EPIZYME, INC. Our management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared by us in accordance with accounting principles generally accepted inthe United States , or GAAP, and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these consolidated financial statements and the notes thereto included elsewhere in 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, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Note on the COVID-19 Pandemic
While the COVID-19 pandemic has had an impact on our business, operations, and
financial performance, we have taken and plan to continue to take steps to
evaluate, monitor, manage, and respond to the challenges that have arisen from
the COVID-19 pandemic and to new challenges that may arise. We continue to
operate under a remote operating model for all employees other than certain
members of our laboratory and facilities staff. As part of this remote operating
model, our laboratory staff who engage in research and development activities
continue to have restricted access to our laboratories. Accordingly, our
laboratory staff are not yet back to their full daily output as existed prior to
the onset of the COVID-19 pandemic. We continue to evaluate our remote operating
model for our offices based on guidance from federal, state and local government
authorities, and we expect that some form of this remote operating model will
exist for us through at least the first half of 2021.
In addition, although the initiation, enrollment and completion of our ongoing
and planned clinical trials are on schedule, we are aware of the impact that
COVID-19 continues to have on other clinical trials in our industry and there is
a risk of material impact on the conduct of our clinical trials as well. We are
continuing to work with our clinical trial sites to ensure study continuity,
enable medical monitoring, facilitate study procedures and maintain clinical
data and records, including the use of local laboratories for testing, home
delivery of study drug and remote data and records monitoring.
To date, the COVID-19 pandemic has not had a material impact on our supply
chain, and we currently have a consistent supply of tazemetostat and TAZVERIK
that we believe will cover our ongoing clinical development as well as the
ongoing commercialization for epithelioid sarcoma, or ES, and follicular
lymphoma, or FL. As a proactive measure, we have taken certain steps to try to
reduce the risk to our supply chain, such as advancing orders for long-lead
items in anticipation of potential future delays or shortages. Because the
ongoing COVID-19 pandemic could materially adversely impact our suppliers and
result in delays or disruptions in our current or future supply chain, we are
continuing to monitor and manage our supply chain accordingly.
For our ongoing commercialization activities for TAZVERIK, our commercial and
medical affairs field teams are continuing to use virtual formats where possible
in order to allow us to serve the needs of healthcare providers, patients and
other stakeholders during this critical time. During the third and fourth
quarters of 2020, the COVID-19 pandemic continued to negatively impact ES and FL
patient visits to physicians, new patient starts across all lines of treatment
as well as the ability of our field-based teams to fully access ES and FL
prescribers, and these challenges continued in the first quarter of 2021.
Notwithstanding these challenges, new prescriptions for TAZVERIK in FL have
increased month over month and are being written for both EZH2 mutation and
wild-type patients; in the academic and community settings; and across multiple
treatment lines in relapsed or refractory FL patients. In addition, payor
coverage for ES and FL continues to be in-line with the TAZVERIK label. We
continue to adapt our commercial strategy to the COVID-19 pandemic to support
increased adoption of TAZVERIK in appropriate patients.
We continue to assess the potential duration, scope and severity of the COVID-19
pandemic and its impacts on our business, operations and financial performance,
and we continue to work closely with our third-party vendors, collaborators and
other parties in order to seek to continue to advance our commercialization
efforts of TAZVERIK
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and to continue to advance the development of our pipeline, as quickly as
possible, while making the health and safety of our employees and their
families, healthcare providers, patients and communities a top priority. Due to
the evolving and uncertain global impacts of the COVID-19 pandemic, however, we
cannot precisely determine or quantify the impact that this pandemic has had on
our business, operations and financial performance or the impact that this
pandemic will have in 2021 and beyond.
Please refer to our Risk Factors in Part I, Item 1A. of this Annual Report on Form 10-K for further discussion of risks related to the COVID-19 pandemic.
Overview
We are a commercial-stage biopharmaceutical company that is committed to rewriting treatment for people with cancer and other serious diseases through the discovery, development, and commercialization of novel epigenetic medicines. By focusing on the genetic drivers of disease, our science seeks to match targeted medicines with the patients who need them. InJanuary 2020 , theU.S. Food and Drug Administration , or FDA, granted accelerated approval of TAZVERIK (tazemetostat), an oral, first in class, selective small molecule inhibitor of the EZH2 histone methyltransferase, or HMT, for the treatment of adult and pediatric patients aged 16 years and older with metastatic or locally advanced ES not eligible for complete resection. This approval was based on overall response rate and duration of response shown in the ES cohort of our Phase 2 trial in patients with INI1-negative tumors. We continue to make TAZVERIK available to eligible patients and their physicians inthe United States . As part of the accelerated approval for ES, continued approval for this indication is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide this confirmatory evidence to support a full approval of TAZVERIK for this indication, we are conducting a single, global, randomized, controlled Phase 1b/3 confirmatory trial assessing TAZVERIK in combination with doxorubicin compared with doxorubicin plus placebo as a front-line treatment for ES. The trial is expected to enroll approximately 152 patients. The safety run-in portion of the trial is fully enrolled and we expect to commence the efficacy portion of the trial in 2021. We anticipate reporting safety and preliminary activity data from the safety run-in portion of the study at a medical meeting in 2021. InJune 2020 , the FDA approved a supplemental New Drug Application, or sNDA, for TAZVERIK for the following FL indications: (1) adult patients with relapsed or refractory FL whose tumors are positive for an EZH2 mutation as detected by an FDA-approved test and who have received at least two prior systemic therapies, and (2) adult patients with relapsed or refractory FL who have no satisfactory alternative treatment options. These indications were approved under accelerated approval with a priority review, based on overall response rate and duration of response shown in the FL cohorts of our Phase 2 clinical trial in patients with EZH2 mutations and wild-type EZH2. We continue to make TAZVERIK available to eligible patients and their physicians inthe United States . As part of the accelerated approval for FL, continued approval for these indications is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide this confirmatory evidence to support a full approval of TAZVERIK for these indications, we are conducting a single global, randomized, adaptive Phase 1b/3 confirmatory trial assessing the combination of TAZVERIK with "R2" (Revlimid® plus rituximab), an approved chemotherapy-free treatment regimen, compared with R2 plus placebo for FL patients in the second-line or later treatment setting. The trial is expected to enroll approximately 500 FL patients, stratified based on their EZH2 mutation status. The safety run-in portion of the trial is fully enrolled and we expect to commence the efficacy portion of the trial in 2021. We anticipate reporting safety and preliminary activity data from the safety run-in portion of the study at a medical meeting in 2021. In addition, we plan to conduct post-marketing commitments, including expanding our ongoing Phase 2 clinical trial with a cohort of FL patients with wild-type EZH2 to evaluate tazemetostat as a monotherapy in patients who have been treated with at least one prior systemic treatment, in order to inform the label and potentially expand the approved indications in the relapsed and refractory setting in the future. 85 -------------------------------------------------------------------------------- Through our planned development efforts, our intention is to eventually make TAZVERIK available in all lines of treatment for patients with FL. We plan to leverage the confirmatory trial and post-marketing commitments to expand TAZVERIK into the second-line treatment setting. In collaboration withThe Lymphoma Study Association , or LYSA, and based on clinical activity observed with tazemetostat in combination with R-CHOP as a front-line treatment for patients with high risk diffuse large B-cell lymphoma, or DLBCL, we commenced a Phase 2 clinical trial that is being conducted by LYSA evaluating this combination as a front-line treatment for high-risk patients with FL. We are also supporting an investigator-sponsored study to evaluate tazemetostat in combination with rituximab with FL in the third-line or later treatment settings, which is currently enrolling. We intend to have this investigator-sponsored study transferred to a Company sponsored study in 2021. In addition, we are finalizing plans for investigator-sponsored studies to evaluate tazemetostat in combination with venetoclax or BTK inhibitors for the treatment of patients with FL in the third-line or later treatment settings. We are developing tazemetostat for the treatment of a broad range of cancer types in multiple treatment settings. Tazemetostat has shown meaningful clinical activity as an investigational monotherapy in multiple cancer indications and has been generally well-tolerated across clinical trials to date. We believe tazemetostat is a "pipeline in a product" opportunity and plan to explore its potential utility in additional indications and combinations. In connection with these efforts, we are conducting a global, multi-center, randomized Phase 1b/2 trial evaluating tazemetostat in combination with enzalutamide or abiraterone, the standard of care treatments for this disease, plus prednisone in chemo-naïve patients with mCRPC. The safety run-in portion of the trial is fully enrolled and we expect to commence the efficacy portion of the trial in 2021. We anticipate reporting safety and preliminary activity data from the safety run-in portion of the study at a medical meeting in 2021. There are four areas where we see the greatest potential for tazemetostat, all of which are based on a strong scientific hypothesis and for diseases that need a new effective and safe treatment option, including:
• Lymphomas and B-cell malignancies, such as DLBCL, mantle cell lymphoma,
or MCL, chronic lymphocytic leukemia, or CLL, chronic myeloid leukaemia,
or CML, and others;
• Molecularly defined solid tumors, such as chordoma, melanoma,
mesothelioma, and tumors harboring an EZH2 or SWI/SNF alteration;
• Chemotherapy or treatment-resistant tumors, such as triple-negative
breast cancer, small cell lung cancer, ovarian cancer, and as described
above, mCRPC; and
•
cancer, soft tissue sarcomas and non-small cell lung cancer.
We own the global development and commercialization rights to tazemetostat
outside of
TAZVERIK is available to eligible patients inthe United States via a specialty distribution network. To commercialize TAZVERIK for the ES and FL indications inthe United States , we have built a focused field presence and marketing capabilities. This includes an efficiently sized field-based organization of approximately 76 individuals.
For geographies outside
InEurope , we are continuing to explore and understand what may be necessary in order for us to submit a marketing authorization application to theEuropean Medicines Agency , or EMA, in an effort to obtain marketing approval of tazemetostat from the EMA in ES and FL. Tazemetostat is covered by claims ofU.S. and European composition of matter patents, which are expected to expire in 2032, exclusive of any patent term or other extensions. Tazemetostat has been granted Fast Track designation by the FDA in patients with relapsed or refractory FL, relapsed or refractory DLBCL with EZH2 activating mutations and metastatic or locally advanced ES who have progressed on or following an anthracycline- 86 -------------------------------------------------------------------------------- based treatment regimen. The FDA has also granted orphan drug designation to tazemetostat for the treatment of patients with malignant rhabdoid tumors, or MRT, soft tissue sarcoma, or STS, mesothelioma and a seven-year orphan drug exclusivity period for treatment of patients with FL. Beyond tazemetostat, we are utilizing our drug discovery platform to progress preclinical efforts and discover and identify additional product candidates to expand our pipeline of inhibitors against several classes of chromatin modifying proteins, or CMPs, including HMTs, histone acetyltransferases, or HATs, and helicases. To date, we have entered into various strategic collaborations, including therapeutic collaborations and other collaborations, including withGlaxo Group Limited (an affiliate of GlaxoSmithKline plc), or GSK, Eisai, Roche and other third parties. As one of several key aspects of our strategy, we plan to continue to leverage our existing collaborations and to seek to identify new strategic collaborations to further support and grow our business in and outside ofthe United States . ThroughDecember 31, 2020 , in addition to revenues from product sales, we have raised an aggregate of$1,527.4 million to fund our operations. This includes$243.8 of non-equity funding through our collaboration agreements,$368.1 million of funding, consisting of$150.0 million in equity funding received through agreements withRPI Finance Trust , or RPI, and$218.1 million in debt financing received through a loan agreement withBioPharma Credit Investments V (Master) LP andBPCR Limited Partnership (as transferee ofBioPharma Credit Investments V (Master) LP's interest as a lender), or the Lenders,$839.5 million from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 .
As of
We commenced active operations in early 2008, and since inception, have incurred significant operating losses. Our net loss was$231.7 million for the year endedDecember 31, 2020 . As ofDecember 31, 2020 , our accumulated deficit totaled$988.7 million . Notwithstanding our sales of TAZVERIK, we expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses to increase in connection with our ongoing activities, particularly as we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we expect our expenses to increase as we fund our tazemetostat development program; make any milestone and royalty payments provided for and achieved under the amended and restated collaboration and license agreement with Eisai; pay interest and principal associated with our amended and restated loan agreement withBioPharma Credit Investments V (Master) LP ,BPCR Limited Partnership and BioPharma Credit PLC, or the Amended and Restated Loan Agreement; and continue research and development and initiate clinical trials of, and seek regulatory approval for, any future product candidates.
Funding Agreements with
We executed a purchase agreement with RPI onNovember 4, 2019 , or the RPI Purchase Agreement. Pursuant to the RPI Purchase Agreement, we sold to RPI 6,666,667 shares of our common stock and a warrant to purchase up to 2,500,000 shares of our common stock at an exercise price of$20.00 per share, or the Common Stock Warrant. We also sold our rights to receive royalties from Eisai with respect to net sales by Eisai of tazemetostat products inJapan , or the Japan Royalty, pursuant to the amended and restated collaboration and license agreement between us and Eisai, dated as ofMarch 12, 2015 , or the Eisai License Agreement. In consideration for the sale of shares of our common stock, the Common Stock Warrant and the Japan Royalty, RPI paid us$100.0 million upon the closing of the RPI Purchase Agreement inNovember 2019 . In addition, RPI agreed, in connection with RPI's acquisition from Eisai of the right to receive royalties from us under the Eisai License Agreement, to reduce our royalty obligation by low single digits upon the achievement of specified annual net sales levels. We also had the option to sell to RPI$50.0 million of shares of common stock for an 18-month period beginningNovember 4, 2019 , or the Put Option. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. 87 -------------------------------------------------------------------------------- OnNovember 4, 2019 , we also entered into a Loan Agreement with BioPharma Credit PLC, or the Collateral Agent, and the Lenders, providing for up to$70.0 million in secured term loans to be advanced in up to three tranches, or the Loan Agreement. We borrowed$70.0 million in the aggregate under the three tranches pursuant to the Loan Agreement. OnNovember 3, 2020 , we, the Collateral Agent and the Lenders amended and restated the Loan Agreement, or, as amended and restated, the Amended and Restated Loan Agreement. The Amended and Restated Loan Agreement provides for, among other things, an additional secured term loan facility of$150.0 million , or the Tranche D Loan. OnNovember 18, 2020 , we borrowed the Tranche D Loan. Under the Amended and Restated Loan Agreement, we have the right to request from the Lenders, subject to the Lenders' agreement to lend additional amounts to us, up to an additional$150.0 million , provided that we have not prepaid any outstanding term loans at the time of our request and such request is made beforeNovember 18, 2021 . The obligations under the Amended and Restated Loan Agreement remain secured by a first priority security interest that was granted at the time of the Loan Agreement in and a lien on substantially all of our assets, subject to certain exceptions. The Amended and Restated Loan Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default applicable to us and our subsidiaries. If an event of default occurs and is continuing, the Collateral Agent under the Amended and Restated Loan Agreement may, among other things, accelerate the loans and foreclose on the collateral. See Note 13, Long-Term Debt, of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a description of the key terms of the Amended and Restated Loan Agreement.
Collaborations
Refer to Item 1, Business--Our Collaborations and Note 11, Collaborations, of the notes to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K for a description of the key terms of our arrangements withGlaxo Group Limited (an affiliate of GlaxoSmithKline plc), or GSK, Eisai Co. Ltd, or Eisai,Roche Sequencing Solutions, Inc. , or Roche Sequencing, andBoehringer Ingelheim International GmbH , orBoehringer Ingelheim . OnNovember 3, 2020 , we received a notice of termination of our collaboration and license agreement with Celgene, effectiveJanuary 2, 2021 . OnDecember 21, 2020 we received written notice fromBoehringer Ingelheim that they elected to terminate the collaboration effectiveJanuary 31, 2021 .
Results of Operations for the Years Ended
Revenues
The following is a comparison of total revenues for the years endedDecember 31, 2020 , 2019, and 2018: Year Ended December 31, 2020 2019 Change (In millions) Product revenues, net$ 11.5 $ -$ 11.5 Collaboration revenue 4.3 23.8 (19.5 ) Total revenues$ 15.8 $ 23.8 $ (8.0 ) Year Ended December 31, 2019 2018 Change (In millions) Product revenues, net $ - $ - $ - Collaboration revenue 23.8 21.7 2.1 Total revenues$ 23.8 $ 21.7 $ 2.1 88
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Product Revenues, net Net product revenues representU.S. sales from our sole commercial product, TAZVERIK, which was first approved by the FDA onJanuary 23, 2020 , less allowances and accruals. During the year endedDecember 31, 2020 , net product revenues were$11.5 million . Sales allowances and accruals consisted of patient financial assistance, distribution fees, discounts, and chargebacks. We did not have product revenues in 2019 or 2018.
Collaboration Revenue
Our collaboration revenue during the periods included amounts recognized from deferred revenue related to upfront payments for licenses or options to obtain licenses in the future, research and development services revenue earned and milestone payments earned under collaboration and license agreements with our collaboration partners.
The following tables summarize our collaboration revenue, by collaboration
partner, for the years ended
Year Ended December 31,
2020 2019 Change %
(In millions)
Collaboration Partner
Celgene $ 3.8 $ - $ 3.8 100.0 %
BI: 0.5 23.8 (23.3 ) (97.9 )%
$ 4.3 $ 23.8 $ (19.5 ) -81.9 %
Year Ended December 31,
2019 2018 Change %
(In millions)
Collaboration Partner
GSK: $ - $ 20.0 $ (20.0 ) (100.0 )%
BI: 23.8 1.7 22.1 1300.0 %
$ 23.8 $ 21.7 $ 2.1 9.7 %
Collaboration revenue for the year ended December 31, 2020 decreased $19.5
million as compared to the year ended December 31, 2019 , primarily as a result
of a decrease in revenue related to milestones and services under our agreement
with Boehringer Ingelheim , offset by an increase of $3.8 million of revenue
under the Celgene collaboration agreement related to the recognition of the
remaining deferred revenue related to the agreement, which was recognized as
revenue as a result of the termination of the collaboration agreement with
Celgene. The revenue recognized under the Boehringer Ingelheim collaboration
during the year ended December 31, 2020 was related to amendments to extend the
research period under the collaboration agreement under which Boehringer
Ingelheim agreed to fund up to $0.5 million of additional research activities.
In December 2020 , we received written notice from Boehringer Ingelheim to
terminate the collaboration agreement, effective January 31, 2021 .
Collaboration revenue for the year ended December 31, 2019 increased $2.1
million as compared to the year ended December 31, 2018 , primarily as a result
of $23.8 million related to milestones and services under our agreement with
Boehringer Ingelheim , as compared to the achievement of a $12.0 million
milestone and a $8.0 million milestone under our agreement with GSK and $1.7
million related to the commencement of services under our agreement with
Boehringer Ingelheim during 2018.
GSK. Under our collaboration agreement with GSK, we have received and recognized
collaboration revenue totaling $89.0 million , consisting of upfront payments,
fixed research funding, research and development services and preclinical and
research milestone payments. In the year ended December 31, 2018 , we recognized
$20.0 million in
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-------------------------------------------------------------------------------- collaboration revenue in connection with achievement of milestones under our collaboration agreement with GSK. As ofDecember 31, 2020 , for the two remaining targets, we are eligible to receive up to$50.0 million in clinical development milestone payments, up to$197.0 million in regulatory milestone payments and up to$128.0 million in sales-based milestone payments in the aggregate. As a result of the termination of the agreement as it relates to the third target, we will receive no additional payments related to that target. In addition, GSK is required to pay us royalties, at percentages from the mid-single digits to the low double-digits, on a licensed product-by-licensed product basis, on worldwide net product sales, subject to reduction in specified circumstances. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, we may not receive any additional milestone payments or royalty payments from GSK. GSK became solely responsible for development and commercialization for each licensed target in the collaboration when the research term ended onJanuary 8, 2015 .Boehringer Ingelheim . Under our collaboration agreement withBoehringer Ingelheim , we have received and recognized collaboration revenue totaling$26.0 million , consisting of upfront payments, fixed research funding, and research and development services. In the years endedDecember 31, 2020 , 2019, and 2018, we recognized$0.5 million ,$23.8 million , and$1.7 million , respectively, in collaboration revenue as part of ourBoehringer Ingelheim collaboration. The revenue recognized in 2020 was related to amendments to extend the research period under the collaboration agreement under whichBoehringer Ingelheim agreed to fund up to$0.5 million of additional research activities. Under the agreement we received$15.0 million in an upfront payment fromBoehringer Ingelheim for our license to inhibitor technology of two undisclosed targets and$5.0 million in research funding in 2019. The revenue was recognized as we performed research services through the end of 2019. The research period expired onDecember 31, 2019 , asBoehringer Ingelheim did not elect to extend the research period throughDecember 31, 2020 , and subsequently elected to terminate the collaboration agreement without cause, and in accordance with the terms of the collaboration agreement. In 2018, we recognized$1.7 million in collaboration revenue related to the commencement of services under the collaboration agreement. Cost of Product Revenue
The following is a comparison of cost of product revenue for the years ended
Year Ended December 31,
2020 2019 Change
(In millions)
Cost of product revenue $ 5.1 $ - $ 5.1
Year Ended December 31,
2019 2018 Change
(In millions)
Cost of product revenue $ - $ - $ -
The cost of product revenue consists of costs related to the sales of TAZVERIK.
These costs include materials, labor, manufacturing overhead, amortization of
milestone payments, and royalties payable on net sales of TAZVERIK. During the
year ended December 31, 2020 , the cost of product revenue was $5.1 million and
consisted of $0.4 million in costs associated with manufacturing TAZVERIK, $3.0
million in amortization expense related to the two $25.0 million milestone
payments under our agreement with Eisai upon regulatory approval of TAZVERIK for
epithelioid sarcoma and upon regulatory approval of TAZVERIK for follicular
lymphoma, and $1.7 million in worldwide royalties owed to Royalty Pharma on net
sales of TAZVERIK in the year ended December 31, 2020 . All product costs
incurred prior to FDA approval of TAZVERIK in January 2020 were expensed as
research and development expenses. We expect our cost of product revenues
(excluding amortization of intangible assets) to continue to be positively
impacted during 2021, as we sell through certain inventory that was expensed
prior to FDA approval of TAZVERIK in January 2020 . We did not have cost of
product revenues in 2019 or 2018.
Research and Development
Research and development expenses consist of expenses incurred in performing research and development activities, including clinical trials and related clinical manufacturing expenses, fees paid to external providers of research and
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--------------------------------------------------------------------------------development services, third-party clinical research organizations, or CROs, compensation and benefits for full-time research and development employees, facilities expenses, overhead expenses, and other outside expenses. Most of our research and development costs are external costs, which we track on a program-by-program basis. Our internal research and development costs are primarily compensation expenses for our full-time research and development employees, including stock-based compensation expense.
In our early-stage research, we identify and prioritize novel CMPs that are implicated in cancer and other diseases, and seek to develop potent and selective small molecule inhibitors of these targets. During this phase of research, our external costs primarily relate to lead discovery, biology, drug metabolism and pharmacokinetics and chemistry services from a multinational network of third-party providers of research and development services. As our product candidates progress into preclinical and clinical development, external costs are driven by clinical trial costs, manufacturing expenses, and third-party research and development expenses. In circumstances where our collaboration and license agreements provide for equally co-funded global development under joint risk sharing collaborations, and where we are the study sponsor, amounts received for co-funding are recorded as a reduction to research and development expense.
The following is a comparison of research and development expenses for the years
ended
Year Ended December 31,
2020 2019 Change %
(In millions)
Research and development $ 110.9 $ 132.6 $ (21.7 ) (16.3 )%
Year Ended December 31,
2019 2018 Change %
(In millions)
Research and development $ 132.6 $ 105.8 $ 26.8 25.3 %
During the year ended December 31, 2020 , total research and development expenses
decreased by $21.7 million compared to the year ended December 31, 2019 ,
primarily due to the payment of $20.0 million in clinical development milestones
to Eisai in 2019, and decreases in tazemetostat manufacturing costs as we began
to capitalize the cost of manufacturing following the approval of TAZVERIK for
the approved ES indication in January 2020 and decreased discovery research
activities related to tazemetostat in other indications, which were offset by
increases in clinical trial expenses and costs associated with the buildout of
our regulatory and late-stage development groups.
During the year ended December 31, 2019 total research and development expenses
increased by $26.8 million compared to the year ended December 31, 2018 ,
primarily due to the payment of $20.0 million in clinical development milestones
to Eisai, increases in tazemetostat manufacturing costs and the buildout of our
regulatory and late-stage development groups, offset by decreases in clinical
trial expenses.
The following table illustrates the components of our research and development
expenses:
Year Ended December 31,
Product Program 2020 2019 Change %
(In millions)
External research and development
expenses:
Tazemetostat and related EZH2 programs $ 42.0 $ 67.8 $ (25.8 ) (38.1 )%
Pinometostat and related DOT1L programs 0.1 0.3 (0.2 ) (66.7 )
Discovery and preclinical stage product
programs, collectively 17.8 18.7 (0.9 ) (4.8 )
Unallocated personnel and other expenses 51.0 45.8 5.2 11.4
Total research and development expenses $ 110.9 $ 132.6 $ (21.7 ) (16.4 )%
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Year Ended December 31,
Product Program 2019 2018 Change %
(In millions)
External research and development expenses:
Tazemetostat and related EZH2 programs $ 67.8 $ 49.5 $ 18.3 37.0 %
Pinometostat and related DOT1L programs 0.3 0.0 0.3 100.0
Discovery and preclinical stage product
programs, collectively 18.7 16.0 2.7 16.9
Unallocated personnel and other expenses 45.8 40.3 5.5 13.6
Total research and development expenses
External research and development costs include external manufacturing costs related to the acquisition of active pharmaceutical ingredient and manufacturing of clinical drug supply, ongoing clinical trial costs, discovery and preclinical research in support of the tazemetostat program and expenses associated with our companion diagnostic program. External research and development expenses for tazemetostat and related EZH2 programs decreased$25.8 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease in tazemetostat related research and development expenses in the year endedDecember 31, 2020 related to a decrease in tazemetostat manufacturing costs, as we began to capitalize the cost of manufacturing following the approval of TAZVERIK for the approved indication in ES inJanuary 2020 , and decreased discovery research activities related to tazemetostat in other indications, which was offset by increases in clinical trial expenses and increased costs associated with the buildout of our regulatory and late-stage development groups. External research and development expenses for tazemetostat and related EZH2 programs increased$18.3 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . The increase in tazemetostat related research and development expenses in the year endedDecember 31, 2019 related to greater tazemetostat manufacturing costs and the build out of our regulatory and late stage development groups, offset by decreases in clinical trial expenses. External research and development expenses for pinometostat and related DOT1L programs for the year endedDecember 31, 2020 decreased$0.2 million compared to the year endedDecember 31, 2019 . The costs incurred in the years endedDecember 31, 2020 and 2019 were primarily associated with costs attributed to theCooperative Research and Development Agreement, or CRADA, with theNational Cancer Institute , or NCI, to evaluate pinometostat in clinical trials in a variety of hematologic malignancies and solid tumors. There were no costs incurred related to pinometostat in 2018. External research and development expenses for discovery and preclinical stage product programs decreased$0.9 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily related to reduced spending for discovery research activities and decreased development activities related to our G9a preclinical program. External research and development expenses for discovery and preclinical stage product programs increased$2.7 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily related to decreased spending for discovery research activities, offset by increased development activities related to our G9a preclinical program. Unallocated personnel and other expenses are comprised of compensation expenses for our full-time research and development employees and other general research and development expenses. Unallocated personnel and other expenses for the year endedDecember 31, 2020 increased$5.2 million compared to the year endedDecember 31, 2019 . The increase is a result of increases in facilities and equipment related expenses and in unallocated personnel costs, offset by an increase in the allocation of expenses to projects. Unallocated personnel and other expenses for the year endedDecember 31, 2019 increased$5.5 million compared to the year endedDecember 31, 2018 . The increase in unallocated personnel and other expenses is a result of the allocation of expenses to projects and increases in facilities and equipment related expenses offset by an increase in unallocated personnel costs. 92 --------------------------------------------------------------------------------
We expect that research and development expenses will increase in 2021, as we increase our clinical trial activity for tazemetostat and utilize our drug discovery platform to progress preclinical efforts and pursue additional development candidates to expand our pipeline.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, intellectual property, business development and support functions. Other selling, general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property and general legal services.
The following is a comparison of selling, general and administrative expenses
for the years ended
Year Ended December 31,
2020 2019 Change %
(In millions)
Selling, general and administrative $ 125.2 $ 68.3 $ 56.9 83.3 %
Year Ended December 31,
2019 2018 Change %
(In millions)
Selling, general and administrative
For the year endedDecember 31, 2020 , our selling, general and administrative expenses increased$56.9 million compared to the year endedDecember 31, 2019 , primarily due to increased commercialization activities, including the build out of our sales force and commercial infrastructure to support the commercial launch of TAZVERIK in the approved ES and FL indications, and increased personnel related expenses. For the year endedDecember 31, 2019 , our selling, general and administrative expenses increased$24.3 million compared to the year endedDecember 31, 2018 , primarily due to increased pre-commercialization activities, including the build out of our medical affairs and commercial organizations, and increased personnel related expenses.
We expect that selling, general and administrative expenses will increase in 2021, as we continue to increase our commercial activities for tazemetostat.
Other (Expense) Income, Net
The following is a comparison of other (expense) income, net for the years ended
Year Ended December 31,
2020 2019 Change %
(In millions)
Other income, net
Interest income $ 2.9 $ 7.4 $ (4.5 ) (60.8 )%
Interest expense (7.6 ) (0.3 ) (7.3 ) 2433.3
Other expense, net (0.1 ) - (0.1 ) 100.0
Non-cash interest expense related to sale
of future royalties (1.4 ) (0.2 ) (1.2 ) 600.0
Other (expense) income, net $ (6.2 ) $ 6.9 $ (13.1 ) (189.9 )%
93
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Year Ended December 31,
2019 2018 Change %
(In millions)
Other income, net
Interest income $ 7.4 $ 4.6 $ 2.8 60.9 %
Interest expense (0.3 ) - (0.3 ) 100.0
Other (expense) income, net - - - 0.0
Non-cash interest expense related to sale
of future royalties (0.2 ) (0.2 ) 100.0
Other income, net $ 6.9 $ 4.6 $ 2.3 50.2 %
Other (expense) income, net consists of interest income earned on our cash
equivalents and marketable securities, net of imputed interest expense paid
under our capital lease obligation. The decrease in other income for the year
ended December 31, 2020 is principally due to an increase in interest expense of
$7.3 million incurred in connection with our long-term debt obligations under
our Amended and Restated Loan Agreement, a decrease in net interest income of
$4.5 million , and an increase in non-cash interest expense related to the sale
of future royalties of $1.2 million . The increase in other income for the year
ended December 31, 2019 as compared to the year ended December 31, 2018 is
primarily due to an increase in interest income of $2.8 million as a result of
active management of our investment portfolio, an increase in investment yields,
and an increased cash balance as a result of the public offering that we
conducted in March 2019 , the RPI Purchase Agreement and the Loan Agreement. The
increase in interest income was offset by non-cash interest expense of $0.2
million related to the sale of future royalties and interest expense of $0.3
million incurred under our Amended and Restated Loan Agreement.
Income Tax Benefit
We evaluated the expected recoverability of our net deferred tax assets as ofDecember 31, 2020 and 2019, and determined that, with the exception of the deferred tax asset related to alternative minimum tax, or AMT, credits, there was insufficient positive evidence to support the recoverability of these net deferred tax assets. The AMT credit becomes refundable no later than 2022 under the Tax Cuts and Jobs Act, and as such, the related deferred tax asset will be able to be realized. The corresponding valuation allowance of$368,000 was reversed as ofDecember 31, 2017 and recognized as a tax benefit. As ofDecember 31, 2018 ,$184,000 of the deferred tax asset was reclassified to an income tax receivable. Fifty percent of the remaining AMT credit is refundable with the filing of the 2019 tax return. As such, as ofDecember 31, 2019 ,$92,000 of the deferred tax asset was reclassified to an income tax receivable. There was no tax benefit or provision as a result of the asset reclassification on the balance sheet. Under the Coronavirus Aid, Relief, and Economic Security Act, the AMT Credit became 100% refundable with the filing of the 2019 tax return. The Company re-classed the remaining deferred tax asset to an income tax receivable as part of the 2019 provision to return analysis. AtDecember 31, 2020 there is no deferred tax asset related to AMT credits and the Company has a full valuation allowance against its net deferred tax assets.
Liquidity and Capital Resources
ThroughDecember 31, 2020 , in addition to revenues from product sales, we have raised an aggregate of$1,527.4 million to fund our operations. This includes$243.8 million was non-equity funding through our collaboration agreements,$368.1 million of funding, consisting of$150.0 million in equity funding received through agreements withRPI Finance Trust , or RPI, and$218.1 million in debt financing received through a loan agreement withBioPharma Credit Investments V (Master) LP andBPCR Limited Partnership (as transferee ofBioPharma Credit Investments V (Master) LP's interest as a lender), or the Lenders,$839.5 million from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million was from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 . As ofDecember 31, 2020 , we had$373.6 million in cash, cash equivalents and marketable securities. InNovember 2019 , we raised approximately$123.1 million in net proceeds from the sale to RPI of 6,666,667 shares of our common stock, the Warrant and the Japan Royalty for, as well as from proceeds of the Tranche A Loan borrowings under the Loan Agreement. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI 94 -------------------------------------------------------------------------------- for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnMarch 27, 2020 , we received proceeds of the Tranche B Loan borrowings of$25.0 million under the Loan Agreement. OnJune 30, 2020 , we received proceeds of the Tranche C Loan borrowings of$20.0 million under the Loan Agreement. OnNovember 18, 2020 , we received proceeds of the Tranche D Loan borrowings of$150.0 million under the Amended and Restated Loan Agreement. InMarch 2019 , we raised approximately$122.7 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 11,500,000 shares of our common stock in a public offering at a price of$11.50 per share. We also raised approximately$37.4 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 350,000 shares of series A convertible preferred stock in a public offering at a price of$115 per share. The series A convertible preferred stock is convertible into 3,500,000 shares of our common stock. InOctober 2018 , we raised approximately$81.6 million in net proceeds (after deducting underwriting discounts and commissions and offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 9,583,334 shares of our common stock in a public offering at a price of$9.00 per share. In addition to our existing cash, cash equivalents and marketable securities, we are eligible to earn a significant amount of milestone payments under our collaboration agreements. Our ability to earn these payments and the timing of earning these payments is dependent upon the outcome of our research and development activities and is uncertain at this time.
Funding Requirements
Our primary uses of capital are clinical trial costs, third-party research and development services, expenses related to commercialization, debt service obligations, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses and general overhead costs. Because the continued approval of TAZVERIK in the approved indications is contingent upon verification and description of clinical benefit in confirmatory trials, and because we are developing tazemetostat for other indications, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of TAZVERIK for the indications that we are exploring or that we may plan to explore. Because any future product candidates are in various stages of preclinical development with uncertain outcomes, we also cannot estimate the actual amounts necessary to successfully complete the development and commercialization of future product candidates. Because of these uncertainties, we also cannot estimate whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. Except for any obligations of our collaborators to make license, milestone or royalty payments under our agreements with them, we do not have any committed external sources of liquidity. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. Debt financing and preferred equity 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. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise any additional funds that may be needed through equity or debt financings 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 product candidates that we would otherwise prefer to develop and market ourselves. Outlook Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities as ofDecember 31, 2020 , together with the cash we expect to generate from product sales, will be sufficient to fund our planned operating expenses and capital expenditure requirements and pay our debt service obligations as they 95
-------------------------------------------------------------------------------- become due into 2023, without giving effect to any potential milestone payments we may receive under our collaboration agreements. We have based this estimate on assumptions that may prove to be wrong, such as the revenue that we expect to generate from the sale of our products, and particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain. As a result, we could use our capital resources sooner than we expect. Cash Flows The following is a summary of cash flows for the years endedDecember 31, 2020 , 2019 and 2018: Year Ended December 31, 2020 2019 Change % (In millions)
Net cash (used in) operating activities
(14.6 ) (85.3 ) 70.7 (82.9 )
Net cash provided by financing activities 249.7 286.3 (36.7 ) (12.8 )
Year Ended December 31,
2019 2018 Change %
(In millions)
Net cash (used in) operating activities
(85.3 ) (102.6 ) 17.3 (16.8 )
Net cash provided by financing activities 286.3 84.2 202.1 240.0
Net cash used in operating activities was$206.3 million during the year endedDecember 31, 2020 compared to$147.2 million during the year endedDecember 31, 2019 . The increase in net cash used in operating activities primarily relates to our net loss of$231.7 million and changes in working capital of$8.0 million , partially offset by net depreciation and amortization of$4.3 million , non-cash stock-based compensation of$27.6 million , and non-cash interest expense associated with the sale of future royalties of$1.4 million . Net cash used in operating activities was$147.2 million during the year endedDecember 31, 2019 compared to$121.6 million during the year endedDecember 31, 2018 . The increase in net cash used in operating activities primarily relates to our net loss of$170.3 million and net depreciation and amortization of$2.3 million , partially offset by changes in working capital of$7.1 million , non-cash stock-based compensation of$18.0 million , and non-cash interest expense associated with the sale of future royalties of$0.2 million .
Net cash used in investing activities during the year endedDecember 31, 2020 reflects$276.4 million of purchases of available for sale securities, a$25.0 million milestone payment under the Eisai collaboration agreement upon regulatory approval of tazemetostat for ES, a$25.0 million milestone payment under the Eisai collaboration agreement upon regulatory approval of tazemetostat for FL, and$0.9 million of purchases of property and equipment, offset by maturities and sales of available for sale securities of$312.7 million . Net cash used in investing activities during the year endedDecember 31, 2019 reflects$505.0 million of purchases of available for sale securities and$0.6 million of purchases of property and equipment, offset by maturities/sales of available for sale securities of$420.3 million . Net cash used in investing activities during the year endedDecember 31, 2018 reflects$298.7 million of purchases of available-for-sale securities and$0.3 million of purchases of property and equipment, offset by maturities of available-for-sale securities of$196.4 million . 96 --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities
Net cash provided by financing activities of$249.7 million during the year endedDecember 31, 2020 primarily reflects cash received from the sale of common stock of$50.0 million in connection with our exercise of our Put Option to sell shares of our common stock to Royalty Pharma, net cash received during the period from Tranche B Loan borrowings of$25.0 million under the Loan Agreement, net cash received during the period from Tranche C Loan borrowings of$20.0 million under the Loan Agreement, net cash received during the period from Tranche D Loan borrowings of$150.0 million under the Amended and Restated Loan Agreement, stock option exercises of$6.7 million , and the purchases of shares under our employee stock purchase plan of$1.3 million , partially offset by payments of debt issuance costs of$3.1 million and offering costs of$0.1 million . Net cash provided by financing activities of$286.3 million during the year endedDecember 31, 2019 primarily reflects net cash received during the period of$123.1 million in the aggregate received through the RPI Purchase Agreement with RPI and the Loan Agreement withBioPharma Credit Investments V (Master) LP and BioPharma Credit PLC, net cash received from the sale of common stock of$123.0 million and net cash received from the sale of convertible preferred stock of$37.4 million , as well as cash received from stock option exercises. Net cash provided by financing activities of$84.2 million during the year endedDecember 31, 2018 primarily reflects net cash received from the sale of common stock in our public offerings in the fourth quarter of 2018 of$81.7 million , cash received from stock option exercises of$1.9 million , and the purchases of shares under our employee stock purchase plan of$0.7 million , partially offset by the payments under our capital lease obligation of$0.1 million .
Contractual Obligations and Contingent Liabilities
The following summarizes our significant contractual obligations as ofDecember 31, 2020 : Less than 1 More than 5 Contractual Obligations Total Year 1 to 3 Years 3 to 5 Years Years (In thousands) Lease obligations$ 25,695 $ 6,436 $
12,293
220,000 - 70,000 150,000 -
Total obligations $ 245,695 $ 6,436 $ 82,293 $ 156,442 $ 524
In addition to commitments under leasing arrangements described in the table
above and in Note 10, Leases to the financial statements in Item 15 of this
Annual Report on Form 10-K, we remain committed to fund $1.0 million of
development costs payable to Roche Molecular upon certain development and
regulatory milestones, under our amended companion diagnostic agreement. The
long-term debt obligations described in the table above were incurred pursuant
to our debt financing arrangements with the Lenders and are more fully described
in Note 13, Long-Term Debt to the financial statements in Item 15 of this Annual
Report on Form 10-K.
The contractual obligations table does not include potential future milestones
or royalties that we may be required to make under license and collaboration
agreements due to the uncertainty of events requiring payment under these
agreements.
We enter into contracts in the normal course of business with clinical research
organizations for clinical and preclinical research studies, external
manufacturers for product for use in our clinical trials, and other research
supplies and other services as part of our operations. These contracts generally
provide for termination on notice, and therefore are cancelable contracts and
not included in contractual commitments.
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration 97
-------------------------------------------------------------------------------- revenue, inventory and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate. We define our critical accounting policies as those accounting principles generally accepted inthe United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. Management has determined that our most critical accounting policies are those relating to revenue recognition, inventory, stock-based compensation and research and development expenses, including our accounting for clinical trial expense and accruals. As our clinical development plan for tazemetostat progresses, we expect research and development expenses and, in particular, our accounting for clinical trial accruals to be an increasingly important critical accounting policy.
Revenue Recognition - Product Revenue
We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. We sell TAZVERIK inthe United States principally to a limited number of specialty pharmacies, which dispense the product directly to patients, and specialty distributors, which in turn sell the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of patients. The specialty pharmacies and specialty distributors are referred to as our customers. Revenue is recognized by us when the customer obtains control of the product, which occurs at a point in time, typically when the product is received by our customers. We provide a right of return to our customers for unopened product for a limited time before and after its expiration date, which lapses upon shipment to a patient. Healthcare providers to whom specialty distributors sell TAZVERIK hold limited inventory that is designated for patients, and we are able to monitor inventory levels in the distribution channel, thereby limiting the risk of return.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction
price), which includes estimates of variable consideration for which reserves
are established and which result from discounts, returns, chargebacks, rebates,
co-pay assistance and other allowances that are offered within contracts between
us and our customers, health care providers, payors and other indirect customers
relating to our product sales. These reserves are based on the amounts earned or
to be claimed on the related sales and are classified as reductions of accounts
receivable (if the amount is payable to the customer) or a current liability (if
the amount is payable to a party other than a customer). Where appropriate,
these estimates take into consideration a range of possible outcomes that are
probability-weighted for relevant factors such as our historical experience,
current contractual and statutory requirements, specific known market events and
trends, industry data and forecasted customer buying and payment patterns.
Overall, these reserves reflect our best estimates of the amount of
consideration to which we are entitled based on the terms of the contract. The
amount of variable consideration that is included in the transaction price may
be constrained, and is included in the net sales price only to the extent that
it is probable that a significant reversal in the amount of the cumulative
revenue recognized will not occur in a future period. Actual amounts of
consideration ultimately received may differ from our estimates. If actual
results in the future vary from our estimates, we will adjust these estimates,
which would affect net product revenue and earnings in the period such variances
become known.
98
-------------------------------------------------------------------------------- Trade Discounts and Allowances: We generally provide customers with discounts that include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from certain customers. To the extent the services received are distinct from our sale of products to the customer, these payments are classified in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss. Product Returns: Consistent with industry practice, we generally offer customers a limited right of return based on the product's expiration date for product that has been purchased from us, which lapses upon shipment to a patient. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We currently estimate product return liabilities using available industry data and our own historical sales information, including our visibility into the inventory remaining in the distribution channel. Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and we generally issue credits for such amounts within a few weeks of the customer's notification to us of the resale. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed but for which we have not yet issued a credit. Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at period end. Payor Rebates: We may contract with various private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. Other Incentives/Patient Assistance Programs: We also offer voluntary patient assistance programs such as co-pay assistance. Co-pay assistance programs are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in in the distribution channel inventories at period end.
Revenue Recognition - Collaboration Revenue
EffectiveJanuary 1, 2018 , we adopted ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective transition method. Under this method, results for reporting periods beginning afterJanuary 1, 2018 are presented pursuant to ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial 99 -------------------------------------------------------------------------------- instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which 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 ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We have entered into collaboration and license agreements, which are within the scope of ASC 606, to discover, develop, manufacture and commercialize product candidates. The terms of these agreements typically contain multiple promises or obligations, which may include: (i) licenses, or options to obtain licenses, to compounds directed to specific targets (referred to as "exclusive licenses") and (ii) research and development activities to be performed on behalf of the collaboration partner related to the licensed targets. Payments to us under these agreements may include non-refundable license fees, customer option exercise fees, payments for research activities, reimbursement of certain costs, payments based upon the achievement of certain milestones and royalties on any resulting net product sales. We first evaluate license and/or collaboration arrangements to determine whether the arrangement (or part of the arrangement) represents a collaborative arrangement pursuant to ASC Topic 808, Collaborative Arrangements, based on the risks and rewards and activities of the parties pursuant to the contractual arrangement. We account for collaborative arrangements (or elements within the contract that are deemed part of a collaborative arrangement), which represent a collaborative relationship and not a customer relationship, outside the scope of ASC 606. Our collaborations primarily represent revenue arrangements. For the arrangements or arrangement components that are subject to revenue accounting guidance, in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for these arrangements, we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration, except for sales-based royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. In determining the stand-alone selling price of a license to our proprietary technology or a material right provided by a customer option, we consider market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreements as well as internally developed estimates that include assumptions related to the market opportunity, estimated development costs, probability of success and the time needed to commercialize a product candidate pursuant to the license. In validating its estimated stand-alone selling price, we evaluate whether changes in the key assumptions used to determine its estimated stand-alone selling price will have a significant effect on the allocation of arrangement consideration between performance obligations. Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Amounts recognized as revenue, but not yet received or invoiced are generally recognized as contract assets. 100 -------------------------------------------------------------------------------- Exclusive Licenses - If the license to our intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, which generally include research and development services, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a license is distinct from the other promises, we consider relevant facts and circumstances of each arrangement, including the research and development capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, we consider whether the collaboration partner can benefit from the license for its intended purpose without the receipt of the remaining promises, whether the value of the license is dependent on the unsatisfied promises, whether there are other vendors that could provide the remaining promises, and whether it is separately identifiable from the remaining promises. For licenses that are combined with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Research and Development Services - The promises under our collaboration and license agreements generally include research and development services to be performed by us on behalf of the collaboration partner. For performance obligations that include research and development services, we generally recognize revenue allocated to such performance obligations based on an appropriate measure of progress. We utilize judgment to determine the appropriate method of measuring progress for purposes of recognizing revenue, which is generally an input measure such as costs incurred. We evaluate the measure of progress each reporting period as described under Exclusive Licenses above. Reimbursements from the partner that are the result of a collaborative relationship with the partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense. Customer Options - Our arrangements may provide a collaborator with the right to select a target for licensing either at the inception of the arrangement or within an initial pre-defined selection period, which may, in certain cases, include the right of the collaborator to extend the selection period. Under these agreements, fees may be due to us (i) at the inception of the arrangement as an upfront fee or payment, (ii) upon the exercise of an option to acquire a license or (iii) upon extending the selection period as an extension fee or payment. If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. We evaluate the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the inception of the arrangement. We allocate the transaction price to material rights based on the relative stand-alone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised or expires. Milestone Payments - At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being achieved 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 not considered probable of being achieved until those approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. If a milestone or other variable consideration relates specifically to our efforts to satisfy a single performance obligation or to a specific outcome from satisfying the performance obligation, we generally allocate the milestone amount entirely to that performance obligation once it is probable that a significant revenue reversal would not occur. 101 -------------------------------------------------------------------------------- Royalties - For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of its licensing arrangements. For a complete discussion of accounting for collaboration revenues, see Note 11, Collaborations, in the accompanying Notes to Consolidated Financial Statements included in Item 15. of Part IV of this Annual Report on Form 10-K.
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. 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: • contract research organizations in connection with clinical trials; • investigative sites in connection with clinical trials; • vendors in connection with non-clinical development activities; and
• vendors related to product manufacturing, development and distribution
of clinical supplies.
We generally accrue expenses related to research and development activities based on the services received and efforts expended pursuant to contracts with multiple contract research organizations that conduct and manage clinical trials on our behalf as well as other vendors that provide research and development services. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed 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 would adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amount actually incurred. Inventory We outsource the manufacturing of TAZVERIK and use contract manufacturers to produce the raw and intermediate materials used in the production of TAZVERIK as well as the finished product. We currently have one supplier qualified for each step in the manufacturing process and are in the process of qualifying additional suppliers.
Inventory is composed of raw materials, intermediate materials, which are classified as work-in-process, and finished goods, which are goods that are available for sale. We state inventory at the lower of cost or net realizable value with the cost based on the first-in, first-out method. If we identify excess, obsolete or unsalable items, we write down our inventory to its net realizable value in the period in which the impairment is identified. These adjustments are recorded based upon various factors related to the product, including the level of product
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manufactured by us, the level of product in the distribution channel, current
and projected demand, the expected shelf-life of the product and firm inventory
purchase commitments. Shipping and handling costs incurred for inventory
purchases are included in inventory costs and costs incurred for product
shipments are recorded as incurred in cost of product revenue.
Prior to receiving our first approval from the U.S. Food and Drug
Administration , or FDA, on January 23, 2020 to sell TAZVERIK for the approved FL
indications, we expensed all costs incurred related to the manufacture of
TAZVERIK as research and development expense because of the inherent risks
associated with the development of a product candidate, the uncertainty about
the regulatory approval process and the lack of history for us of regulatory
approval of drug candidates.
Liability Related to Sale of Future Royalties
We treat the liability related to sale of future royalties as a debt financing, as we have significant continuing involvement in the generation of the cash flows, to be amortized to interest expense using the effective interest rate method over the life of the related royalty stream. The liability related to sale of future royalties and the related interest expense are based on our current estimates of future royalties expected to be paid over the life of the arrangement. We will periodically assess the expected royalty payments using a combination of internal projections and forecasts from external sources. To the extent our future estimates of royalty payments are greater or less than previous estimates or the estimated timing of such payments is materially different than its previous estimates, we will prospectively recognize related non-cash interest expense.
Going Concern
We continually evaluate our ability to continue as a going concern within one year of the date of issuance of financial statements in both our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Our evaluation entails analyzing forward looking budgets and forecasts for expectations of our cash needs, and comparing those needs to our current cash, cash equivalent and marketable security balances.
Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities will be sufficient to fund our planned operating expenses and capital expenditure requirements into 2023, without giving effect to any potential milestone payments we may receive under our collaboration agreements.
Recently Adopted Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and
the expected impact on our consolidated financial statements, see Note 2,
Summary of Significant Accounting Policies-Recently Adopted Accounting
Pronouncements, in the accompanying Notes to Consolidated Financial Statements
included in Item 15. of Part IV of this Annual Report on Form 10-K.
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