EXELIXIS, INC. Some of the statements under in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry and involve known and unknown risks, uncertainties and other factors that may cause our company's or our industry's results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in "Item 1A. Risk Factors" as well as those discussed elsewhere in this Annual Report on Form 10-K. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report. We have adopted a 52- or 53-week fiscal year policy that ends on the Friday closest toDecember 31st . Fiscal year 2019, which was a 53-week fiscal year, ended onJanuary 3, 2020 , fiscal year 2018, which was a 52-week fiscal year, ended onDecember 28, 2018 and fiscal year 2017, which was a 52-week fiscal year, ended onDecember 29, 2017 . For convenience, references in this report as of and for the fiscal years endedJanuary 3, 2020 ,December 28, 2018 andDecember 29, 2017 are indicated as being as of and for the years endedDecember 31, 2019 , 2018 and 2017, respectively. This discussion and analysis generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Annual Report on Form 10-K can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , filed with theSEC onFebruary 22, 2019 . Overview We are an oncology-focused biotechnology company that strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Since we were founded in 1994, four products resulting from our discovery efforts have progressed through clinical development, received regulatory approval and established commercial presence in various geographies around the world. Two are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET. Our cabozantinib products are: CABOMETYX tablets approved for advanced RCC and previously treated HCC; and COMETRIQ capsules approved for progressive, metastatic MTC. For these types of cancer, cabozantinib has become or is becoming a standard of care. The other two products resulting from our discovery efforts are: COTELLIC, an inhibitor of MEK, approved as part of a combination regimen to treat a specific form of advanced melanoma and marketed under a collaboration withGenentech ; and MINNEBRO, an oral, non-steroidal, selective blocker of the MR, approved for the treatment of hypertension inJapan and licensed to Daiichi Sankyo. The FDA first approved CABOMETYX for previously treated patients with advanced RCC inApril 2016 , and inDecember 2017 the FDA expanded CABOMETYX's approval to include previously untreated patients with advanced RCC. Additionally, inJanuary 2019 , the FDA approved CABOMETYX as a treatment for patients with HCC who have been previously treated with sorafenib. This approval was based on results from CELESTIAL, our phase 3 pivotal trial evaluating cabozantinib in patients with previously treated HCC, which demonstrated a statistically significant and clinically meaningful improvement in OS versus placebo. To develop and commercialize CABOMETYX and COMETRIQ outside theU.S. , we have entered into license agreements with Ipsen andTakeda . We granted to Ipsen rights to cabozantinib outside of theU.S. andJapan , and toTakeda rights to cabozantinib inJapan . Both Ipsen andTakeda also contribute financially and operationally to the further global development and commercialization of cabozantinib in other potential indications, and we continue to work closely with them on these activities. Utilizing its regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of theU.S. , including in the EU andCanada , as a treatment for advanced RCC and for HCC in adults who have previously been treated with sorafenib. Additionally, with respect to the Japanese market,Takeda achieved important regulatory milestones with its applications to the Japanese MHLW for Manufacturing and Marketing Approval of CABOMETYX as a treatment for patients with unresectable and metastatic RCC inApril 2019 , and more recently inJanuary 2020 , as a treatment for patients with unresectable HCC who progressed after prior systemic therapy. 57
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In addition to our regulatory and commercialization efforts in theU.S. and the support provided to our collaboration partners for rest of world regulatory and commercialization activities, we are also pursuing other indications for cabozantinib that have the potential to increase the number of cancer patients who could benefit from this medicine. We are evaluating cabozantinib, both as a single agent and in combination with other therapies, in a broad development program comprising over 85 ongoing or planned clinical trials across multiple indications. We, along with our collaboration partners, sponsor some of the trials, and independent investigators conduct the remaining trials through our CRADA with NCI-CTEP or our IST program. Informed by the available data from these clinical trials, we continue to advance cabozantinib's development program with potentially label-enabling trials. One pivotal trial that has resulted from this effort is COSMIC-311, our ongoing phase 3 pivotal trial evaluating cabozantinib versus placebo in patients with RAI-refractory DTC who have progressed after up to two VEGF receptor-targeted therapies. We are particularly interested in examining cabozantinib's potential in combination with ICIs to determine if such combinations further improve outcomes for patients. Building on preclinical and clinical observations that cabozantinib may promote a more immune-permissive tumor environment potentially resulting in cooperative activity of cabozantinib in combination with these products, we are evaluating cabozantinib in combination with a variety of ICIs. The most advanced of these combination studies include CheckMate 9ER, a phase 3 pivotal trial evaluating cabozantinib in combination with nivolumab in previously untreated advanced or metastatic RCC, for which our collaboration partner BMS has announced top-line results are expected in the first half of 2020, and CheckMate 040, a phase 1/2 trial evaluating cabozantinib in combination with nivolumab and in combination with both nivolumab and ipilimumab in patients with previously treated or previously untreated advanced HCC, also in collaboration with BMS and for which initial clinically meaningful results were presented at ASCO's Gastrointestinal Cancers Symposium inJanuary 2020 . Additionally inMay 2019 , as part of our clinical collaboration with BMS, we initiated COSMIC-313, a phase 3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. We expect to complete enrollment for COSMIC-313 in early 2021 and to report top-line results of the event-driven analyses from the trial in the 2022 timeframe. We also intend to evaluate the combination of cabozantinib and nivolumab, with or without ipilimumab, in other phase 3 trials in various other tumor types. In an effort to diversify our exploration of combinations with ICIs, we also initiated COSMIC-312, a phase 3 pivotal trial evaluating cabozantinib in combination with the Roche's ICI, atezolizumab, versus sorafenib in previously untreated advanced HCC, and COSMIC-021, a broad phase 1b study evaluating the safety and tolerability of cabozantinib in combination with atezolizumab in patients with locally advanced or metastatic solid tumors. COSMIC-021 is divided into two parts: a dose-escalation phase, which was completed in 2018; and an expansion phase, which is ongoing. Findings from the dose-escalation stage of COSMIC-021 demonstrated that the combination was well-tolerated and showed encouraging anti-tumor activity in patients with advanced RCC. The expansion phase of COSMIC-021 comprises 24 total cohorts, with 20 cohorts evaluating the combination of cabozantinib and atezolizumab and four cohorts evaluating cabozantinib or atezolizumab as single-agent therapies. Based on continuing encouraging efficacy and safety data certain cohorts have been or may be further expanded, including the cohorts of patients with NSCLC who have been previously treated with an ICI and mCRPC who have been previously treated with enzalutamide and/or abiraterone acetate and experienced radiographic disease progression in soft tissue. We anticipate enrolling up to 1,732 patients in the trial in late 2020, which timing is subject to the initiation of additional cohorts or expansion of selected existing cohorts. Since its initiation, data from COSMIC-021 have been instrumental in guiding our clinical development strategy for cabozantinib in combination with ICIs, including supporting planned pivotal trials in NSCLC, mCRPC and RCC. Encouraging results from an interim analysis of the mCRPC cohort of COSMIC-021 were presented at ASCO's Genitourinary Cancer Symposium inFebruary 2020 . For additional information on the COSMIC-021 results, see "Business-Cabozantinib Development Program-Trials Conducted under our Clinical Collaboration Agreements-Combination Studies withF. Hoffmann-La Roche Ltd. (Roche)" in Part I, Item 1 of this Annual Report on Form 10-K. Based on regulatory feedback from the FDA, and if supported by the clinical data, we intend to file with the FDA for accelerated approval in an mCRPC indication as early as 2021. We also remain committed to building our product pipeline by discovering and developing new cancer therapies for patients. Notably, these efforts are led by some of the same experienced scientists that led the efforts to discover cabozantinib, cobimetinib and esaxerenone, which have been approved for commercialization. Using our expertise in medicinal chemistry, tumor biology and pharmacology, we are advancing drug candidates toward and through preclinical development. Furthest along in these internal drug discovery efforts is XL092, a next-generation oral tyrosine kinase inhibitor that is currently in a phase 1 clinical trial in patients with advanced solid malignancies. We anticipate that dose expansion cohorts and potential combination cohorts with ICIs of this phase 1 trial will begin to enroll in 2020. We augment these internal drug discovery activities with business development initiatives aimed at identifying and in-licensing promising, early-stage oncology assets and then further develop them utilizing our established clinical 58
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development infrastructure. In furtherance of this strategy, in 2019, we entered into collaboration and license agreements withAurigene , which is focused on the discovery and development of novel small molecules as therapies for cancer, and Iconic, which is focused on the advancement of a next-generation ADC program targeting the tissue factor in solid tumors. Both the leadAurigene program targeting CDK7 and tissue factor ADC program with Iconic are in preclinical development and could result in IND filings in 2020. We have also made progress under our 2018 collaborations with Invenra, which is focused on the discovery and development of multispecific antibodies for the treatment of cancer, and StemSynergy, which is focused on the discovery and development of novel oncology compounds aimed to inhibit tumor growth by targeting CK1?. To further enhance our early-stage pipeline, we expect to enter into additional, external collaborative relationships around assets and technologies that complement our internal drug discovery and development efforts. For additional information regarding our business, see "Business" in Part I, Item 1 of this Annual Report on Form 10-K. 2019 Business Updates and Financial Highlights During 2019, we continued to execute on our business objectives, generating significant revenue from operations and enabling us to continue to seek to maximize the clinical and commercial potential of our products and expand our product pipeline. Significant business updates and financial highlights for 2019 and subsequent to year end include: Business Updates • InJanuary 2019 , the FDA approved CABOMETYX as a treatment for patients
with HCC who have been previously treated with sorafenib.
• In
next-generation oral TKI, we initiated a phase 1 dose escalation trial,
evaluating the pharmacokinetics, safety and tolerability of XL092 in
patients with advanced solid tumors, with the primary objective of
determining a dose for daily oral administration suitable for further
evaluation.
• In
Marketing Approval of CABOMETYX as a treatment for patients with
unresectable and metastatic RCC.
• In
trial evaluating the triplet combination of cabozantinib, nivolumab and
ipilimumab versus the combination of nivolumab and ipilimumab in patients
with previously untreated advanced intermediate- or poor-risk RCC, which
will be conducted in collaboration with BMS.
• In May 2019 , following the Japanese MHLW's approval, we announced that
Daiichi Sankyo launched MINNEBRO as a treatment for patients with
hypertension in Japan .
• In
Iconic to advance an innovative next-generation ADC program for cancer.
• In June 2019 , Genentech informed us that IMspire170, Genentech's phase 3pivotal trial evaluating the combination of cobimetinib with atezolizumab
in patients with previously untreated BRAF V600 wild-type advanced
melanoma, did not meet its primary endpoint.
• In
the phase 1b trial of cabozantinib in combination with atezolizumab in
patients with locally advanced or metastatic solid tumors, to expand
patient enrollment in certain existing mCRPC and NSCLC cohorts and to add
new expansion and exploratory cohorts in mCRPC (an aggregate of 24 total
cohorts, with 20 expansion cohorts evaluating the combination of
cabozantinib and atezolizumab and four exploratory cohorts evaluating
cabozantinib or atezolizumab as single-agent therapies).
• In
agreement with
and develop small molecules as therapies for cancer.
• In
CABOMETYX for the first-line treatment of adults with advanced RCC.
• In
discovery and development of multispecific antibodies for the treatment of
cancer to include the development of novel binders against six additional
targets which we can use to generate multispecific antibodies based on
Invenra's B-Body™ technology platform, or with other platforms and formats
at our option.
• In October 2019 , we filed a patent infringement lawsuit against MSN ,
following receipt of a Paragraph IV certification notice letter from MSN
that it had filed an ANDA with the FDA requesting approval to market a
generic version of CABOMETYX tablets, following expiration of the '473
Patent, which expires on August 14, 2026 . For a
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more detailed discussion of this litigation matter, see "Legal Proceedings" in
Part I, Item 3 of this Annual Report on Form 10-K.
• In
pivotal trial of esaxerenone in patients with diabetic nephropathy.
• In
for CABOMETYX for treatment of patients with HCC who have been previously
treated with sorafenib.
• In
evaluating the combination of cobimetinib with atezolizumab and
vemurafenib in patients with previously untreated BRAF V600 mutant
melanoma, met its primary endpoint. Results will be presented at an
upcoming medical meeting and discussed with healthcare authorities around
the world, including the FDA and EMA.
• In December 2019 , we announced a joint clinical research agreement with
Roche for the purpose of further evaluating the combination of
cabozantinib with atezolizumab in patients with locally advanced ormetastatic solid tumors, including in three planned phase 3 pivotal trials
in advanced NSCLC, mCRPC and RCC.
• In
to further expand patient enrollment in an existing mCRPC cohort to up to
130 patients.
• In
1/2 trial evaluating cabozantinib in combination with nivolumab and in
combination with both nivolumab and ipilimumab in patients with previously
treated or previously untreated advanced HCC, were presented at ASCO's
Gastrointestinal Cancers Symposium. For additional information on the
CheckMate 040 results, see "Business-Cabozantinib Development
Program-Trials Conducted under our Clinical CollaborationAgreements-Combination Studies with Bristol-Myers Squibb Company (BMS)" in
Part I, Item 1 of this Annual Report on Form 10-K.
• In January 2020 , Takeda applied to the Japanese MHLW for approval to
manufacture and sell CABOMETYX as a treatment for patients with
unresectable HCC who progressed after prior systemic therapy in Japan .
• In February 2020 , we presented clinically meaningful results from themCRPC cohort of COSMIC-021 at ASCO's Genitourinary Cancers Symposium. For
additional information on the COSMIC-021 results, see
"Business-Cabozantinib Development Program-Trials Conducted under our
Clinical Collaboration Agreements-Combination Studies with F. Hoffmann-La
Roche Ltd. (Roche)" in Part I, Item 1 of this Annual Report on Form 10-K.
• In
COSMIC-311, the phase 3 pivotal trial of cabozantinb versus placebo in
patients with RAI-refractory DTC who have progressed after up to two prior
VEGF receptor-targeted therapies.
2019 Financial Highlights
• Net product revenues for 2019 increased to
• Total revenues for 2019 increased to
million for 2018.
• Research and development expenses for 2019 increased to
compared to
• Selling, general and administrative expenses for 2019 increased to
million, compared to $206.4 million for 2018.
• Provision for income taxes for 2019 was $77.1 million , compared to an
income tax benefit of $238.0 million for 2018.
• Net income for 2019 was $321.0 million , or $1.06 per share, basic and
basic and
• Cash and investments increased to
compared to
See "Results of Operations" below for a discussion of the detailed components
and analysis of the amounts above.
Challenges and Risks
We will continue to face challenges and risks that may impact our ability to
execute on our 2020 business objectives. In particular, for the foreseeable
future, we expect our ability to generate sufficient cash flow to fund our
business operations and growth will depend upon the continued commercial success
of CABOMETYX as a treatment for advanced RCC and previously treated HCC, and
possibly for other indications for which cabozantinib is being evaluated in
potentially label-enabling clinical trials, if warranted by the data generated
from such trials. However, we cannot be certain that the clinical trials we and
our collaboration partners are currently conducting, or may conduct in the
future, will
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demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial markets where CABOMETYX is approved. Even if we and our collaboration partners receive the required regulatory approvals to market cabozantinib for additional indications, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in these additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. However, as is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is becoming increasingly difficult, both within theU.S. and in foreign markets, because of growing concerns over healthcare cost containment and corresponding policy initiatives and activities aimed at limiting access to, and restricting the prices of, pharmaceuticals. Achievement of our 2020 business objectives and the continued success of CABOMETYX will also depend on the success of our development and commercialization strategies to navigate increased competition, including that from, but not limited to, the use of therapies that combine an ICI with another targeted agent to treat cancer. In the longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic version of CABOMETYX tablets that is the subject of the ANDA submitted to the FDA byMSN , which if approved following the expiration of our composition of matter patent in 2026, could result in significant decreases in the revenue derived from theU.S. sales of CABOMETYX and thereby materially harm our business and financial condition. Separately, our research and development objectives may be impeded by the challenges of scaling our organization to meet the demands of expanded drug development, unanticipated delays in clinical testing and the inherent risks and uncertainties associated with internal drug discovery operations. In connection with efforts to expand our product pipeline, we may be unsuccessful in discovering new drug candidates or identifying appropriate candidates for in-licensing or acquisition. Some of these challenges and risks are specific to our business, and others are common to companies in the biotechnology, biopharmaceutical and pharmaceutical industries with development and commercial operations. For a complete discussion of challenges and risks we face, see "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Results of Operations Impact of the Duration of Our Fiscal Year We have adopted a 52- or 53-week fiscal year policy that ends on the Friday closest toDecember 31st . Accordingly, 2019 was a 53-week fiscal year and 2018 was a 52-week fiscal year. The 53-week fiscal year in 2019, as compared to the 52-week fiscal year in 2018, contributed to the year-over-year increases in certain revenues and expenses. Revenues Revenues by category were as follows (dollars in thousands): Year Ended December 31, 2019 2018 Percentage Change Net product revenues$ 759,950 $ 619,279 23 % Collaboration revenues 207,825 234,547 (11 )% Total revenues$ 967,775 $ 853,826 13 % Net Product Revenues Gross product revenues, discounts and allowances, and net product revenues were as follows (dollars in thousands): Year Ended December 31, 2019 2018 Percentage Change Gross product revenues$ 957,621 $ 738,529 30 % Discounts and allowances (197,671 ) (119,250 ) 66 % Net product revenues$ 759,950 $ 619,279 23 % 61
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Net product revenues by product were as follows (dollars in thousands):
Year Ended December 31,
2019 2018 Percentage Change
CABOMETYX $ 733,421 $ 599,946 22 %
COMETRIQ 26,529 19,333 37 %
Net product revenues $ 759,950 $ 619,279 23 %
The increase in product revenues for CABOMETYX for the year ended December 31,
2019 , as compared to 2018, was primarily due to a 17% increase in the number of
units of CABOMETYX sold and, to a lesser extent, an increase in the average
selling price of the product. The increase in CABOMETYX sales volume reflects
the continued growth of CABOMETYX for the treatment of patients with advanced
RCC as well as the launch of CABOMETYX for the treatment of patients with HCC
who have been previously treated with sorafenib, following FDA approval for that
indication in January 2019 .
The increase in product revenues for COMETRIQ for the year ended December 31,
2019 , as compared to 2018, was primarily due to a 24% increase in the number of
units of COMETRIQ sold and, to a lesser extent, an increase in the average
selling price of the product. The increase in COMETRIQ sales volume was entirely
due to a comparator purchase of the product for use in a clinical trial.
Excluding the comparator purchase, COMETRIQ sales volume has continued to
decrease since the launch of CABOMETYX in April 2016 .
We expect our 2020 net product revenues to remain in-line with 2019, reflecting
the continued evolution of the metastatic RCC and HCC treatment landscapes.
We recognize product revenues net of discounts and allowances as described in
"Note 1. Organization and Summary of Significant Accounting Policies" to
our "Notes to Consolidated Financial Statements" contained in Part II, Item 8 of
this Annual Report on Form 10-K. The increase in discounts and allowances for
the year ended December 31, 2019 , as compared to 2018, was primarily the result
of the overall increase in product sales volume and increases in Public Health
Service hospital utilization and the dollar amount of the related chargebacks,
and, to a lesser extent, increases in utilization and the dollar amount of
chargebacks associated with Veterans Affairs hospitals and Group Purchasing
Organizations, as well as increases to other government and commercial rebates.
We expect a moderate increase in our discounts and allowances as a percentage of
gross product revenues during 2020 as the number of patients participating in
government programs continues to increase, and as the discounts given and
rebates paid to government payers also increase.
Collaboration Revenues
Collaboration revenues were as follows (dollars in thousands):
Year Ended December 31,
2019 2018 Percentage Change
Collaboration revenues:
License revenues $ 161,299 $ 192,188 (16 )%
Research and development services revenues 49,965 39,501 26 %
Other collaboration revenues (3,439 ) 2,858 n/m
Total collaboration revenues $ 207,825 $ 234,547 (11 )%
License Revenues
License revenues include the recognition of the portion of milestone payments
allocated to the transfer of intellectual property licenses for which it had
become probable in the related period that the milestone would be achieved and a
significant reversal of revenues would not occur, as well as royalty revenues.
Milestone revenues, which are allocated between license revenues and research
and development services revenues, were $96.2 million for the year ended
December 31, 2019 , as compared to $164.4 million for the comparable periods in
2018. Due to the nature and timing of milestone events, their achievement can
vary significantly from year to year. Milestone revenues by period primarily
included the following:
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• Milestone revenues for the year ended
included: 1) recognition of a
their achievement of
territories over four consecutive quarters; 2) recognition of a
million milestone from Daiichi Sankyo for the first commercial sale of
MINNEBRO tablets as a treatment for patients with hypertension in
3) recognition of
milestone from
cabozantinib as a treatment for patients with advanced RCC to the Japanese
MHLW; 4) recognition of
million milestone from
application in
with advanced HCC to the Japanese MHLW; and 5) recognition of two
milestones totaling
for the treatment of adults with advanced HCC who have been previously
treated with sorafenib.
• Milestone revenues for the year ended December 31, 2018 primarily
included: 1) recognition of $46.5 million in revenue related to a $50.0
million milestone from Ipsen for the approval of cabozantinib for thefirst-line treatment of adults with intermediate- or poor-risk advanced
RCC by the EC; 2) recognition of
cabozantinib for previously-treated HCC; 3) recognition of a
milestone from Ipsen upon their achievement of $100.0 million in net sales
of cabozantinib in their territories over four consecutive quarters; 4)
recognition of a
to the Japanese MHLW of a regulatory application for esaxerenone as a
treatment for patients with hypertension; 5) recognition of
of a
and 6) recognition of a
by
RCC.
Royalties increased primarily as a result of an increase in royalties on Ipsen's net sales of cabozantinib outside of theU.S. andJapan . Ipsen royalties were$62.4 million for the year endedDecember 31, 2019 , as compared to$32.3 million in 2018. Ipsen's net sales of cabozantinib have continued to grow since their first commercial sale of the product in the fourth quarter of 2016, primarily due to increased demand of CABOMETYX, which, as ofDecember 31, 2019 , is approved and commercially available in 51 and 48 countries outside of theU.S. , respectively. In addition, we earned royalties on ex-U.S. net sales of COTELLIC byGenentech of$5.7 million for the year endedDecember 31, 2019 , as compared to$5.6 million in 2018. We also earned$0.1 million in royalties on the sale of MINNEBRO by Daiichi Sankyo for the year endedDecember 31, 2019 . Research and Development Services Revenues Research and development services revenues include the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, as well as development cost reimbursements earned under our collaboration agreements. Development cost reimbursements increased in 2019, as compared to 2018, primarily as a result of reimbursements from Ipsen for their share of the increase in spending on the COSMIC-312 and COSMIC-021 studies. Other Collaboration Revenues Other collaboration revenues include royalties earned by GSK related to Ipsen's sales of products containing cabozantinib, the profit on theU.S. commercialization of COTELLIC fromGenentech and product supply revenues, net of product supply costs. Profits on theU.S. commercialization of COTELLIC under our collaboration agreement withGenentech were$4.6 million for the year endedDecember 31, 2019 , as compared to$8.1 million in 2018. Sales of COTELLIC in theU.S. have declined followingGenentech's decision to scale back the personal promotion of COTELLIC commencing inJanuary 2018 . For year endedDecember 31, 2019 , other collaboration revenues were reduced by$8.4 million for the 3% royalty we are required to pay GSK on the net sales by Ipsen of any product incorporating cabozantinib, as compared to$5.4 million in 2018. As royalty generating sales of cabozantinib by Ipsen have increased as described above, our royalty payments to GSK have also increased. In addition, pursuant to a license agreement we entered into with Ligand, we are required to pay a royalty of 0.5% to Ligand on net sales of MINNEBRO; such amounts were either not significant or zero for the years endedDecember 31, 2019 and 2018. 63
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2020 Expectations
We expect our collaboration revenues to decrease in 2020 as a result of a
decrease in milestones expected to be achieved during the year.
Cost of Goods Sold
The cost of goods sold and our gross margins were as follows (dollars in
thousands):
Year Ended December 31,
2019 2018 Percentage Change
Cost of goods sold $ 33,097 $ 26,348 26 %
Gross margin 96 % 96 %
Cost of goods sold consists primarily of a 3% royalty payable to GSK on U.S. net
sales of any product incorporating cabozantinib, as well as the cost of
inventory sold, indirect labor costs, write-downs related to expiring and excess
inventory, and other third-party logistics costs. The increase in cost of goods
sold for the year ended December 31, 2019 , as compared to 2018, was primarily
the result of the increases in product sales volume described above. We expect
the cost of goods sold and our gross margin to remain flat during 2020.
Research and Development Expenses
Research and development expenses were as follows (dollars in thousands):
Year Ended December 31,
2019 2018 Percentage Change
Research and development expenses $ 336,964 $ 182,257 85 %
Research and development expenses consist primarily of clinical trial costs, personnel expenses, license and other collaboration costs, consulting and outside services, stock-based compensation and the allocation of general corporate costs. The increase in research and development expenses for the year endedDecember 31, 2019 , as compared to 2018, was primarily related to increases in clinical trial costs, license and other collaboration costs, personnel expenses, consulting and outside services, the allocation of general corporate costs and stock-based compensation. Clinical trial costs, which includes services performed by third-party contract research organizations and other vendors who support our clinical trials, and comparator drug purchases, increased$70.3 million for the year endedDecember 31, 2019 , as compared to 2018. The increase in clinical trial costs was primarily due to costs associated with the expanding clinical trial program for cabozantinib which includes COSMIC-311, COSMIC-312, COSMIC-313, COSMIC-021 and CheckMate 9ER. License and other collaboration costs increased$39.4 million for the year endedDecember 31, 2019 , as compared to 2018, primarily as a result of the collaboration agreements we entered into withAurigene inJuly 2019 and Iconic inMay 2019 . Personnel expenses increased$17.9 million for the year endedDecember 31, 2019 , respectively, as compared to 2018, primarily due to increases in headcount to support our expanded discovery and development efforts. Consulting and outside services increased$7.5 million for the year endedDecember 31, 2019 , as compared to 2018, primarily in support of our expanded discovery and development efforts. Stock-based compensation increased$6.3 million for the year endedDecember 31, 2019 , as compared to 2018, primarily due to the increase in headcount, as well as the expense recognition for restricted stock units that were granted inSeptember 2018 that either have vested or are expected to vest upon the achievement of specific performance targets (the 2018 PSUs). General corporate costs, which include our costs for facilities, information technology, human resources, financial planning and analysis and purchasing, are allocated to cost of goods sold, research and development and selling general and administrative expenses based on headcount. The allocation of general corporate costs to research and development expenses increased$7.1 million for the year endedDecember 31, 2019 , as compared to 2018, primarily due to increases in headcount to support our expanded discovery and development efforts. We do not track fully-burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: 1) development; 2) drug discovery; and 3) other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or may be studied in clinical trials. Our drug discovery group utilizes a variety of technologies to enable the rapid discovery, optimization and extensive characterization of lead compounds such 64
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that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development. Research and development expenses by category were as follows (in thousands):
Year Ended December 31,
2019 2018
Research and development expenses:
Development:
Clinical trial costs $ 136,763 $ 66,434
Personnel expenses 61,433 48,114
Consulting and outside services 14,531 9,693
Other development costs 15,034 13,505
Total development 227,761 137,746
Drug discovery:
License and other collaboration costs 47,691 8,245
Other drug discovery (1) 25,610 13,699
Total drug discovery 73,301 21,944
Other (2) 35,902 22,567
Total research and development expenses
____________________
(1) Primarily includes personnel expenses, consulting and outside services and
laboratory supplies.
(2) Includes stock-based compensation and the allocation of general corporate
costs to research and development.
In addition to reviewing the three categories of research and development
expenses described above, we principally consider qualitative factors in making
decisions regarding our research and development programs. Such factors include
enrollment in clinical trials for our drug candidates, preliminary data from and
final results of clinical trials, the potential indications for our drug
candidates, the clinical and commercial potential for our drug candidates, and
competitive dynamics. We also make our research and development decisions in the
context of our overall business strategy.
We are focusing our development efforts primarily on cabozantinib to maximize
the therapeutic and commercial potential of this compound and, as a result, we
expect our near-term research and development expenses to primarily relate to
the continued clinical development of cabozantinib. We expect to continue to
incur significant development costs for cabozantinib in future periods as we
evaluate its potential in a broad development program comprising over 85 ongoing
or planned clinical trials across multiple indications. Notable studies of this
program include: CheckMate 9ER and CheckMate 040, each in collaboration with
BMS; company-sponsored COSMIC-021 and COSMIC-312, for which Roche is providing
atezolizumab free of charge; company-sponsored COSMIC-313, for which BMS is
providing nivolumab and ipilimumab free of charge; and company-sponsored
COSMIC-311. In addition, post-marketing commitments in connection with the
approval of COMETRIQ in progressive, metastatic MTC dictate that we conduct an
additional study in that indication.
We are also committed to building our product pipeline by discovering and
developing new cancer therapies for patients. In this regard, we are conducting
internal drug discovery activities with the goal of identifying new product
candidates to advance into clinical trials. We augment these internal drug
discovery activities with business development initiatives aimed at identifying
and in-licensing promising, early-stage oncology assets and then further develop
them utilizing our established clinical development infrastructure.
We expect our research and development expenses to continue to increase in 2020
as a result of the expected initiation and completion of numerous late-stage and
other potentially label-enabling cabozantinib trials.
The length of time required for clinical development of a particular product
candidate and our development costs for that product candidate may be impacted
by the scope and timing of enrollment in clinical trials for the product
candidate, our decisions to develop a product candidate for additional
indications and whether we pursue development of the product candidate or a
particular indication with a collaborator or independently. For example,
cabozantinib is being developed in multiple indications, and we do not yet know
for how many of those indications we will ultimately pursue
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regulatory approval. In this regard, our decisions to pursue regulatory approval of cabozantinib for additional indications depend on several variables outside of our control, including the strength of the data generated in our prior, ongoing and potential future clinical trials. Furthermore, the scope and number of clinical trials required to obtain regulatory approval for each pursued indication is subject to the input of the applicable regulatory authorities, and we have not yet sought such input for all potential indications that we may elect to pursue. Even after having given such input, applicable regulatory authorities may subsequently require additional clinical studies prior to granting regulatory approval based on new data generated by us or other companies, or for other reasons outside of our control. As a condition to any regulatory approval, we may also be subject to post-marketing development commitments, including additional clinical trial requirements. As a result of the uncertainties discussed above, we are unable to determine the duration of or complete costs associated with the development of cabozantinib or any of our other research and development projects. In any event, our potential therapeutic products are subject to a lengthy and uncertain regulatory process that may not result in our receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected, including cabozantinib in any additional indications. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval. A discussion of the risks and uncertainties with respect to our research and development activities, including our ability to expand the labeled indications of use for CABOMETYX and completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Selling , General and Administrative Expenses Selling, general and administrative expenses were as follows (dollars in thousands): Year EndedDecember 31, 2019
2018 Percentage Change
Selling, general and administrative expenses
11 %
Selling, general and administrative expenses consist primarily of personnel
expenses, consulting and outside services, stock-based compensation and
marketing costs.
The increase in selling, general and administrative expenses for the year ended
December 31, 2019 , as compared to 2018, was primarily related to increases in
personnel expenses, stock-based compensation, consulting and outside services
and marketing costs, and were partially offset by a decrease in corporate
giving. Personnel expenses increased $11.5 million for the year ended
December 31, 2019 , as compared to 2018, primarily due to an increase in
administrative headcount to support the company's commercial and research and
development organizations. Stock-based compensation increased $9.7 million for
the year ended December 31, 2019 , as compared to 2018, primarily due to an
increase in headcount as well as the expense recognition for certain of the 2018
PSUs. Consulting and outside services increased $4.2 million and marketing costs
increased $3.2 million for the year ended December 31, 2019 , as compared to
2018, primarily due to increased marketing activities in support of the launch
of CABOMETYX for the treatment of patients with HCC who have been previously
treated with sorafenib and continued support of the product in an increasingly
competitive RCC market. Corporate giving, consisting predominantly of donations
to independent patient support foundations, decreased $6.5 million for the year
ended December 31, 2019 , as compared to 2018.
We expect our selling, general and administrative expenses to continue to
increase in 2020 in support of our continued commercial investment in CABOMETYX
and the growth in the broader organization.
Other Income (Expenses), Net
Other income (expenses), net, was as follows (dollars in thousands):
Year Ended December 31,
2019 2018 Percentage Change
Interest income $ 27,959 $ 12,840 118 %
Other, net 680 397 71 %
Total other income (expenses), net $ 28,639 $ 13,237 116 %
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The increase in interest income for the year endedDecember 31, 2019 , as compared to 2018, was the result of increase in our investment balance as well as an increase in the yield earned on those investments. Income Tax Provision (Benefit) The income tax provision (benefit) was as follows (in thousands): Year EndedDecember 31, 2019 2018
Income tax provision (benefit)
Our effective income tax rate was 19.4% during the year endedDecember 31, 2019 . During the year endedDecember 31, 2018 , we recorded a$244.1 million benefit related to the release of substantially all of our valuation allowance against our deferred tax assets. The decision to release the valuation allowance was made after we determined that it was more likely than not that these deferred tax assets, including net operating losses and tax credits, would be realized, and was based on the evaluation and weighting of both positive and negative evidence, including our achievement of a cumulative three-year income position as ofDecember 31, 2018 and forecasts of future operating results, as well as considering the utilization of net operating losses and tax credits prior to their expiration. Other than the benefit we recorded for the release of our valuation allowance, income taxes for the year endedDecember 31, 2018 primarily related to a provision for taxes in states for which we do not have net operating loss carryforwards due to a limited operating history. We expect that our effective tax rate will be between 20 percent and 22 percent in 2020. Liquidity and Capital Resources As ofDecember 31, 2019 , we had$1.4 billion in cash and investments. We anticipate that the aggregate of our current cash and cash equivalents, short-term investments available for operations, product revenues and collaboration revenues will enable us to maintain our operations for a period of at least 12 months following the filing date of this report. We expect to continue to spend significant amounts to fund the continued development and commercialization of cabozantinib. In addition, we intend to continue to expand our product pipeline through our internal drug discovery efforts and the execution of strategic transactions that align with our oncology drug expertise. Financing these activities could materially impact our liquidity and capital resources and may require us to incur debt or raise additional funds through the issuance of equity. Furthermore, even though we believe we have sufficient funds for our current and future operating plans, we may choose to incur debt or raise additional funds through the issuance of equity due to market conditions or strategic considerations. Sources and Uses of Cash Cash flow activities were as follows (in thousands): Year EndedDecember 31, 2019 2018
Net cash provided by operating activities
Operating Activities Cash flows provided by operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Cash provided by operating activities is derived by adjusting our net income for: non-cash operating items such as deferred taxes, stock-based compensation, depreciation, non-cash lease expense and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Consolidated Statements of Income. The most significant factors that contributed to the increase in cash provided by operating activities for the year endedDecember 31, 2019 , as compared to 2018, were the increase in cash received on sales of our products and the changes in operating assets and liabilities described above, which were partially offset by an increase in cash paid for operating expenses. 67
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Investing Activities Cash used in investing activities for the year endedDecember 31, 2019 was primarily due to investment purchases of$1.2 billion , and purchases of property, equipment and other of$12.8 million , less cash provided by the maturity and sale of investments of$608.3 million . Cash used in investing activities for the year endedDecember 31, 2018 was primarily due to investment purchases of$557.8 million and purchases of property and equipment of$33.3 million , less cash provided by the maturity and sale of investments of$293.0 million . Financing Activities Cash provided by financing activities for the year endedDecember 31, 2019 was primarily a result of$22.5 million in proceeds from the issuance of common stock under our equity incentive plans, partially offset by$9.9 million of taxes paid related to net share settlements. Cash provided by financing activities for the year endedDecember 31, 2018 was primarily a result of$17.3 million in proceeds from the issuance of common stock under our equity incentive plans, partially offset by$7.6 million of taxes paid related to net share settlements. Contractual Obligations Contractual obligations as ofDecember 31, 2019 were as follows (in thousands): Payments Due by Period Less than 1 More than 5 Contractual Obligations (1) Total Year 1-3 Years 3-5 Years Years Leases (2)$ 302,737 $ 4,641 $ 19,289 $ 29,194 $ 249,613 Purchase obligations (3) 33,344 29,335 2,913 1,096 - Other long-term obligations 1,626 - 1,626 - - Total contractual cash obligations$ 337,707 $ 33,976 $ 23,828
____________________
(1) In addition to the amounts presented, we have committed to make payments
for potential future milestones, research funding commitments and
royalties to certain collaboration partners as part of our agreements with
those parties. Because the amount and timing of those payments is
uncertain they have not been included in the table above. For more
information about these obligations, see "Note 3. Collaboration
Agreements" in our "Notes to Consolidated Financial Statements" contained
in Part II, Item 8 of this Annual Report on Form 10-K.
(2) We entered into the build-to-suit lease agreement in October 2019 , which
is expected to commence in
estimated lease commitment payments at the estimated commencement of the
lease, subject to adjustment dependent upon the actual total development
costs of the premises but do not include the impact of a tenant
improvement allowance of approximately
about our lease obligations, see "Note 11. Commitments" in our "Notes to
Consolidated Financial Statements" contained in Part II, Item 8 of this
Annual Report on Form 10-K.
(3) Purchase obligations include firm purchase commitments related to
manufacturing and maintenance of inventory, software services and other
facilities and equipment.
Off-Balance Sheet Arrangements As ofDecember 31, 2019 , we did not have any material off-balance-sheet arrangements, as defined by applicableSEC regulations. Critical Accounting Policies and Estimates The preparation of our Consolidated Financial Statements conforms to accounting principles generally accepted in theU.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to: those related to revenue recognition, 68
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including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances as well as milestones included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement; recoverability of inventory; the amounts of deferred tax assets and liabilities including the related valuation allowance; the accrual for certain liabilities including accrued clinical trial liabilities; and valuations of equity awards used to determine stock-based compensation, including certain awards with vesting subject to market or performance conditions. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe 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. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates. We believe our critical accounting policies relating to revenue recognition, inventory, clinical trial accruals, stock-based compensation and income taxes reflect the more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements. For a complete description of our significant accounting policies, see "Note 1. Organization and Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K. Revenue Recognition Net Product Revenues and Discounts and Allowances We recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in theU.S. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) returns. Discounts and allowances are complex and require significant judgment by management. Management assesses estimates each period and updates them to reflect current information. We initially record estimates for these deductions at the time we recognize the related gross product revenue. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data. For a further description of our discounts and allowances, see "Note 1. Organization and Summary of Significant Accounting Policies" to our "Notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K. Collaboration Revenues We enter into collaboration arrangements, under which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; product supply services; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We use key assumptions to determine the standalone selling price, which may include forecast revenues and costs, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. 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. At the end of each subsequent reporting period, we re-evaluate the probability of earning of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. In addition, in recording revenues for our research and development services performance obligations, we use internal development projected cost estimates to determine the amount of revenue to record as we satisfy this performance obligation, known as the inputs method. We record royalty revenues andU.S. profits and losses under the collaboration agreement withGenentech based on estimates of the sales that occurred during the period. We base the relevant period estimates of sales on interim data provided by licensees and analysis of historical activity, adjusted for any changes in facts and circumstances, as appropriate. 69
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We base our estimates on the best information available at the time provided to
us by our collaboration partners. However, additional information may
subsequently become available to us, which may allow us to make a more accurate
estimate in future periods. In this event, we are required to record adjustments
in future periods when the actual level of activity becomes more certain. We
generally consider such increases or decreases to be changes in estimates and
they will be reflected in our Consolidated Statements of Operations in the
period they become known.
Inventory
We value inventory at the lower of cost or net realizable value. We determine
the cost of inventory using the standard-cost method, which approximates actual
cost based on a first-in, first-out method. We analyze our inventory levels
quarterly and write down inventory subject to expiry in excess of expected
requirements, or that has a cost basis in excess of its expected net realizable
value. On a quarterly basis, we analyze our estimated production levels for the
following twelve-month period, which is our normal operating cycle, and
reclassify inventory we expect to use or sell in periods beyond the next twelve
months into other long-term assets in the Consolidated Balance Sheets.
Clinical Trial Accruals
We execute all of our clinical trials with support from contract research
organizations and other vendors and we accrue costs for clinical trial
activities performed by these third parties based upon the estimated amount of
work completed on each trial. For clinical trial expenses, the significant
factors used in estimating accruals include the number of patients enrolled, the
activities to be performed for each patient, the number of active clinical sites
and the duration for which the patients will be enrolled in the trial. We
monitor patient enrollment levels and related activities to the extent possible
through internal reviews, correspondence with contract research organizations
and review of contractual terms. We base our estimates on the best information
available at the time. However, additional information may become available to
us, which may allow us to make a more accurate estimate in future periods. If we
do not identify costs that we have begun to incur or if we underestimate or
overestimate the level of services performed or the costs of these services, our
actual expenses could differ from our estimates.
Stock-based Compensation
Stock-based compensation expense requires us to estimate the fair value of stock
options, including PSOs, and the estimate the number of shares subject to PSUs
that will ultimately vest.
Fair value models require a number of complex and subjective assumptions
including our stock price volatility, employee exercise patterns and risk-free
interest rates. The most significant assumptions are our estimates of the
expected volatility and the expected term of the stock option. The value of a
stock option is derived from its potential for appreciation. The more volatile
the stock, the more valuable the option becomes because of the greater
possibility of significant changes in stock price. Because there is a market for
options on our common stock, we consider implied volatilities as well as our
historical volatilities when developing an estimate of expected volatility. The
expected option term also has a significant effect on the value of the option.
The longer the term, the more time the option holder has to allow the stock
price to increase without a cash investment and thus, the more valuable the
option. Further, lengthier option terms provide more opportunity to take
advantage of market highs. However, empirical data show that employees typically
do not wait until the end of the contractual term of a nontransferable option to
exercise. Accordingly, we are required to estimate the expected term of the
option for input to an option-pricing model. As required under generally
accepted accounting principles, we review our valuation assumptions at each
grant date and, as a result, from time to time we change the valuation
assumptions we use to value stock options granted. The assumptions used in
calculating the fair value of stock options represent management's best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use
different assumptions, our stock-based compensation could be materially
different in the future.
We recognize stock-based compensation for PSUs over the requisite service period
only for awards which we estimate will ultimately vest, which requires judgment
as to the probability and timing of the achievement of the underlying
performance goals. Significant factors we consider in making those judgments
include forecasts of our product revenues and those of our collaboration
partners, estimates regarding the operational progress of late-stage clinical
development programs and discovery pipeline expansion performance targets. To
the extent actual results, or updated estimates, differ from current estimates,
such amounts are recorded as a cumulative adjustment in the period estimates are
revised.
For additional description of our stock-based compensation, see "Note 8.
Employee Benefit Plans" to our "Notes to Consolidated Financial
Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K.
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Income Taxes We compute our income tax provision or benefit under the asset and liability method. Significant estimates are required in determining our income tax provision or benefit. We base some of these estimates on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that we deem a reversal of any portion of our valuation allowance against our deferred tax assets to be appropriate, we recognize a tax benefit against our income tax provision in the period of such reversal. Prior to 2018, we recorded a valuation allowance that fully offset our deferred tax assets. In the fourth quarter of 2018, based on our evaluation of various factors, including our achievement of a cumulative three-year income position as ofDecember 28, 2018 and forecasts of future operating results, we released substantially all of our valuation allowance against our deferred tax assets and recorded a corresponding income tax benefit as described in "Note 9. Income Taxes", below. We continue to maintain a valuation allowance against ourCalifornia state deferred tax assets. Recent Accounting Pronouncements For a description of the expected impact of recent accounting pronouncements, see "Note 1. Organization and Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to credit risk, changes in interest rates and foreign exchange rates. Our investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. None of these market risk-sensitive instruments are held for trading purposes. We do not have derivative financial instruments in our investment portfolio. Credit Risk We manage credit risk associated with our investment portfolio through our investment policy, which limits purchases to high-quality issuers and limits the amount of our portfolio that can be invested in a single issuer. Interest Rate Risk We invest our cash in a variety of financial instruments, principally securities issued by theU.S. government and its agencies, investment-grade corporate bonds and commercial paper, and money market funds. These investments are denominated inU.S. Dollars. All of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term-to-maturity of our investment instruments. Due to the conservative and short-term nature of these instruments, we do not believe that we have a material exposure to interest rate risk. If market interest rates were to increase or decrease by one percentage point, the fair value of our investment portfolio would increase or decrease by an immaterial amount. Foreign Exchange Rate Risk Fluctuations in the exchange rates of theU.S. dollar and foreign currencies may have the effect of increasing or decreasing our revenues and expenses. Royalty revenues and sales-based milestones we receive from our collaboration agreements with Ipsen andGenentech are a percentage of the net sales made by those collaboration partners from sales made in countries outside theU.S. and are denominated in currencies in which the product is sold, which is predominantly the Euro. Research and development expenses include clinical trial services performed by third-party contract research organizations and other vendors located outside theU.S. that may bill us in currencies where their services are provided, 71
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which is also predominantly the Euro. If theU.S. dollar strengthens against a foreign currency, then our royalty revenues will decrease for the same number of units sold in that foreign currency and the date we achieve certain sales-based milestones may also be delayed. Similarly, if theU.S. dollar weakens against a foreign currency, then our research and development expenses would increase. However, we believe that we are not subject to material risks arising from changes in foreign exchange rates and that a hypothetical 10% increase or decrease in foreign exchange rates would not have a material adverse impact on our financial condition, results of operations or cash flows. Item 8. Financial Statements and Supplementary DataEXELIXIS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 73 Consolidated Balance Sheets 75 Consolidated Statements of Income 76 Consolidated Statements of Comprehensive Income 76 Consolidated Statements of Stockholders' Equity 77 Consolidated Statements of Cash Flows 78 Notes to Consolidated Financial Statements 79 72
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Exelixis, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Exelixis, Inc.
(the Company) as of January 3, 2020 and December 28, 2018 , the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended January 3,
2020 , and the related notes (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 January 3, 2020 and December 28, 2018 , and the results of its operations and
its cash flows for each of the three fiscal years in the period ended January 3,
2020 , 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 January 3, 2020 , 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 25, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method for recognizing revenue as a result of the adoption of
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers
(Topic 606), effective December 30, 2017 .
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the
current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole and we are not, by
communicating the critical audit matter below, providing a separate opinion on
the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition - Product sales
Description of During the year ended January 3, 2020 , the Company's gross
the Matter product revenues were $957.6 million . As discussed in Note 1 of
the financial statements, the Company sells its products
principally to specialty distributors and specialty pharmacy
providers, or collectively, Customers. These Customers
subsequently resell the products to health care providers and
patients. Revenues from product sales are recognized when
control is transferred to the Customer.
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Auditing the Company's product sales was challenging,
specifically related to the effort required to audit Customer
sales activity to assess whether incentives resulted in orders
in excess of demand (i.e., channel stuffing) and whether any
such transactions meet the criteria for revenue recognition.
This involved judgmentally assessing factors including market
demand, Customer ordering patterns, Customer inventory levels,
contractual terms and incentives offered.
How We Addressed We obtained an understanding, evaluated the design and tested
the Matter in the operating effectiveness of controls designed to monitor and
Our Audit review inventory levels in the channel and sales under Customer
incentive programs. This includes testing relevant controls
over the information systems that are important to the
initiation, recording and billing of revenuetransactions as
well as controls over the completeness and accuracy of the data
used.
Our audit procedures over the Company's product sales included,
among others, examination of inventory channel reports for
unusual trends or transactions as well as performing analytical
procedures to detect and investigate anomalies within the data.
Procedures included those to detect sales of short dated
product near year end as well as testing thecompleteness and
accuracy of the underlying data. We also examined the terms and
conditions of any new or amended contracts with Customers and
its impact on the Company's returns reserve. We also confirmed
the terms and conditions of contracts directly with a selection
of Customers, including whether there are side agreements and
terms not formally included in the contract that may impact the
Company's returns reserve. In addition, we obtained written
representations from members of the commercial function and the
market access group regarding changes to Customer incentives
and the completeness of the terms and conditions reported to
the legal and accounting departments.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2002.
Redwood City, California
February 25, 2020
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EXELIXIS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
2019 2018
ASSETS
Current assets:
Cash and cash equivalents $ 266,501 $ 314,775
Short-term investments 585,742 378,559
Trade receivables, net 119,073 162,771
Inventory 12,886 9,838
Prepaid expenses and other current assets 26,988 31,073
Total current assets 1,011,190 897,016
Long-term investments 536,385 158,287
Property and equipment, net 48,892 50,897
Deferred tax assets, net 172,374 244,111
Goodwill 63,684 63,684
Other long-term assets 53,145 8,291
Total assets $ 1,885,670 $ 1,422,286
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,581 $ 10,901
Accrued compensation and benefits 37,364 32,142
Accrued clinical trial liabilities 38,777
18,231
Rebates and fees due to customers 18,719
14,954
Accrued collaboration liabilities 11,856 7,419 Other current liabilities 24,449 21,825 Total current liabilities 142,746 105,472 Long-term portion of deferred revenue 6,596
15,897
Long-term portion of operating lease liabilities 48,011 12,178 Other long-term liabilities 2,347 1,286 Total liabilities 199,700 134,833 Commitments
Stockholders' equity:
Preferred stock,
- -
Common stock,
305 300
Additional paid-in capital 2,241,947
2,168,217
Accumulated other comprehensive income (loss) 3,069 (701 ) Accumulated deficit (559,351 ) (880,363 ) Total stockholders' equity 1,685,970 1,287,453 Total liabilities and stockholders' equity$ 1,885,670
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended December 31,
2019 2018 2017
Revenues:
Net product revenues $ 759,950 $ 619,279 $ 349,008
Collaboration revenues 207,825 234,547 103,469
Total revenues 967,775 853,826 452,477
Operating expenses:
Cost of goods sold 33,097 26,348 15,066
Research and development 336,964 182,257 112,171
Selling, general and administrative 228,244 206,366 159,330
Total operating expenses 598,305 414,971 286,567
Income from operations 369,470 438,855 165,910
Other income (expense), net:
Interest income 27,959 12,840 4,883
Interest expense - - (8,679 )
Other, net 680 397 (3,537 )
Total other income (expense), net 28,639 13,237 (7,333 )
Income before income taxes 398,109 452,092 158,577
Income tax provision (benefit) 77,097 (237,978 ) 4,350 Net income$ 321,012 $ 690,070 $ 154,227 Net income per share: Basic$ 1.06 $ 2.32 $ 0.52 Diluted$ 1.02 $ 2.21 $ 0.49 Weighted-average common shares outstanding: Basic 302,584 297,892 293,588 Diluted 315,009 312,803 312,003 The accompanying notes are an integral part of these Consolidated Financial Statements. EXELIXIS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2019 2018 2017 Net income$ 321,012 $ 690,070 $ 154,227 Other comprehensive income (loss): Net unrealized gains (losses) on available-for-sale securities, net of tax impact of$(1,049) ,$156 , and$0 , respectively 3,770 (354 ) 69 Comprehensive income$ 324,782 $ 689,716 $ 154,296
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Common Stock Additional Other Total
Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Income (Loss) Deficit Equity
Balance at December 31, 2016 289,924 $ 290 $ 2,072,591 $ (416 ) $ (1,983,147 ) $ 89,318
Adoption of Accounting Standards
Update (ASU) No.
2016-09, Compensation-Stock
Compensation (Topic 718): Improvements
to Employee Share-Based Payment
Accounting - - 252 - (252 ) -
Net income - - - - 154,227 154,227
Other comprehensive income - - - 69 - 69
Issuance of common stock under equity
incentive and stock purchase plans 5,408 5 17,404 - - 17,409
Issuance of common stock on exercise
of warrants 877 1 (1 ) - - -
Stock-based compensation - - 23,938 - - 23,938
Balance at December 31, 2017 296,209 296 2,114,184 (347 ) (1,829,172 ) 284,961
Adoption of ASU No. 2014-09, Revenue
from Contracts with Customers (Topic
606) - - - - 258,505 258,505
Adoption of ASU No. 2016-02, Leases
(Topic 842) - - - - 234 234
Net income - - - - 690,070 690,070
Other comprehensive loss - - - (354 ) - (354 )
Issuance of common stock under equity
incentive and stock purchase plans 3,667 4 13,407 - - 13,411
Stock-based compensation - - 40,626 - - 40,626
Balance at December 31, 2018 299,876 300 2,168,217 (701 ) (880,363 ) 1,287,453
Net income - - - - 321,012 321,012
Other comprehensive income - - - 3,770 - 3,770
Issuance of common stock under equity
incentive and stock purchase plans 4,955 5 17,128 - - 17,133
Stock-based compensation - - 56,602 - - 56,602
Balance at December 31, 2019 304,831 $ 305 $ 2,241,947 $ 3,069 $ (559,351 ) $ 1,685,970 The accompanying notes are an integral part of these Consolidated Financial
Statements.
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EXELIXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2019 2018 2017
Net income $ 321,012 $ 690,070 $ 154,227
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,348 4,915 1,187
Stock-based compensation 56,602 40,626 23,938
Non-cash lease expense 2,819 2,854 -
Deferred taxes 71,002 (244,111 ) -
Other, net 88 1,129 (6,795 )
Changes in operating assets and liabilities:
Trade receivables, net 43,716 (85,471 ) (43,299 )
Inventory (5,731 ) (3,181 ) (3,319 )
Prepaid expenses and other assets (5,723 ) (8,525 ) (378 )
Deferred revenue (9,301 ) 271 13,745
Accounts payable and other liabilities 44,124 17,143 26,305
Net cash provided by operating activities 526,956 415,720 165,611
Cash flows from investing activities:
Purchases of property, equipment and other (12,834 ) (33,297 ) (21,143 )
Proceeds from sale of property and equipment - 308 164
Purchases of investments (1,182,682 ) (557,832 ) (319,090 )
Proceeds from sales and maturities of
investments 608,269 292,971 376,864
Net cash (used in) provided by investing
activities (587,247 ) (297,850 ) 36,795
Cash flows from financing activities:
Proceeds from issuance of common stock under
equity incentive and stock purchase plans 22,499 17,278 22,423
Taxes paid related to net share settlement of
equity awards (9,904 ) (7,574 ) (6,563 )
Principal repayments of debt - - (185,788 )
Other, net (42 ) (13 ) -
Net cash provided by (used in) financing
activities 12,553 9,691 (169,928 )
Net (decrease) increase in cash, cash
equivalents and restricted cash equivalents (47,738 ) 127,561 32,478
Cash, cash equivalents and restricted cash
equivalents at beginning of period 315,875 188,314 155,836
Cash, cash equivalents and restricted cash
equivalents at end of period $ 268,137 $ 315,875 $ 188,314
Supplemental cash flow disclosure:
Cash paid for interest $ - $ - $ 20,460
Cash paid for taxes $ 7,873 $ 10,677 $ 538
Non-cash activities:
Right-of-use assets obtained in exchange for
lease obligations $ 29,562 17,180 $ -
Property and equipment deemed to have been
acquired in build-to-suit lease $ - $ - $ 14,530
Unpaid liabilities incurred for purchases of
property and equipment $ 26 $ 802 $ 524 The accompanying notes are an integral part of these Consolidated Financial
Statements.
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EXELIXIS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Exelixis, Inc. (Exelixis , we, our or us) is an oncology-focused biotechnology company that strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Our drug discovery and development capabilities and commercialization platform are the foundations upon which we intend to bring to market novel, effective and tolerable therapies to provide cancer patients with additional treatment options. Since we were founded in 1994, four products resulting from our discovery efforts have progressed through clinical development, received regulatory approval and established a commercial presence in various geographies around the world. Two are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including MET, AXL, VEGF receptors and RET. Our cabozantinib products are: CABOMETYX® (cabozantinib) tablets approved for advanced renal cell carcinoma (RCC) and previously treated hepatocellular carcinoma (HCC); and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer. For these types of cancer, cabozantinib has become or is becoming a standard of care. Beyond these approved indications, cabozantinib is currently the focus of a broad clinical development program, and is being investigated both alone and in combination with other therapies in a wide variety of cancers. The other two products resulting from our discovery efforts are: COTELLIC® (cobimetinib), an inhibitor of MEK, approved as part of a combination regimen to treat advanced melanoma and marketed under a collaboration withGenentech, Inc. (a member of the Roche Group) (Genentech ); and MINNEBRO® (esaxerenone), an oral, non-steroidal, selective blocker of the mineralocorticoid receptor (MR), approved for the treatment of hypertension inJapan and licensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo). Basis of Presentation The accompanying Consolidated Financial Statements include the accounts ofExelixis and those of our wholly-owned subsidiaries. These entities' functional currency is theU.S. dollar. All intercompany balances and transactions have been eliminated. We have made reclassifications to our prior years' Consolidated Balance Sheet and Consolidated Statements of Cash Flows to conform to the current year's presentation. These reclassifications had no effect on total current assets, total assets, total operating cash flows, total investing cash flows or total financing cash flows. We have adopted a 52- or 53-week fiscal year policy that ends on the Friday closest toDecember 31st . Fiscal year 2019, which was a 53-week fiscal year, ended onJanuary 3, 2020 , fiscal year 2018, which was a 52-week fiscal year, ended onDecember 28, 2018 and fiscal year 2017, which was a 52-week fiscal year, ended onDecember 29, 2017 . For convenience, references in this report as of and for the fiscal years endedJanuary 3, 2020 ,December 28, 2018 andDecember 29, 2017 are indicated as being as of and for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Segment Information We operate in one business segment that focuses on the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Our Chief Executive Officer, as the chief operating decision-maker, manages and allocates resources to our operations on a total consolidated basis. Consistent with this decision-making process, our Chief Executive Officer uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets. All of our long-lived assets are located in theU.S. See "Note 2. Revenues" for enterprise-wide disclosures about product sales, revenues from major customers and revenues by geographic region. Use of Estimates The preparation of the accompanying Consolidated Financial Statements conforms to accounting principles generally accepted in theU.S. , which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosures. On an ongoing basis, we 79
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evaluate our significant estimates. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe 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 could differ materially from those estimates. Recently Adopted Accounting Pronouncements In the third quarter of 2019, we adopted ASU No. 2018-15, Intangibles-Goodwill andOther-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15 requires a customer in a hosting arrangement that is a service contract to follow the guidance in Accounting Standards Codification (ASC) Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 requires capitalized implementation costs to be expensed over the term of the hosting arrangement, which includes reasonably certain renewals. We adopted ASU 2018-15 using the prospective transition method in the accompanying Consolidated Financial Statements. The adoption of ASU 2018-15 did not have a material impact on our Consolidated Financial Statements. In the first quarter of 2019, we adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (ASU 2018-02). There was no financial impact from the adoption of ASU 2018-02 and we did not make an election to reclassify the income tax effects of the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income (loss) to accumulated deficit. In connection with the adoption of ASU 2018-02, we adopted the individual unit of account approach for releasing income tax effects from accumulated other comprehensive income (loss). In the first quarter of 2019, we also adopted ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) (ASU 2017-08). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The adoption of ASU 2017-08 did not have a material impact on our Consolidated Financial Statements. Cash and Investments We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include high-grade, short-term investments in money market funds, certificates of deposit and marketable debt securities which are subject to minimal credit and market risk. We designate all investments in marketable debt securities as available-for-sale and therefore, report such investments at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. We include realized gains and losses on the sale of investments in other income (expense), net in the accompanying Consolidated Statements of Income. We classify those investments that we do not require for use in current operations and that mature in more than 12 months as long-term investments in the accompanying Consolidated Balance Sheets. The classification of restricted cash equivalents as short-term or long-term is dependent upon the longer of the remaining term to maturity of the investment or the remaining term of the related restriction. We subject all of our investments to a quarterly impairment review. We recognize an impairment charge when a decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investments fair value has been less than their cost basis, the financial condition and near-term prospects of the issuer, extent of the loss related to credit of the issuer, the expected cash flows from the security, our intent to sell the security and whether or not we will be required to sell the security before we are able to recover our carrying value. Fair Value Measurements We define fair value as the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that 80
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market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks. Accounts Receivable We record trade accounts receivable net of allowances for chargebacks and cash discounts for prompt payment, as described further below. Estimates of our allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of our customers and individual customer circumstances, an analysis of days sales outstanding by geographic region and a review of the local economic environment and its potential impact on government funding and reimbursement practices. Historically, the amounts of uncollectible accounts receivable that have been written off have been insignificant. Inventory We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard-cost method, which approximates actual cost based on a first-in, first-out method. We analyze our inventory levels quarterly and write down inventory subject to expiry in excess of expected requirements, or that has a cost basis in excess of its expected net realizable value. These write downs are charged to either cost of goods sold or the cost of supplied product included in collaboration revenues in the accompanying Consolidated Statements of Income. On a quarterly basis, we analyze our estimated production levels for the following twelve-month period, which is our normal operating cycle, and reclassify inventory we expect to use or sell in periods beyond the next twelve months into other long-term assets in the accompanying Consolidated Balance Sheets. Property and Equipment We record property and equipment at cost, net of depreciation. We compute depreciation using the straight-line method based on estimated useful lives of the assets, which ranges up to 15 years and depreciate leasehold improvements over the lesser of their estimated useful lives or the remainder of the lease term. We charge repairs and maintenance costs to expense as incurred. We periodically review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We did not recognize impairment charges in any of the periods presented.Goodwill We recorded goodwill amounts as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair value. We periodically review the carrying amount of goodwill for impairment (at least annually) and whenever events or changes in circumstance indicate that the carrying value may not be recoverable. Historically, we assessed the recoverability of our goodwill on the last day of our third quarter. Beginning in 2019, we changed the date of our annual goodwill impairment assessment to the first day of our fourth quarter to allow for operational expediency. The change in goodwill impairment testing date does not represent a significant change to our accounting for goodwill. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We perform a quantitative assessment if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the carrying amount of the reporting unit's goodwill exceeds its fair value. We continue to operate in one segment, which is also considered to be our sole reporting unit and therefore, goodwill is tested for impairment at the enterprise level. We did not recognize any impairment charges in any of the periods presented. Collaboration Agreements We assess whether our collaboration agreements are subject to ASC 808: Collaborative Arrangements (Topic 808) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808, we assess whether the payments between us and our collaboration partner are subject to other accounting literature. If we conclude that payments from the collaboration partner to us represent consideration from a customer, then we account for those payments within the scope of Topic 606. However, if we conclude that our collaboration partner is not a customer for certain activities, such as for certain collaborative research and development activities, we present such payments as a reduction of research and development expense. 81
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Revenue
In the first quarter of 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of the adoption date. Results for the years endedDecember 31, 2019 and 2018 are presented under Topic 606, while results for the year endedDecember 31, 2017 have not been adjusted and continue to be reported in accordance with our historic accounting under previous revenue recognition guidance, ASC Topic 605: Revenue Recognition (Topic 605). Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration to which the entity is entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of Topic 606, we perform the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Net Product Revenues We sell our products principally to specialty distributors and specialty pharmacy providers, 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. Product Sales Discounts and Allowances We record revenues from product sales at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and that result from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between us and our Customers, health care providers, payors and other indirect customers relating to the sales of our 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 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 our contracts. 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 revenues and earnings in the period such variances become known. Chargebacks: Chargebacks are discounts that occur when contracted Customers purchase directly from a specialty distributor. Contracted Customers, which currently consist primarily ofPublic Health Service institutions, Federal government entities purchasing via the Federal Supply Schedule, Group Purchasing Organizations, and health maintenance organizations, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to us the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the Customer. The allowance for chargebacks is based on actual chargebacks received and an estimate of sales to contracted Customers. Discounts for Prompt Payment: Our Customers in theU.S. receive a discount of 2% for prompt payment. We expect our Customers will earn 100% of their prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program, other government programs and commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on Customer and payer data received from the specialty 82
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pharmacies and distributors and historical utilization rates. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's shipments to our Customers, plus an accrual balance for known prior quarters' unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net product revenues in the period of adjustment. Allowances for rebates also include amounts related to the Medicare Part D Coverage Gap Discount Program. In theU.S. during 2018 and 2017, the Medicare Part D prescription drug benefit mandated participating manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. This amount increased to 70% in 2019. Our estimates for expected Medicare Part D coverage gap amounts are based on Customer and payer data received from specialty pharmacies and distributors and historical utilization rates. Funding of the coverage gap is invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's shipments to Customer, plus an accrual balance for known prior quarters' unpaid claims. If actual future funding varies from estimates, we may need to adjust our accruals, which would affect net product revenues in the period of adjustment. Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using Customer data provided by the specialty distributor that administers the copay program. Other Customer Credits: We pay fees to our Customers for account management, data management and other administrative services. To the extent the services received are distinct from the sale of products to the Customer, we classify these payments in selling, general and administrative expenses in our Consolidated Statements of Income. Collaboration Revenues We enter into collaboration arrangements, under which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development, regulatory and sales-based milestone payments; product supply services; development cost reimbursements; profit sharing arrangements; and royalties on net sales of licensed products. Except for profit sharing arrangements, payments for product supply services and certain development cost reimbursements, each of these payment types were within the scope of Topic 606 during the years endedDecember 31, 2019 and 2018. As part of the accounting for these arrangements, we develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. These key assumptions may include forecasted revenues, clinical development timelines and costs, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. Up-front License Fees: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, 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. Regulatory and Development 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 or the licensee's control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone 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 achieving such development and regulatory 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. 83
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Product Supply Services: Arrangements that include a promise for future supply of 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. Development Cost Reimbursements: Our collaboration arrangements may include promises of future clinical development and drug safety services, as well as participation on certain joint committees. When such services are provided to a customer, and they are distinct from the licenses provided to our collaboration partners, these promises are accounted for as a separate performance obligation which we estimate using internal development costs incurred and projections through the term of the arrangements. We record revenue for these services as the performance obligations are satisfied over time. Profit Sharing Arrangements: Under the terms of our collaboration agreement withGenentech for cobimetinib, we are entitled to a share ofU.S. profits and losses received in connection with commercialization of cobimetinib. We account for such arrangements in accordance with Topic 808. We have determined that we are an agent under the agreement and therefore revenues are recorded net of costs incurred. We recordU.S. profits and losses under the collaboration agreement in the period earned based on our estimate of those amounts. We recognized an annual profit under the agreement for the years endingDecember 31, 2019 and 2018 and accordingly, those profits are recognized as collaboration revenues in the accompanying Consolidated Statements of Income. Prior to 2018, the commercialization of cobimetinib in theU.S. had not been profitable for any annual period and accordingly, losses for periods prior to 2018 were recognized as selling, general and administrative expenses in the accompanying Consolidated Statements of Income. Royalty and Sales-based Milestone Payments: For arrangements that include royalties and sales-based milestone payments, including milestone payments earned for the first commercial sale of a product, the license is deemed to be the predominant item to which such payments relate and we recognize revenue at the later of when the related sales occur or when the performance obligation to which the royalty has been allocated has been satisfied. Cost of Goods Sold Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty we are required to pay GlaxoSmithKline (GSK) on all net sales of any product incorporating cabozantinib, the cost of manufacturing, indirect labor costs, write-downs related to expiring and excess inventory, shipping and other third-party logistics and distribution costs for our product. We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval were not capitalized as inventory but are expensed as research and development costs. Portions of the manufacturing costs for inventory sold during the years endedDecember 31, 2018 and 2017 were incurred prior to the regulatory approval of CABOMETYX and COMETRIQ and, therefore, were expensed as research and development costs when incurred, rather than capitalized as inventory. There were no amounts remaining related to previously expensed materials in our inventory balances as ofDecember 31, 2019 or 2018. Research and Development Expenses Research and development costs are expensed as incurred and primarily include: (1) direct and indirect internal costs for drug discovery; (2) upfront license and project initiation fees, license option fees, funded research and milestone payments incurred for our in-licensing arrangements with our collaboration partners; and (3) development costs associated with our clinical trial projects, which include fees paid to Contract Research Organizations (CRO) performing work on our behalf. Our clinical trial projects have been executed with support from third-party CROs, who specialize in conducting and managing global clinical trials. We accrue expenses for clinical trial activities performed by the CROs based upon the estimated amount of work completed on each trial. For clinical trial expenses, the significant factors used in estimating accruals include direct CRO costs, the number of patients enrolled, the number of active clinical sites involved, the duration for which the patients will be enrolled in the trial and patient out of pocket costs. We monitor patient enrollment levels and related activities to the extent possible through CRO meetings and correspondence, internal reviews and review of contractual terms. We base our estimates on the best information available at the time. However, additional information may become available to us which may allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity 84
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becomes more certain. As described further above, certain payments made to us from our collaboration partners may be presented as a reduction of research and development expense. Development, regulatory or commercial milestone payments to collaboration partners are recorded as research and development costs when we determine such payments become probable. Leases We determine if an arrangement includes a lease at the inception of the agreement. For each of our lease arrangements, we record a right-of-use asset representing our right to use an underlying asset for the lease term and a lease liability representing our obligation to make lease payments. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the net present value of lease payments over the lease term. In determining the weighted average discount rate used to calculate the net present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense for our operating leases is recognized on a straight-line basis over the lease term. We have elected not to apply the recognition requirements of Topic 842 for short-term leases. Advertising Advertising expenses were$17.9 million ,$14.8 million and$8.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses are recorded in sales, general and administrative expenses. Stock-Based Compensation We account for stock-based payments to employees, including grants of service-based restricted stock awards, performance-based restricted stock awards (PSUs), service-based stock options, performance-based stock options (PSOs), and purchases under our 2000 Employee Stock Purchase Plan (ESPP) in accordance with ASC 718, Compensation-Stock Compensation, which requires that stock-based payments (to the extent they are compensatory) be recognized in our Consolidated Statements of Income based on their fair values. We account for forfeitures of stock-based awards as they occur. The expense for stock-based compensation is based on the grant date fair value of the award. The grant date fair value of restricted stock units (RSUs) and PSUs are estimated as the value of the underlying shares of our common stock. The grant date fair values are estimated using a Monte Carlo simulation pricing model for PSOs with market vesting conditions and a Black-Scholes Merton option pricing model for other stock options. Both option pricing models require the input of subjective assumptions. These variables include, but are not limited to, the expected volatility of our stock price and the expected term of the awards. We consider both implied and historical volatilities when developing an estimate of expected volatility. We estimate the term using historical data. We recognize compensation expense over the requisite service period on an accelerated basis for awards with a market or performance condition and on a straight-line basis for service-based stock options and awards. Compensation expense relating to PSUs is recognized when we determine that it is probable that the performance goals will be achieved, which we assess on a quarterly basis. Income Taxes Our income tax provision or benefit is computed under the asset and liability method. Significant estimates are required in determining our income tax provision or benefit. Some of these estimates are based on interpretations of existing tax laws or regulations. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (temporary differences) at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets, including net operating losses and tax credits, will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on various factors including our historical earnings experience by taxing jurisdiction, and forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Significant judgment is required in making this assessment and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal. Prior to 2018, we recorded a valuation allowance that fully offset our deferred tax assets. In the fourth quarter of 2018, based on our evaluation of various factors, including our achievement of a cumulative three-year income position as ofDecember 28, 2018 and 85
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forecasts of future operating results, we released substantially all of our valuation allowance against our deferred tax assets and recorded a corresponding income tax benefit as described in "Note 9. Income Taxes", below. We continue to maintain a valuation allowance against ourCalifornia state deferred tax assets. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the tax authorities based on the technical merits of the position. An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period. Foreign Currency Translation and Remeasurement Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured using exchange rates in effect at the end of the period and related gains or losses are recorded in other income (expense), net in the accompanying Consolidated Statements of Income. Net foreign currency translational gains and losses were not material for the years endedDecember 31, 2019 , 2018 and 2017. Recent Accounting Pronouncements Not Yet Adopted InDecember 2019 , theFinancial Accounting Standards Board (FASB) issued ASU 2019-12, Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. ASU 2019-12 will be effective for us in the first quarter of 2021 with early adoption permitted. We are currently assessing the impact of ASU 2019-12 on our Consolidated Financial Statements. InNovember 2018 , the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the counterparty is a customer for a distinct good or service (i.e. a unit of account). For units of account that are in the scope of Topic 606, all of the guidance in Topic 606 should be applied, including the guidance on recognition, measurement, presentation and disclosure. ASU 2018-18 also adds a reference in ASC Topic 808, Collaborative Arrangements (Topic 808) to the unit of account guidance in Topic 606 and requires that it be applied only to assess whether transactions in a collaborative arrangement are in the scope of Topic 606. ASU 2018-18 will preclude entities from presenting amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer as revenue from contracts with customers. ASU 2018-18 is effective for us in the first quarter of 2020. We are currently assessing the impact of ASU 2018-18 on our Consolidated Financial Statements. InJanuary 2017 , the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for us in the first quarter of 2020. We do not expect the adoption of ASU 2017-04 to have a material impact on our Consolidated Financial Statements. InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (ASU 2016-13). ASU 2016-13 implements an impairment model, known as the current expected credit loss model that is based on expected losses rather than incurred losses. Under the new guidance, an entity will recognize as an allowance its estimate of expected credit losses. ASU 2016-13 is effective for us in the first quarter of 2020. We are currently assessing the impact of ASU 2016-13 on our Consolidated Financial Statements. 86
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NOTE 2. REVENUES
Revenues consisted of the following (in thousands):
Year Ended December 31,
2019 2018 2017
Product revenues:
Gross product revenues $ 957,621 $ 738,529 $ 402,569
Discounts and allowances (197,671 ) (119,250 ) (53,561 )
Net product revenues 759,950 619,279 349,008
Collaboration revenues:
License revenues 161,299 192,188 96,637Research and development service revenues 49,965 39,501 8,737 Other collaboration revenues
(3,439 ) 2,858 (1,905 )
Total collaboration revenues 207,825 234,547 103,469
Total revenues $ 967,775 $ 853,826 $ 452,477
Net product revenues, license revenues and research and development services
revenues were recorded in accordance with Topic 606 during the years ended
December 31, 2019 and 2018 and Topic 605 during the year ended December 31,
2017 . During the periods presented in accordance with Topic 606, net product
revenues and license revenues related to goods and intellectual property
licenses transferred at a point in time and research and development services
revenues related to services performed over time. License revenues includes the
recognition of the portion of upfront payment milestones allocated to the
transfer of intellectual property licenses for which it had become probable in
the current period that the milestone would be achieved and a significant
reversal of revenues would not occur, as well as royalty revenues. Research and
development services revenues includes the recognition of deferred revenue for
the portion of upfront and milestone payments that have been allocated to
research and development services performance obligations, as well as
development cost reimbursements earned under our collaboration agreements. Other
collaboration revenues were recorded in accordance with Topic 808 for all
periods presented and includes product supply revenues, net of product supply
costs and the royalties we paid to GSK on sales by Ipsen Pharma SAS (Ipsen) of
products containing cabozantinib. Profits on the U.S. commercialization of
COTELLIC for the years ended December 31, 2019 and 2018 were also included other
collaboration revenues, and losses on the U.S. commercialization of COTELLIC for
the year ended December 31, 2017 were included in selling, general and
administrative expenses
Net product revenues disaggregated by product were as follows (in thousands):
Year Ended December 31,
2019 2018 2017
CABOMETYX $ 733,421 $ 599,946 $ 324,000
COMETRIQ 26,529 19,333 25,008
Net product revenues
The percentage of total revenues by customer who individually accounted for 10% or more of our total revenues were as follows:
Year Ended December 31,
2019 2018 2017
Ipsen 16 % 21 % 15 %
Affiliates of CVS Health Corporation 15 % 13 % 16 %
Affiliates of McKesson Corporation 12 % 12 % 11 %
Affiliates of AmerisourceBergen Corporation 10 % 8 % 8 %
Accredo Health, Incorporated 9 % 9 % 11 %
Diplomat Specialty Pharmacy 5 % 9 % 18 %
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Revenues by geographic region were as follows (in thousands):
Year Ended December 31,
2019 2018 2017
U.S. $ 770,244 $ 632,927 $ 367,906
Europe 152,771 182,879 69,792
Japan 44,760 38,020 14,779
Total revenues $ 967,775 $ 853,826 $ 452,477
Net product revenues are attributed to geographic regions based on the ship-to
location. Collaboration revenues are attributed to geographic regions based on
the location of our collaboration partners' headquarters.
Product Sales Discounts and Allowances
The activities and ending reserve balances for each significant category of
discounts and allowances (which constitute variable consideration) were as
follows (in thousands):
Chargebacks and Other Customer
Discounts for Credits/Fees and
Prompt Payment Co-pay Assistance Rebates Total
Balance at December 31, 2017 $ 1,928 $ 1,795 $ 5,770 $ 9,493
Provision related to sales made in:
Current period 75,543 13,017 31,040 119,600
Prior periods (403 ) 206 (153 ) (350 )
Payments and customer credits issued (74,746 ) (11,980 ) (24,741 ) (111,467 )
Balance at December 31, 2018 2,322 3,038 11,916 17,276
Provision related to sales made in:
Current period 129,936 15,605 48,250 193,791
Prior periods 3,989 (111 ) 2 3,880
Payments and customer credits issued (128,733 ) (15,035 ) (44,946 ) (188,714 )
Balance at December 31, 2019 $ 7,514 $
3,497
The reserves for chargebacks and discounts for prompt payment are recorded as a reduction of trade receivables, net and the remaining reserves are recorded as rebates and fees due to customers in the accompanying Consolidated Balance Sheets. Contract Assets and Liabilities We receive payments from our collaboration partners based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We may also recognize revenue in advance of the contractual billing schedule and such amounts are recorded as a contract asset when recognized. Contract assets were$1.1 million and$0 as ofDecember 31, 2019 and 2018, respectively, and are presented in prepaid expenses and other current assets in the accompanying Consolidated Balance Statements. We may be required to defer recognition of revenue for upfront and milestone payments until we perform our obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt or when due. Contract liabilities were$6.6 million and$15.9 million as ofDecember 31, 2019 and 2018, respectively, and are presented in long-term portion of deferred revenue in the accompanying Consolidated Balance Sheets. For those contracts that have multiple performance obligations, contract assets and liabilities are reported on a net basis at the contract level. Significant changes in contract assets during the year endedDecember 31, 2019 , as compared to 2018, were a result of the determination that it is probable that we will earn a$10.0 million milestone from Takeda Pharmaceutical Company Limited (Takeda ) for the submission of a regulatory application in 2020 for cabozantinib as a treatment for patients with second-line HCC inJapan . This contract asset was recorded in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets, offset by the effect of reporting theTakeda contract asset and liability on a net basis. 88
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During the years endedDecember 31, 2019 and 2018, we recognized$6.5 million and$8.7 million , respectively, in revenues that were included in the beginning deferred revenue balance for those years. During the years endedDecember 31, 2019 and 2018, we recognized$161.2 million and$198.1 million , respectively, in revenues for performance obligations satisfied in previous periods. Such revenues primarily related to milestone and royalty payments allocated to our license performance obligations of our collaborations with Ipsen,Takeda and Daiichi Sankyo. As ofDecember 31, 2019 ,$63.1 million of the transaction price allocated to our performance obligations had not been satisfied. See "Note 3. Collaboration Agreements - Cabozantinib Commercial Collaborations - Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations" for additional information about our performance obligations. NOTE 3. COLLABORATION AGREEMENTS We have established multiple collaborations with leading pharmaceutical companies for the commercialization and further development of cabozantinib, as well as with smaller, discovery-focused biotechnology companies to expand our product pipeline. Additionally, in line with our business strategy prior to the commercialization of our first product, COMETRIQ, we entered into other collaborations with leading pharmaceutical companies includingGenentech and Daiichi Sankyo for other compounds and programs in our portfolio. Under these collaborations, we are generally entitled to receive milestone and royalty payments, and for certain collaborations, payments for product supply services, development cost reimbursements, and/or profit sharing payments. See "Note 2. Revenues" for information on the amount of collaboration revenues recognized during the years endedDecember 31, 2019 , 2018 and 2017. Cabozantinib Commercial Collaborations Ipsen Collaboration Description of the Collaboration InFebruary 2016 , we entered into a collaboration and license agreement with Ipsen for the commercialization and further development of cabozantinib. Pursuant to the terms of the collaboration agreement, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of theU.S. ,Canada andJapan . The collaboration agreement was subsequently amended on three occasions, including inDecember 2016 to include commercialization rights inCanada . We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications. The parties' efforts are governed through a joint steering committee and appropriate subcommittees established to guide and oversee the collaboration's operation and strategic direction; provided, however, that we retain final decision-making authority with respect to cabozantinib's ongoing development. Unless terminated earlier, the collaboration agreement has a term that continues, on a product-by-product and country-by-country basis, until the latter of 1) the expiration of patent claims related to cabozantinib, 2) the expiration of regulatory exclusivity covering cabozantinib or 3) ten years after the first commercial sale of cabozantinib, other than COMETRIQ. A related supply agreement will continue in effect until expiration or termination of the collaboration agreement. The collaboration agreement may be terminated for cause by either party based on uncured material breach of either the collaboration agreement or the supply agreement by the other party, bankruptcy of the other party or for safety reasons. We may terminate the collaboration agreement if Ipsen challenges or opposes any patent covered by the collaboration agreement. Ipsen may terminate the collaboration agreement if theU.S. Food and Drug Administration (FDA) orEuropean Medicines Agency orders or requires substantially all cabozantinib clinical trials to be terminated. Ipsen also has the right to terminate the collaboration agreement on a region-by-region basis after the first commercial sale of cabozantinib in advanced RCC in the given region. Upon termination by either party, all licenses granted by us to Ipsen will automatically terminate, and, except in the event of a termination by Ipsen for our material breach, the licenses granted by Ipsen to us shall survive such termination and shall automatically become worldwide, or, if Ipsen were to terminate only for a particular region, then for the terminated region. Following termination by us for Ipsen's material breach, or termination by Ipsen without cause or because we undergo a change of control by a party engaged in a competing program, Ipsen is prohibited from competing with us for a period of time. 89
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Consideration under the Collaboration In consideration for the exclusive license and other rights contained in the collaboration agreement, including commercialization rights inCanada , we received aggregate upfront payments of$210.0 million from Ipsen in 2016. As ofDecember 31, 2019 , we have achieved aggregate milestones of$330.0 million related to regulatory, development and sales-based progress by Ipsen since the inception of the collaboration agreement, including$55.0 million and$140.0 million in milestones achieved during the years endedDecember 31, 2019 and 2018, respectively. As ofDecember 31, 2019 , we are eligible to receive additional regulatory and development milestone payments from Ipsen totaling an aggregate of$79.0 million , as well as sales-based milestones, including milestone payments earned for the first commercial sale of a product, of up to$470.4 million . We also receive royalties on the net sales of cabozantinib by Ipsen outside of theU.S. andJapan . During the year endedDecember 31, 2019 and going forward, we are entitled to receive a tiered royalty of 22% to 26% on annual net sales, with separate tiers forCanada ; these royalty tiers reset each calendar year. InCanada , we are entitled to receive a tiered royalty of 22% on the firstCAD$30.0 million of annual net sales and a tiered royalty thereafter to 26% on annual net sales; these royalty tiers forCanada also reset each calendar year. We are required to pay a 3% royalty to GSK on all net sales of any product incorporating cabozantinib, including net sales by Ipsen. We are responsible for funding cabozantinib-related development costs for those trials in existence at the time we entered into the collaboration agreement with Ipsen; global development costs for additional trials are shared between the parties, with Ipsen reimbursing us for 35% of such costs, provided Ipsen chooses to opt into such trials. Ipsen has opted into and is co-funding: CheckMate 9ER; CheckMate 040 (though Ipsen has opted not to co-fund the triplet arm of the study evaluating cabozantinib with nivolumab and ipilimumab); the dose escalation phase and first 20 expansion cohorts of COSMIC-021; and COSMIC-312. We remain responsible for manufacturing and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. In connection with the collaboration agreement, we entered into a supply agreement with Ipsen to supply finished, labeled drug product to Ipsen for distribution in the territories outside of theU.S. andJapan for the term of the collaboration agreement. The product is supplied at our cost, as defined in the agreement. Revenues from the Collaboration Collaboration revenues under the collaboration agreement with Ipsen were$152.8 million ,$182.9 million and$69.8 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 ,$45.0 million of the transaction price allocated to our research and development services performance obligation had not been satisfied. See "-Performance Obligations and Transaction Prices for our Ipsen and Takeda Collaborations", below, for additional information related to the revenue recognition for this collaboration. Takeda Collaboration Description of the Collaboration InJanuary 2017 , we entered into a collaboration and license agreement withTakeda , which was subsequently amended effectiveMarch 2018 andMay 2019 , to, among other things, modify the amount of reimbursements we receive for costs associated with our required pharmacovigilance activities and milestones we are eligible to receive. Pursuant to this collaboration agreement,Takeda has exclusive commercialization rights for current and potential future cabozantinib indications inJapan , and the parties have agreed to collaborate on the clinical development of cabozantinib inJapan . The operation and strategic direction of the parties' collaboration is governed through a joint executive committee and appropriate subcommittees. Unless earlier terminated, the collaboration agreement has a term that continues, on a product-by-product basis, until the earlier of 1) two years after first generic entry with respect to such product inJapan or 2) the later of (A) the expiration of patent claims related to cabozantinib and (B) the expiration of regulatory exclusivity covering cabozantinib inJapan . The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. For clarity,Takeda's failure to achieve specified levels of commercial performance, based upon sales volume and/or promotional effort, during the first six years of the collaboration will constitute a material breach of the collaboration agreement. We may terminate the agreement ifTakeda challenges or opposes any patent covered by the collaboration agreement. At any time prior toAugust 1, 2023 , the parties may mutually 90
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agree to terminate the collaboration agreement ifJapan's Pharmaceuticals and Medical Devices Agency is unlikely to grant any approval of the marketing authorization application in any cancer indication inJapan . After the commercial launch of cabozantinib inJapan ,Takeda may terminate the collaboration agreement upon twelve months' prior written notice following the third anniversary of the first commercial sale of cabozantinib inJapan . Upon termination by either party, all licenses granted by us toTakeda will automatically terminate, and the licenses granted byTakeda to us shall survive such termination and shall automatically become worldwide. Consideration under the Collaboration In consideration for the exclusive license and other rights contained in the collaboration agreement, we received an upfront payment of$50.0 million fromTakeda in 2017. As ofDecember 31, 2019 , we have also achieved regulatory and development milestones in the aggregate of$26.0 million since the inception of the collaboration agreement, including$16.0 million and$10.0 million in milestones achieved during the years endedDecember 31, 2019 and 2018, respectively. As ofDecember 31, 2019 , we had also determined that it was probable that we will earn a$10.0 million milestone in the first quarter of 2020 for the anticipatedJanuary 2020 submission of a regulatory application to the Japanese MHLW for Manufacturing and Marketing Approval of cabozantinib as a treatment for patients inJapan with unresectable HCC who progressed after prior systemic therapy. Under the collaboration agreement, as amended, as ofDecember 31, 2019 , we are eligible to receive regulatory and development milestone payments fromTakeda of up to$20.0 million related to first-line RCC and second-line HCC, including the$10.0 million milestone we expect to earn for the submission of a regulatory application in the first quarter of 2020 described above. We are also eligible to receive additional regulatory and development milestone payments, without limit, for additional potential future indications. We are further eligible to receive sales-based milestones, including milestone payments earned for the first commercial sale of a product, of up to$155.0 million . We also receive royalties on the net sales of cabozantinib inJapan . We are entitled to receive a tiered royalty of 15% to 24% on the initial$300.0 million of net sales, and following this initial$300.0 million of net sales, we are then entitled to receive a tiered royalty of 20% to 30% on annual net sales thereafter; these 20% to 30% royalty tiers reset each calendar year. We are required to pay a 3% royalty to GSK on all net sales of any product incorporating cabozantinib, including net sales byTakeda .Takeda is responsible for 20% of the costs associated with the cabozantinib development plan's current and future trials, providedTakeda opts into such trials, and 100% of costs associated with the cabozantinib development activities that are exclusively for the benefit ofJapan .Takeda has opted into and is co-funding CheckMate 9ER. Pursuant to the terms of the collaboration agreement, we are responsible for the manufacturing and supply of cabozantinib for all development and commercialization activities under the collaboration agreement. In connection with the collaboration agreement, we entered into a clinical supply agreement covering the supply of cabozantinib toTakeda for the term of the collaboration agreement, as well as a quality agreement that provides respective quality responsibilities for the aforementioned supply. Furthermore, at the time we entered into the collaboration agreement, the parties also entered into a safety data exchange agreement, which defines each partner's responsibility for safety reporting. This agreement also requires us to maintain the global safety database for cabozantinib. To meet our obligations to regulatory authorities for the reporting of safety data fromJapan from sources other than our sponsored global clinical development trials, we rely on data collected and reported to us byTakeda . Revenues from the Collaboration Collaboration revenues under the collaboration agreement withTakeda were$24.6 million ,$18.0 million and$14.8 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 ,$18.1 million of the transaction price allocated to our research and development services performance obligation had not been satisfied. Performance Obligations and Transaction Prices for our Ipsen andTakeda Collaborations We identified two performance obligations for both the Ipsen andTakeda collaboration agreements: (1) the transfer of an exclusive license for the commercialization and further development of cabozantinib; and (2) research and development services, which includes certain committed studies for the development of cabozantinib, pharmacovigilance services and participation on various joint committees (as defined in the specific collaboration agreements). 91
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We have allocated the transaction price for each of these collaborations to the identified performance obligations based on our best estimate of their relative standalone selling price. For the licenses, the estimate of the relative standalone selling price was determined using a discounted cash flow valuation utilizing forecasted revenues and costs. For research and development services the estimate of the relative standalone selling price was determined using an adjusted market assessment approach that relies on internal and external costs and market factors. The portion of the transaction price allocated to our license performance obligation is recorded immediately as our license represents functional intellectual property that was transferred at a point in time. The portion of the transaction price allocated to our research and development services performance obligation is being recognized as revenue using the inputs method based on our internal development projected cost estimates through the current estimated patent expiration of cabozantinib in theEuropean Union for the Ipsen Collaboration andJapan for the Takeda Collaboration, both of which are early 2030. Based on our evaluation of the collaboration agreements as of the date adoption of Topic 606, we determined that for both agreements, the up-front, nonrefundable payments, the milestones and royalties achieved as ofDecember 31, 2017 , and our estimate for the reimbursements of our research and development services performance obligation over the term of each agreement constituted the amount of the consideration to be included in the transaction price as ofDecember 31, 2017 . In addition, the transaction price for the Ipsen collaboration agreement included a$10.0 million milestone we expected to achieve during the three months endedMarch 31, 2018 . Other than the$10.0 million milestone, variable consideration for both agreements related to regulatory and development milestones not previously recognized was constrained due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. Any variable consideration related to royalties and sales-based milestones will be recognized when the related sales occur as these amounts have been determined to relate to the relevant transferred license and therefore are recognized as the related sales occur. We re-evaluate the transaction price for the collaboration agreements in each reporting period as uncertain events are resolved or other changes in circumstances occur and we allocate those changes in the transaction price between our performance obligations. During the years endedDecember 31, 2019 and 2018, the transaction price increased as a result of the achievement of various milestones. We further updated the transaction price based upon the actual research and development services performed during the period and changes in our estimated reimbursements for our future research and development services. The portion of the increase in transaction price that was allocated to the previously satisfied performance obligations for the transfer of an intellectual property license was recognized during the period and the portion allocated to research and development services will be recognized in future periods as those services are delivered through early 2030. As ofDecember 31, 2019 , variable consideration related to the remaining unearned regulatory and development milestones for both agreements remained constrained due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur. Cabozantinib Development Collaborations Bristol-Myers Squibb Company (BMS) InFebruary 2017 , we entered into a clinical trial collaboration agreement with BMS for the purpose of exploring the therapeutic potential of cabozantinib in combination with BMS's immune checkpoint inhibitors (ICIs), nivolumab and/or ipilimumab, to treat a variety of types of cancer. As part of the collaboration, we are evaluating these combinations as treatment options for RCC in the CheckMate 9ER and COSMIC-313 trials and for HCC in the CheckMate 040 trial. Under the terms of the collaboration agreement with BMS, we may also evaluate these combinations in other phase 3 pivotal trials in various other tumor types. Under the terms of the collaboration agreement with BMS, as subsequently amended effectiveMarch 2019 ,May 2019 andNovember 2019 , each party granted to the other a non-exclusive, worldwide (within the collaboration territory as defined in the collaboration agreement and its supplemental agreements), non-transferable, royalty-free license to use the other party's compounds in the conduct of each clinical trial. The parties' efforts are governed through a joint development committee established to guide and oversee the collaboration's operation. Each trial will be conducted under a combination Investigational New Drug application, unless otherwise required by a regulatory authority. Each party will be responsible for supplying finished drug product for the applicable clinical trial, and we are sponsoring the COSMIC-313 trial and BMS is sponsoring the CheckMate 9ER and CheckMate 040 trials. The responsibility for the payment of costs for any further trials will be determined on a trial-by-trial basis. Unless earlier terminated, the collaboration agreement will remain in effect until the completion of all clinical trials under the collaboration, all related trial data has been delivered to both parties and the 92
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completion of any then agreed upon analysis. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. Upon termination by either party, the licenses granted to each party to conduct a combined therapy trial will terminate. F.Hoffmann-La Roche Ltd. (Roche) Collaboration InFebruary 2017 , we entered into a master clinical supply agreement with Roche for the purpose of evaluating cabozantinib and Roche's ICI, atezolizumab, in locally advanced or metastatic solid tumors. Pursuant to the terms of this agreement with Roche, inJune 2017 , we initiated COSMIC-021, a phase 1b dose escalation study that is evaluating the safety and tolerability of cabozantinib in combination with Roche's atezolizumab in patients with locally advanced or metastatic solid tumors, and inDecember 2018 , we initiated COSMIC-312, a multicenter, randomized, controlled phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab versus sorafenib in previously untreated advanced HCC. We are the sponsor of both trials, and Roche is providing atezolizumab free of charge. InDecember 2019 , we entered into a joint clinical research agreement with Roche for the purpose of further evaluating the combination of cabozantinib with atezolizumab in patients with locally advanced or metastatic solid tumors, including in three planned phase 3 pivotal trials in advanced non-small cell lung cancer, metastatic castration-resistant prostate cancer and RCC. If a party to the joint clinical research agreement proposes any additional combined therapy trials beyond the initial three planned phase 3 pivotal trials, the joint clinical research agreement provides that such proposing party must notify the other party and that if agreed to, any such additional combined therapy trial will become part of the collaboration, or if not agreed to, the proposing party may conduct such additional combined therapy trial independently, subject to specified restrictions set forth in the joint clinical research agreement. Pursuant to the terms of the joint clinical research agreement, each party granted to the other a non-exclusive, worldwide (excluding, in our case, territory already the subject of a license by us toTakeda ), non-transferable, royalty-free license, with a right to sublicense (subject to limitations), to use the other party's intellectual property and compounds solely as necessary for the party to perform its obligations under the joint clinical research agreement. The parties' efforts will be governed through a joint steering committee established to guide and oversee the collaboration and the conduct of the combined therapy trials. Each party will be responsible for providing clinical supply for all combined therapy trials, and the cost of the supply will be borne by such party. The clinical trial expenses for each combined therapy trial agreed to be conducted jointly under the joint clinical research agreement will be shared equally between the parties, and the clinical trial expenses for each additional combined therapy trial not agreed to be conducted jointly under the joint clinical research agreement will be borne by the proposing party, except that the cost of clinical supply for all combined therapy trials will be borne by the party that owns the applicable product. We determined the contract is within the scope of Topic 808 as it involves joint operating activities where both parties have active participation in the arrangement and are exposed to significant risks and rewards. Payments between us and Roche under this arrangement are not subject to other accounting literature. Payments due to Roche for our share of clinical trial costs incurred by Roche will be recorded as research and development expense and payments due from Roche for their share of clinical trial costs incurred by us will be recorded as a reduction of research and development expense. Unless earlier terminated, the joint clinical research agreement provides that it will remain in effect until the completion of all combined therapy trials under the collaboration, the delivery of all related trial data to both parties, and the completion of any then agreed-upon additional analyses. The joint clinical research agreement may be terminated for cause by either party based on any uncured material breach by the other party, bankruptcy of the other party or for safety reasons. Upon termination by either party, the licenses granted to each party will terminate upon completion of any ongoing activities under the joint clinical research agreement. GSK InOctober 2002 , we established a product development and commercialization collaboration agreement with GSK. Under the terms of the collaboration agreement, GSK had the right to choose cabozantinib for further development and commercialization, but notified us inOctober 2008 that it had waived its right to select the compound for such activities. Although the collaboration agreement was terminated during 2014, we continue to be required to pay a 3% royalty to GSK on the net sales of any product incorporating cabozantinib by us and our collaboration partners. Royalties earned by GSK in connection with the sales of cabozantinib are included in cost of goods sold for sales by us and as a reduction of other collaboration revenues for sales by our collaboration partners. Such royalties were$31.3 million ,$24.0 million and$12.4 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively. 93
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In-Licensing CollaborationsAurigene Discovery Technologies Limited (Aurigene ) Collaboration InJuly 2019 , we entered into an exclusive collaboration, option and license agreement withAurigene to in-license as many as six programs to discover and develop small molecules as therapies for cancer. Under the terms of the agreement, we made aggregate upfront payments of$17.5 million for exclusive options to license up to six programs, including three pre-existing programs. We are also responsible for up to$32.6 million in research funding for the discovery and preclinical development work on these programs. During the year endedDecember 31, 2019 , we incurred$4.0 million in expense for the discovery and preclinical development funding commitment. For each option we decide to exercise, we will be required to pay an exercise fee of either$10.0 million or$12.0 million , depending on the program, and would then assume responsibilities for all subsequent clinical development, manufacturing and commercialization for that program.Aurigene would then become eligible for up to$148.8 million per program in potential development and regulatory milestone payments,$280.0 million per program in potential commercial milestone payments, as well as royalties on potential sales. Under the terms of the agreement,Aurigene retains limited development and commercial rights forIndia andRussia .Iconic Therapeutics, Inc. (Iconic) Collaboration InMay 2019 , we entered into an exclusive option and license agreement with Iconic to advance an innovative next-generation antibody-drug conjugate (ADC) program for cancer, leveraging Iconic's expertise in targeting tissue factor in solid tumors. Under the terms of the agreement, we gained an exclusive option to license ICON-2, Iconic's lead oncology ADC program, in exchange for an upfront payment to Iconic of$7.5 million and a commitment for preclinical development funding. During the year endedDecember 31, 2019 , we incurred$9.8 million in expense for the preclinical development funding commitment. Both the upfront payment and the accrual for the preclinical development funding commitment were included in research and development expenses in the accompanying Consolidated Statements of Income. If we exercise the option, we will be required to make an option exercise fee payment of$20.0 million to Iconic; we would then assume responsibilities for all subsequent clinical development, manufacturing and commercialization activities, and Iconic would become eligible for up to$190.6 million in potential development, regulatory and first-sale milestone payments,$262.5 million in potential commercial milestone payments, as well as royalties on potential sales.Invenra, Inc. (Invenra) Collaboration InMay 2018 , we entered into a collaboration and license agreement with Invenra to discover and develop multispecific antibodies for the treatment of cancer. Invenra is responsible for antibody lead discovery and generation while we will lead IND-enabling studies, manufacturing, clinical development in single-agent and combination therapy regimens, and future regulatory and commercialization activities. The collaboration agreement provides that we will receive an exclusive, worldwide license to one preclinical, multispecific antibody asset, and that we will pursue up to six additional discovery projects during the term of the collaboration, which in total are directed to three discovery programs. InOctober 2019 , we expanded our collaboration to include the development of novel binders against six additional targets, which we can use to generate multispecific antibodies based on Invenra's B-BodyTM technology platform, or with other platforms and formats at our option. As ofDecember 31, 2019 , we have initiated three additional discovery projects and two binder projects, and in total we incurred an aggregate of$7.0 million and$4.0 million in expense during the years endedDecember 31, 2019 and 2018, respectively, in consideration of the upfront licensing and project initiation fees. Invenra is eligible to receive up to$131.5 million in project initiation fees and milestone payments based on the achievement of specific development and regulatory milestones for a B-Body product in the first indication, or in lieu of such payments, up to$43.4 million in project initiation fees and milestone payments based on the achievement of specific development and regulatory milestones for a non- B-Body product. Upon successful commercialization of a product, Invenra is eligible to receive sales-based milestone payments up to$325.0 million as well as single-digit tiered royalties on net sales of the approved product. We have the right to initiate three additional discovery projects for development subject to an upfront payment of$2.0 million for each B-Body project and four additional binder projects subject to an upfront payment of$1.5 million for each project, as well as additional milestone payments and royalties for any products that arise from these efforts.StemSynergy Therapeutics, Inc. (StemSynergy) Collaboration InJanuary 2018 , we entered into an exclusive collaboration and license agreement with StemSynergy for the discovery and development of novel oncology compounds targeting Casein Kinase 1 alpha (CK1?), a component of the Wnt signaling pathway implicated in key oncogenic processes. Under the terms of the agreement, we will partner with 94
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StemSynergy to conduct preclinical and clinical studies with compounds targeting CK1?. We paid StemSynergy an upfront payment of$3.0 million in initial research and development funding during the year endedDecember 31, 2018 and provided$1.9 million and$1.2 million in additional research and development funding during the years endedDecember 31, 2019 and 2018, respectively. StemSynergy is eligible for up to$0.5 million in additional research and development funding on an as needed basis. StemSynergy will also be eligible for up to$56.5 million in milestones for the first product to emerge from the collaboration, including preclinical and clinical development and regulatory milestone payments, sales-based milestones, as well as single-digit royalties on worldwide sales. We will be solely responsible for the commercialization of products that arise from the collaboration. Other CollaborationsGenentech Profits and losses onU.S. commercialization and royalty revenues on ex-U.S. sales under the collaboration agreement withGenentech were as follows (in thousands): Year Ended December 31, 2019 2018 2017
Profits and losses on
$ 5,679 $ 5,564 $
6,398
Profits on theU.S. commercialization of COTELLIC for the years endedDecember 31, 2019 and 2018 were included collaboration revenues and losses on theU.S. commercialization of COTELLIC for the year endedDecember 31, 2017 were included in selling, general and administrative expenses. The royalty revenues on ex-U.S. sales were included in Collaboration revenues for all periods presented. See "-Performance Obligations and Transaction Prices for our Other Collaborations", below, for additional information related to revenue recognition for this collaboration. Cobimetinib Profit Sharing and Royalty Revenues InDecember 2006 , we out-licensed the development and commercialization of cobimetinib toGenentech pursuant to a worldwide collaboration agreement. InNovember 2015 , the FDA approved cobimetinib, under the brand name COTELLIC, in combination withGenentech's Zelboraf (vemurafenib) as a treatment for patients with BRAF V600E or V600K mutation-positive advanced melanoma. Under the terms of our collaboration agreement, as amended inJuly 2017 , we share in the profits and losses received or incurred in connection with COTELLIC's commercialization in theU.S. This profit and loss share has multiple tiers: we receive 50% of profits and losses from the first$200.0 million ofU.S. actual sales, decreasing to 30% of profits and losses fromU.S. actual sales in excess of$400.0 million . These tiers reset each calendar year. The revenue for each sale of COTELLIC applied to the profit and loss statement for the collaboration agreement (Genentech Collaboration P&L) is calculated using the average of the quarterly net selling prices of COTELLIC and any additional brandedGenentech product(s) prescribed with COTELLIC in such sale.U.S. commercialization costs for COTELLIC are then applied to the Genentech Collaboration P&L, subject to reduction based on the number ofGenentech products in any given combination including COTELLIC. In addition to our profit share in theU.S. , under the terms of the collaboration agreement, we are entitled to low double-digit royalties on net sales of COTELLIC outside theU.S. We are not eligible for any additional milestone payments under the collaboration agreement withGenentech . Unless earlier terminated, the collaboration agreement has a term that continues until the expiration of the last payment obligation with respect to the licensed products under the collaboration.Genentech has the right to terminate the collaboration agreement without cause at any time. IfGenentech terminates the collaboration agreement without cause, all licenses that were granted toGenentech under the agreement terminate and revert to us. Additionally, ifGenentech terminates the collaboration agreement without cause, or we terminate the collaboration agreement for cause, we would receive, subject to certain conditions, licenses fromGenentech to research, develop and commercialize reverted product candidates. The collaboration agreement may be terminated for cause by either party based on uncured material breach by the other party. Daiichi Sankyo InMarch 2006 , we entered into a collaboration agreement with Daiichi Sankyo pursuant to which we granted to Daiichi Sankyo an exclusive, worldwide license to certain intellectual property primarily relating to compounds that 95
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modulate MR, including esaxerenone, an oral, non-steroidal, selective MR antagonist. Daiichi Sankyo was responsible for all further preclinical and clinical development, regulatory, manufacturing and commercialization activities for the compounds. InJanuary 2019 , theJapanese Ministry of Health, Labour and Welfare approved esaxerenone, under the brand name MINNEBRO, as a treatment for patients with hypertension and inMay 2019 , Daiichi Sankyo had its first commercial sale of MINNEBRO. We have achieved milestones of$20.0 million each during the years endedDecember 31, 2019 and 2018 for the approval and first commercial sale of MINNEBRO. We are eligible to receive additional sales-based milestone payments of up to$90.0 million under this collaboration agreement. In addition, we are entitled to receive low double-digit royalties on sales of MINNEBRO. Such revenues were$0.1 million during the year endedDecember 31, 2019 . Daiichi Sankyo may terminate the agreement upon 90 days' written notice, in which case Daiichi Sankyo's payment obligations would cease, its license relating to compounds that modulate MR would terminate and revert to us and we would receive, subject to certain terms and conditions, licenses from Daiichi Sankyo to research, develop and commercialize compounds that were discovered under the collaboration. In addition, pursuant to a license agreement we entered into with Ligand Pharmaceuticals, Inc. (Ligand), we are required to pay a royalty of 0.5% to Ligand on net sales of MINNEBRO. Collaboration revenues under the collaboration agreement with Daiichi Sankyo were$20.1 million and$20.0 million and zero during the years endedDecember 31, 2019 , 2018 and 2017, respectively. See "-Performance Obligations and Transaction Prices for our Other Collaborations", below, for additional information related to revenue recognition for this collaboration. Performance Obligations and Transaction Prices for our Other Collaborations We have evaluated our collaborations agreements withGenentech and Daiichi Sankyo and have determined that those collaboration agreements each have one performance obligation: the delivery of intellectual property licenses to the collaboration partner. We have further determined that the licenses we provided represent functional intellectual property that was transferred at a point in time, when the agreements were executed, prior to the adoption of Topic 606. Potential variable consideration for these collaborations related to regulatory and development milestones was constrained due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones and therefore, any additional consideration earned and received from these collaborations will be fully recognized when the milestone is no longer constrained. Any variable consideration related to royalties and other sales-based milestones will be recognized when the related sales occur as these amounts have been determined to relate predominantly to the licenses transferred, and therefore are recognized at the later of when the performance obligation is satisfied or the related sales occur. NOTE 4. CASH AND INVESTMENTS Cash, Cash Equivalents and Restricted Cash Equivalents A reconciliation of cash, cash equivalents, and restricted cash equivalents reported within our Consolidated Balance Sheets to the amount reported within the accompanying Consolidated Statements of Cash Flows was as follows (in thousands): December 31, 2019 2018 2017 Cash and cash equivalents$ 266,501 $ 314,775 $ 183,164 Short-term restricted cash equivalents - -
504
Restricted cash equivalents included in long-term investments 1,636 1,100
4,646
Cash, cash equivalents, and restricted cash equivalents as reported within the accompanying Consolidated Statements of Cash Flows$ 268,137 $ 315,875
Restricted cash equivalents consisted of certificates of deposit with original maturities of 90 days or less used to collateralize letters of credit and, during prior periods, a purchasing card program. The classification of restricted cash
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equivalents as short-term or long-term is dependent upon the longer of the
remaining term to maturity of the investment or the remaining term of the
related restriction.
Cash and Investments
Cash and investments consisted of the following (in thousands):
December 31, 2019
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
Investment securities
available-for-sale:
Commercial paper $ 389,573 $ - $ - $ 389,573
Corporate bonds 752,295 3,934 (3 ) 756,226
U.S. Treasury and government sponsored
enterprises 166,483 187 (5 ) 166,665
Total investment securities
available-for-sale 1,308,351 4,121 (8 ) 1,312,464
Cash 40,964 - - 40,964
Money market funds 2,467 - - 2,467
Certificates of deposit 32,728 5 - 32,733
Total cash and investments $ 1,384,510 $ 4,126 $ (8 ) $ 1,388,628
December 31, 2018
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
Investment securities
available-for-sale:
Commercial paper $ 381,134 $ - $ (1 ) $ 381,133
Corporate bonds 344,741 180 (857 ) 344,064
U.S. Treasury and government sponsored
enterprises 55,224 2 (25 ) 55,201
Total investment securities
available-for-sale 781,099 182 (883 ) 780,398
Cash 6,883 - - 6,883
Money market funds 47,744 - - 47,744
Certificates of deposit 16,596 - - 16,596
Total cash and investments $ 852,322 $ 182 $
(883 )
Gains and losses on the sales of investment securities available-for-sale were insignificant during the years endedDecember 31, 2019 , 2018 and 2017. We manage credit risk associated with our investment portfolio through our investment policy, which limits purchases to high-quality issuers and limits the amount of our portfolio that can be invested in a single issuer. The fair value and gross unrealized losses on investment securities available-for-sale in an unrealized loss position were as follows (in thousands): December
31, 2019
In an Unrealized Loss Position Less In an Unrealized Loss Position 12
than 12 Months Months or Greater Total
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
Corporate bonds $ 14,529 $ (3 ) $ - $ - $ 14,529 $ (3 )
U.S. Treasury and
government
sponsored
enterprises 2,848 (5 ) - - 2,848 (5 )
Total $ 17,377 $ (8 ) $ - $ - $ 17,377 $ (8 )
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December 31, 2018
In an Unrealized Loss Position In an Unrealized Loss Position
Less than 12 Months 12 Months or Greater Total
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value LossesCorporate bonds$ 236,162 $ (606 ) $ 39,627 $ (251 ) $ 275,789 $ (857 ) U.S. Treasury and government sponsored enterprises 28,105 (16 ) 9,182 (9 ) 37,287 (25 ) Commercial paper 7,091 (1 ) - - 7,091 (1 ) Total$ 271,358 $ (623 ) $ 48,809 $ (260 ) $ 320,167 $ (883 ) There were 9 and 199 investment securities in an unrealized loss position as ofDecember 31, 2019 and 2018, respectively. During the years endedDecember 31, 2019 , 2018 and 2017 we did not record any other-than-temporary impairment charges on our available-for-sale securities. Based upon our quarterly impairment review, we determined that the unrealized losses were not attributed to credit risk, but were primarily associated with changes in interest rates. Based on the scheduled maturities of our investments, we determined that it was more likely than not that we will hold these investments for a period of time sufficient for a recovery of our cost basis. The fair value of investment securities available-for-sale by contractual maturity were as follows (in thousands): December 31, 2019 2018 Maturing in one year or less$ 789,913 $ 626,711
Maturing after one year through five years 522,551 153,687
Total investment securities available-for-sale
NOTE 5. FAIR VALUE MEASUREMENTS Fair value reflects the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy has the following three levels: • Level 1 - quoted prices (unadjusted) in active markets for identical
assets and liabilities;
• Level 2 - inputs other than level 1 that are observable either directly or
indirectly, such as quoted prices in active markets for similar
instruments or on industry models using data inputs, such as interest
rates and prices that can be directly observed or corroborated in active
markets;
• Level 3 - unobservable inputs that are supported by little or no market
activity that are significant to the fair value measurement
The classifications within the fair value hierarchy of our financial assets that
were measured and recorded at fair value on a recurring basis were as follows
(in thousands):
December 31, 2019
Level 1 Level 2 Total
Commercial paper $ - $ 389,573 $ 389,573
Corporate bonds - 756,226 756,226166,665
Total investment securities available-for-sale - 1,312,464 1,312,464 Money market funds 2,467 - 2,467 Certificates of deposit - 32,733 32,733
Total financial assets carried at fair value
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December 31, 2018
Level 1 Level 2 Total
Commercial paper $ - $ 381,133 $ 381,133
Corporate bonds - 344,064 344,06455,201
Total investment securities available-for-sale - 780,398 780,398 Money market funds 47,744 - 47,744 Certificates of deposit - 16,596 16,596
Total financial assets carried at fair value
When available, we value investments based on quoted prices for those financial
instruments, which is a Level 1 input. Our remaining investments are valued
using third-party pricing sources, which use observable market prices, interest
rates and yield curves observable at commonly quoted intervals for similar
assets as observable inputs for pricing, which is a Level 2 input.
The carrying amount of our remaining financial assets and liabilities, which
include cash and restricted cash, receivables and payables approximate their
fair values due to the short-term nature.
NOTE 6. INVENTORY
Inventory consisted of the following (in thousands):
December 31,
2019 2018
Raw materials $ 2,709 $ 1,922
Work in process 9,447 6,170
Finished goods 4,367 3,836
Total $ 16,523 $ 11,928
Balance Sheet classification:
Current portion included in inventory $ 12,886 $ 9,838 Long-term portion included in other long-term assets 3,637 2,090 Total
$ 16,523 $ 11,928 Write-downs related to excess and expiring inventory were$1.3 million ,$1.1 million and$1.2 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. NOTE 7. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): December 31, Estimated Useful Lives 2019 2018 Leasehold improvements up to 15 years$ 33,904 $ 33,941 Computer equipment and software 3 years 17,338 15,022 Furniture and fixtures 5 to 7 years 13,053 12,709 Laboratory equipment 5 years 8,904 5,668 Construction in progress 1,253 866 74,452 68,206 Less: accumulated depreciation (25,560 ) (17,309 ) Property and equipment, net$ 48,892 $ 50,897 99
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Depreciation and amortization expenses were$8.3 million ,$4.9 million and$1.2 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively. NOTE 8. EMPLOYEE BENEFIT PLANS Equity Incentive Plans and ESPP We allocated the stock-based compensation expense for our equity incentive plans and our ESPP as follows (in thousands): Year Ended December 31, 2019 2018 2017 Research and development$ 19,374 $ 13,115 $ 7,569
Selling, general and administrative 37,228 27,511 16,369
Total stock-based compensation
We have several equity incentive plans under which we granted stock options and RSUs, including PSOs and PSUs, to employees and directors. AtDecember 31, 2019 , 6,258,319 shares were available for grant under our equity incentive plans. The Board of Directors (the Board) delegated responsibility for administration of our equity incentive plans to the Compensation Committee of the Board, including the authority to determine the term, exercise price and vesting requirements of each grant. Stock options granted to our employees and directors generally have a four-year vesting term and a one-year vesting term, respectively, an exercise price equal to the fair market value on the date of grant, and a seven-year life from the date of grant. Stock options issued prior toMay 2011 have a ten-year life from the date of grant. RSUs granted to our employees and directors generally have a four-year vesting term and a one-year vesting term, respectively. PSUs and PSOs granted pursuant to our equity incentive plans vest upon the achievement of a performance target or market condition, respectively. We have adopted a Change in Control and Severance Benefit Plan for certain executive officers. Eligible Change in Control and Severance Benefit Plan participants include employees with the title of vice president and above. If a participant's employment is terminated without cause during a period commencing one month before and ending thirteen months following a change in control, as defined in the plan document, then the Change in Control and Severance Benefit Plan participant is entitled to have the vesting of all their outstanding equity awards accelerated and the exercise period for their stock options extended to no more than one year. We have an ESPP that allows for qualified employees (as defined in the ESPP) to purchase shares of our common stock at a price equal to the lower of 85% of the closing price at the beginning of the offering period or 85% of the closing price at the end of each six month purchase period. Compensation expense related to our ESPP was$2.2 million ,$2.2 million , and$1.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 , we had 4,238,999 shares available for issuance under our ESPP. Pursuant to the ESPP, we issued 483,009, 330,492 and 434,523 shares of common stock at an average price per share of$12.60 ,$15.74 and$11.20 during the years endedDecember 31, 2019 , 2018 and 2017, respectively. Cash received from purchases under the ESPP for the years endedDecember 31, 2019 , 2018 and 2017 was$6.1 million ,$5.2 million and$4.9 million , respectively. We used a Monte Carlo simulation pricing model to value PSOs that include market vesting conditions and a Black-Scholes Merton option pricing model to value other stock options and ESPP purchases. The weighted average grant-date fair value per share of stock options and ESPP purchases were as follows: Year Ended December 31, 2019 2018 2017 Stock options, including PSOs$ 8.19 $ 9.07 $ 11.42 ESPP$ 4.85 $ 6.40 $ 6.00 100
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The grant-date fair value of stock option grants, including PSOs, and ESPP purchases was estimated using the following assumptions:
Year Ended December 31,
2019 2018 2017
Stock options, including PSOs:
Risk-free interest rate 1.77 % 2.81 % 1.98 %
Dividend yield - % - % - %
Volatility 48 % 55 % 59 %
Expected life 4.3 years 4.4 years 4.5 years
ESPP:
Risk-free interest rate 2.16 % 1.93 % 1.09 %
Dividend yield - % - % - %
Volatility 50 % 53 % 58 %
Expected life 6 months 6 months 6 months
We considered both implied and historical volatilities in developing our
estimate of expected volatility. The assumption for the expected life of stock
options is based on historical exercise patterns and post-vesting termination
behavior. The risk-free interest rate is based on U.S. Treasury rates with the
same or similar term as the underlying award. Our dividend rate is based on
historical experience and our investors' current expectations.
The fair value of RSUs, including the PSUs, was based on the closing price of
the underlying common stock on the date of grant.
Activity for stock options, including PSOs, during the year ended December 31,
2019 was as follows (in thousands, except per share amounts):
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Shares Exercise Price Term Value
Stock options outstanding at
December 31, 2018 22,674 $ 8.71
Granted 1,311 $ 20.08
Exercised (3,274 ) $ 5.01
Forfeited (217 ) $ 16.89
Expired (51 ) $ 22.98
Stock options outstanding at
December 31, 2019 20,443 $ 9.91 3.2 years $ 169,299
Stock options exercisable at
December 31, 2019 16,216 $ 7.36 2.6 years $ 167,449
As of December 31, 2019 , there was $33.7 million of unrecognized compensation
expense related to our unvested stock options, including PSOs. The compensation
expense for the unvested stock options will be recognized over a
weighted-average period of 2.2 years.
During the year ended December 31, 2018 , in connection with our long-term
incentive compensation program, we granted 308,365 PSOs to our President and
Chief Executive Officer. In addition to the standard service conditions included
in our other stock options, these PSOs may not be exercised until, at any time
after the grant date, the closing market price of a share of our Common Stock is
equal to or greater than 125% of the per share exercise price of the PSO over a
period of at least 30 consecutive calendar days. The stock-based compensation
expense for the PSO is being recognized on an accelerated basis over the service
period of the award, which commenced on the date of grant.
The aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between our closing stock price on the last trading day of
fiscal 2019 and the exercise prices, multiplied by the number of in-the-money
stock options) that would have been received by the stock option holders had all
stock option holders exercised their stock options on December 31, 2019 . The
total intrinsic value of stock options exercised during the years ended
December 31 ,
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2019, 2018 and 2017 was$54.1 million ,$39.1 million and$85.2 million , respectively. Cash received from stock option exercises during the years endedDecember 31, 2019 , 2018 and 2017 was$16.4 million ,$12.1 million and$17.6 million , respectively. The total estimated fair value of stock options vested and recorded as expense during the years endedDecember 31, 2019 , 2018 and 2017 was$23.4 million ,$18.9 million and$13.1 million , respectively. Activity for RSUs, including PSUs, during the year endedDecember 31, 2019 was as follows (in thousands, except per share amounts): Weighted Weighted Average Average Remaining Aggregate Grant Date Contractual Intrinsic Shares Fair Value Term Value
RSUs outstanding at
5,842 $ 19.46
Vested and released (1,541 ) $ 17.23
Forfeited (357 ) $ 18.66 RSUs outstanding at
As ofDecember 31, 2019 , there was$158.0 million of unrecognized compensation expense related to our unvested RSUs, including PSUs. The compensation expense for the unvested RSUs will be recognized over a weighted-average period of 2.7 years. During 2019, in connection with our long-term incentive compensation program, we awarded 1,926,605 PSUs (the target amount) that will vest upon the achievement of a performance target related to a product approval by the FDA (the 2019 PSUs); employees may earn 150% of the target amount, or an additional 963,136 shares relative to the target amount, if the performance target is achieved beforeDecember 31, 2020 and may earn 200% of the target amount, or up to an additional 1,926,605 shares relative to the target amount, if we receive a second product approval byDecember 31, 2021 . During 2018 we awarded 693,131 PSUs that will vest upon the achievement of certain product revenue, late-stage clinical development programs and discovery pipeline expansion performance targets (the 2018 PSUs). The 2018 PSUs and 2019 PSUs were designed to drive the performance of our management team and employees toward the achievement of key corporate objectives and will be forfeited if the performance targets are not met byDecember 31, 2021 . Expense recognition for PSUs commences when it is determined that attainment of the performance target is probable. During the year endedDecember 31, 2019 , we achieved two of the performance targets for 281,238 of the 2018 PSUs and determined that it was probable that we would achieve one additional performance target for 99,281 additional 2018 PSUs. As a result, 141,004 of the 2018 PSUs have vested as ofDecember 31, 2019 and the remainder are expected to vest over various dates throughNovember 2021 . We recognized$4.9 million in compensation expense related to those 2018 PSUs during the year endedDecember 31, 2019 ; the remaining unrecognized compensation expense for those 2018 PSUs was$2.1 million as ofDecember 31, 2019 . The total unrecognized compensation expense for both the 2019 PSUs and the remaining 2018 PSUs for which we have not yet determined that attainment of the performance target is probable was$80.2 million as ofDecember 31, 2019 .Exelixis, Inc. 401(k) Plan (the 401(k) Plan) We sponsor the 401(k) Plan under which we historically made matching contributions to our employees' 401(k) accounts in the form of our common stock. We recorded compensation expense related to the stock match of$4.6 million ,$3.6 million , and$1.7 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Beginning in 2020, we will make matching contributions to our employees' 401(k) accounts in cash. 102
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NOTE 9. INCOME TAXES Our income before income taxes is derived solely from within theU.S. Our income tax provision (benefit) was as follows (in thousands): Year Ended December 31, 2019 2018 2017 Current: Federal $ - $ - $ - State 6,095 6,133 4,350 Total current tax expense 6,095 6,133 4,350 Deferred: Federal 71,580 (238,675 ) - State (578 ) (5,436 ) -
Total deferred tax expense 71,002 (244,111 ) -
Income tax provision (benefit)
The income tax provision for the year endedDecember 31, 2019 primarily relates to the utilization of federal net operating loss and state taxes in jurisdictions outside ofCalifornia , for which we do not have net operating loss carryforwards due to a limited operating history. The income tax benefit for the year endedDecember 31, 2018 primarily relates to the release of our valuation allowance against significantly all of our deferred tax assets offset by state taxes in jurisdictions outside ofCalifornia . The income tax provision for the year endedDecember 31, 2017 primarily related to state taxes in jurisdictions outside ofCalifornia . Our historical net operating losses were sufficient to fully offset any federal taxable income for the years endedDecember 31, 2019 , 2018 and 2017. The reconciliation of theU.S. federal income tax provision (benefit) at the statutory federal income tax rates of 21%, 21% and 34% for the years endedDecember 31, 2019 , 2018 and 2017, respectively, to our income tax provision (benefit) was as follows (in thousands): Year Ended
2019 2018 2017
$ 53,916 State tax expense 1,148 4,690 8,282 Change in valuation allowance 3,208 (315,394 ) (34,266 ) Research credits (8,299 ) (18,308 ) - Stock-based compensation (9,177 ) (5,998 ) (20,548 ) Non-deductible executive compensation 4,228 1,111 1,239 Non-deductible interest - - 1,367 Other 2,386 982 (5,640 ) Income tax provision (benefit)$ 77,097 $ (237,978
)
Deferred tax assets and liabilities reflect the net tax effects of net operating
loss and tax credit carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting and the amounts used
for income tax purposes.
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Our deferred tax assets and liabilities were as follows (in thousands):
December 31,
2019 2018
Deferred tax assets:
Net operating loss carryforwards $ 65,131 $ 146,701
Tax credit carryforwards 110,037 98,467
Depreciation and amortization 26,792 29,929
Stock-based compensation 14,966 11,366
Lease liabilities 11,211 3,265
Accruals and reserves not currently deductible 8,248 7,160
Deferred revenue 6,547 5,474
Other assets 345 1,140
Total deferred tax assets 243,277 303,502
Valuation allowance (61,659 ) (58,112 )
Net deferred tax assets 181,618 245,390
Deferred tax liabilities:
Lease right-of-use assets (9,244 ) (1,279 )
Total deferred tax liabilities (9,244 ) (1,279 )
Net deferred taxes $ 172,374 $ 244,111
ASC Topic 740: Income Taxes (Topic 740) requires that the tax benefit of net
operating losses, temporary differences and credit carry forwards be recorded as
an asset to the extent that management assesses that realization is "more likely
than not." Realization of the future tax benefits is dependent on our ability to
generate sufficient taxable income within the carry forward period. As of each
reporting date, management considers new evidence, both positive and negative,
that could affect its view of the future realization of deferred tax assets. As
of December 31, 2019 , based on the evaluation and weighting of both positive and
negative evidence, including our achievement of a cumulative three-year income
position as of December 31, 2019 and forecasts of future operating results, as
well as considering the utilization of net operating losses and tax credits
prior to their expiration, management determined that there is sufficient
positive evidence to conclude that it is more likely than not the deferred tax
assets are realizable. As of December 31, 2019 and 2018, we continue to carry a
valuation allowance of $61.7 million and $58.1 million , respectively, against
our California state deferred tax assets. Prior to December 31, 2018 , because of
our history of operating losses, management believed that recognition of the
deferred tax assets was not more likely than not (as defined in Topic 740) to be
realized and, accordingly, had provided a full valuation allowance. The
valuation allowance increased by $3.5 million and decreased by $360.8 million
during the years ended December 31, 2019 and 2018, respectively.
At December 31, 2019 , we had federal net operating loss carryforwards of
approximately $225 million , of which approximately $203 million will expire in
the years 2035 through 2036, and federal business tax credits of approximately
$112 million which expire in the years 2020 through 2039. We also had state net
operating loss carryforwards of approximately $450 million , which expire in the
years 2020 through 2036, and California research and development tax credits of
approximately $38 million , which do not expire.
Under the Internal Revenue Code and similar state provisions, certain
substantial changes in our ownership could result in an annual limitation on the
amount of net operating loss and credit carryforwards that can be utilized in
future years to offset future taxable income. The annual limitation may result
in the expiration of net operating losses and credit carryforwards before
utilization. We completed a Section 382 analysis through December 31, 2019 , and
concluded that an ownership change, as defined under Section 382, had not
occurred.
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The following table summarizes the activity related to our unrecognized tax
benefits (in thousands):
Year Ended December 31,
2019 2018 2017
Beginning balance $ 76,060 $ 79,342 $ 61,809
Change relating to prior year provision 589 (4,254 ) 247
Change relating to current year provision 2,429 1,083 17,378
Reductions based on the lapse of the applicable statutes of limitations - (111 ) (92 ) Ending balance$ 79,078 $ 76,060 $ 79,342 We do not anticipate that the amount of unrecognized tax benefits existing as ofDecember 31, 2019 will significantly change over the next 12 months. As ofDecember 31, 2019 , we had$79.1 million in unrecognized tax benefits, of which$48.1 million would reduce our income tax provision and the effective tax rate, if recognized. Interest and penalties were nominal or zero for all periods presented. We have elected to record interest and penalties in the accompanying Consolidated Statements of Income as a component of income taxes. We fileU.S. and state income tax returns in jurisdictions with varying statues of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 1999 through 2019 tax years generally remain subject to examination by federal and most state tax authorities to the extent net operating losses and credits generated during these periods are being utilized in the open tax periods. NOTE 10. NET INCOME PER SHARE Net income per share - basic and diluted, were computed as follows (in thousands, except per share amounts): Year Ended December 31, 2019 2018 2017 Numerator: Net income$ 321,012 $ 690,070 $ 154,227 Net income allocated to participating securities - - (367 ) Net income allocable to common stock - basic 321,012 690,070
153,860
Adjustment to net income allocated to participating securities - - 22
Net income allocable to common stock - diluted
$ 153,882 Denominator: Weighted-average common shares outstanding - basic 302,584 297,892
293,588
Dilutive effect of employee stock plans 12,425 14,911
18,415
Weighted-average common shares outstanding - diluted 315,009 312,803
312,003
Net income per share - basic$ 1.06 $ 2.32 $ 0.52 Net income per share - diluted$ 1.02 $ 2.21
Participating securities included warrants issued inJanuary 2014 to purchase an aggregate of 1.0 million shares of our common stock that were fully exercised inSeptember 2017 . Dilutive securities included outstanding stock options, unvested RSUs and ESPP contributions. Certain potential common shares were excluded from our calculation of weighted-average common shares outstanding - diluted because either they would have had an anti-dilutive effect on net income per share or they are related to shares from PSOs and PSUs that were contingently issuable and the contingency had not been satisfied. See to "Note 8. Employee Benefit Plans" for a further description of our equity awards. These potential common shares were as follows (in thousands): Year Ended
2019 2018 2017
Anti-dilutive securities and contingently
issuable shares excluded 9,111 3,968 1,645
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Table of Contents NOTE 11. COMMITMENTS Leases Headquarters Lease InMay 2017 , we entered into a Lease Agreement (the Lease) for our corporate headquarters located inAlameda, California (the Initial Premises). The Lease was subsequently amended inOctober 2017 ,June 2018 ,April 2019 andAugust 2019 , resulting in, among other things, an increase to the amount of space leased and changes to the lease term. Our right-of-use asset, lease liability and the related lease costs reflect the 221,464 square feet of space we have taken possession of as ofDecember 31, 2019 (the Current Premises) under the amended Lease. We expect to take possession of the remainder of the space provided for under theAugust 2019 amendment on or prior toApril 30, 2020 , which will increase the space leased to 228,941 square feet. The term of the Lease continues throughOctober 31, 2031 (the Lease Term). We have two five-year options to extend the Lease; these optional periods have not been considered in the determination of the right-of-use asset or the lease liability for the Lease as we did not consider it reasonably certain that we would exercise any such options. We have made certain tenant improvements on the Initial Premises, for which we received$8.2 million in reimbursements inJanuary 2019 . We were also provided an allowance of up to$1.7 million for tenant improvements to the space we obtained under theApril 2019 amendment which is expected to be received in 2020. The balance sheet classification of our operating lease assets and liabilities were as follows (in thousands):December 31, 2019 2018
Assets:
Right-of-use assets included in other long-term assets
$ 50,739 $ 14,837 The components of operating lease costs, which are included in selling, general and administrative expenses in our Consolidated Statements of Income, were as follows (in thousands): Year Ended December 31, 2019 2018 2017 (1) Operating lease cost$ 2,844 $ 4,189 $ 3,944 Variable lease cost 1,024 1,661 2,216 Sublease income - - (1,225 )
Total operating lease costs
____________________
(1) The 2017 amounts have not been adjusted for the adoption of Topic 842 and
continue to be reported in accordance with the previous lease guidance,
ASC Topic 840: Leases.
Cash paid for amounts included in the measurement of lease liabilities for the
year ended
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As ofDecember 31, 2019 , the maturities of our operating lease liabilities were as follows (in thousands): Year EndingDecember 31 , Amount 2020$ 4,538 2021 4,669 2022 4,820 2023 5,147 2024 5,407 Thereafter 41,585 Total lease payments 66,166 Less: Imputed interest (13,685 )
Future tenant improvement reimbursements (1,742 ) Operating lease liabilities
$ 50,739 As ofDecember 31, 2019 , the weighted average discount rate used to determine the operating lease liability was 3.9% and the weighted average remaining lease term is 11.8 years. Build-to-Suit Lease InOctober 2019 , we entered into a build-to-suit Lease Agreement (the Build-to-Suit Lease) for approximately 220,000 square feet of office space located inAlameda, California (the New Premises), adjacent to the Current Premises. The term of the Build-to-Suit Lease is for a period of 242 months (the Term), which will begin upon the substantial completion of the building and tenant improvements by the lessor. We currently anticipate that the Term will begin inOctober 2021 (the Lease Commencement Date). The monthly base rent under the Build-to-Suit Lease will equal a percentage of the total development costs incurred in connection with the development of the New Premises (excluding the cost of the tenant improvements in excess of the allowance provided by the lessor and any development costs we pay) and is currently estimated to be about$0.7 million , subject to an annual increase of 3% during the Term. We will also be responsible for paying operating expenses related to the New Premises. The rent payments will begin sixty days following commencement of the Term. We have been provided a tenant improvement allowance for the New Premises of approximately$16.5 million . To the extent that the total development costs of the New Premises exceeds$525 per square foot, we will also pay 50% of such excess costs prior to the commencement of the Term, and may be required to secure such amount and the cost of the tenant improvements in excess of the allowance by providing a letter of credit or depositing such amounts in an account with the lessor's lender prior to the start of construction. The Build-to-Suit Lease includes two five-year options to extend the term of the Build-to-Suit Lease, exercisable under certain conditions and at a market rate determined in accordance with the Build-to-Suit Lease. We have a one-time option to terminate the Build-to-Suit Lease without cause after the 180th month of the Term, exercisable under certain conditions as described in the Build-to-Suit Lease and subject to a termination payment calculated in accordance with the Build-to-Suit Lease. In addition, we have a right of first offer to purchase the New Premises, subject to certain procedures and exclusions set forth in the Build-to-Suit Lease. We have determined that, under the guidance provided in Topic 842, we do not have control of the New Premises during the construction period. Therefore, we will not record a right-of-use asset or lease liability for the Build-to-Suit Lease until the Lease Commencement Date. We will evaluate the classification the Build-to-Suit Lease as an operating lease or financing lease at the Lease Commencement Date. Letters of Credit We have obtained standby letters of credit related to our lease obligations and certain other obligations with combined credit limits of$1.6 million and$1.1 million as ofDecember 31, 2019 and 2018, respectively. None of our letters of credit have been drawn upon. All of the letters of credit are fully collateralized by certificates of deposit. 107
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NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data was as follows (in thousands, except
per share data):
Fiscal 2019 Quarter Ended
March 31, June 30, September 30, December 31, (4)
Total revenues (1) $ 215,487 $ 240,275 $ 271,703 $ 240,310
Gross profit (2) $ 172,080 $ 186,136 $ 184,231 $ 184,406
Income from operations $ 84,559 $ 91,989 $ 115,606 $ 77,316
Net income $ 75,775 $ 79,042 $ 97,452 $ 68,743
Net income per share:
Basic $ 0.25 $ 0.26 $ 0.32 $ 0.23
Diluted $ 0.24 $ 0.25 $ 0.31 $ 0.22
Fiscal 2018 Quarter Ended
March 31, June 30, September 30, December 31,
Total revenues (1) $ 213,719 $ 186,108 $ 225,397 $ 228,602
Gross profit (2) $ 128,633 $ 139,839 $ 155,586 $ 168,873
Income from operations $ 116,307 $ 85,770 $ 125,176 $ 111,602
Net income (3) $ 115,857 $ 87,494 $ 126,630 $ 360,089
Net income per share:
Basic $ 0.39 $ 0.29 $ 0.42 $ 1.20
Diluted $ 0.37 $ 0.28 $ 0.41 $ 1.15
____________________(1) Total revenues for the quarters endedMarch 31, 2019 ,June 30, 2019 ,September 30, 2019 andDecember 31, 2019 included$10.0 million ,$20.4 million ,$50.6 million and$15.1 million in milestone revenue,
respectively, as compared to
and $29.6 million during the comparable periods in 2018. Due to
uncertainties surrounding the timing and achievement of regulatory and
development milestones, it is difficult to predict future milestonerevenues and such milestones can vary significantly from period to period.
(2) Gross profit is computed as net product revenues less cost of goods sold.
(3) Net income for the quarter ended
million income tax benefit related to the release of substantially all of
the valuation allowance against our deferred tax assets.
(4) The fiscal quarter ended
other quarters presented are 13-week fiscal periods.
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