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MarketScreener Homepage  >  Equities  >  Nasdaq  >  SAGE Therapeutics Inc    SAGE

SAGE THERAPEUTICS INC

(SAGE)
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SAGE THERAPEUTICS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/06/2019 | 07:19am EDT

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Quarterly Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this report, including under Part II, Item 1A. "Risk Factors" and under "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, or SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.




                                    Overview

We are a biopharmaceutical company committed to developing and commercializing novel medicines with the potential to transform the lives of people with debilitating disorders of the brain. Our lead product, ZULRESSO™ (brexanolone) injection, was approved by the U.S. Food and Drug Administration, or FDA, in March 2019 for the treatment of postpartum depression, or PPD, in adults, and was made commercially available in the U.S. beginning on June 24, 2019, after completion of controlled substance scheduling of brexanolone by the U.S. Drug Enforcement Administration, or DEA and incorporation of the scheduling into the FDA-approved label and other product information. We have a portfolio of other product candidates with a current focus on modulating two critical CNS receptor systems, GABA and NMDA. The GABA receptor family, which is recognized as the major inhibitory neurotransmitter in the CNS, mediates downstream neurologic and bodily function via activation of GABAA receptors. The NMDA-type receptors of the glutamate receptor system are a major excitatory receptor system in the CNS. Dysfunction in these systems is implicated in a broad range of CNS disorders. We are targeting CNS indications where patient populations are easily identified, clinical endpoints are well-defined, and development pathways are feasible.




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The following table summarizes the status of our product and product candidate portfolio as of the filing date of this Quarterly Report.



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Our lead product, ZULRESSO™ (brexanolone) injection, is a proprietary intravenous, or IV, formulation of brexanolone. Brexanolone is chemically identical to allopregnanolone, a naturally occurring neuroactive steroid that acts as a positive allosteric modulator of GABAA receptors. In March 2019, the FDA approved ZULRESSO for the treatment of PPD in adults. We launched ZULRESSO commercially in the U.S. beginning on June 24, 2019, after completion of controlled substance scheduling of brexanolone by the DEA and incorporation of the scheduling into the FDA-approved label and other product information. The DEA placed ZULRESSO into Schedule IV of the Controlled Substances Act. PPD is a common biological complication of childbirth, and is characterized by significant depressive symptoms that typically commence during the third trimester of pregnancy or in the months following childbirth. Because of the risk of serious harm resulting from excessive sedation or sudden loss of consciousness during the ZULRESSO infusion, ZULRESSO must be administered in a medically-supervised healthcare setting that has been certified under a Risk Evaluation and Mitigation Strategy, or REMS, program and meets the other requirements of the REMS program, including requirements related to monitoring of the patient during the infusion. Patients who are prescribed ZULRESSO are required to enroll in a registry to allow us to compile additional information to further our understanding of the risk of sudden loss of consciousness during administration of ZULRESSO and management of the risk. Given the mode and setting of administration of ZULRESSO and the requirements of the REMS program, we expect use of ZULRESSO will, at least initially, be focused primarily on women with severe PPD. We estimate that about 20 to 30% of women diagnosed with PPD fall into this category.

We have received PRIority MEdicines, or PRIME, designation from the European Medicines Agency, or EMA, in the European Union, or EU, for our proprietary formulation of brexanolone as a potential treatment for PPD. The EMA has requested that we conduct an additional clinical trial evaluating brexanolone in the treatment of PPD to support submission of a potential marketing authorization application, or MAA, seeking approval of brexanolone in such indication. We will continue to evaluate the EMA's request in light of our overall portfolio and program priorities as well as the potential timing of development in the EU of SAGE-217, our next most advanced product candidate.


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Our next most advanced product candidate is SAGE-217, an oral compound that is currently in Phase 3 clinical development for PPD and major depressive disorder, or MDD. SAGE-217 is a novel neuroactive steroid that, like brexanolone, is a positive allosteric modulator of GABAA receptors, targeting both synaptic and extrasynaptic GABAA receptors. The FDA has granted Breakthrough Therapy designation and Fast Track designation to SAGE-217 in the treatment of MDD. We have completed two positive placebo-controlled pivotal clinical trials with SAGE-217, one in MDD completed in 2017 and one in PPD for which top-line results were announced in January 2019. The ongoing Phase 3 clinical program for SAGE-217 in MDD is comprised of:

    -   a placebo-controlled Phase 3 clinical trial in patients with MDD, known as
        the Mountain Study, in which we are studying two weeks of treatment with
        SAGE-217 followed by four weeks of follow-up, with an open-label extension
        to continue to follow patients for up to six months;


    -   an ongoing open-label retreatment study, known as the Shoreline Study,
        evaluating initial treatment with SAGE-217, treatment-free intervals, and
        as needed retreatment, in patients with MDD in which patients will be
        followed for up to a year after treatment; and


    -   a placebo-controlled trial to evaluate fixed interval SAGE-217 monotherapy
        (treatment without traditional antidepressants) for up to a year, known as
        the Redwood Study; and

We are also conducting a placebo-controlled polysomnography Phase 3 clinical trial of SAGE-217 in patients with MDD who have co-morbid insomnia, known as the Rainforest Study. We expect to report top-line results from the Mountain Study in the fourth quarter of 2019 or the first quarter of 2020. We expect to report top-line results from the Shoreline Study and the Rainforest Study in 2020. We expect to initiate the Redwood Study in the third quarter of 2019.

We also plan to explore SAGE-217 in other indications. Based on analysis of subpopulations of patients from our completed placebo-controlled clinical trials of SAGE-217 in MDD and PPD who had ongoing symptoms of depression at baseline despite receiving standard anti-depressant pharmacotherapy, we plan to initiate clinical trials of SAGE-217 in the treatment of treatment resistant depression, or TRD. We also plan to continue to evaluate the potential for development of SAGE-217 in generalized anxiety disorder and bipolar depression. In July 2019, we reported positive top-line results from a small open-label clinical trial of SAGE-217 in patients with bipolar depression.

In addition to SAGE-217, we have a portfolio of other novel compounds that target GABAA receptors. SAGE-324 is a novel GABAA receptor positive allosteric modulator with preclinical pharmacokinetic and pharmacodynamic properties that suggest suitability for chronic oral dosing. We plan to develop SAGE-324 for a number of neurological conditions, including essential tremor, epileptiform disorders and Parkinson's disease. Results from our Phase 1 clinical program demonstrated that the profile of SAGE-324 includes good oral bioavailability and a pharmacokinetic profile consistent with once-daily dosing. We have also studied SAGE-324 in a Phase 1 single dose, open-label trial involving a small number of patients with essential tremor. Based on the results of the Phase 1 clinical program, including the positive signal observed in the small cohort of patients with essential tremor, and our other work in this area to date, we plan to initiate a Phase 2 clinical trial evaluating SAGE-324 in the treatment of essential tremor in the second half of 2019. Our portfolio of novel GABAA receptor positive allosteric modulators also includes SAGE-689, with which we have conducted non-clinical studies to date, and other compounds at earlier stages of development with a focus on both acute and chronic CNS disorders.

Our second area of focus is the development of novel compounds that target the NMDA receptor. The first product candidate selected for development from this program is SAGE-718, an oxysterol-based positive allosteric modulator of the NMDA receptor, which we are exploring in certain cognition-related disorders impacted by NMDA receptor dysfunction. Examples of indications involving NMDA receptor dysfunction include certain types, aspects or subpopulations of a number of diseases such as depression, Huntington's disease, Alzheimer's disease, attention deficit hyperactivity disorder, schizophrenia, and neuropathic pain. We have completed a Phase 1 single ascending dose trial and multiple ascending dose trials of SAGE-718. We have also completed a suite of Phase 1 clinical trials in healthy volunteers designed to demonstrate CNS-target engagement using a low-dose ketamine challenge paradigm. SAGE-718 demonstrated a long half-life consistent with once-daily dosing in Phase 1 clinical trials. Results of an integrated analysis of the target engagement studies in healthy volunteers demonstrated that SAGE-718 had effects on electrophysiological, functional neuroimaging, and cognitive measures consistent with CNS activity. In addition, healthy volunteers dosed with


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SAGE-718 in the trials exhibited superior performance on tests of working memory and complex problem solving than the placebo-group. A Phase 1 clinical trial to evaluate the safety, tolerability and pharmacokinetics of SAGE-718 in a small number of patients with early manifest Huntington's disease is ongoing. We expect to report top-line results from this trial in the second half of 2019. Based on the results we have generated to date in the SAGE-718 Phase 1 clinical program, we plan to evaluate SAGE-718 in a Phase 2 development program in certain neurodegenerative disorders and other conditions where executive function is impaired.

We expect to continue our work on allosteric modulation of the GABAA and NMDA receptor systems in the brain. The GABAA and NMDA receptor systems are broadly accepted as impacting many psychiatric and neurological disorders, spanning disorders of mood, seizure, cognition, anxiety, sleep, pain, and movement, among others. We believe that we may have the opportunity to develop molecules from our internal portfolio with the goal of addressing a number of these disorders in the future. We also continue to evaluate business development opportunities in potential new areas of interest.

We began to generate revenue from product sales in the second quarter of 2019 in conjunction with launch of our first product, ZULRESSO, which commenced on June 24, 2019. Prior to the second quarter of 2019, all of our revenue had been derived from a strategic collaboration we entered into in the second quarter of 2018 with Shionogi & Co., Ltd., or Shionogi, for the clinical development and commercialization of SAGE-217 in Japan, Taiwan and South Korea. The initial list price for ZULRESSO in the U.S. is $7,450 per vial, which we estimate will result in a projected average course of therapy cost of $34,000 per patient before discounts based on an assumption of an average of 4.5 vials used per patient. The actual number of vials used and resulting cost of therapy per patient before discounts will vary by patient and by healthcare setting. Given the timing of U.S. launch of ZULRESSO and the time required for healthcare settings to become REMS-certified, achieve formulary approvals, establish protocols for administering ZULRESSO and secure satisfactory reimbursement which may take six to nine months or more, depending on the site, we do not expect to start to see revenue momentum from sales of ZULRESSO to build, if such momentum is achieved, until the fourth quarter of 2019 into 2020.

We have incurred net losses in each year since our inception, and we have an accumulated deficit of $1.3 billion as of June 30, 2019. Our net losses were $331.6 million for the six months ended June 30, 2019 and $372.9 million for the year ended December 31, 2018. These losses have resulted principally from costs incurred in connection with research and development activities and selling, general and administrative costs associated with our operations and our commercial build. We expect to incur significant expenses and increasing operating losses for the foreseeable future.

We expect that our expenses will increase substantially in connection with our ongoing activities, as we:

    •   continue our commercialization efforts with respect to ZULRESSO in the
        treatment of PPD in the U.S.;


  • fulfill our post-approval commitments related to ZULRESSO;


    •   continue to advance clinical development of SAGE-217, including the
        ongoing Phase 3 clinical program in MDD and initiation of development in
        TRD;


    •   continue to advance clinical development of SAGE-324 with an initial focus
        on development in essential tremor, certain epileptiform disorders, and
        potentially other neurological conditions;


    •   continue to advance clinical development of SAGE-718 with an initial focus
        on development in indications involving NMDA receptor hypofunction;


    •   advance one or more non-clinical stage compounds into Phase 1 clinical
        development;


    •   continue our research and development efforts to evaluate the potential
        for our existing product candidates in the treatment of additional
        indications or in new formulations, and to identify new drug candidates in
        the treatment of CNS disorders;


    •   determine the potential development and regulatory pathway for SAGE-217 in
        the EU;


    •   seek regulatory approvals for any product candidates that successfully
        complete clinical development;


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    •   continue to manufacture supplies of SAGE-217 for ongoing late stage
        clinical trials; refine the formulation and improve the manufacturing
        process for our other product candidates; and manufacture clinical
        supplies as development progresses;


    •   add personnel, including personnel to support our product development and
        ongoing and future commercialization efforts, and incur increases in
        stock-based compensation expense related to existing and new personnel
        with respect to both service-based and performance-based awards;


    •   evaluate market opportunities for our products and product candidates in
        markets outside the U.S.;


    •   evaluate business development opportunities in potential new areas of
        interest;


  • add operational, financial and management information systems; and


  • maintain, leverage and expand our intellectual property portfolio.

Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of revenue, equity or debt financings or other sources, which may include collaborations with third parties. We may not be successful in our commercialization of ZULRESSO, and may not generate revenues at the levels we expect. We may never successfully complete development of any of our current or future product candidates, obtain necessary regulatory approval for such product candidates; or achieve commercial viability for any resulting approved product. We may not obtain or maintain adequate patent protection or other exclusivity for our products or product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and on our ability to pursue our business strategy. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. We will need to generate significant revenue to achieve profitability, and we may never do so.

We expect that our existing cash, cash equivalents and marketable securities as of June 30, 2019 will enable us to fund our operating expenses and capital expenditure requirements, based on our current operating plan, at least the next 12 months from the filing date of this Quarterly Report. See "-Liquidity and Capital Resources".


                         Financial Operations Overview

Revenue

We began to generate revenue from product sales in the second quarter of 2019 in conjunction with launch of our first product, ZULRESSO, which commenced on June 24, 2019. Prior to the second quarter of 2019, all of our revenue had been derived from a strategic collaboration we entered into in the second quarter of 2018 with Shionogi. All of our revenue from sales of ZULRESSO in the second quarter of 2019 was attributable to channel stocking of ZULRESSO by distributors upon launch of the product. No patients had been administered ZULRESSO using commercial product as of the end of the second quarter of 2019. Given the timing of U.S. launch of ZULRESSO, and the time required for healthcare settings to become REMS-certified, achieve formulary approvals, establish protocols for administering ZULRESSO and secure satisfactory reimbursement which may take six to nine months or more, depending on the site, we do not expect to start to see revenue momentum from sales of ZULRESSO to build, if such momentum is achieved, until the fourth quarter of 2019 into 2020. We expect that, even if we start to see revenue momentum in the fourth quarter of 2019, revenues are likely to fluctuate quarter to quarter. We will not generate revenue from other products unless and until we successfully develop, obtain regulatory approval of, and commercialize one of our current or future product candidates. If we enter into additional collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates. We expect that revenue, if any, we generate under collaboration agreements will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development services and related reimbursements, payments for clinical materials or manufacturing services, and milestone and other payments.


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Cost of goods sold

Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of ZULRESSO, including third-party manufacturing costs, packaging services, freight, third-party royalties payable on our net product revenues and amortization of intangible assets associated with ZULRESSO.

Operating Expenses

Our operating expenses since inception have consisted primarily of costs associated with research and development activities and selling, general and administrative activities.

Research and Development Expenses

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of:

    •   personnel costs, including salaries, benefits, stock-based compensation
        and travel expenses, for employees engaged in research and development
        functions;


    •   expenses incurred under agreements with contract research organizations,
        or CROs, and sites that conduct our non-clinical studies and clinical
        trials;


    •   expenses associated with manufacturing materials for use in clinical
        trials and developing external manufacturing capabilities;


    •   costs of outside consultants engaged in research and development
        activities, including their fees, stock-based compensation and travel
        expenses;


    •   other expenses related to our non-clinical studies and clinical trials and
        expenses related to our regulatory activities; and


  • payments made under our third-party license agreements.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We have been developing our product candidates and focusing on other research and development programs, including exploratory efforts to identify new compounds, target validation for identified compounds and lead optimization for our earlier-validated programs. Our direct research and development expenses are tracked on a program-by-program basis, and consist primarily of external costs, such as fees paid to investigators, central laboratories, CROs and contract manufacturing organizations, or CMOs, in connection with our non-clinical studies and clinical trials; third-party license fees related to our product candidates; and fees paid to outside consultants who perform work on our programs. We do not allocate employee-related costs and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under research and development and, as such, are separately classified as unallocated or stock-based compensation in research and development expenses.

Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue or initiate clinical trials and non-clinical studies for certain product candidates, and pursue later stages of clinical development of our product candidates.


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We cannot determine with certainty the duration and costs of the current or future clinical trials of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

• the scope, size, rate of progress, and expense of our ongoing as well as

any additional clinical trials, non-clinical studies, and other research

and development activities;

• future clinical trial and non-clinical study results;

• decisions by regulatory authorities related to our product candidates;

• uncertainties in clinical trial enrollment rate or design;

• significant and changing government regulation; and

• the receipt and timing of regulatory approvals, if any.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or for regulatory approval, or if we experience significant delays in enrollment in any of our clinical trials or need to enroll additional patients, we could be required to expend significant additional financial resources and time on the completion of clinical development.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel costs, including salaries, benefits and travel expenses for our executive, finance, business, commercial, corporate development and other administrative functions; and stock-based compensation expense. Selling, general and administrative expenses also include facilities and other related expenses, including rent, depreciation, maintenance of facilities, insurance and supplies; professional fees for expenses incurred under agreements with third parties relating to the commercialization of ZULRESSO; and for public relations, audit, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

We anticipate that our selling, general and administrative expenses, including payroll and related expenses, will increase in the future as we continue to increase our headcount to support the expected growth in our business, expand our operations and organizational capabilities, continue to support our commercial activities associated with ZULRESSO, and prepare for potential commercialization of our current or future product candidates, if successfully developed and approved. We also anticipate increased expenses associated with general operations, including costs related to audit, tax and legal services, director and officer insurance premiums, and investor relations costs.


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Results of Operations


Comparison of the Three Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the three months ended June 30, 2019 and 2018:



                                         Three Months Ended
                                              June 30,              Increase
                                         2019          2018        (Decrease)
                                                   (in thousands)
Product revenue, net                  $      519     $       -     $       519
Collaboration revenue                        354        90,000         (89,646 )
Total revenue                                873        90,000         (89,127 )
Operating costs and expenses:
Cost of goods sold                            44             -              44
Research and development                  89,059        68,980          20,079
Selling, general and administrative       88,227        43,167          45,060
Total operating costs and expenses       177,330       112,147          65,183
Loss from operations                    (176,457 )     (22,147 )      (154,310 )
Interest income, net                       8,220         5,137           3,083
Other income, net                             16            32             (16 )
Net loss                              $ (168,221 )$ (16,978 )$  (151,243 )




Product revenue, net


We began to record net product revenues in the second quarter of 2019 following the approval of ZULRESSO by the FDA on March 19, 2019 and its subsequent commercial launch in the United States in June 2019. During the three months ended June 30, 2019, we recognized $0.5 million of net product revenues related to sales of ZULRESSO. All of our revenue from sales of ZULRESSO in the second quarter of 2019 was attributable to channel stocking of ZULRESSO by distributors upon launch of the product. No patients had been administered ZULRESSO using commercial product as of the end of the second quarter of 2019. Sales allowances and accruals consisted of patient financial assistance, distribution fees, discounts, and chargebacks.



Collaboration revenue


For the three months ended June 30, 2019, we recognized $0.4 million in collaboration revenue from our agreement with Shionogi related to the supply of SAGE-217 drug product for clinical development. For further discussion regarding our collaboration agreement with Shionogi and the accounting for revenue from collaboration agreements, refer to Note 6, Collaboration Agreement and Note 2, Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

Effective June 12, 2018, we entered into a strategic collaboration with Shionogi for the clinical development and commercialization of SAGE-217 for the treatment of MDD and other potential indications in Japan, Taiwan and South Korea. Under the terms of the agreement, Shionogi will be responsible for all clinical development, regulatory filings and commercialization of SAGE-217 for MDD, and potentially other indications, in Japan, Taiwan and South Korea. Shionogi was required to make an upfront payment to us upon execution of the agreement of $90.0 million, and it was recorded as collaboration revenue in the three months ended June 30, 2018.




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Cost of goods sold


Cost of goods sold of $44,000 for the three months ended June 30, 2019 is related to royalties on net sales payable to CyDex and The Regents of the University of California under license agreements (see Note 5, Leases, Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Part I of this Quarterly Report), labeling and packaging costs incurred after FDA approval, and certain distribution costs. Prior to receiving regulatory approval for ZULRESSO on March 19, 2019, we manufactured ZULRESSO inventory to be sold upon commercialization and recorded all costs incurred as research and development expense. As a result, the manufacturing costs related to the ZULRESSO inventory build-up incurred before FDA approval were already expensed in a prior period and are therefore excluded from the cost of goods sold for the three months ended June 30, 2019. We expect our cost of goods sold of ZULRESSO to increase as a percentage of net sales in future periods as we produce and then sell inventory that reflects the full cost of manufacturing.

Research and development expenses



                                            Three Months Ended
                                                 June 30,               Increase
                                             2019          2018        (Decrease)
                                                       (in thousands)
brexanolone (SAGE-547)                    $    2,350$  9,643$     (7,293 )
SAGE-217                                      37,450       15,600           21,850
SAGE-324                                       4,367        1,242            3,125
SAGE-718                                       1,453        2,781           (1,328 )
Other research and development programs       10,248        8,009            2,239
Unallocated expenses                          19,519       19,610              (91 )
Stock-based compensation                      13,672       12,095            1,577

Total research and development expenses $ 89,059$ 68,980$ 20,079

Research and development expenses for the three months ended June 30, 2019 were $89.1 million, compared to $69.0 million for the three months ended June 30, 2018. The increase of $20.1 million was primarily due to the following:



    •   a decrease of $7.3 million in expenses related to our brexanolone program,
        due to the completion of the Phase 3 clinical trials in PPD;




    •   an increase of $21.9 million in expenses related to conduct of our Phase 3
        clinical trials of SAGE-217 in MDD and supporting supply chain activities;




    •   an increase of $3.1 million in expenses related to conduct of our Phase 1
        clinical trials of SAGE-324;




    •   a decrease of $1.3 million in expenses related to conduct of our Phase 1
        clinical trials of SAGE-718;




    •   an increase of $2.2 million in expenses related to research and
        development programs and discovery efforts focused on identifying new
        clinical candidates and additional indications of interest, and on our
        back-up programs; and




    •   an increase of $1.6 million in non-cash stock-based compensation expense,
        due to the hiring of additional full-time employees to support the growth
        of our operations and the increase in the fair market value of our common
        stock. The amount of non-cash stock-based compensation expense related to
        the achievement of performance-based vesting criteria was $1.0 million for
        the three months ended June 30, 2019. There was no non-cash stock-based
        compensation expense recognized related to the achievement of
        performance-based vesting criteria during the three months ended June 30,
        2018.




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Selling, general and administrative expenses



                                                         Three Months Ended
                                                              June 30,                Increase
                                                        2019            2018         (Decrease)
                                                                   (in thousands)
Personnel-related                                    $    31,993$   11,432$     20,561
Stock-based compensation                                  21,095         16,933            4,162
Professional fees                                         20,670         10,953            9,717
Other                                                     14,469          3,849           10,620

Total selling, general and administrative expenses $ 88,227$ 43,167$ 45,060

Selling, general and administrative expenses for the three months ended June 30, 2019 and 2018 were $88.2 million and $43.2 million, respectively. The increase of $45.1 million was primarily due to the following:



    •   an increase of $20.6 million in personnel-related costs in connection with
        the hiring of additional full-time employees to support the growth of our
        operations and commercial-related activities;




    •   an increase of $4.2 million in non-cash stock-based compensation expense,
        due to the hiring of additional full-time employees to support the growth
        of our operations and the increase in the fair market value of our common
        stock. The amount of non-cash stock-based compensation expense related to
        the achievement of performance-based vesting criteria was $1.1 million for
        the three months ended June 30, 2019. The amount of non-cash stock-based
        compensation expense related to the achievement of performance-based
        vesting criteria was $6.9 million during the three months ended June 30,
        2018 for a milestone related to the consummation of a licensing or
        corporate partnering arrangement;




    •   an increase of $9.7 million in professional fees associated with expanding
        operations, primarily for costs related to preparations for the launch of
        ZULRESSO in the U.S., which commenced on June 24, 2019; and




    •   an increase of $10.6 million in other expenses due to increased costs
        associated with facilities, mainly due to the increase in the amount of
        rented square feet of office space to accommodate our increased number of
        employees, along with other corporate infrastructure and office-related
        costs, such as information technology costs.

Interest income, net and Other expense, net

Interest income, net, and other expense, net, for the three months ended June 30, 2019 and 2018 were $8.2 million and $5.2 million, respectively. The primary reason for the increase was an increase in the balance of marketable securities.







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Comparison of the Six Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the six months ended June 30, 2019 and 2018:



                                          Six Months Ended
                                              June 30,               Increase
                                         2019           2018        (Decrease)
                                                   (in thousands)
Product revenue, net                  $      519     $        -     $       519
Collaboration revenue                        819         90,000         (89,181 )
Total revenue                              1,338         90,000         (88,662 )
Operating costs and expenses:
Cost of goods sold                            44              -              44
Research and development                 175,457        118,250          57,207
Selling, general and administrative      172,146         72,016         100,130
Total operating costs and expenses       347,647        190,266         157,381
Loss from operations                    (346,309 )     (100,266 )      (246,043 )
Interest income, net                      14,662          8,666           5,996
Other income, net                             20             24              (4 )
Net loss                              $ (331,627 )$  (91,576 )$  (240,051 )




Product revenue, net


We began to record net product revenues in the second quarter of 2019 following the approval of ZULRESSO by the FDA on March 19, 2019 and its subsequent commercial launch in the United States in June 2019. During the six months ended June 30, 2019, we recognized $0.5 million of net product revenues related to sales of ZULRESSO. All of our revenue from sales of ZULRESSO in the second quarter of 2019 was attributable to channel stocking of ZULRESSO by distributors upon launch of the product. No patients had been administered ZULRESSO using commercial product as of the end of the second quarter of 2019. Sales allowances and accruals consisted of patient financial assistance, distribution fees, discounts, and chargebacks.



Collaboration revenue


For the six months ended June 30, 2019, we recognized $0.8 million in collaboration revenue from our agreement with Shionogi related to the supply of SAGE-217 drug product for clinical development. For further discussion regarding our collaboration agreement with Shionogi and the accounting for revenue from collaboration agreements, refer to Note 6, Collaboration Agreement and Note 2, Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

Effective June 12, 2018, we entered into a strategic collaboration with Shionogi for the clinical development and commercialization of SAGE-217 for the treatment of MDD and other potential indications in Japan, Taiwan and South Korea. Under the terms of the agreement, Shionogi will be responsible for all clinical development, regulatory filings and commercialization of SAGE-217 for MDD, and potentially other indications, in Japan, Taiwan and South Korea. Shionogi was required to make an upfront payment to us upon execution of the agreement of $90.0 million, and it was recorded as collaboration revenue in the six months ended June 30, 2018.




Cost of goods sold



Cost of goods sold of $44,000 for the six months ended June 30, 2019 is related to royalties on net sales payable to CyDex and The Regents of the University of California related to license agreements (see Note 5, Leases, Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Part I of this Quarterly Report), labeling and packaging costs incurred after FDA approval, and certain distribution costs. Prior to receiving regulatory approval for ZULRESSO on March 19, 2019, we manufactured ZULRESSO inventory to be sold upon commercialization and recorded all costs incurred as research and development expense. As a result, the manufacturing costs related to the ZULRESSO inventory build-up incurred before FDA approval were already expensed in a prior period and are therefore excluded from the cost of goods sold for the six months ended June 30, 2019. We expect our cost of


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goods sold of ZULRESSO to increase as a percentage of net sales in future periods as we produce and then sell inventory that reflects the full cost of manufacturing.

Research and development expenses



                                             Six Months Ended
                                                 June 30,               Increase
                                            2019          2018         (Decrease)
                                                       (in thousands)
brexanolone (SAGE-547)                    $   4,248$  18,186$    (13,938 )
SAGE-217                                     67,679        20,987           46,692
SAGE-324                                      7,278         2,761            4,517
SAGE-718                                      6,949         4,217            2,732
Other research and development programs      17,491        14,719            2,772
Unallocated expenses                         37,395        36,386            1,009
Stock-based compensation                     34,417        20,994           13,423

Total research and development expenses $ 175,457$ 118,250$ 57,207

Research and development expenses for the six months ended June 30, 2019 were $175.5 million, compared to $118.3 million for the six months ended June 30, 2018. The increase of $57.2 million was primarily due to the following:



    •   a decrease of $13.9 million in expenses related to our brexanolone
        program, due to the completion of the Phase 3 clinical trials in PPD;




    •   an increase of $46.7 million in expenses related to conduct of our Phase 3
        clinical trials of SAGE-217 in MDD and supporting supply chain activities;




    •   an increase of $4.5 million in expenses related to conduct of our Phase 1
        clinical trials of SAGE-324;




    •   an increase of $2.7 million in expenses related to conduct of our Phase 1
        clinical trials of SAGE-718 and supporting clinical activities;




    •   an increase of $2.8 million in expenses related to research and
        development programs and discovery efforts focused on identifying new
        clinical candidates and additional indications of interest, and on our
        back-up programs; and




    •   an increase of $13.4 million in non-cash stock-based compensation expense,
        due to the hiring of additional full-time employees to support the growth
        of our operations and the increase in the fair market value of our common
        stock. The amount of non-cash stock-based compensation expense related to
        the achievement of performance-based vesting criteria was $9.5 million for
        the six months ended June 30, 2019. There was no non-cash stock-based
        compensation expense recognized related to the achievement of
        performance-based vesting criteria during the six months ended June 30,
        2018.



Selling, general and administrative expenses



                                                         Six Months Ended
                                                             June 30,                Increase
                                                        2019           2018         (Decrease)
                                                                   (in thousands)
Personnel-related                                    $   62,164$   19,432$     42,732
Stock-based compensation                                 44,466         23,851           20,615
Professional fees                                        39,045         22,152           16,893
Other                                                    26,471          6,581           19,890

Total selling, general and administrative expenses $ 172,146$ 72,016$ 100,130




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Selling, general and administrative expenses for the six months ended June 30, 2019 and 2018 were $172.1 million and $72.0 million, respectively. The increase of $100.1 million was primarily due to the following:



    •   an increase of $42.7 million in personnel-related costs in connection with
        the hiring of additional full-time employees to support the growth of our
        operations and commercial-related activities;




    •   an increase of $20.6 million in non-cash stock-based compensation expense,
        due to the hiring of additional full-time employees to support the growth
        of our operations and the increase in the fair market value of our common
        stock. The amount of non-cash stock-based compensation expense related to
        the achievement of performance-based vesting criteria was $6.8 million for
        the six months ended June 30, 2019. The amount of non-cash stock-based
        compensation expense related to the achievement of performance-based
        vesting criteria was $6.9 million during the six months ended June 30,
        2018 for a milestone related to the consummation of a licensing or
        corporate partnering arrangement;




    •   an increase of $16.9 million in professional fees associated with
        expanding operations, primarily for costs related to preparations for the
        launch of ZULRESSO in the U.S., which commenced on June 24, 2019; and




    •   an increase of $19.9 million in other expenses due to increased costs
        associated with facilities, mainly due to the increase in the amount of
        rented square feet of office space to accommodate our increased number of
        employees, along with other corporate infrastructure and office-related
        costs, such as information technology costs.

Interest income, net and Other expense, net

Interest income, net, and other expense, net, for the six months ended June 30, 2019 and 2018 were $14.7 million and $8.7 million, respectively. The primary reason for the increase was an increase in the balance of marketable securities.

Liquidity and Capital Resources

Prior to the second quarter of 2019, we had not generated revenue from product sales. We began to generate revenue from product sales in the second quarter of 2019 in conjunction with launch of our first product, ZULRESSO, which commenced on June 24, 2019. Prior to the second quarter of 2019, all of our revenue had been derived from our collaboration with Shionogi. To date, we have incurred recurring net losses. As of June 30, 2019, we had an accumulated deficit of $1.3 billion. From our inception through June 30, 2019, we received net proceeds of $2.2 billion from the sales of redeemable convertible preferred stock, the issuance of convertible notes and the sales of common stock in our initial public offering in July 2014 and follow-on offerings in April 2015, January 2016, September 2016, November 2017, February 2018 and February 2019.

On February 13, 2018, we completed the sale of 4,032,012 shares of our common stock in an underwritten public offering at a price to the public of $164.00 per share, resulting in net proceeds of $631.2 million after deducting commissions and underwriting discounts and offering costs paid by us.

On February 27, 2019, we completed the sale of 3,833,334 shares of our common stock in an underwritten public offering at a price to the public of $150.00 per share, resulting in net proceeds of $560.9 million after deducting commissions and underwriting discounts and offering costs paid by us.

As of June 30, 2019, our primary sources of liquidity were our cash, cash equivalents and marketable securities, which totaled $1.2 billion. We invest our cash in money market funds, U.S. government securities, corporate bonds and commercial paper, with the primary objectives to preserve principal, provide liquidity and maximize income without significantly increasing risk.




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The following table summarizes the primary sources and uses of cash for the six months ended June 30, 2019 and 2018:




                                  Six Months Ended June 30,
                                    2019               2018
Net cash provided by (used in):
Operating activities            $    (283,278 )$  (78,706 )
Investing activities                 (333,019 )       (550,931 )
Financing activities                  591,539          649,652
Total                           $     (24,758 )$   20,015




Operating Activities


Cash used in operating activities for the six months ended June 30, 2019 was $283.3 million, compared to $78.7 million for the six months ended June 30, 2018. The increase of $204.6 million was primarily due to the following:

    •   An increase of $240.1 million in cash used related to our net loss,
        primarily due to an increase in selling, general and administrative
        expenses due to increased headcount and other costs to support our
        expanding operations and increased research and development activities
        related to our development programs along with increased headcount in
        related functions;


    •   Offset by an increase of $31.8 million in non-cash charges, primarily due
        to an increase in stock-based compensation expense due to increased
        hiring; and


    •   A decrease of $3.6 million in cash used in changes in our operating assets
        and liabilities, primarily due to the growth of the business and the
        timing of vendor invoicing and payments.


Investing Activities



During the six months ended June 30, 2019 and 2018, net cash used in investing activities was $333.0 million and $550.9 million, respectively. During the six months ended June 30, 2019 and 2018, we purchased marketable securities and had sales and maturities of our marketable securities as part of managing our cash and investments portfolio, including purchases using proceeds received in our underwritten follow-on public offerings during February 2018 and February 2019.

Financing Activities

During the six months ended June 30, 2019 and 2018, net cash provided by financing activities was $591.5 million and $649.7 million, respectively, which primarily consisted of net proceeds from follow-on underwritten public offerings of our common stock, after deducting commissions and underwriting discounts and offering costs.

Operating Capital Requirements

We began to generate revenue from product sales in the second quarter of 2019 in conjunction with launch of our first product, ZULRESSO, which commenced on June 24, 2019. Given the timing of the U.S. launch of ZULRESSO and the time required for healthcare settings to become REMS-certified, achieve formulary approvals, establish protocols for administering ZULRESSO and secure satisfactory reimbursement, which may take six to nine months or more, depending on the site, we do not expect to start to see revenue momentum from sales of ZULRESSO build, if such momentum is achieved, until the fourth quarter of 2019 into 2020. We expect that, even if we start to see revenue momentum in the fourth quarter of 2019, revenues are likely to fluctuate quarter to quarter. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of our current and future product candidates, and seek regulatory approvals for those product candidates that are successfully developed; prepare for potential future commercialization of product candidates beyond ZULRESSO that are successfully developed and approved; begin to commercialize any such products, if successfully developed and approved; and continue our efforts to identify and develop new product candidates beyond our current portfolio. We also expect to incur additional costs associated with general operations. In addition, we expect to incur significant commercialization expenses for product sales, marketing and outsourced manufacturing with respect to ZULRESSO and any future products that are successfully developed and approved. Accordingly, we anticipate that we will need substantial additional funding in connection with our continuing operations.


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Based on our current operating plans, we expect that our existing cash, cash equivalents and marketable securities as of June 30, 2019, will enable us to fund our operating expenses and capital expenditure requirements at least the next 12 months from the filing date of this Quarterly Report. During that time, we expect that our expenses will increase substantially as we:

    •   continue our commercial activities related to ZULRESSO in the treatment of
        PPD in the U.S.;


  • fulfill our post-approval commitments related to ZULRESSO;


    •   continue to advance clinical development of SAGE-217, including the
        ongoing Phase 3 clinical program in MDD;


    •   continue to advance clinical development of SAGE-324 with an initial focus
        on development in essential tremor, certain epileptiform disorders, and
        other neurological conditions;


    •   continue to advance clinical development of SAGE-718 with an initial focus
        on development in indications involving NMDA receptor hypofunction;


    •   advance one or more non-clinical stage compounds into Phase 1 clinical
        development;


    •   continue our research and development efforts to evaluate the potential
        for our product candidates in the treatment of additional indications or
        in new formulations, and the identification of new drug candidates in the
        treatment of CNS disorders;


    •   determine the potential development and regulatory pathway for SAGE-217 in
        the EU;


    •   seek regulatory approvals in the U.S. for any product candidates that
        successfully complete clinical development;


    •   refine and scale-up the manufacturing process for SAGE-217 for planned
        late stage clinical trials; continue to improve the manufacturing process
        for our other product candidates; and manufacture clinical supplies as
        development progresses;


    •   add personnel, including personnel to support our product development and
        ongoing and future commercialization efforts, and incur increases in stock
        compensation expense related to existing and new personnel with respect to
        both service-based and performance-based awards;


    •   evaluate market opportunities for our products and product candidates in
        markets outside the U.S.;


  • add operational, financial and management information systems; and


  • maintain, leverage and expand our intellectual property portfolio.

Our current operating plan does not contemplate other development activities that we may pursue or that all of our currently planned activities will proceed at the same pace, or that all of these activities will be fully initiated or completed during that time. We have based our estimates on assumptions that could change, and we may use our available capital resources sooner than we currently expect. We may also choose to change or increase our development, commercialization or other efforts. Because of the numerous risks and uncertainties associated with the development and commercialization of any product or product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete development of our current or future product candidates or to commercialize any approved product.


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Our future capital requirements will depend on many factors, including:

    •   the amount and timing of revenues from sales of ZULRESSO, the success of
        which will depend on the rate, degree and level of market acceptance for
        ZULRESSO in the treatment of PPD in the U.S., including the impact of
        factors such as: availability and willingness of sites of care to
        undertake the responsibilities necessary to administer ZULRESSO; the level
        of reimbursement for both ZULRESSO and the infusion in the healthcare
        setting and the nature of limitations on reimbursement; the number of
        healthcare professionals willing to prescribe ZULRESSO, healthcare
        settings willing to administer ZULRESSO and women with PPD who agree to be
        treated with ZULRESSO;


    •   the timing and amount of costs associated with our commercialization of
        ZULRESSO;


    •   the ability of SAGE-217 and our other clinical-stage product candidates to
        progress through clinical development successfully; the timing, scope and
        outcome of regulatory filings, reviews and approvals of such product
        candidates, if we are successful in our development efforts; the scope and
        cost of any clinical trials or other commitments required post-approval
        for any approved products resulting from such development efforts, if
        successful; and the level, timing and amount of costs associated with
        preparing for a potential future commercial launch of any such product
        candidate that is successfully developed and approved;


    •   the initiation, progress, timing, costs, and results of non-clinical
        studies and clinical trials for our existing and future product
        candidates; the number and length of clinical trials required by
        regulatory authorities to support regulatory approval; and the costs of
        preparing regulatory filings;


    •   the outcome of regulatory and other discussions and activities focused on
        potential pathways for advancing our product candidates in the EU and
        other markets outside the U.S., if we choose to proceed there, and the
        scope and timing of resulting decisions and plans, if any, we make to
        build or expand in those markets;


    •   the size of the PPD market and the size of the markets for which SAGE-217
        and our other product candidates may be approved in the future, if
        successfully developed; the portion of the population in the approved
        indication for which our products are actually prescribed; the rate and
        degree of market acceptance for our products, and the pricing,
        availability and level of reimbursement for our products;


    •   the number and characteristics of the product candidates we pursue in
        development and the nature and scope of our discovery and development
        programs;


    •   the costs of preparing, filing and prosecuting patent applications,
        maintaining and enforcing our intellectual property rights and defending
        intellectual property-related claims;


    •   the extent to which we acquire or in-license other products and
        technologies; and


    •   our ability to establish any future collaboration arrangements on
        favorable terms, if at all.



Until such time, if ever, as we can generate substantial product revenue and achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other sources of funding. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or in light of specific strategic considerations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interest of our stockholders. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or research programs or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other means when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.


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Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments as included in our Annual Report on Form 10-K, which was filed with the SEC on February 19, 2019.

Off-Balance Sheet Arrangements

We do not currently have, nor did we have during the periods presented, any off-balance sheet arrangements as defined by SEC rules.

Application of Critical Accounting Policies

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. Our preparation of these consolidated financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the consolidated financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

Except for the revenue recognition, inventory, cost of goods sold and accounts receivable policies described below, there have been no material changes to our critical accounting policies from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed by us with the SEC on February 19, 2019.

Revenue Recognition

Effective January 1, 2017, we adopted Accounting Standards Codification ("ASC"), Topic 606, Revenue from Contracts with Customers ("Topic 606"). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as collaboration arrangements and leases. The adoption of Topic 606 had no impact on our consolidated financial statements as we did not have any revenue prior to adoption.

We received approval of ZULRESSO from the FDA in March 2019 and subsequently began to record revenues from product sales in June 2019. Prior to the second quarter of 2019, all of our revenues were derived from our collaboration agreement with Shionogi. The terms of our collaboration agreement include consideration such as non-refundable license fees, funding of research and development services, payments due upon the achievement of clinical and pre-clinical performance-based development milestones, regulatory milestones, manufacturing services to supply drug product for clinical trials, and sales-based milestones and royalties on product sales.

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. For contracts determined to be within the scope of Topic 606, we assess whether the goods or services promised within each contract are distinct to identify those that are performance obligations. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. We allocate the transaction price (the amount of consideration we expect to be entitled to from a customer in exchange for the promised goods or services) to each performance obligation and recognize the associated revenue when (or as) each performance obligation is satisfied. Our estimate of the transaction price for each contract includes all variable consideration to which we expect to be entitled.




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Collaboration and license revenue

In assessing whether a promised good or service is distinct in the evaluation of a collaboration or license arrangement subject to Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, we are required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices ("SSP") on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. In certain circumstances, we may apply the residual method to determine the SSP of a good or service if the standalone selling price is considered highly variable or uncertain. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.

If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. We assessed our arrangement with Shionogi and concluded that a significant financing component does not exist. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. To date, revenue from our collaboration agreement with Shionogi has come from an initial, up-front fee upon execution of the agreement and payment for the supply of drug product for Shionogi clinical trials.




Product revenue

We recognize product revenues, net of variable consideration related to certain allowances and accruals that are determined using the expected value method, in our consolidated financial statements at the point in time when delivery is made and when control transfers to the customer, which is typically when the product has been delivered to the customer's location. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. Our only performance obligation identified for ZULRESSO is to deliver the product to the location specified by the customer's order. We record shipping and handling costs associated with delivery of product to our customers within selling, general and administrative expenses on our consolidated statements of operations and comprehensive loss. We expense incremental costs of obtaining a contract as incurred if the expected amortization period of the asset would be less than one year. If we were to incur incremental costs with an amortization period greater than a year, such costs would be capitalized as contract assets, as they are expected to be recovered, and would be expensed by amortizing on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. We did not have any contract assets (unbilled receivables) at June 30, 2019, as customer invoicing generally occurs before or at the time of revenue recognition. We did not have any contract liabilities at June 30, 2019, as we did not receive any payments in advance of satisfying our performance


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obligations to our customers. Amounts billed or invoiced are included in accounts receivable, net on the consolidated balance sheets.

We record reserves, based on contractual terms, for the following components of variable consideration related to product sold during the reporting period, as well as our estimate of product that remains in the distribution channel inventory of our customers at the end of the reporting period. On a quarterly basis, we will update our estimates and record any necessary material adjustments in the period they are identified.

Chargebacks: We estimate chargebacks from our customers who directly purchase the product from us for fees and discounts resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to our customers. Customers charge us for the difference between what they pay to us for the product and the selling price to the qualified healthcare providers. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at the end of each reporting period that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed, but for which we have not yet issued a credit.

Government Rebates: We are subject to discount obligations under government programs, including Medicaid. We record reserves for rebates in the same period the related product revenue is recognized, resulting in a reduction of ZULRESSO product revenues and a current liability that is included in accrued expenses on our consolidated balance sheet. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimates of future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.

Trade Discounts and Allowances: We generally provide customary invoice discounts on ZULRESSO sales to our customers for prompt payment and we pay fees for sales order management, data, and distribution services. We estimate our customers will earn these discounts and fees and deduct these discounts and fees in full from gross ZULRESSO revenues and accounts receivable at the time we recognize the related revenues.

Financial Assistance: We provide voluntary financial assistance programs to patients with commercial insurance that have coverage and reside in states that allow financial assistance. We estimate the average financial assistance amounts for ZULRESSO based on demographics for patients who have registered and been approved for assistance and record any such amounts within accrued expenses on our consolidated balance sheet. The calculation of the accrual for financial assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period, as well as claims that have been approved but not yet paid. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included as a component of accrued expenses and other current liabilities on the consolidated balance sheets.

Product Returns: Consistent with industry practice, we offer the specialty pharmacies and specialty distributors that are our customers limited product return rights for damaged, defective or expiring product, provided it is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. We estimate the amount of our product sales that may be returned by our customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as a reserve within accrued expenses on our consolidated balance sheets. Based on the distribution model for ZULRESSO, contractual inventory limits with our customers, the product price and limited contractual return rights, we believe there will be minimal ZULRESSO returns. We will update our estimated refund liability, on at least a quarterly basis, based on actual shipments of ZULRESSO subject to contractual return rights, changes in expectations about the amount of estimated refunds or actual returns.




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Inventory


Inventory is stated at the lower of cost or estimated net realizable value with cost determined on a first-in, first-out basis. Inventory costs include raw materials, third-party contract manufacturing, third-party packaging services, and freight. Raw and intermediate materials that may be utilized for either research and development or commercial purposes are identical and, as a result, are both classified as inventory. Amounts in inventory associated with research and development are charged to research and development expense when the product enters the research and development process and can no longer be used for commercial purposes and, therefore, does not have an "alternative future use" as defined in authoritative guidance. We perform an assessment of the recoverability of capitalized inventory during each reporting period and writes down any excess and obsolete inventory to its estimated net realizable value in the period it is identified. If they occur, such impairment charges are recorded as a component of cost of goods sold in the consolidated statements of operations and comprehensive loss. Inventory on-hand that will be sold beyond our normal operating cycle is classified as non-current and grouped with other assets on our consolidated balance sheets. At June 30, 2019, we did not have any such inventory.

Prior to the initial date regulatory approval is received, costs related to the production of inventory are recorded as research and development expense on our consolidated statements of operations and comprehensive loss in the period incurred. We received FDA approval for ZULRESSO on March 19, 2019 and subsequently began capitalizing costs related to inventory manufacturing.

Cost of Goods Sold

Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of ZULRESSO, including third-party manufacturing costs, packaging services, freight, third-party royalties payable on our net product revenues and amortization of intangible assets associated with ZULRESSO. Cost of goods sold may also include period costs related to certain inventory manufacturing services, inventory adjustment charges, as well as manufacturing variances. In connection with the FDA approval of ZULRESSO on March 19, 2019, we subsequently began capitalizing inventory manufactured or purchased after this date. As a result, certain manufacturing costs associated with product shipments of ZULRESSO were expensed prior to FDA approval and, therefore, are not included in cost of goods sold during the current period.

Accounts Receivable

Our trade accounts receivable consist of amounts due from specialty distributors and specialty pharmacies in the U.S. related to sales of ZULRESSO and have standard payment terms that generally require payment within 30 to 60 days from the invoice date. We monitor the financial performance and creditworthiness of customers so that we can properly assess and respond to changes in their credit profile. We reserve against trade accounts receivable for estimated losses that may arise from a customer's inability to pay and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 2, "Summary of Significant Accounting Policies," in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report.


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