CLOVIS ONCOLOGY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents inthe United States ,Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, for those indications that 70
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require them, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use.
Our marketed product Rubraca® (rucaparib), an oral small molecule inhibitor of
poly ADP-ribose polymerase ("PARP"), is marketed in the United States for two
indications specific to recurrent epithelial ovarian, fallopian tube or primary
peritoneal cancer and also an indication specific to metastatic
castration-resistant prostate cancer ("mCRPC"). The initial indication received
approval from the FDA in December 2016 and covers the treatment of adult
patients with deleterious BRCA (human genes associated with the repair of
damaged DNA) mutation (germline and/or somatic)-associated epithelial ovarian,
fallopian tube, or primary peritoneal cancer who have been treated with two or
more chemotherapies and selected for therapy based on an FDA-approved companion
diagnostic for Rubraca. In April 2018 , the FDA also approved Rubraca for the
maintenance treatment of adult patients with recurrent epithelial ovarian,
fallopian tube, or primary peritoneal cancer who are in a complete or partial
response to platinum-based chemotherapy. The approval in this second, broader
and earlier-line indication on a priority review timeline was based on positive
data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required
for patients to be prescribed Rubraca in this maintenance treatment indication.
In May 2020 , the FDA approved Rubraca for the treatment of adult patients with
mCRPC associated with a deleterious BRCA mutation (germline and/or somatic) who
have been treated previously with androgen receptor-directed therapy and a
taxane-based chemotherapy. The FDA approved this third indication under
accelerated approval based on objective response rate and duration of response
data from the TRITON2 clinical trial. We launched Rubraca for this indication in
the U.S. following receipt of the approval. As an accelerated approval,
continued approval for this indication may be contingent upon verification and
description of clinical benefit in confirmatory trials. The TRITON3 clinical
trial is expected to serve as the confirmatory study for Rubraca's approval in
mCRPC. In August 2020 , the FDA approved the use of Foundation Medicine's
blood-based diagnostic test, FoundationOne Liquid CDx, as a companion diagnostic
for the detection of deleterious BRCA mutation (germline and/or somatic) to
select mCRPC patients for treatment with Rubraca.
In Europe , the European Commission granted a conditional marketing authorization
in May 2018 for Rubraca as monotherapy treatment of adult patients with
platinum-sensitive, relapsed or progressive, BRCA mutated (germline and/or
somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal
cancer, who have been treated with two or more prior lines of platinum-based
chemotherapy, and who are unable to tolerate further platinum-based
chemotherapy. In January 2019 , the European Commission granted a variation to
the marketing authorization to include the maintenance treatment of adult
patients with recurrent epithelial ovarian, fallopian tube, or primary
peritoneal cancer who are in a complete or partial response to platinum-based
chemotherapy. With this approval, Rubraca is authorized in Europe for certain
patients in the recurrent ovarian cancer maintenance setting regardless of their
BRCA mutation status. Following successful reimbursement negotiations, Rubraca
has been launched in each of Germany , United Kingdom , Italy , France , Spain and
the Netherlands , and reimbursement is pending in Switzerland .
In December 2020 , Rubraca met the primary study endpoint of significantly
improving PFS versus chemotherapy in the ARIEL4 confirmatory study. Additional
ARIEL4 study results are expected to be submitted for presentation at a medical
congress meeting in 2021. ARIEL4 is a Phase 3 multicenter, randomized study of
Rubraca versus chemotherapy, which enrolled relapsed ovarian cancer patients
with BRCA mutations (inclusive of germline and/or somatic) who had received two
or more prior lines of chemotherapy. Completion of ARIEL4 is a post-marketing
commitment in the U.S. and Europe .
Beyond our labeled indications, we have a clinical development program underway
to further evaluate Rubraca in a variety of solid tumor types, either as
monotherapy or in combination with other agents, including several studies as
part of our ongoing clinical collaboration with Bristol Myers Squibb to evaluate
its immunotherapy Opdivo (nivolumab) in combination with Rubraca. We anticipate
initial data of Rubraca monotherapy versus placebo from our ATHENA study in the
second half of 2021, with the results of Rubraca versus Opdivo in all study
populations a year or more later. However, the timing of the ATHENA data
readouts is dependent on the timing of data maturity driven by PFS events.
We initiated the Phase 2 LODESTAR study in December 2019 to evaluate Rubraca as
monotherapy treatment in patients with recurrent solid tumors associated with a
deleterious mutation in homologous recombination repair genes. Based on our
interactions with the FDA, we believe that this study may be
registration-enabling for a targeted gene- and tumor-agnostic label, if data
from the trial support the potential for an accelerated approval. Assuming
enrollment in this
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study continues as planned, and subject to the data, we may potentially file an
sNDA with the FDA for this indication in the second half of 2021 or the first
half of 2022.
Pursuant to our license and collaboration agreement with 3BP, entered into inSeptember 2019 , we have initiated development of a peptide-targeted radionuclide therapy ("PTRT") and imaging agent targeting fibroblast-activating protein ("FAP"). We have completed sufficient preclinical work to support an IND for the lead candidate under our license and collaboration agreement, designated internally as FAP-2286. Accordingly, we submitted two INDs for FAP-2286 for use as imaging and treatment agents inDecember 2020 to support an initial Phase 1 study to determine the dose and tolerability of FAP-2286 as a therapeutic agent with expansion cohorts planned in multiple tumor types as part of a global development program. The INDs are expected to become effective following receipt and submission, and acceptance by the FDA, of satisfactory chemistry, manufacturing and controls ("CMC") data for the imaging agent from clinical sites. The FAP-targeting imaging agent will be utilized to identify tumors that contain FAP for treatment in the Phase 1 LuMIERE clinical study, which we anticipate initiating in the first half of 2021. In addition to our planned studies, theUniversity of California San Francisco is sponsoring a separate, investigator-initiated, imaging-only study with gallium-68 labeled FAP-2286 (NCT04621435) to evaluate FAP expression in multiple tumor types; their study is currently recruiting. We holdU.S. and global rights to FAP-2286, excludingEurope (defined to includeRussia ,Turkey andIsrael ), where 3BP retains rights. We are also collaborating with 3BP on a discovery program directed to up to three additional, undisclosed targets for targeted radionuclide therapy, to which we would obtain global rights for any resulting product candidates.
Lucitanib, our second product candidate currently in clinical development, is an
investigational, oral, potent angiogenesis inhibitor which inhibits vascular
endothelial growth factor receptors 1 through 3 ("VEGFR1-3"), platelet-derived
growth factor receptors alpha and beta ("PDGFR ?/?") and fibroblast growth
factor receptors 1 through 3 ("FGFR1-3"). Lucitanib inhibits the same three
pathways as Lenvima® (lenvatinib), which has received an FDA approval for use in
endometrial cancer in combination with Keytruda® (pembrolizumab), a PD-1
inhibitor. This, together with preclinical data for lucitanib in combination
with a PD-1 inhibitor that demonstrated enhanced anti-tumor activity compared to
that of single agents, represent a scientific rationale for development of
lucitanib in combination with a PD-1 inhibitor, and in February 2019 , lucitanib
was added to our clinical collaboration with Bristol Myers Squibb. The
Clovis-sponsored LIO-1 study of lucitanib in combination with nivolumab in
advanced solid tumors and gynecologic cancers is currently enrolling patients in
the Phase 2 part of the study. We expect to present interim data from this study
at medical meetings in 2021, which are expected to include interim results from
the ovarian and endometrial cancer expansion cohorts. We hold the global
(excluding China ) development and commercialization rights for lucitanib.
We commenced operations in April 2009 . To date, we have devoted substantially
all of our resources to identifying and in-licensing product candidates,
performing development activities with respect to those product candidates and
the general and administrative support of these operations. For the year ended
December 31, 2020 , we generated $164.5 million product revenue related to sales
of Rubraca. We have principally funded our operations using the net proceeds
from public offerings of our common stock, convertible senior notes offerings
and our financing agreement related to our ATHENA trial.
We have never been profitable and, as of
We expect to incur significant losses for the foreseeable future, as we incur
costs related to commercial activities associated with Rubraca. Based on current
estimates, we believe that our cash, cash equivalents and liquidity available
under our financing agreement related to our ATHENA trial will allow us to fund
our operating plan through at least the next 12 months. Until we can generate a
sufficient amount of revenue from Rubraca, we expect to finance our operations
in part through additional public or private equity or debt offerings and may
seek additional capital through arrangements with strategic partners or from
other sources. Adequate additional financing may not be available to us on
acceptable terms, or at all. Our failure to raise capital as and when needed
would have a negative impact on our financial condition and our ability to
pursue our business strategy. We will need to generate significant revenues to
achieve profitability, and we may never do so.
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Product License Agreements
For a discussion of our product license agreements, see Note 14, License Agreements, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Financial Operations Overview Revenue During 2020, we recorded$164.5 million in revenue related to sales of Rubraca. For further discussion of our revenue recognition policy, see "Critical Accounting Policies and Significant Judgments and Estimates" below. Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products. Any inability on our part to successfully commercialize Rubraca inthe United States ,Europe and any foreign territories where it may be approved, or any significant delay in such approvals, could have a material adverse impact on our ability to execute upon our business strategy and, ultimately, to generate sufficient revenues from Rubraca to reach or maintain profitability or sustain our anticipated levels of operations. We supply commercially labeled Rubraca free of charge to eligible patients who qualify due to financial need through our patient assistance program and the majority of these patients are on Medicare. This product is distributed through a separate vendor who administers the program on our behalf. It is not distributed through our specialty distributor and specialty pharmacy network. This product is neither included in the transaction price nor the variable considerations to arrive at product revenue. Manufacturing costs associated with this free product is included in selling, general and administrative expenses. For the year endedDecember 31, 2020 and 2019, the supply of this free drug was approximately 17% and 20%, respectively, of the overall commercial supply or the equivalent of$30.4 million and$34.8 million , respectively, in commercial value. Our ability to generate product revenue for the year endedDecember 31, 2020 was negatively affected by the COVID-19 pandemic due to fewer diagnoses and fewer patients going to in-person office visits as oncology practices and patients continue to adapt to the impact of the virus. As a result of the COVID-19 pandemic, ourU.S. and European sales forces have had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or have been limited. Our European launches inItaly ,Spain andFrance occurred in an environment in which our field-based personnel in those countries have not been allowed to visit hospitals since lateFebruary 2020 . Similarly, we launched Rubraca for prostate cancer in theU.S beginning inMay 2020 , but our physical access to hospital, clinics, doctors and pharmacies has been limited.
Research and Development Expenses
Research and development expenses consist of costs incurred for the development of our product candidates and companion diagnostics, which include:
license fees and milestone payments related to the acquisition of in-licensed
? products, which are reported on our Consolidated Statements of Operations and
Comprehensive Loss as acquired in-process research and development;
? employee-related expenses, including salaries, benefits, travel and share-based
compensation expense;
? expenses incurred under agreements with CROs and investigative sites that
conduct our clinical trials;
? the cost of acquiring, developing and manufacturing clinical trial materials;
? costs associated with non-clinical activities and regulatory operations;
? market research and disease education; and
? activities associated with the development of companion diagnostics for our
product candidates.
Research and development costs are expensed as incurred. License fees and
milestone payments related to in-licensed products and technology are expensed
if it is determined that they have no alternative future use. Costs for certain
development activities, such as clinical trials and manufacturing of clinical
supply, are recognized based on an evaluation of the progress to completion of
specific tasks using data such as patient enrollment, clinical site activations
or information provided to us by our vendors. Our research and development
expenses decreased for 2020 compared to 2019. We expect research and development
costs to be lower in the full year 2021 compared to 2020.
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We did not see material disruption to our clinical trials as a result of the
COVID-19 pandemic for the year ended December 31, 2020 as we completed target
enrollment of ATHENA, our largest clinical trial, during the second quarter.
However, we may see disruption during 2021. For example, new patient recruitment
in certain clinical studies may be affected and the conduct of clinical trials
may vary by geography as some regions are more adversely affected. Additionally,
we may slow or delay enrollment in certain trials to manage expenses.
The following table identifies research and development and acquired in-process
research and development costs on a program-specific basis for our products
under development. Personnel-related costs, depreciation and share-based
compensation are not allocated to specific programs, as they are deployed across
multiple projects under development and, as such, are separately classified as
personnel and other expenses in the table below.
Year Ended December 31,
2020 2019 2018
(in thousands)
Rucaparib Expenses
Research and development $ 159,364 $ 184,617 $ 153,083
Rucaparib Total 159,364 184,617 153,083
FAP Expenses
Research and development 6,928 3,633Acquired in-process research and development - 9,440
-
FAP Total 6,928 13,073 -
Lucitanib Expenses
Research and development 6,860 5,128 786
Lucitanib Total 6,860 5,128 786
Rociletinib Expenses
Research and development (1,089) 1,101 2,391
Rociletinib Total (1,089) 1,101 2,391
Personnel and other expenses 85,644 88,667 75,087
Total $ 257,707 $ 292,586 $ 231,347 Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of salaries and related costs for personnel in executive, commercial, finance, legal, investor relations, human resources and information technology functions. Other general and administrative expenses include facilities expenses, communication expenses, information technology costs, corporate insurance and professional fees for legal, consulting and accounting services. With the FDA approval of Rubraca onDecember 19, 2016 , all sales and marketing expenses associated with Rubraca are included in selling, general and administrative expenses. As a result of the COVID-19 pandemic, ourU.S. and European sales forces have had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or have been limited, which have decreased sales and marketing expenses during 2020 and will extend to 2021. In addition, due to increased travel restrictions, quarantines, "work-at-home" and "shelter-in-place" orders and extended shutdown of certain non-essential business inthe United States , and European andAsia-Pacific countries, in-person conferences and meetings requiring travel have and will continue to decrease resulting in a decrease of our selling, general and administrative expenses. The COVID-19 pandemic has accelerated a preference by oncology practices for more digital programming, including digital, peer-to-peer interactions and reduced in-person promotion. In order to meet these changing preferences, we are adopting a hybrid commercial strategy combining increased digital promotion activities, greater online resources and more peer-to-peer interactions with reduced and more targeted in-person promotion. Accordingly, new tools and performance indicators based on this hybrid approach were rolled out during the fourth quarter, and theU.S. commercial organization was reduced in size by approximately 45 employees during the fourth quarter. Despite increased investment in digital promotion, we anticipate an effect of adopting this hybrid model will result in annual cost-savings of approximately$10.0 million . We are adopting this strategy in order to better reach customers in the way they want to be reached with the goal of returning to growth, especially as the ongoing impact of COVID-19 is reduced. 74 Table of Contents
Acquired in-process research and development expenses consist of upfront payments to acquire a new drug compound, as well as subsequent milestone payments. Acquired in-process research and development payments are immediately expensed provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Once regulatory approval is received, payments to acquire rights, and the related milestone payments, are capitalized and the amortization of such assets recorded to product cost of sales. Other Income and Expense
Other income and expense are primarily comprised of foreign currency gains and losses resulting from transactions with CROs, investigational sites and contract manufacturers where payments are made in currencies other than theU.S. dollar. Other expense also includes interest expense recognized related to our convertible senior notes.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, revenue and related disclosures. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition We are currently approved to sell Rubraca inthe United States and the EU markets. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers. Our customers subsequently sell our products to patients and health care providers. Separately, we have arrangements with certain payors and other third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less. Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from price concessions that include rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known. 75 Table of Contents For the year endedDecember 31, 2020 , we recognized$164.5 million of product revenue. For a complete discussion of the accounting for product revenue, see Note 3, Revenue Recognition.
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include:
? fees paid to CROs in connection with clinical studies;
? fees paid to investigative sites in connection with clinical studies;
? fees paid to vendors in connection with non-clinical development activities;
? fees paid to vendors associated with the development of companion
diagnostics; and
? fees paid to vendors related to product manufacturing, development and
distribution of clinical supplies.
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. Share-Based Compensation
Determining the amount of share-based compensation to be recorded requires us to
develop estimates of the fair value of stock options as of their grant date.
Compensation expense is recognized over the vesting period of the award.
Calculating the fair value of share-based awards requires that we make highly
subjective assumptions. We use the Black-Scholes option pricing model to value
our stock option awards. Use of this valuation methodology requires that we make
assumptions as to the expected dividend yield, price volatility of our common
stock, the risk-free interest rate for a period that approximates the expected
term of our stock options and the expected term of our stock options. We utilize
a dividend yield of zero based on the fact that we have never paid cash
dividends and have no current intention to pay cash dividends.
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The fair value of stock options for the years ended
Year Ended December 31,
2020 2019 2018
Dividend yield - - -
Volatility (a) 99 % 93 % 88 %Risk-free interest rate (b) 0.49 % 1.67 % 2.92 % Expected term (years) (c) 6.0 5.9 5.9
(a) Volatility: The expected volatility was estimated using our historical data.
Risk-free interest rate: The rate is based on the yield on the grant date of
(b) a zero-coupon
option's expected term.
(c) Expected term: The expected term of the award was estimated using our
historical data.
We recognized share-based compensation expense of approximately $50.8 million ,
$54.3 million and $49.1 million for the years ended December 31, 2020 , 2019 and
2018, respectively. As of December 31, 2020 , the unrecognized share-based
compensation expense related to unvested options, adjusted for expected
forfeitures, was $18.1 million , which is expected to be recognized over a
weighted-average remaining vesting period of 1.5 years. As of December 31, 2020 ,
the unrecognized share-based compensation expense related to RSUs, adjusted for
expected forfeitures, was $33.6 million , which is expected to be recognized over
an estimated weighted-average remaining vesting period of 2.2 years. We expect
our share-based compensation to continue to grow in future periods due to the
potential increases in the value of our common stock and headcount.
We estimate the level of forfeitures expected to occur and record compensation expense only for those awards that we ultimately expect will vest.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value,
on a first-in, first-out ("FIFO") basis. Inventories include active
pharmaceutical ingredient ("API"), contract manufacturing costs and overhead
allocations. We begin capitalizing incurred inventory related costs upon
regulatory approval. Prior to regulatory approval, incurred costs for the
manufacture of drugs that could potentially be available to support the
commercial launch of our products are recognized as research and development
expense.
We regularly analyze our inventory levels for excess quantities and obsolescence
(expiration), considering factors such as historical and anticipated future
sales compared to quantities on hand and the remaining shelf-life of Rubraca.
Rubraca finished goods have a shelf-life of four years from the date of
manufacture. We expect to sell the finished goods prior to expiration. The API
currently has a shelf-life of four years from the date of manufacture but can be
retested at an immaterial cost with no expected reduction in potency, thereby
extending its shelf-life as needed. We expect to consume substantially all of
the API over a period of approximately seven years based on our long-rangesales projections of Rubraca.
We write down inventory that has become obsolete, inventory that has a cost
basis in excess of its estimated realizable value and/or inventory in excess of
expected sales requirements. Expired inventory would be disposed of and the
related costs would be written off as cost of product revenue. Inventories that
are not expected to be consumed within 12 months following the balance sheet
date are classified as long-term inventories. Long-term inventories primarily
consist of API.
API is currently produced by Lonza. As the API has undergone significant
manufacturing specific to its intended purpose at the point it is purchased by
us, we classify the API as work-in-process inventory. In addition, we currently
manufacture Rubraca finished goods with a single third-party manufacturer. The
disruption or termination of the supply of API or the disruption or termination
of the manufacturing of our commercial products could have a material adverse
effect on our business, financial position and results of operations. API that
is written off due to damage and certain costs related to our dedicated
production train at Lonza are included in Other Operating Expenses in the
Consolidated Statements of Operations and Comprehensive Loss.
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Inventory used in clinical trials is expensed as research and development expense when it has been identified for such use.
At
Intangible Assets Definite-lived intangible assets related to capitalized milestones under license agreements are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of the product's useful life is shorter than the remaining patent life, then a shorter period is used. Amortization expense is recorded as a component of cost of sales in the Consolidated Statements of Operations and Comprehensive Loss. Intangible assets are evaluated for impairment at least annually in the fourth quarter or more frequently if impairment indicators exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the decision to discontinue the development of a drug, the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. In connection with any impairment assessment, the fair value of the intangible assets as of the date of assessment is compared to the carrying value of the intangible asset. Impairment losses are recognized if the carrying value of an intangible asset is both not recoverable and exceeds its fair value. Results of Operations Comparison of the Year EndedDecember 31, 2020 to the Year EndedDecember 31, 2019 (in thousands) Year ended December 31, 2020 2019 U.S. ex-U.S. Total U.S. ex-U.S. Total Transaction price$ 178,427 $ 36,035 $ 214,462 $ 160,450 $ 7,867 $ 168,317 Sales deductions: Government rebates and chargebacks (19,620) (16,312) (35,932) (13,437) (1,771) (15,208) Discounts and fees (12,548) (1,460) (14,008) (9,826) (277) (10,103) Total sales deductions (32,168) (17,772) (49,940) (23,263) (2,048) (25,311) Product revenue 146,259 18,263 164,522 137,187 5,819 143,006 Operating expenses: External cost of sales - product 29,526 6,602 36,128 28,179 1,747 29,926 Cost of sales - intangible asset amortization 2,287 2,890 5,177 1,956 2,804 4,760 Research and development 249,444 8,263 257,707 275,518 7,628 283,146 Selling, general and administrative 139,455 24,439 163,894 161,132 21,637 182,769 Acquired in-process research and development - - - 9,440 - 9,440 Other operating expenses 3,804 - 3,804 9,711 - 9,711 Total expenses 424,516 42,194 466,710 485,936 33,816 519,752 Operating loss (278,257) (23,931) (302,188) (348,749) (27,997) (376,746) Other income (expense): Interest expense (30,508) (19,405) Foreign currency loss (72) (547) (Loss) gain on extinguishment of debt (3,277) 18,480 Loss on convertible senior notes conversion (35,075) - Legal settlement loss - (26,750) Other income 1,361 6,342 Other income (expense), net (67,571) (21,880) Loss before income taxes (369,759)
(398,626)
Income tax benefit
(expense) 547 (1,798)
Net loss $ (369,212) $ (400,424)
Product Revenue. Product revenue for the year ended December 31, 2020 increased
compared to the same period in the prior year primarily due to continued growth
in sales of Rubraca, which is approved for sale in the United States and Europe
markets. Following successful reimbursement negotiations, Rubraca has been
launched in countries in Europe throughout 2019 and 2020. In May 2020 , the FDA
approved Rubraca as a monotherapy treatment of adult patients
with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer and
we have launched Rubraca for prostate
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cancer in theU.S. Product revenue is recorded net of variable considerations comprised of rebates, chargebacks and other discounts. Product revenue for the year endedDecember 31, 2020 was$146.3 million inthe United States and$18.2 million outside ofthe United States . Variable considerations represented 23.3% and 15.0% of the transaction price recognized in the year endedDecember 31, 2020 and 2019, respectively. The increase in variable considerations is primarily due to the European National Health Service rebates related to our sales inEurope . Countries inEurope contract larger government rebates and discounts compared to theU.S. contributing to the overall increase in variable considerations. As sales inEurope increase in percentage terms compared to theU.S. , variable considerations will also increase. Inthe United States , PHS chargebacks increased during the year endedDecember 31, 2020 compared to the prior year. In addition, inthe United States , GPO discounts increased during the year endedDecember 31, 2020 and beginning inJanuary 2020 , we began providing payor rebates, which is included in discounts and fees for the year endedDecember 31, 2020 .
Cost of Sales - Product. Product cost of sales for the year endedDecember 31, 2020 increased primarily due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.U.S. product cost of sales for the year endedDecember 31, 2020 increased$1.3 million compared to the same period in the prior year due to the increase in product revenue. Ex-U.S. product cost of sales for the year endedDecember 31, 2020 increased$4.9 million compared to the same period in the prior year due to the increase in product revenue.
Cost of Sales - Intangible Asset Amortization. For the year endedDecember 31, 2020 and 2019, we recognized cost of sales of$5.2 million and$4.8 million , respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and theEuropean Commission . Research and Development Expenses. Except for activities related to medical research and disease education, research and development expenses are attributable to ourU.S. segment. Research and development expenses decreased during the year endedDecember 31, 2020 compared to the same period in the prior year primarily due to lower research and development costs for Rubraca. The decrease related to our TRITON studies for prostate cancer, our ARIEL studies for ovarian cancer, discontinuation of our ATLAS study, diagnostic development costs and personnel costs. These decreases were partially offset by increased costs related to our ATHENA combination study with Bristol Myers Squibb's immunotherapy OPDIVO for ovarian cancer. The ATHENA study was initiated in the second quarter of 2018 and we completed target enrollment during the second quarter of 2020. In addition, research and development costs related to FAP and lucitanib have increased since the prior year. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased during the year endedDecember 31, 2020 compared to the same period in the prior year due to a decrease of$13.1 million in marketing costs and$3.2 million in share-based compensation expense. In addition, there was a decrease of$4.0 million in travel due to the COVID-19 pandemic.U.S. selling, general and administrative expenses decreased$21.7 million during the year endedDecember 31, 2020 compared to the same period in the prior year due to decreases in marketing costs, share-based compensation expense and a decrease in travel due to the COVID-19 pandemic.
Ex-
Acquired In-Process Research and Development Expenses. Upon the signing of the license and collaboration agreement with 3BP inSeptember 2019 , we made a$9.4 million upfront payment to 3BP, which is related to ourU.S. segment. 79 Table of Contents Other Operating Expenses. During the year endedDecember 31, 2020 , we recognized other operating expenses related to the write off of some damaged API and certain costs related to our dedicated production train at Lonza, which is related to ourU.S. segment. We expect these expenses to increase during 2021 related to our fixed facility fee each quarter since we expect to have sufficient inventory and do not plan to produce inventory at Lonza during 2021. Interest Expense. Interest expense increased during the year endedDecember 31, 2020 compared to the same period in the prior year due to theMay 2019 financing agreement related to our ATHENA trial. In addition, our convertible senior notes transactions during the year resulted in the write off of$4.3 million of unamortized debt issuance costs, which was recorded as interest expense. Loss/Gain on Extinguishment of Debt. InApril 2020 , we entered into a privately negotiated exchange agreement with a Holder of our 2021 Notes, pursuant to which we issued to such Holder of the 2021 Notes approximately$36.1 million in additional 2024 Notes (2019 Issuance) of our currently outstanding 2024 Notes (2019 Issuance) in exchange for approximately$32.8 million in aggregate principal of 2021 Notes held by such Holder, which resulted in a$3.3 million loss on extinguishment of debt. InAugust 2019 , we repurchased$190.3 million aggregate principal amount of our outstanding 2021 Notes and$2.0 million of accrued interest for an aggregate repurchase price of$171.8 million . This repurchase resulted in the write off of$2.0 million in unamortized debt issuance costs and the recognition of$18.5 million gain on extinguishment of debt. Loss on Convertible Senior Notes Conversion. InJanuary 2020 , we completed a registered direct offering of an aggregate 17,777,679 shares of our common stock at a price of$9.25 per share. We used the proceeds of the share offering to repurchase an aggregate of$123.4 million principal amount of 2024 Notes (2019 Issuance) in privately negotiated transactions. In addition, we paid customary fees and expenses in connection with the transactions. These transactions resulted in a loss of$7.8 million for the year endedDecember 31, 2020 . InNovember 2020 , we entered into a privately negotiated exchange and purchase agreement with a holder of our 2024 Notes (2019 Issuance). Pursuant to the agreement, in exchange for approximately$64.8 million aggregate principal amount of 2024 Notes (2019 Issuance) held by the holder, we agreed to issue to the holder a number shares of our common stock (the "Exchanged Shares") utilizing an exchange ratio that is based in part on the daily volume-weighted average prices ("VWAPs") per share of our common stock during a seven-day pricing period following execution of the agreement. The number of Exchanged Shares was calculated utilizing an exchange ratio that is based in part on the average VWAPs of our common stock (subject to a floor) during a seven-day pricing period beginning onNovember 5, 2020 and ending on, and including,November 13, 2020 . InNovember 2020 , we issued 15,112,848 Exchanged Shares pursuant to the debt exchange transaction. As a result, we recognized a$27.3 million loss on the transactions.
Legal Settlement Loss. During the second quarter of 2019, we recorded a charge
of
Other Income. Other income decreased during the year endedDecember 30, 2020 due to interest income earned on our available-for-sale securities. We did not have available-for-sale securities starting with the quarter endedJune 30, 2020
throughDecember 31, 2020 . 80 Table of Contents Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 (in thousands) Year ended December 31, 2019 2018 U.S. ex-U.S. Total U.S. ex-U.S. Total Transaction price$ 160,450 $ 7,867 $ 168,317 $ 106,479 $ -$ 106,479 Sales deductions: Government rebates and chargebacks (13,437) (1,771) (15,208) (6,379) - Discounts and fees (9,826) (277) (10,103) (4,712) - Total sales deductions (23,263) (2,048) (25,311) (11,091) - (11,091) Product revenue 137,187 5,819 143,006 95,388 - 95,388 Operating expenses: Cost of sales - product 28,179 1,747 29,926 19,444 - 19,444 Cost of sales - intangible asset amortization 1,956 2,804 4,760 1,954 676 2,630 Research and development 275,518 7,628 283,146 226,925 4,422 231,347 Selling, general and administrative 161,132 21,637 182,769 161,743 14,038 175,781 Acquired in-process research and development 9,440 - 9,440 - - - Other operating expenses 9,711 - 9,711 - - - Total expenses 485,936 33,816 519,752 410,066 19,136 429,202 Operating loss (348,749) (27,997) (376,746) (314,678) (19,136) (333,814) Other income (expense): Interest expense (19,405) (13,183) Foreign currency loss (547) (346) Gain on extinguishment of debt 18,480 - Legal settlement loss (26,750) (27,975) Other income 6,342 7,917 Other income (expense), net (21,880) (33,587) Loss before income taxes (398,626)
(367,401)
Income tax benefit
(expense) (1,798) (608)
Net loss $ (400,424) $ (368,009)
Product Revenue. Product revenue for the year ended December 31, 2019 increased
primarily due to continued growth in sales of Rubraca, which is approved for
sale in the United States and Europe markets. We completed our launch of Rubraca
as maintenance therapy in Germany and the UK in March 2019 . Product revenue is
recorded net of variable considerations comprised of rebates, chargebacks and
other discounts. Product revenue for the year ended December 31, 2019 was $137.2
million in the United States and $5.8 million outside of the United States .
Variable considerations represented 15.0% and 10.4% of the transaction price
recognized in the year ended December 31, 2019 and 2018, respectively. This
increase is primarily due to government and group purchasing organization
rebates; in addition, our launch in Germany and the UK in March 2019 contributed
to the increase.
Ex-
Cost of Sales - Product. Product cost of sales for the year endedDecember 31, 2019 increased due to the increase in product revenue. Product cost of sales primarily relate to manufacturing, freight and royalties costs associated with Rubraca sales in the period.U.S. product cost of sales for the year endedDecember 31, 2019 increased$8.7 million compared to the same period in the prior year due to the increase in product revenue. Ex-U.S. product cost of sales for the year endedDecember 31, 2019 increased$1.7 million compared to the same period in the prior year due to the increase in product revenue.
Cost of Sales - Intangible Asset Amortization. For the year endedDecember 31, 2019 and 2018, we recognized cost of sales of$4.8 million and$2.6 million , respectively, associated with the amortization of capitalized milestone payments related to the approvals of Rubraca by the FDA and theEuropean Commission .
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Research and Development Expenses. Except for activities related to medical research and disease education, research and development expenses are attributable to ourU.S. segment. Research and development expenses increased during the year endedDecember 31, 2019 due to higher research and development costs for Rubraca. Clinical trial costs for Rubraca were higher compared to the same period a year ago due to increased enrollment in our TRITON3 study for prostate cancer. We have increased costs related to our new ATLAS study for bladder cancer and our ATHENA combination study with Bristol Myers Squibb Company's immunotherapy OPDIVO for ovarian cancer. Since our ATLAS study for bladder cancer was discontinued inApril 2019 , costs for this study decreased during the remainder of 2019. In addition, personnel costs increased during the year endedDecember 31, 2019 due to higher headcount to support increased Rubraca clinical trial activities. Clinical trial costs for lucitanib were$4.3 million higher than the year endedDecember 31, 2018 primarily due to increase enrollment in our Phase 1b/2 studies. In addition, we incurred$3.6 million for FAP-2286 as we have begun to pursue a clinical development program in multiple tumor types. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased during the year endedDecember 31, 2019 primarily due to increased commercialization activities for Rubraca and the increase of costs associated with building out the European infrastructure for commercialization which began inMarch 2019 . This includes an increase of$4.3 million in personnel costs and$3.6 million in marketing costs. These increases were primarily related to our ex-U.S. segment.Acquired In-Process Research and Development Expenses. Upon the signing of the license and collaboration agreement with 3BP inSeptember 2019 , we made a$9.4 million upfront payment to 3BP, which is related to ourU.S. segment.
Other Operating Expenses. During the year ended
Interest Expense. Interest expense increased during the year endedDecember 31, 2019 due to the issuance of the 2025 Notes inApril 2018 and the 2024 Notes
inAugust 2019 . Legal Settlement Loss. During the second quarter of 2019, we recorded a charge of$26.8 million to settle a complaint filed byAntipodean Domestic Partners (the "Antipodean Complaint"). During the first quarter of 2018, we recorded a charge of$8.0 million related to an agreement to resolve a potential litigation claim against us and our officers. We also recorded a charge of$20.0 million related to an agreement reached with theSEC to resolve its investigation. Gain on Extinguishment of Debt. InAugust 2019 , we repurchased$190.3 million principal amount of the outstanding 2021 Notes and$2.0 million of accrued interest for an aggregate repurchase price of$171.8 million . This repurchase resulted in the write off of$2.0 million in unamortized debt issuance costs and the recognition of$18.5 million gain on extinguishment of debt.
Other Income. Other income decreased during the year ended
Liquidity and Capital Resources
To date, we have principally funded our operations using the net proceeds from
public offerings of our common stock, convertible senior notes offerings and our
financing agreement related to our ATHENA trial.
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The following table sets forth the primary sources and uses of cash for each of
the periods set forth below:
Year Ended December 31,
2020 2019 2018
(in thousands)
Net cash used in operating activities $ (252,728) $ (323,615) $ (365,997)
Net cash provided by (used in) investing
activities 126,328 143,398 (264,242)
Net cash provided by financing activities 203,644 119,888 388,464
Effect of exchange rate changes on cash and cash
equivalents 1,152 286 (547)
Net increase (decrease) in cash and cash
equivalents $ 78,396 $ (60,043) $ (242,322)
Operating Activities
Net cash used in operating activities resulted primarily from our net losses
adjusted for non-cash items and changes in components of working capital. Net
cash used in operating activities was lower during the year ended December 31,
2020 compared to the same period in the prior year primarily due to a lower net
loss, as adjusted for non-cash items related to our debt transactions. In
addition, there was a reduction in payments made for inventory during the period
partially offset by payments made for prepaid and accrued research and
development expenses.
Net cash used in operating activities resulted primarily from our net losses
adjusted for non-cash items and changes in components of working capital. Net
cash used in operating activities was lower during the year ended December 31,
2019 compared to prior year primarily due to higher amounts paid for inventory
during the year ended December 31, 2018 , partially offset by a higher net loss
as adjusted for non-cash items primarily due to legal settlement loss and gain
on extinguishment of debt.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2020
included sales of available-for-sale securities of $144.6 million , partially
offset by purchases of available-for-sale securities of $10.0 million and a
milestone payment of $8.0 million .
Net cash provided by investing activities for the year ended
Financing Activities Net cash provided by financing activities for the year endedDecember 31, 2020 included proceeds of$246.7 million from the issuance of common stock, proceeds of$56.6 million from the issuance of our 2024 Notes (2020 Issuance), partially offset by a$164.4 million payment of our 2024 Notes. In addition, we had$65.1 million proceeds from borrowings under our financing agreement. Net cash provided by financing activities for the year endedDecember 31, 2019 included proceeds of$254.9 million from the issuance of our 2024 Notes (2019 Issuance),$32.9 million proceeds from borrowings under our financing agreement and$3.3 million received from employee stock option exercises and issuance of stock under the employee stock purchase plan, partially offset by the$170.0 million extinguishment of a portion of our 2021 Notes.
Operating Capital Requirements
Rubraca is approved inthe United States andEurope for multiple indications. We expect to incur significant losses for the foreseeable future, as we commercialize Rubraca and as we complete research and development activities related to FAP-2286 and lucitanib.
As of
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Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including but not limited to:
? the number and characteristics of the product candidates, companion diagnostics
and indications we pursue;
the achievement of various development, regulatory and commercial milestones
? resulting in required payments to partners pursuant to the terms of our license
agreements;
the scope, progress, results and costs of researching and developing our
? product candidates and related companion diagnostics and conducting clinical
and non-clinical trials;
? the timing of, and the costs involved in, obtaining regulatory approvals for
our product candidates and companion diagnostics;
? the cost of commercialization activities, including marketing and distribution
costs;
? the cost of manufacturing any of our product candidates we successfully
commercialize;
the costs involved in preparing, filing, prosecuting, maintaining, defending
? and enforcing patent claims, including litigation costs and outcome of such
litigation; and
? the timing, receipt and amount of sales, if any, of our products.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations atDecember 31, 2020 (in thousands): Less than 1 More Than 5 Year 1 to 3 Years 3 to 5 Years Years Total
Convertible senior notes$ 64,418 $ -$ 443,282 $ -$ 507,700 Interest on convertible senior notes 11,338 20,396 8,789 - 40,523 Financing agreement (principal and interest) - 50,025 94,259 55,227 199,511 Operating lease commitments 5,796 10,167 9,893 9,938 35,794 Finance lease commitments 2,287 4,574 4,574 - 11,435 Purchase and other commitments (a) 13,616 27,232
27,232 - 68,080
Total $ 97,455 $ 112,394 $ 588,029 $ 65,165 $ 863,043 On
(the "Agreement") with a non-exclusive third-party supplier for the
production of the active ingredient for Rubraca. Under the terms of the
Agreement, we will provide the third-party supplier a rolling forecast for
the supply of the active ingredient in Rubraca that will be updated by us on
a quarterly basis. We are obligated to order material sufficient to satisfy
an initial quantity specified in any forecast. In addition, the third-party (a) supplier constructed, in its existing facility, a production train that is
exclusively dedicated to the manufacture of the Rubraca active ingredient. We
are obligated to make scheduled capital program fee payments toward capital
equipment and other costs associated with the construction of the dedicated
production train. Once the facility became operational in October 2018 , we
are obligated to pay a fixed facility fee each quarter for the duration of
the Agreement, which expires on
consent of the parties.
Royalty and License Fee Commitments
Rubraca. We have certain obligations under licensing agreements with third parties contingent upon achieving various development, regulatory and commercial milestones. OnAugust 30, 2016 , we entered into a first amendment to the worldwide license agreement with Pfizer, which amends theJune 2011 existing worldwide license agreement to permit us to defer payment of the milestone payments payable upon (i) FDA approval of an NDA for 1st Indication in US and (ii)European Commission approval of an MAA for 1st Indication in the EU, to a date that is 18 months after the date of achievement of such milestones. OnDecember 19, 2016 , Rubraca received its initial FDA approval. This approval resulted in a$0.75 million milestone payment to Pfizer as required by the license agreement, which was paid in the first quarter of 2017. This FDA approval also resulted in an obligation to pay a$20.0 million milestone payment, for which we exercised the option to defer payment by agreeing to pay$23.0 million within 18 months after the date of the FDA approval. We paid the$23.0 million milestone payment inJune 2018 . 84 Table of Contents InApril 2018 , Rubraca received a second FDA approval. This approval resulted in an obligation to pay a$15.0 million milestone payment, which we paid inApril 2018 .
In
InJanuary 2019 , Rubraca received a secondEuropean Commission approval. This approval resulted in an obligation to pay a$15.0 million milestone payment, which we paid inFebruary 2019 .
In
InMay 2020 , Rubraca received a third FDA approval for Rubraca as a monotherapy treatment of adult patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer. This approval resulted in an obligation to pay an$8.0 million milestone payment, which we paid inJune 2020 .
These milestone payments were recognized as intangible assets and are amortized over the estimated remaining useful life of Rubraca.
We are obligated under the license agreement to use commercially reasonable efforts to develop and commercialize Rubraca and we are responsible for all ongoing development and commercialization costs for Rubraca. We are required to make regulatory milestone payments to Pfizer of up to an additional$8.0 million in aggregate if specified clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are obligated to make sales milestone payments to Pfizer if specified annual sales targets for Rubraca are met, which relate to annual sales targets of$250.0 million and above, which, in the aggregate, could amount to total milestone payments of$170.0 million , and tiered royalty payments at a mid-teen percentage rate on net sales, with standard provisions for royalty offsets to the extent we need to obtain any rights from third parties to commercialize Rubraca. Lucitanib. OnNovember 19, 2013 , we acquired all of the issued and outstanding capital stock of EOS pursuant to the terms set forth in that certain Stock Purchase Agreement, dated as ofNovember 19, 2013 (the "Stock Purchase Agreement"), by and among the Company, EOS, its shareholders (the "Sellers") and Sofinnova Capital V FCPR, acting in its capacity as the Sellers' representative. Following the acquisition, EOS became a wholly-owned subsidiary of the Company. Under the terms of the Stock Purchase Agreement, in addition to the initial purchase price paid at the time of the closing of the acquisition and other license fees due to Advenchen described below, we will also be obligated to pay to the Sellers a milestone payment of$65.0 million upon obtaining the first NDA approval from the FDA with respect to lucitanib. InOctober 2008 , Ethical Oncology Science, S.p.A. ("EOS") (now known as Clovis Oncology Italy S.r.l.) entered into an exclusive license agreement withAdvenchen Laboratories LLC ("Advenchen") to develop and commercialize lucitanib on a global basis, excludingChina . We are obligated to pay Advenchen tiered royalties at percentage rates in the mid-single digits on net sales of lucitanib, based on the volume of annual net sales achieved. In addition, after giving effect to the first and second amendments to the license agreement, we are required to pay to Advenchen 25% of any consideration, excluding royalties, we receive from sublicensees, in lieu of the milestone obligations set forth in the agreement. We are obligated under the agreement to use commercially reasonable efforts to develop and commercialize at least one product containing lucitanib, and we are also responsible for all remaining development and commercialization costs for lucitanib. The license agreement with Advenchen will remain in effect until the expiration of all of our royalty obligations to Advenchen, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, Advenchen can terminate the agreement, resulting in a loss of our rights to lucitanib. FAP. InSeptember 2019 , we entered into a global license and collaboration agreement with 3BP to develop and commercialize a PTRT and imaging agent targeting FAP. The lead candidate, designated internally as FAP-2286, is being developed pursuant to a global development plan agreed to by the parties. We are responsible for the costs of all 85
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preclinical and clinical development activities described in the plan, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the preclinical development phase of the collaboration. Upon the signing of the license and collaboration agreement inSeptember 2019 , we made a$9.4 million upfront payment to 3BP, which we recognized as acquired in-process research and development expense. Pursuant to the terms of the FAP agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP single- to low-double-digit royalties on net sales of the FAP-targeted therapeutic product and imaging agent, based on the volume of annual net sales achieved. In addition, 3BP is entitled to receive 34% of any consideration, excluding royalties on the therapeutic product, pursuant to any sublicenses we may grant. We are obligated under the license and collaboration agreement to use diligent efforts to develop FAP-2286 and commercialize a FAP-targeted therapeutic product and imaging agent, and we are responsible for all commercialization costs in our territory. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. 3BP also has the right to terminate the agreement under certain circumstances in connection with our change of control in which the acquiring party retains a product competitive with the FAP-targeted therapeutic product or, in the event marketing authorization has not yet been obtained, does not agree to the then-current global development plan. InFebruary 2020 , we finalized the terms of a drug discovery collaboration agreement with 3BP to identify up to three additional, undisclosed targets for peptide-targeted radionuclide therapy, to which we will obtain global rights for any resulting product candidates. We are responsible for the costs of all preclinical and clinical development activities conducted under the discovery program, including the costs for a limited number of 3BP full-time equivalents and external costs incurred during the discovery and preclinical development phase for each collaboration target. The agreement was effectiveDecember 31, 2019 , for which we incurred a$2.1 million technology access fee, which we accrued and recognized as a research and development expense. Pursuant to the terms of the discovery collaboration agreement, we are required to make additional payments to 3BP for annual technology access fees and upon the achievement of certain development and regulatory milestone events (or on certain dates, whichever occur earlier). We are also obligated to pay 3BP a 6% royalty on net sales of License Products (as defined in the agreement), based on the volume of quarterly net sales achieved. We are obligated under the discovery collaboration agreement to use diligent efforts to develop and commercialize the product candidates, if any, that result from the discovery program, and we are responsible for all clinical development and commercialization costs. The agreement with 3BP will remain in effect until the expiration of our royalty obligations to 3BP, determined on a product-by-product and country-by-country basis, unless we elect to terminate the agreement earlier. If we fail to meet our obligations under the agreement and are unable to cure such failure within specified time periods, 3BP can terminate the agreement, resulting in a loss of our rights. Impact of COVID-19 Pandemic Our ability to generate product revenue for the year endedDecember 31, 2020 was negatively affected by the COVID-19 pandemic due to fewer diagnoses and fewer patients going to in-person office visits as oncology practices and patients continue to adapt to the impact of the virus. As a result of the COVID-19 pandemic, ourU.S. and European sales forces have had physical access to hospitals, clinics, doctors and pharmacies curtailed and/or have been limited. Our European launches inItaly ,Spain andFrance occurred in an environment in which our field-based personnel in those countries have not been allowed to visit hospitals since as early as late February. Similarly, we launched Rubraca for prostate cancer in theU.S. beginning inMay 2020 , but our physical access to hospitals, clinics, doctors and pharmacies has been limited. It is difficult to discern or predict any trend in new patient starts due to the unpredictability of the COVID-19 situation and the changing competitive landscape.
This curtailment of and/or limited physical access has decreased sales and
marketing expenses during 2020 and will likely extend to 2021. In addition, due
to increased travel restrictions, quarantines, "work-at-home" and
"shelter-in-place" orders and extended shutdown of certain non-essential
business in
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Pacific countries, in-person conferences and meetings requiring travel will decrease, resulting in a decrease of our selling, general and administrative expenses. We believe that we have sufficient supply of Rubraca and our product candidates to continue our commercial and clinical operations as planned. The COVID-19 pandemic has accelerated a preference by oncology practices for more digital programming, including digital, peer-to-peer interactions and reduced in-person promotion. In order to meet these changing preferences, we are adopting a hybrid commercial strategy combining increased digital promotion activities, greater online resources and more peer-to-peer interactions with reduced and more targeted in-person promotion. Accordingly, new tools and performance indicators based on this hybrid approach were rolled out beginning in the fourth quarter, and theU.S. commercial organization was reduced in size by approximately 45 employees. Despite increased investment in digital promotion, we anticipate an effect of adopting this hybrid model will result in annual cost-savings of approximately$10.0 million . We are adopting this strategy in order to better reach customers in the way they want to be reached with the goal of returning to growth, especially as the ongoing impact of COVID-19 is reduced. We did not see material disruption to our clinical trials as a result of the COVID-19 pandemic for the year endedDecember 31, 2020 as we completed target enrollment of ATHENA, our largest clinical trial, during the second quarter. However, we may see disruption during 2021. For example, new patient recruitment in certain clinical studies may be affected and the conduct of clinical trials may vary by geography as some regions are more adversely affected. Additionally, we may slow or delay enrollment in certain trials to manage expenses. OnMarch 18, 2020 , the Families First Coronavirus Response Act ("FFCR Act"), and onMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security ("CARES") Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning afterDecember 31, 2017 . We evaluated the impact of this legislation and the income tax provisions did not result in a material cash benefit to us. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the Tax Cuts and Jobs Act) remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible thatCongress will enact additional legislation in connection with the COVID-19 pandemic, some of which could impact us. The trading prices for our common stock and of other biopharmaceutical companies have been highly volatile as a result of the coronavirus pandemic. As a result of this volatility and uncertainties regarding future impact of COVID-19 on our business and operations, we may face difficulties raising capital or may only be able to raise capital on unfavorable terms.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules promulgated by theU.S. Securities and Exchange Commission . Tax Loss Carryforwards As ofDecember 31, 2020 , we have net operating loss ("NOL") carryforwards of approximately$1.7 billion to offset future federal income taxes. We also have research and development and orphan drug tax credit carryforwards of$254.5 million to offset future federal income taxes. The federal net operating loss carryforwards and research and development and orphan drug tax credit carryforwards expire at various times through 2040. We believe that a change in ownership as defined under Section 382 of theU.S. Internal Revenue Code occurred as a result of our public offering of common stock completed inApril 2012 . Future utilization of the federal net operating losses and tax credit carryforwards accumulated from inception to the change in ownership date will be subject to annual limitations to offset future taxable income. It is possible that a change in ownership will occur in the future, which will limit the NOL amounts generated since the last estimated change in ownership. AtDecember 31, 2020 , we recorded a 100% valuation allowance against our net deferred tax assets in theU.S. of$801.5 million , as we believe it is more likely than not that the tax benefits will not be fully realized. In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period of determination. 87 Table of Contents
Recently Adopted and Issued Accounting Standards
For a discussion of recently adopted and issued accounting standards, see Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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