Calls coincides with the maturity date of the Convertible Notes. The aggregate cost of the Capped Calls was $20.8 million and was recorded in stockholders’ equity and will not be remeasured.
2017 Term Loan Agreement
In November 2017, the Company entered into a loan agreement, or the Loan Agreement, with BioPharma Credit PLC and affiliates, or the Lenders. The Lenders agreed to provide up to an aggregate principal amount of $500.0 million in two tranches, with the first tranche equal to $300.0 million, or Tranche A, and the second in an amount between $50.0 million and $200.0 million at the Company’s discretion, or Tranche B. The Company drew Tranche A on December 6, 2017 with a maturity date of December 6, 2024. Tranche B is available for draw at the Company’s option, on 90 days’ notice, from June 30, 2018 until December 20, 2018 and if drawn by the Company, will also have a maturity date of December 6, 2024. Borrowings under the Tranche A and Tranche B loans bear interest at a rate equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of 8% per annum and 7.5% per annum, respectively (with the LIBOR rate subject to a floor of 1% and cap equal to the LIBOR rate as of the Tranche A closing date plus 1.5%). The loans have an up-front fee of 2% on the funded amount of each tranche, payable at the applicable closing date.
The obligations of the Company under the Loan Agreement are guaranteed by the Company’s wholly-owned U.S. subsidiary, TESARO Securities Corporation, and are secured by security interests in (i) all of the Company’s owned or exclusively licensed U.S. registered patents and trademarks relating to the research, development, manufacture, production, use, commercialization, marketing, importing, storage, transport, offer for sale, distribution or sale of VARUBI (rolapitant) or ZEJULA (niraparib) in the U.S., (ii) rights under any U.S. new drug application relating to VARUBI and ZEJULA, (iii) 100% of the equity interests in wholly owned domestic subsidiaries and 65% of the equity interests in directly owned foreign subsidiaries, in each case of the Company and any guarantor, and (iv) cash held in all deposit accounts of the Company and any guarantor.
The Company has the option to prepay, in whole or in part, Tranche A or Tranche B, subject to a prepayment premium and a make-whole amount, if applicable. If any prepayment occurs prior to the 24-month anniversary of the respective closing date, a make-whole amount equal to the sum of all interest accruing from the prepayment date through the 24-month anniversary of the respective closing date, and a 3% premium would also apply to such repayment. If the
prepayment occurs prior to the 36-month anniversary, a 2% premium would apply to such repayment, and a 1% premium if the prepayment occurs prior to the 48-month anniversary. The Company is obligated to make quarterly repayments of principal in an amount equal to 3%, starting December 31, 2019 for the Tranche A loan amount with any remaining balance payable on the final maturity date. Interest on the outstanding Tranche A loan amount is payable quarterly in arrears.
There are no financial covenants associated with the Loan Agreement; however, there are customary representations and warranties and customary affirmative and negative covenants, including among other things, restrictions (subject to various exceptions) on transfer of intellectual property related to the collateral, indebtedness, liens, prepayment of other indebtedness and payment of dividends and stock repurchases by the Company.
The Loan Agreement also includes events of default, the occurrence and continuation of any of which provides the Lenders the right to exercise remedies against the Company and the collateral securing the loans under the Loan Agreement, including cash. These events of default include, among other things, failure to pay any amounts due under the Loan Agreement, insolvency, the occurrence of a material adverse change in the ability of the Company to perform its obligations under the Loan Agreement, the occurrence of any default under certain other indebtedness and a final judgment against the Company in an uninsured amount greater than $10.0 million.
The Tranche A loan was recorded on the consolidated balance sheets, net of a debt discount of $6.0 million in upfront fees assessed by the Lenders at the time of borrowing. The debt discount and deferred financing costs of $0.4 million are being amortized to interest expense using the effective interest method over the same term. The effective annual interest rate of the outstanding debt under Tranche A loan is approximately 10.0%. During the year ended December 31, 2017, the Company recognized $2.0 million of interest expense related to the Tranche A Loan, including $0.1 million related to the accretion of debt discount and amortization of deferred financing costs.
Future annual principal payments on the Company’s long-term debt as of December 31, 2017 were as follows (in thousands):
8. Stockholders’ Equity
As of December 31, 2017, the authorized capital stock of the Company consisted of 10,000,000 shares of preferred stock and 100,000,000 shares of common stock, both with a par value of $0.0001, of which no shares of preferred stock were issued or outstanding and 54,464,039 shares of common stock were issued and outstanding.
Preferred Stock
The Company’s certificate of incorporation authorizes its board of directors to issue preferred stock from time to time in one or more series. The rights, preferences, restrictions, qualifications and limitations of such stock are determined by the board of directors.
Common Stock
In March 2015, the Company sold 3,755,000 shares of common stock, in an underwritten public offering at a price to the public of $51.00 per share, resulting in gross proceeds of approximately $191.5 million. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $179.8 million. The shares were issued pursuant to an automatic shelf registration statement on Form S-3.
In March 2016, the Company sold 4,404,658 shares of common stock in a private placement offering at a price of $35.19 per share, to certain accredited investors, including funds affiliated with three of its directors and current investors,
resulting in gross proceeds of approximately $155.0 million. The price per share was equal to the volume weighted average price for the ten-day period ending on March 17, 2016. There were no placement agents used for this financing. The sale and issuance of the shares of common stock in the private placement was made in reliance on the exemption afforded by Section 4(a)(2) under the Securities Act of 1933 and Regulation D promulgated under the Securities Act.
In April 2016, the Company sold 1,130,198 shares of common stock to Johnson & Johnson Innovation - JJDC, Inc., or JJDC, at a price of $44.24 per share, for an aggregate purchase price of approximately $50.0 million. The price per share was equal to the volume weighted average price for the five-day period ending on April 4, 2016. There were no placement agents used, or any underwriting discounts or commissions paid in connection with the transaction. The sale and issuance of the shares of common stock was made in reliance on the exemption afforded by Section 4(a)(2) under the Securities Act of 1933 and Regulation D promulgated under the Securities Act.
In July 2016, the Company sold 5,347,500 shares of common stock, in an underwritten public offering at a price to the public of $81.00 per share, resulting in gross proceeds of approximately $433.1 million. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $408.9 million. The shares were issued pursuant to an automatic shelf registration statement on Form S-3.
In November 2016, the Company sold 1,750,000 shares of common stock, in an underwritten public offering at a price to the public of $135.00 per share, resulting in gross proceeds of approximately $236.3 million. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $224.2 million. The shares were issued pursuant to an automatic shelf registration statement on Form S-3.
The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company. 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 the Company’s board of directors.
9. Stock-Based Compensation
The following table presents stock-based compensation expense as reflected in the Company’s consolidated statements of operations and comprehensive loss (in thousands):
The Company maintains several equity compensation plans, including the TESARO, Inc. 2012 Omnibus Incentive Plan, or the 2012 Incentive Plan, the TESARO, Inc. 2010 Stock Incentive Plan, or the 2010 Incentive Plan, the TESARO, Inc. 2015 Non-Employee Director Stock Incentive Plan, or the 2015 Director Plan, and the TESARO, Inc. 2012 Employee Stock Purchase Plan, or the 2012 ESPP. Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the individual plans. To date, stock option awards granted to employees by the Company generally vest either monthly over four years, or 25% one year from the vesting start date and 75% in equal installments over the subsequent thirty-six (36) months, and are exercisable from the date of grant for a period of ten years. RSUs granted to employees by the Company generally vest annually over four years in equal annual installments of 25% each.
2010 Stock Incentive Plan
In connection with the Company’s formation, the Company adopted the 2010 Incentive Plan, under which it was authorized to grant stock-based awards of up to 1,981,130 shares of common stock as of January 1, 2012. As of April 27, 2012, the Company ceased making awards under the 2010 Incentive Plan and the remaining 6,857 shares available for future grants were added to the total number of shares reserved for issuance under the 2012 Incentive Plan. For options granted under the 2010 Incentive Plan, the exercise price equaled the estimated fair value of the common stock as determined by the board of directors on the date of grant. As of December 31, 2017, there are no shares available for grant under the 2010 Incentive Plan.
2012 Omnibus Incentive Plan
On April 27, 2012, the stockholders of the Company approved the 2012 Incentive Plan, which had been previously adopted by the board of directors. Upon effectiveness of the 2012 Incentive Plan, the Company ceased making awards under the 2010 Incentive Plan. The 2012 Incentive Plan allows the Company to grant awards for up to 1,428,571 shares of common stock plus the number of shares of common stock available for grant under the 2010 Incentive Plan as of the effectiveness of the 2012 Incentive Plan (which is an additional 6,857 shares) plus that number of shares of common stock related to awards outstanding under the 2010 Incentive Plan that terminate by expiration, forfeiture, cancellation, cash settlement or otherwise. The number of shares available for grants of awards under the 2012 Incentive Plan is increased automatically on January 1 by a number of shares of common stock equal to the lesser of 4% of the shares of common stock outstanding at such time or the number of shares determined by the Company’s board of directors. Accordingly, effective January 1, 2017 and 2018, the number of shares authorized for issuance under the 2012 Incentive Plan was increased by 2,144,867 shares and 2,178,561 shares, respectively. Awards under the 2012 Incentive Plan may include the following award types: stock options, which may be either incentive stock options or nonqualified stock options; stock appreciation rights; restricted stock; RSUs; dividend equivalent rights; performance shares; performance units; cash-based awards; other stock-based awards, including unrestricted shares; or any combination of the foregoing. The exercise price of stock options granted under the 2012 Incentive Plan is equal to the closing price of a share of the Company’s common stock on the grant date. As of December 31, 2017, there were 1,810,240 shares available for grant under the 2012 Incentive Plan, prior to taking into account the additional shares authorized for issuance as of January 1, 2018, as described above.
2015 Director Plan
On May 14, 2015, the stockholders of the Company approved the 2015 Director Plan, which had been previously adopted by the board of directors in order to have a plan in addition to the 2012 Incentive Plan for purposes of granting awards to non-employee directors. On May 11, 2016, the Company’s stockholders approved certain amendments to the 2015 Director Plan to limit the number of shares of the Company's common stock subject to awards granted in a calendar year to any non-employee director to 50,000 shares, and to affirm the number of shares reserved for issuance under the plan. The 2015 Director Plan allows the Company to grant awards for up to 500,000 shares of common stock. Awards under the 2015 Director Plan may include the following award types: stock options; stock appreciation rights; restricted stock; RSUs; unrestricted stock; or any combination of the foregoing. The exercise price of stock options granted under the 2015 Director Plan is equal to the closing price of a share of the Company’s common stock on the grant date. As of December 31, 2017, there were 198,433 shares available for grant under the 2015 Director Plan.
Stock Options
The following table presents a summary of the Company’s stock option activity and related information:
The fair value of each stock option was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
The Company uses the simplified method as prescribed by U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted. The expected term is applied to all stock option grants as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its population. The computation of expected volatility is based on a blend of the historical volatility of the company and the volatility of a representative group of public biopharmaceutical companies with similar characteristics to the Company, including stage of product development, market capitalization and therapeutic focus. The risk-free interest rate is based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options. The value of the award is recognized as expense on a straight-line basis over the requisite service period and is adjusted for pre-vesting forfeitures in the period in which the forfeitures occur. For stock awards that have a performance condition, the Company recognizes compensation expense based on its assessment of the probability that the performance condition will be achieved, using an accelerated attribution model, over the explicit or implicit service period.
The weighted-average grant date fair values of options granted in the years ended December 31, 2015, 2016 and 2017 were $32.05, $32.13 and $94.50 per share, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2015, 2016 and 2017 was $11.8 million, $37.4 million and $57.1 million, respectively. The intrinsic value of a stock option is the amount by which the fair market value of the underlying stock on the exercise date exceeds the exercise price of the stock option.
In June 2015, June 2016, and June 2017 as provided for under the 2012 Incentive Plan and the 2015 Director Plan, the Company issued 3,429, 6,027 and 3,111 shares of common stock, respectively, to certain non-employee board members who elected to receive shares of common stock in lieu of cash, as payment of fees owed them for services as members of the Company’s board of directors.
At December 31, 2017, there was $110.3 million of total unrecognized compensation cost related to unvested stock options, which the Company expects to recognize over a remaining weighted-average period of 2.1 years.
Restricted Stock Units
The following table presents a summary of the Company’s RSU activity and related information:
In July 2016, the Company issued 15,000 RSUs with service and performance conditions to certain employees, of which 11,512 vested during the year ended December 31, 2017. Vesting of these awards is contingent on the occurrence of certain milestone events and fulfillment of any remaining service condition. As a result, the related compensation cost is recognized as an expense when achievement of the milestone is considered probable. The expense recognized for these awards is based on the grant date fair value of the Company’s common stock multiplied by the number of units granted. The Company recognized $0.4 million and $0.9 million of related expense during the years ended December 31, 2016 and 2017, respectively.
The weighted-average grant date fair values of RSUs granted during the years ended December 31, 2015, 2016 and 2017 were $56.00, $58.47, and $162.79 per share, respectively. The total grant date fair value of RSUs that vested during the years ended December 31, 2015, 2016 and 2017 was $0.5 million, $1.1 million and $11.9 million, respectively, based upon the number of RSUs vested multiplied by the closing stock price of the Company’s common stock on the grant date. As of December 31, 2017, there was approximately $107.3 million of unrecognized compensation cost related to unvested RSUs that the Company expects to recognize over a remaining weighted-average period of approximately 2.8 years.
Employee Stock Purchase Plan
On June 6, 2012, the board of directors adopted the 2012 ESPP, and the stockholders approved it on June 18, 2012, to be effective in connection with the closing of the Company’s initial public offering. A total of 275,000 shares of common stock were originally approved for future issuance under the 2012 ESPP pursuant to purchase rights granted to the Company’s employees or to employees of the Company’s designated subsidiaries. As of December 31, 2017, 151,859 shares remained available for issuance. The 2012 ESPP provides for consecutive six-month offering periods, during which participating employees may elect to have a portion of their compensation withheld and used for the purchase of common stock at the end of each offering period. The purchase price is equal to 85% of the lower of the fair market value of a share of common stock on the first trading date of each offering period or the fair market value of a share of common stock on the last trading day of the offering period, and is limited by participant to $25,000 in fair value of common stock per year. The 2012 ESPP will terminate on June 6, 2022, the tenth anniversary of the date of initial adoption of the plan. For the years ended December 31, 2015, 2016 and 2017, the Company issued a total of 20,601, 42,478 and 42,386 shares of common stock, respectively, under the 2012 ESPP.
The following table presents stock-based compensation expense by type of award (in thousands):
10. Income Taxes
The following table presents the components of income (loss) before the provision for (benefit from) income taxes during the years ended December 31, 2015, 2016, and 2017 (in thousands):
Provisions for income taxes for the years ended December 31, 2015, 2016 and 2017 are as follows (in thousands):
The following table presents a reconciliation of income tax expense (benefit) at the statutory federal income tax rate to the effective income tax rate as reflected in the consolidated financial statements:
The Company’s effective rate for the year ended December 31, 2017 compared to the year ended December 31, 2016 decreased primarily as a result of China withholding taxes on the up-front license payment received from Zai Lab during the year ended December 31, 2016, offset by increases as a result of subsidiary operations in foreign tax jurisdictions during the year ended December 31, 2017.
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred income tax assets and liabilities are determined based upon temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The following table presents the principal components of the Company’s deferred tax assets and liabilities (in thousands):
Effective January 1, 2017, the Company adopted ASC Topic 606, using the full retrospective transition method. Under this method, the Company has revised its consolidated financial statements for the years ended December 31, 2015 and 2016, and applicable interim periods within those years, as if Topic 606 had been effective for those periods. The adoption of this guidance did not have a significant impact on the Company’s related tax disclosures.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act, was signed into law, resulting in significant changes to the U.S. corporate income tax system. These changes include a reduction of the federal statutory rate from 35% to 21%, reduction of certain tax credits, limitations on deductibility of interest expense and executive compensation, and limitations on the use of net operating loss, or NOL, carryforwards. The Tax Act also transitions U.S. international taxation from a worldwide system to a territorial system and includes provisions to prevent base erosion on foreign earnings, which has the effect of subjecting certain earnings of the Company’s foreign subsidiaries to current U.S. taxation. These changes are generally effective beginning in 2018.
The Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries’ previously untaxed foreign earnings, or the Transition Toll Tax. The Transition Toll Tax can be paid over an eight-year period, starting in 2018 and will not be subject to interest.
The Company has recognized the provisional tax impacts related to the Transition Toll Tax and the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The Tax Act did not have a significant impact on the Company’s consolidated financial statements for the year ended December 31, 2017 because the Company maintains a full valuation allowance on its net operating losses and other deferred tax assets. In addition, the Company has an accumulated deficit from its foreign operations and does not have an associated liability from the Transition Toll Tax.
The Tax Act subjects a U.S. stockholder to tax on global intangible low-taxed income, or GILTI, earned by certain foreign subsidiaries. Companies can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years, or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of GILTI provisions and has not yet determined its accounting policy.
In accordance with SEC Staff Accounting Bulletin No. 118, the Company’s preliminary estimate of the impact of the Tax Act is subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of the Company’s tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in the Company’s estimates, which could have a material adverse effect on the Company’s business, results of operations or financial condition. The Company’s final
determination of the impact of the Tax Act will be completed as additional information becomes available, but no later than one year from its enactment.
ASC Topic 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded full valuation allowances against its domestic and foreign deferred tax assets at December 31, 2017, because management has determined that is it more likely than not that these assets will not be realized. The valuation allowance increased by $50.0 million from December 31, 2016 to December 31, 2017, primarily due to increases in operating losses and tax credits, partially offset by decreases reflecting the change in the U.S. corporate income tax rate from 35% to 21% resulting from the Tax Act.
As of December 31, 2017, the Company had cumulative federal, state and foreign NOL carryforwards of $963.9 million and $449.5 million and $14.2, million respectively. The federal, state and foreign NOL carryforwards will expire at various dates through 2037, if not utilized, and are fully offset by a valuation allowance.
As of December 31, 2017, the Company had federal general business and state research and development tax credit carryforwards of approximately $102.1 million and $7.4 million, respectively, available to reduce future tax liabilities. The federal general business and state research and development tax credits will expire at various dates through 2037. The federal and state tax credit carryforwards are fully offset by a valuation allowance.
Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception that it believes may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code.
The Company and its subsidiaries file income tax returns in the United States, as well as various state and foreign jurisdictions. Generally, the tax years 2014 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, or state or foreign tax authorities, to the extent utilized in a future period.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows (in thousands):
During the year ended December 31, 2017, the Company established gross reserves of $4.0 million and $9.9 million related to research and development tax credits and the allocation of taxable income to the various jurisdictions where the Company is subject to tax, respectively.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of its income tax provision. As of December 31, 2016 and 2017, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statement of operations.
11. Employee Benefit Plans
In 2010, the Company adopted a retirement plan, which is qualified under Section 401(k) of the Internal Revenue Code, for its U.S. employees. The plan allows eligible employees to defer, at the employee’s discretion, pre-tax or post-tax compensation up to the IRS annual limits. Company contributions may be made at the discretion of the board of directors.
Effective as of January 1, 2012, the Company amended its 401(k) plan to provide for employer matching contributions equal to (1) 100% of employee deferral contributions up to a deferral rate of 3% of compensation, plus (2) 50% of employee deferral contributions up to a deferral rate of an additional 2% of compensation. During the years ended December 31, 2015, 2016 and 2017, the Company made aggregate matching contributions of $1.0 million, $2.2 million and $4.2 million, respectively.
The Company maintains a pension plan covering employees of its wholly owned subsidiary in Switzerland. This plan is considered a defined benefit plan and is a government-mandated retirement fund that provides benefits to employees upon retirement, death, or disability. Employer and employee contributions are made based on various percentages of salaries and wages that vary based on employee age and other factors. As of December 31, 2017, the plan had an unfunded net pension obligation of approximately $6.5 million and plan assets of approximately $9.9 million. In 2017, the Company recognized expense of $1.3 million related to this plan.
12. Commitments and Contingencies
The Company leases office space for its corporate headquarters in Waltham, Massachusetts under a non-cancelable operating lease agreement and an indenture of lease. Since the lease term of the non-cancelable operating lease agreement commenced on April 1, 2013, the Company has executed seven amendments to increase its leased space under that lease to a total of approximately 180,000 square feet as of December 31, 2017. The lease term, as amended, continues through June 30, 2020. The lease agreement, as amended, provides for varying periods of free rent with respect to portions of the leased premises and tenant improvement allowances of $3.0 million. On December 18, 2017, the Company entered into an indenture of lease for approximately 83,000 additional square feet of leased office space. The indenture of lease continues through December 18, 2022 and provides for tenant improvement allowances of $2.9 million. The Company also leases office space in several locations throughout Europe.
The Company recognizes rent expense on a straight-line basis over the respective lease term including any free rent periods and tenant allowances. The following table presents future minimum rental commitments, by fiscal year and in the aggregate, as of December 31, 2017 (in thousands):
The Company recorded $2.1 million, $3.4 million and $5.4 million in rent expense for the years ended December 31, 2015, 2016 and 2017, respectively.
The Company has entered into agreements with certain vendors for the provision of services, including services related to data management clinical operation support services, that the Company is not contractually able to terminate for convenience and avoid any and all future obligations to the vendors. Under such agreements, the Company is contractually obligated to make certain minimum payments to the vendors, with the exact amounts in the event of termination to be based on the timing of the termination and the exact terms of the agreement.
Litigation and Other Proceedings
The Company may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which the Company is focused.
A putative class action complaint was filed on January 17, 2018 in the United States District Court for the District of Massachusetts, entitled Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086. The complaint alleges that the Company and its Chief Executive Officer and its Chief Financial Officer violated certain federal securities laws, specifically under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. The plaintiff seeks unspecified damages on behalf of a purported class of purchasers of the Company’s common stock between March 14, 2016 and January 12, 2018. The Court has not set a trial date for this matter. The Company believes that the allegations contained in the complaint are without merit and intends to defend the case vigorously. The Company has not recorded an estimated liability associated with this legal proceeding as it does not believe that such a liability is probable.
13. Revenue Recognition
Product Revenue, Net
The Company sells its products principally to a limited number of specialty distributors and specialty pharmacy providers in the U.S. and the EU, or collectively, its Customers. These Customers subsequently resell the Company’s products to health care providers and patients. In addition to distribution agreements with Customers, the Company enters into arrangements with health care providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of the Company’s products.
Revenues from product sales are recognized when the Customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the Customer. When the Company performs shipping and handling activities after the transfer of control to the Customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that the Company 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 discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between the Company and its Customers, health care providers, payors and other indirect customers relating to the Company’s sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s 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 the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is 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 the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances: The Company generally provides Customers with discounts that include incentive fees that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company receives sales order management, data and distribution services from certain Customers. To the extent the services received are distinct from the Company’s sale of products to the Customer, these payments are classified in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss of the Company.
Product Returns: Consistent with industry practice, the Company generally offers Customers a limited right of return based on the product’s expiration date for product that has been purchased from the Company, which lapses upon shipment to a patient. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using available industry data and its own historical sales information, including its visibility into the inventory remaining in the distribution channel.
Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period end that the Company expects will be sold to qualified healthcare providers, and chargebacks that Customers have claimed but for which the Company has not yet issued a credit.
Government Rebates: The Company is subject to discount obligations under state Medicaid programs and Medicare. The Company estimates its Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.
Payor Rebates: The Company contracts with various private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates and records 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.
Other Incentives: Other incentives that the Company offers include voluntary patient assistance programs, such as co-pay assistance programs, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.
To date, the Company’s sources of product revenue have been U.S. sales of ZEJULA and VARUBI, and limited sales of ZEJULA and VARUBY in Europe. For the years ended December 31, 2015 and 2016, product revenues consisted solely of VARUBI in the U.S. Total net product revenue was $5.2 million and $120.7 million for the years ended December 31, 2016 and 2017, respectively. These totals included $5.2 million and $11.9 million from sales of VARUBI/VARUBY, respectively, and zero and $108.8 million from sales of ZEJULA, respectively. The following table summarizes balances and activity in
each of the product revenue allowance and reserve categories for the years ended December 31, 2015 (as revised), 2016 (as revised) and 2017 (in thousands):
The provision for returns related to sales for the year ended December 31, 2017 was primarily related to VARUBI IV, due to the Company’s update to the VARUBI IV package insert in January 2018.
License, Collaboration and Other Revenues
The Company enters into out-licensing agreements that are within the scope of Topic 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals
are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, any additional payments are recorded in license, collaboration and other revenues when the licensee obtains control of the goods, which is upon delivery.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its out-licensing arrangements.
The Company receives payments from its licensees based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.
The following table presents changes in the Company’s contract assets and liabilities during the years ended December 31, 2016 (as revised) and 2017 (in thousands):
During the years ended December 31, 2015, 2016 and 2017, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods (in thousands):
14. License and Collaboration Agreements
Rolapitant In-License
In December 2010, the Company entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell rolapitant. Under the OPKO license the Company is obligated to use commercially reasonable efforts to conduct all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant. Under the terms of the OPKO license, the Company paid OPKO $6.0 million upon signing the agreement and issued to OPKO shares of its convertible preferred stock, then valued at $0.6 million, which shares have since been converted into common stock. The Company has also made all development milestone payments to OPKO, totaling $30.0 million, based on achieving specified regulatory milestones in the U.S. and Europe. In addition, the Company is required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved.
The Company is required to pay OPKO tiered royalties on annual net sales of rolapitant achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which the Company expects will result in an effective royalty rate in the low teens. The royalty rate on annual net sales outside of the United States and Europe is slightly above the single digits. Under certain circumstances, the Company is required to pay OPKO an annual minimum royalty of $2.5 million in each of the first five full calendar years of commercial sales of VARUBI/VARUBY. In any year during this period, in certain circumstances, if royalty payments amount to less than $2.5 million, the difference may be deemed a royalty shortfall and will be payable within 45 days of each calendar year end. Any such royalty shortfalls may be offset dollar for dollar against royalties due in future periods, for the first five calendar years of VARUBI sales. As of December 31, 2016, the Company had incurred $0.7 million of royalties based on its 2016 VARUBI net product revenues. As this amount was less than the $2.5 million annual minimum, the Company accrued an additional $1.8 million royalty obligation owed to OPKO as of December 31, 2016, which is capitalized in the ‘other assets’ caption on the consolidated balance sheet. The Company has concluded the royalty shortfall amount for the year ended December 31, 2016 will no longer be recoverable through future years’ sales, and wrote off $2.0 million as a component of cost of product sales in the year ended December 31, 2017.
If the Company elects to develop and commercialize rolapitant in Japan through a third-party licensee the Company will share equally with OPKO all amounts received by it in connection with such activities under the Company’s agreement with such third party, subject to certain exceptions and deductions. The Company is responsible for all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant. There were no ongoing clinical trials for rolapitant at the time of its acquisition. As of the date of acquisition, none of the assets acquired had alternative future uses, nor had they reached a stage of technological feasibility. As no processes or activities that would constitute a “business” were acquired along with the license, the transaction was accounted for as an asset acquisition by recording the entire purchase price of $6.6 million as acquired in-process research and development expense. As of December 31, 2017, the Company has made milestone payments to date totaling $30.0 million under this license agreement, $25.0 million of which has been capitalized as intangible assets on the consolidated balance sheet.
Niraparib In-License
In May 2012, the Company entered into a license agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck, under which the Company obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib for all therapeutic and prophylactic uses in humans. Under the Merck license, the Company is obligated to use diligent efforts to develop and commercialize a licensed product. Under the terms of the license agreement, the Company made an up-front payment to Merck of $7.0 million in June 2012. The Company is also required to make milestone payments to Merck of up to an aggregate of $57.0 million in development and regulatory milestones for the first indication, up to an aggregate of $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives. The Company pays Merck tiered royalties at a percentage rate in the low teens based on worldwide annual net sales. As of the date of acquisition, none of the assets acquired had alternative future uses, nor had they reached a stage of technological feasibility. As no processes or activities that would constitute a “business” were acquired along with the license, the transaction has been accounted for as an asset acquisition and the entire purchase price of $7.0 million has been recorded as acquired in-process research and development expense. The Company has made milestone payments to date totaling $52.2 million, $40.0 million of which has been capitalized as intangible assets on the consolidated balance sheet. The Company paid $39.5 million of milestones during the year ended December 31, 2017.
Immuno-Oncology Platform License
In March 2014, the Company entered into a collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, a therapeutic antibody company. Under the terms of this agreement, the Company obtained an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of certain specified immunotherapy antibodies. Specifically, the Company received exclusive rights to monospecific antibody product candidates targeting PD-1, TIM-3 and LAG-3, and certain bi-specific antibody product candidates. The Company and AnaptysBio entered into an amendment in November 2014 to add an additional bi-specific antibody product candidate to the agreement. Under the agreement, AnaptysBio was responsible for performing initial discovery and development of therapeutic antibodies against immune checkpoint proteins, with the goal of generating immunotherapy antibodies for use in the treatment of cancer. The Company is responsible for the performance and costs of all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of four development programs and is obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program. The Company and AnaptysBio entered into another amendment in February 2016 to extend the term of the initial discovery period and the Company’s and AnaptysBio’s associated activities under the agreement.
Under the terms of the agreement, the Company made up-front, non-creditable and non-refundable cash payments of $19.0 million to AnaptysBio in 2014. The Company was also required to reimburse AnaptysBio for specified costs incurred by AnaptysBio in its initial discovery and development activities covered by the agreement. These activities are now complete. Programs may be extended by mutual agreement of the parties, and the Company can terminate on a program-by-program basis by providing 90 days prior written notice, subject to a wind-down period during which the Company’s obligation to reimburse AnaptysBio for specified costs would continue. For each of the four development programs, the Company will be required to make milestone payments to AnaptysBio of up to an aggregate of $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications. The Company will be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on worldwide annual net sales, and additional commercial milestone payments if specified levels of annual net sales of a product are attained. The Company has made milestone payments to date totaling $21.0 million, including $10.0 million during the year ended December 31, 2017.
As of the date of the license transaction, none of the assets acquired had alternative future uses, nor had they reached a stage of technological feasibility. As the processes or activities that were acquired along with the license do not constitute a “business,” the transaction has been accounted for as an asset acquisition. In addition, the Company has concluded that its reimbursements to AnaptysBio for the research services called for under the agreement are at fair value. As a result of these factors, the up-front payments totaling $19.0 million have been recorded as acquired in-process research and development expense, and no portion of the payments has been ascribed to the future services to be provided to the Company by AnaptysBio. For the year ended December 31, 2016, the Company recorded approximately $3.3 million of research and development expense and no amounts for the year ended December 31, 2017 associated with amounts due to AnaptysBio under the collaboration.
Technology Licenses
In October 2012, the Company entered into two license agreements with AstraZeneca UK Limited, having aggregate up-front payments of $0.4 million. These agreements provide the Company with the exclusive right to certain methods of treating patients with PARP inhibitors solely with respect to niraparib. Under certain circumstances, the Company may be required to make milestone and royalty payments to AstraZeneca UK Limited based on the achievement of certain development and regulatory milestone events with regard to niraparib, and on net sales of niraparib. The Company has made milestone payments to AstraZeneca totaling $1.5 million to date.
Merck Collaboration
In May 2015, the Company entered into a research agreement with Merck Sharp & Dohme B.V., a subsidiary of Merck, to perform a trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® (pembrolizumab) in patients with triple negative breast cancer and patients with ovarian cancer. Under the terms of this agreement, the Company is responsible for providing niraparib study materials and for carrying out clinical research activities. The Company and Merck share in the external costs of the study equally, with certain exceptions. The Company records cost-sharing payments received from Merck as reductions of research and development expense. During the year ended December 31, 2017, the Company
incurred $8.4 million in external costs related to this study, of which $4.1 million is reimbursable by Merck. At December 31, 2017, $1.3 million of cost-sharing receivable from Merck has been recorded in other current assets on the consolidated balance sheet.
Out-Licenses
Takeda Pharmaceutical Co., Ltd.
On July 27, 2017, the Company entered into an exclusive license agreement, or the Takeda Agreement, with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda. Pursuant to the Takeda Agreement, the Company granted Takeda licenses under certain patent rights and know-how relating to niraparib to develop and commercialize niraparib for the treatment of all tumor types in Japan, and all tumor types excluding prostate cancer in South Korea, Taiwan, Russia and Australia.
In connection with the Takeda Agreement, the Company received a $100.0 million up-front payment and is eligible to receive additional payments of up to $140.0 million related to the achievement of certain clinical development and regulatory milestones as well as up to $100.0 million related to the achievement of additional sales milestones. The Company will also be eligible to receive tiered royalties from Takeda based on percentages of net product sales ranging from the high teens to low thirties. Takeda is responsible for conducting and funding all development and commercialization of niraparib in the licensed territories, including research, development, regulatory and commercialization activities. Unless earlier terminated, the Takeda Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.
The Company identified the following performance obligations at the inception of the Takeda Agreement: (1) exclusive license with rights to develop and commercialize niraparib to Takeda in the licensed territories for the associated tumor types, and (2) initial supply to Takeda of certain materials for the manufacture of niraparib. In addition, the Company may also become responsible for manufacturing certain niraparib products for clinical and commercial supply and providing technical assistance related to the transfer of know-how, at Takeda’s option, for the manufacture of niraparib for which the Company will receive reimbursement that approximates stand-alone selling prices.
The Company evaluated the Takeda Agreement under Topic 606. Based on that evaluation, the up-front, non-refundable fees and the reimbursement received for the initial supply of materials constituted the amount of the consideration to be included in the transaction price and have been allocated to the performance obligations identified based on the Company’s best estimate of the relative stand-alone selling price. None of the clinical or regulatory milestones has been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and the licensee’s efforts. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license granted to Takeda and therefore are recognized at the later of when the performance obligation is satisfied or the related sales occur. The Company considered Takeda’s right to sublicense and manufacture certain niraparib products, and the fact that the manufacturing services are not proprietary and can be provided by other vendors, to conclude that the license has stand-alone functionality and is distinct. The Company believes that a change in the assumptions used to determine its stand-alone selling price for the license most likely would not have a significant effect on the allocation of consideration received (or receivable) to the performance obligations. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
During the year ended December 31, 2017, the Company allocated $100.0 million of the transaction price to the license and recognized this amount as revenue concurrent with the transfer of the license. Revenue associated with the initial supply of niraparib materials will be recognized when delivered to Takeda. Under the Takeda Agreement, for the year ended December 31, 2017, the Company recognized $100.0 million within license, collaboration and other revenues in its consolidated statements of operations and comprehensive loss.
Janssen Biotech, Inc.
On April 5, 2016, the Company entered into separate transactions with Janssen Biotech, Inc., or Janssen, and its affiliate, Johnson & Johnson Innovation - JJDC, Inc., or JJDC, consisting of a collaboration and license agreement with Janssen, or the Collaboration Agreement, and a stock purchase agreement and investor agreement, each with JJDC (the “Stock
Purchase Agreement” and the “Investor Agreement,” respectively, and collectively with the Collaboration Agreement, the “Agreements”).
Under the terms of the Collaboration Agreement, the Company granted Janssen licenses under certain patent rights and know-how relating to niraparib for prostate cancer worldwide, except for Japan. Janssen will conduct all development and commercialization of niraparib in the field of prostate cancer worldwide (excluding Japan).
Pursuant to the Collaboration Agreement, within 30 days after the date of the Collaboration Agreement, the Company provided Janssen with electronic copies of certain know-how relating to development of niraparib. In addition, at Janssen’s request and in return for certain reimbursement, the Company is also responsible for manufacturing and supplying to Janssen all of Janssen’s requirements of active pharmaceutical ingredient, or API, for niraparib and niraparib products to be used by Janssen for its development activities in prostate cancer indications. Also at Janssen’s request, the Company is responsible for manufacturing of certain niraparib products and API for commercial sale in the field of prostate cancer. In both cases, if Janssen exercises its right to receive the manufacturing services, the Company will receive reimbursement that will at least cover its cost of providing such services.
The Company received a $35.0 million up-front, non-refundable license fee from Janssen. Assuming successful development and commercialization of niraparib products for prostate cancer, the Company could receive up to an additional $43.0 million in clinical milestones and $372.0 million in regulatory and sales milestones as well as tiered, double-digit royalties on aggregate net sales of products in the field of prostate cancer. Janssen is responsible for funding all development and commercialization of niraparib in prostate cancer worldwide (excluding Japan), including research, development, manufacturing, regulatory and commercialization activities. Janssen may terminate the Collaboration Agreement at any time after April 5, 2017 upon 90 days’ written notice, upon termination of the Company’s license agreement with Merck or in the event of certain safety concerns. Either party may terminate the Collaboration Agreement for uncured material breach or bankruptcy. Unless earlier terminated, the Collaboration Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.
The Company assessed this arrangement in accordance with Topic 606 and concluded that the contract counterparty, Janssen, is a customer. The Company identified the following material promises under the contract: (1) the licenses under certain patent rights relating to niraparib for prostate cancer worldwide, except for Japan, and transfer of certain development and regulatory information; and (2) the obligation to participate in Joint Committees. In addition, the Company identified the following customer options that will create manufacturing obligations for the Company upon exercise by Janssen: (1) the supply of API and niraparib products for Janssen’s development and commercial needs; and (2) the supply of niraparib for Janssen’s clinical trial needs. The Company considered the manufacturing capabilities of Janssen, Janssen’s right to sublicense and manufacture API, and the fact that the manufacturing services are not proprietary and can be provided by other vendors, to conclude that the license has stand-alone functionality and is distinct. The Company’s obligation to participate in the Joint Committees and provide development, regulatory and commercialization information to Janssen does not significantly impact or modify the licenses’ granted functionality. Further, the customer options for manufacturing services were evaluated as a material right, but were concluded to be immaterial to the Company’s financial statements. Based on these assessments, the Company identified the license and the participation in Joint Committees as the only performance obligations at the inception the arrangement, which were both deemed to be distinct.
Under the Collaboration Agreement, in order to evaluate the appropriate transaction price, the Company determined that the up-front amount constituted the entirety of the consideration to be included in the transaction price and to be allocated to the performance obligations based on the Company’s best estimate of their relative stand-alone selling prices. For the license, the stand-alone selling price was calculated using an income approach model and included the following key assumptions: the development timeline, revenue forecast, discount rate and probabilities of technical and regulatory success. The relative selling price of the Company’s Joint Committee participation was based on a full-time equivalent rate for the level of effort required, which can be reasonably estimated to be incurred over the performance period, which is the development period. The Company believes that a change in the assumptions used to determine its stand-alone selling price for the license most likely would not have a significant effect on the allocation of consideration received (or receivable) to the performance obligations.
At execution, the transaction price included only the $35.0 million up-front consideration received. None of the clinical or regulatory milestones has been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and the licensee’s efforts. Any
consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Janssen and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
During the second quarter of 2016, the Company allocated $34.5 million (as revised) of the transaction price to the license and recognized this amount as revenue concurrent with the transfer of the license and certain development and regulatory know-how that occurred within 30 days of entering into the Collaboration Agreement. Revenue allocated to the Joint Committees performance obligation, $0.5 million, is being recognized on a straight-line basis over a period of five years, which, in management’s judgment, is the best measure of progress toward satisfying the performance obligation and represents the Company’s best estimate of the period of the obligation to participate in the Joint Committees. Through December 31, 2017, the Company had recognized $34.7 million as license and collaboration revenue under the Collaboration Agreement. The remaining transaction price of $0.3 million is recorded in deferred revenue as of December 31, 2017 on the consolidated balance sheets and will be recognized as revenue over the remaining period of 39 months.
Revenue associated with the manufacturing supply services is recognized when the material is delivered to Janssen. For the years ended December 31, 2016 and 2017, the Company recognized $1.8 million (as revised) and $2.5 million, respectively, as other revenues within license, collaboration and other revenues in the Company’s consolidated statements of operations and comprehensive loss under the Collaboration Agreement.
Additionally, the Company considered whether the Stock Purchase Agreement and the Investor Agreement with JJDC would be subject to combination with the Collaboration Agreement. The Company determined that they should not be combined because the deliverables and terms in these arrangements are not closely interrelated or interdependent in terms of payment or functionality, the arrangements were negotiated separately, and the common stock was sold at approximately its fair value.
Zai Lab (Shanghai) Co., Ltd.
On September 28, 2016, the Company entered into a Collaboration, Development and License Agreement, or the Zai Agreement, with Zai Lab. Under the terms of the Zai Agreement, the Company exclusively licensed the rights to develop and commercialize niraparib to Zai Lab for the China Territories. Zai Lab will conduct all development and commercialization of niraparib in the China Territories, except for prostate cancer.
Under the terms of the Zai Agreement, the Company received a $15.0 million up-front, non-refundable license fee from Zai Lab in the fourth quarter of 2016. Assuming successful development and commercialization of niraparib products in the China Territories, the Company could receive additional regulatory and sales milestones as well as tiered, double-digit royalties on aggregate net sales of products in the China Territories. Zai Lab is responsible for funding all development and commercialization of niraparib in the China Territories, including research, development, manufacturing, regulatory and commercialization activities. The term of the Zai Agreement continues, on a country-by-country basis, until the later of expiration of the last patent in the China Territories covering the niraparib product, or ten years from the first commercial sale in such country. The Zai Agreement may also be terminated by Zai Lab at any time upon prior written notice, or by either party for material breach or insolvency.
The Company identified the following performance obligations under the contract: (1) exclusive license with rights to develop and commercialize niraparib to Zai Lab for the China Territories; (2) provision of technical assistance related to the know-how transfer for the development of niraparib; and (3) initial supply to Zai Lab of certain materials for the manufacture of niraparib. In addition, the Company may also become responsible for manufacturing of certain niraparib products and materials for commercial sale in certain instances based on regulatory requirements in the China Territories for which the Company will receive reimbursement that approximates stand-alone selling price. The Zai Agreement also provided the Company with an option to co-market niraparib in the China Territories with Zai Lab, in return for certain consideration. In February 2018, the Company and Zai Lab entered into an amendment to the Zai Agreement, eliminating the Company’s co-marketing right. In addition, the Zai Agreement provides the Company with a right of first refusal with respect to licenses for two novel, discovery-stage immuno-oncology programs from Zai Lab.
The Company evaluated the Zai Agreement under Topic 606. Based on that evaluation, the up-front, non-refundable fees and the reimbursement received for the initial supply of materials constituted the amount of the consideration to be included in the transaction price and have been allocated to the performance obligations identified based on the Company’s
best estimate of the relative stand-alone selling price. None of the clinical or regulatory development milestones have been included in the transaction price, as all such milestone amounts are not within the control of the Company or the licensee and are not considered probable to occur until those approvals are received. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license granted to Zai Lab and therefore are recognized at the later of when the performance obligation is satisfied or the related sales occur. The Company concluded the option to co-market niraparib was not a repurchase right as Zai Lab would continue to control its rights to commercialize niraparib in its licensed territories if the Company exercised its right. The Company further assessed and concluded that the probability of exercise of this right is remote, and the transaction price received and described above was properly allocated to the performance obligations under this agreement and recognized to revenue as those performance obligations were satisfied by the Company. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. The amendment described above, eliminating the co-marketing right, had no impact on the Company’s accounting conclusions under Topic 606.
During the third quarter of 2016, the Company allocated $14.8 million (as revised) of the transaction price to the license and recognized this amount as revenue concurrent with the transfer of the license. Revenue allocated to the technical assistance performance obligation, $0.2 million (as revised), was recognized on a straight-line basis through the service period which was substantially completed during the fourth quarter of 2016. In addition, $0.7 million (as revised) of revenue associated with the initial manufacturing supply services was recognized upon delivery of the materials during the fourth quarter of 2016. No revenues were recognized under the Zai Agreement during the year ended December 31, 2017.
Jiangsu Hengrui Medicine Co., Ltd.
In July 2015, the Company entered into a license agreement with Jiangsu Hengrui Medicine Co., Ltd., or Hengrui, pursuant to which Hengrui has licensed the rights to develop, manufacture and commercialize rolapitant in the China Territories. The Company received a $1.0 million up-front, non-refundable license fee from Hengrui in the fourth quarter of 2015. The Company has evaluated the terms of this arrangement under Topic 606 and has determined that there are two performance obligations: (1) exclusive license with rights to develop, manufacture and commercialize rolapitant in the China Territories; and (2) provision of technical assistance related to the know-how transfer for the development of the rolapitant formulations. The Company further determined that the transaction price for this arrangement includes the $1.0 million up-front consideration received and a future regulatory development milestone of $1.0 million. This future milestone payment relates to the submission of the clinical trial application with the China Food and Drug Administration, or the China FDA. The Company is also entitled to an additional payment of $1.0 million contingent on the achievement of regulatory approval from the China FDA. However, as this milestone is not within the control of the Company or Hengrui, the amount has not been included in the transaction price by the Company. Any consideration related to sales-based milestones (including royalties at percentage rates in the low teens) will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the license granted to Hengrui. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
During the third quarter of 2015, the Company allocated $1.9 million (as revised) of the transaction price to the license and recognized this amount as revenue concurrent with the transfer of the license. Revenue allocated to the technical assistance performance obligation, $0.1 million (as revised), was recognized on a straight-line basis through the service period and was substantially completed during the fourth quarter of 2016. No revenues were recognized under this agreement during the year ended December 31, 2017.
15. Segment Information
Revenues by Product
Product revenues, net consisted of the following (in thousands):
Revenues by Geographic Location
Net product revenues are attributed to countries based on the location of the customer. License, collaboration and other revenues are attributed to the operations of the Company in the United States. Royalty revenues are attributed to countries based on the location of the collaborator.
The following table presents total revenues by geography (in thousands):
Significant Customers
Revenues and accounts receivable from each of the Company’s customers who individually accounted for 10% or more of total revenues and/or 10% or more of accounts receivable consisted of the following (* indicates less than 10%):
Property and Equipment, Net by Location
Property and equipment, net by location consisted of the following (in thousands):
16. Consolidated Quarterly Financial Data - Unaudited
The following table presents unaudited consolidated quarterly financial data for the years ended December 31, 2016 and 2017 (in thousands, except per share data):
(a)
Amounts for the quarter ended March 31, 2016 have been retroactively adjusted to reflect an increase in research and development costs and selling, general and administrative costs in the amount of $0.1 million and $0.1 million, respectively, as a result of the adoption of ASU 2016-09.
(b)
Amounts for each of the quarterly periods for the year ended December 31, 2016 have been revised to reflect the Company’s adoption of ASU No. 2014-09 effective January 1, 2017, with full retrospective application. This ASU amends the guidance for accounting for revenue from contracts with customers.
(c)
Acquired in-process research and development expenses relate to licensing agreement milestone expenses for the following periods: (i) $4.0 million to AnaptysBio for the quarter ended March 31, 2016; (ii) $4.0 million to AnaptysBio for the quarter ended June 30, 2016; (iii) $1.0 million to AnaptysBio and $0.9 million to Merck for the quarter ended September 30, 2016; (iv) $9.0 million to Merck for the quarter ended December 31, 2016; (v) $7.0 million to AnaptysBio for the quarter ended June 30, 2017; and (vi) $3.0 million to AnaptysBio for the quarter ended December 31, 2017.
(d)
In the quarter ended June 30, 2016, the Company received $35.0 million and transferred the license and related know-how required under its collaboration agreement with Janssen. $34.6 million of related license revenue was recognized during the quarter.
(e)
In the quarter ended September 30, 2016, the Company received $15.0 million and transferred the license and related know-how required under its collaboration agreement with Zai Lab. $14.8 million of related license revenue was recognized during the quarter.
(f)
In the quarter ended September 30, 2017, the Company received $100.0 million and transferred certain patent rights and know-how relating to niraparib to Takeda. The entire amount of related license revenue was recognized during the quarter.
(g)
Product cost of sales for the quarter ended December 31, 2017 includes a $16.7 million lower of cost or market write-down of VARUBI inventories and a $1.6 million loss on firm purchase commitments.
17. Subsequent Events
In January 2018, after post-marketing reports of side effects experienced following the commercial introduction of VARUBI IV, the Company updated the VARUBI IV package insert, including modifications to the contraindications, warnings and precautions, and adverse reactions sections. In February 2018, the Company determined that it would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2017, management, with the participation of our Principal Executive Officer and Principal Financial Officer, performed an evaluation 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 Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the 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 Principal Executive Officer and the Principal Financial 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. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2017, the design and operation of our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in conformity with generally accepted accounting principles and includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of our principal executive officer and principal financial officer, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
Ernst & Young LLP, independent registered public accounting firm, who audited and reported on the TESARO, Inc. Consolidated Financial Statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of December 31, 2017, as stated in its report appearing in this Item 9A.
Changes in Internal Control Over Financial Reporting
There were no reportable changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2017 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of TESARO, Inc.
Opinion on Internal Control over Financial Reporting
We have audited TESARO, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, TESARO, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2016 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and financial statement schedule listed in the Index at item 15(a)(2) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 28, 2018
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and is incorporated herein by reference from our definitive proxy statement relating to our 2018 annual meeting of stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, also referred to in this Annual Report on Form 10-K as our 2018 Proxy Statement, which we expect to file with the SEC no later than April 30, 2018.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated into this Annual Report on Form 10-K by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated into this Annual Report on Form 10-K by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Other than the information set forth below, the information required by this Item will be set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated into this Annual Report on Form 10-K by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information as of December 31, 2017
(1)
As of December 31, 2017, 1,810,240 shares remained available for issuance under our 2012 Omnibus Incentive Plan, or the 2012 Incentive Plan, which became effective in April 2012, including 6,857 remaining shares that were then available for future issuance under the 2010 Stock Incentive Plan, or the 2010 Incentive Plan, which were transferred to the 2012 Incentive Plan. The number of shares of our common stock reserved for issuance under the 2012 Incentive Plan is increased (i) from time to time by the number of shares of our common stock forfeited upon the expiration, cancellation, forfeiture, cash settlement or other termination of awards under the 2010 Incentive Plan and (ii) on January 1 of each year, by a number of shares of common stock equal to the lesser of (x) 4% of the shares of common stock outstanding at such time or (y) the number of shares determined by our board of directors. As of December 31, 2017, 151,075 shares of our common stock had been cancelled under the 2010 Incentive Plan and transferred to the 2012 Incentive Plan. Effective January 1, 2018, the number of shares authorized for issuance under the 2012 Incentive Plan was increased by 2,178,561 shares.
(2)
As of December 31, 2017, 151,859 shares were reserved for issuance under our 2012 Employee Stock Purchase Plan, or ESPP, which became effective in June 2012.
(3)
As of December 31, 2017, 198,433 shares were reserved for issuance under our 2015 Non-Employee Director Stock Incentive Plan, or the 2015 Director Plan, which became effective in May 2015.
(4)
On March 30, 2015, 75,000 shares were granted as part of an inducement award outside of the 2012 Omnibus Incentive Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated into this Annual Report on Form 10-K by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated into this Annual Report on Form 10-K by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) See Item 8 for the Financial Statements required to be included in this Annual Report on Form 10-K.
(2)Schedule II - Valuation and Qualifying Accounts and Reserves is included on page 138 of this Annual Report on Form 10-K.
(3)See the accompanying Index to Exhibits filed as a part of this Annual Report on Form 10-K, which list is incorporated by reference in this Item.
(b)
See the accompanying Index to Exhibits filed as a part of this Annual Report on Form 10-K.
(c)
Other schedules are not applicable.
ITEM 16. FORM 10-K SUMMARY
None.
INDEX TO EXHIBITS
+ Indicates management contract or compensatory plan.
* Confidential treatment has been requested or granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
TESARO, Inc.
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2015, 2016 and 2017
(in thousands)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Leon O. Moulder, Jr.
Chief Executive Officer, Director
February 28, 2018
Leon O. Moulder, Jr.
(Principal Executive Officer)
/s/ Mary Lynne Hedley, Ph.D.
President, Chief Operating Officer and Director
February 28, 2018
Mary Lynne Hedley, Ph.D.
/s/ Timothy R. Pearson
Executive Vice President and Chief Financial Officer
February 28, 2018
Timothy R. Pearson
(Principal Financial and Accounting Officer)
/s/ David M. Mott
Chairman of the Board of Directors
February 28, 2018
David M. Mott
/s/ Lawrence M. Alleva
Director
February 28, 2018
Lawrence M. Alleva
/s/ James O. Armitage, M.D.
Director
February 28, 2018
James O. Armitage, M.D.
/s/ Earl M. (Duke) Collier, Jr.
Director
February 28, 2018
Earl M. (Duke) Collier, Jr.
/s/ Garry A. Nicholson
Director
February 28, 2018
Garry A. Nicholson
/s/ Arnold L. Oronsky, Ph.D.
Director
February 28, 2018
Arnold L. Oronsky, Ph.D.
/s/ Kavita Patel, M.D.
Director
February 28, 2018
Kavita Patel, M.D.
/s/ Beth Seidenberg, M.D.
Director
February 28, 2018
Beth Seidenberg, M.D.