You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and in ourSecurities and Exchange Commission ("SEC") filings, including our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onMarch 1, 2021 ("2020 Form 10-K").
FORWARD-LOOKING STATEMENTS
The following discussion and information contained elsewhere in this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), Section 27A of the Securities Act of 1933, as amended ("Securities Act") and within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q and are cautioned not to place undue reliance on such forward-looking statements. BUSINESS OVERVIEW We are headquartered inSan Francisco, California , with subsidiary offices inBeijing andShanghai ,People's Republic of China ("China"). We are a leading biopharmaceutical company developing and commercializing a pipeline of first-in-class therapeutics to advance innovative medicines for the treatment of anemia, fibrotic disease, and cancer. Roxadustat,FibroGen's most advanced product, is an oral small molecule inhibitor of hypoxia-inducible factor prolyl hydroxylase ("HIF-PH") activity that is approved in theEuropean Union ,Great Britain ,Japan ,South Korea , andChile for the treatment of anemia caused by chronic kidney disease ("CKD") in dialysis and non-dialysis patients, under the tradename EVRENZO®. Roxadustat is also being commercialized inChina for CKD anemia in dialysis and non-dialysis patients under the tradename: ???®.
Roxadustat is in Phase 3 clinical development for anemia associated with myelodysplastic syndromes ("MDS") and Phase 2 clinical development for chemotherapy-induced anemia.
Pamrevlumab, a human monoclonal antibody targeting connective tissue growth factor ("CTGF"), is in Phase 3 clinical development for the treatment of idiopathic pulmonary fibrosis ("IPF"), pancreatic cancer and Duchenne muscular dystrophy ("DMD").
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Table of Contents Financial Highlights Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands, except for per share data) Result of Operations Revenue $ 155,973$ 44,032 $ 218,766 $ 111,320 Operating costs and expenses 104,999 11,702 372,055 245,202 Net income (loss) 49,798 33,004 (155,945 ) (130,657 ) Net income (loss) per share 0.54 0.36 (1.69 ) (1.46 ) - basic Net income (loss) per share $ 0.54 $ 0.35 $ (1.69 ) $ (1.46 ) - diluted September 30, 2021 December 31, 2020 (in thousands) Balance Sheet Cash and cash equivalents $ 274,527 $ 678,393 Short-term and long-term investments 354,511 8,388 Accounts receivable $ 35,994 $ 41,883
Our revenue for the three and nine months ended
•
agreements with our partners Astellas Pharma Inc. ("Astellas") associated
with the approval by
treatment of adult patients with symptomatic anemia associated with CKD
during the third quarter of 2021. Of this amount,
license revenue and the remainder included as development revenue;
•
collaboration agreements with our partners
("AstraZeneca");
•
commercial sales in
•
with
As a comparison, our revenue for the three and nine months ended
•
collaboration agreements with our partners Astellas and AstraZeneca;
•
commercial sales in
•
bulk drug or active pharmaceutical ingredient ("API") deliveries to
AstraZeneca and Astellas.
Operating costs and expenses for the three and nine months endedSeptember 30, 2021 increased compared to the same periods a year ago as a result of the net effect of the following:
• Higher sales and marketing expenses due to a reversal in the prior year
periods based on a change in the calculation method of co-promotion expenses
with AstraZeneca as a result of the China Amendment between FibroGen China
and AstraZeneca entered in the third quarter of 2020. This impact was
partially offset by the decrease due to the transition that substantially all
direct product sales to distributors were made by Beijing Falikang
in
Ltd. ("FibroGen Beijing") continued to sell product directly in a few
provinces in
Falikang and to FibroGen Beijing respectively. All defined terms referenced
in this paragraph that are not already defined, are defined below in
Collaboration Partnerships for Roxadustat.
• Higher clinical trial expenses associated with Phase 3 trials for pamrevlumab
and roxadustat post-approval safety studies;
• Higher drug development expenses associated with drug substance and drug
product manufacturing activities primarily related to pamrevlumab; and
• Lower legal expenses primarily associated with patent-related activities in theUnited Kingdom . 32
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Operating costs and expenses for the nine months ended
Following the complete response letter ("CRL") for roxadustat in theU.S. , we are implementing a cost reduction effort, and as a result, operating expenses may decrease in certain areas in the near future. For the three months endedSeptember 30, 2021 , we had net income of$49.8 million or net income per basic and diluted share of$0.54 , as compared to a net income of$33.0 million for the same period a year ago, due to increases in revenue, partially offset by increases in operating costs and expenses as discussed above. For the nine months endedSeptember 30, 2021 , we had net loss of$155.9 million or net loss per basic and diluted share of$1.69 , as compared to a net loss of$130.7 million for the same period a year ago, due to increases in operating costs and expenses, partially offset by increases in revenue as discussed above. Cash and cash equivalents, investments and accounts receivable totaled$665.0 million atSeptember 30, 2021 , a decrease of$63.7 million fromDecember 31, 2020 , primarily due to the cash used in operations.
Commercial and Development Programs
Roxadustat for the Treatment of Anemia in Chronic Kidney Disease
Roxadustat is our most advanced product, an oral small molecule inhibitor of HIF-PH activity that acts by stimulating the body's natural pathway of erythropoiesis, or red blood cell production.
Our collaboration partner AstraZeneca and we continue to expand the commercialization of roxadustat (tradename: ???®) inChina where it is approved for the treatment of anemia caused by CKD in non-dialysis and dialysis patients. As ofOctober 2021 , roxadustat had a 33% value share within the segment of erythropoiesis stimulating agents and HIF-PH inhibitors (roxadustat is the only HIF-PH inhibitor currently on the market inChina ). InAugust 2021 , EVRENZO® (roxadustat) was approved for the treatment of adult patients with symptomatic anemia associated with CKD in theEuropean Union andGreat Britain . Astellas has launched EVRENZO inGermany , theUnited Kingdom ,the Netherlands , andAustria .
In
InAugust 2021 , theU.S. Food and Drug Administration ("FDA") issued a complete response letter regarding roxadustat's New Drug Application ("NDA") for the treatment of anemia due to CKD in adult patients, stating that it could not be approved in its present form. The FDA decision followed a negative advisory vote regarding roxadustat by theRenal Drugs Advisory Committee inJuly 2021 . We are preparing to meet with the FDA to discuss the potential trial(s) that would be required for approval in CKD anemia.
Roxadustat for the Treatment of Anemia in Myelodysplastic Syndromes
We are continuing to enroll MATTERHORN, our Phase 2/3 placebo controlled, double-blind clinical trial to evaluate the safety and efficacy of roxadustat for treatment of anemia in MDS in theU.S. andEurope . This 160-patient trial is studying roxadustat in transfusion-dependent, lower-risk MDS patients, in which subjects are randomized 3:2 to receive roxadustat or placebo three-times-weekly. The primary endpoint is the proportion of patients who achieve transfusion independence by 28 weeks with secondary endpoints and safety evaluated at 52 weeks. We expect topline data from this study between the second half of 2022 and the first half of 2023. InChina , we are enrolling the randomized, double-blind, placebo-controlled portion of our Phase 3 clinical trial to evaluate the safety and efficacy of roxadustat in non-transfusion dependent, lower-risk MDS patients with anemia. One hundred thirty-five subjects will be randomized 2:1 to receive roxadustat or placebo three-times weekly for 26 weeks. The primary endpoint for this study is the percentage of patients achieving a hemoglobin response. 33
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Roxadustat for the Treatment of Chemotherapy-Induced Anemia
We have completed enrollment and announced positive topline results from WHITNEY, our Phase 2 clinical trial of roxadustat in theU.S. in chemotherapy-induced anemia. This is a single-arm open label study investigating the efficacy and safety of roxadustat for the treatment of anemia in 92 patients receiving myelosuppressive chemotherapy treatment for non-myeloid malignancies, with a treatment duration of 16 weeks. We expect to release data from this study at an upcoming medical meeting.
Pamrevlumab (FG-3019) - Monoclonal Antibody Targeting Connective Tissue Growth Factor (CTGF)
Pamrevlumab is our first-in-class antibody developed to inhibit the activity of CTGF, a common factor in fibrotic and fibro-proliferative disorders characterized by persistent and excessive scarring that can lead to organ dysfunction and failure.
In the second quarter of 2021, the FDA granted both Rare Pediatric Disease designation and Fast Track designation for pamrevlumab for the treatment of patients with DMD. In addition, the FDA has granted Orphan Drug Designation to pamrevlumab for the treatment of IPF, locally advanced unresectable pancreatic cancer, and DMD. Pamrevlumab has also received Fast Track designation from the FDA for the treatment of both IPF and locally advanced unresectable pancreatic cancer.
Idiopathic Pulmonary Fibrosis
We are conducting ZEPHYRUS-1 and ZEPHYRUS-2, our two Phase 3 trials of pamrevlumab in IPF patients. Both studies are randomized, double-blind, placebo-controlled Phase 3 trials targeting approximately 340 patients, each with a primaryU.S. efficacy endpoint of change from baseline in forced vital capacity. The primary efficacy endpoint inEurope for each study is disease progression (defined by a decline in forced vital capacity percent predicted of greater than or equal to 10% or death). Secondary endpoints will include clinical outcomes of disease progression, patient reported outcomes, and quantitative changes in lung fibrosis volume from baseline. We expect topline data from ZEPHYRUS-1 in mid-2023.
Pancreatic Cancer
We continue to enroll LAPIS, our double-blind placebo controlled Phase 3 clinical program for pamrevlumab as a neoadjuvant therapy for locally advanced unresectable pancreatic cancer. We intend to enroll approximately 280 patients, randomized at a 1:1 ratio to receive either pamrevlumab or placebo, in each case in combination with chemotherapy (either FOLFIRINOX or gemcitabine plus nab-paclitaxel). We currently expect topline overall survival data, the primary endpoint, in the first half of 2024. An interim analysis of event-free survival will be completed in the second half of 2022 for potential accelerated approval. InJune 2021 thePancreatic Cancer Action Network's (PanCAN) Precision PromiseSM adaptive trial platform included pamrevlumab, with standard of care chemotherapy treatments for pancreatic cancer (gemcitabine and Abraxane®), in its study for patients with metastatic pancreatic cancer. The combination therapy is offered to patients as either a first- or second-line treatment option, marking the first experimental treatment arm to be offered as a first-line treatment in PanCAN's innovative Precision Promise trial. The objective of Precision Promise is to expedite the study and approval of promising therapies for pancreatic cancer by bringing multiple stakeholders together, including academic, industry and regulatory entities. Duchenne Muscular Dystrophy We continue to enroll LELANTOS-1, our Phase 3 clinical trial evaluating pamrevlumab in combination with systemic corticosteroids as a treatment for DMD. LELANTOS-1 is a double-blind, placebo-controlled trial in approximately 90 non-ambulatory DMD patients. Patients are randomized at a 1:1 ratio to pamrevlumab or placebo and have a treatment period of 52 weeks. The primary endpoint will assess change in upper limb strength and additional endpoints will include pulmonary, cardiac, performance, and fibrosis assessments. We expect topline data from this study in the first half of 2023. We also continue to enroll our double-blind, placebo-controlled Phase 3 clinical trial, LELANTOS-2, evaluating pamrevlumab in combination with systemic corticosteroids in approximately 70 ambulatory DMD patients. Patients aged 6-12 will be randomized at a 1:1 ratio to pamrevlumab or placebo and have a treatment period of 52 weeks. The primary efficacy endpoint will assess ambulatory function, measured by the change in North Star Ambulatory Assessment from baseline to Week 52. 34
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Table of Contents Licensing Activities
Exclusive License with Eluminex Biosciences
In
Under the terms of the agreement with Eluminex (the "Eluminex Agreement"), Eluminex will make an$8.0 million upfront payment toFibroGen . In addition,FibroGen may receive up to a total of$64.0 million in future manufacturing, clinical, regulatory, and commercial milestone payments for the biosynthetic cornea program, as well as$36.0 million in commercial milestones for the first recombinant collagen III product that is not the biosynthetic cornea.FibroGen will be eligible to receive mid single-digit to low double-digit royalties based upon worldwide net sales of cornea products, and low single-digit to mid single-digit royalties based on worldwide net sales of other recombinant human collagen type III products that are not cornea products. During the third quarter of 2021, the$8.0 million upfront license payment was recognized as license revenue for the performance obligations satisfied. See Note 2, Collaboration Agreements, License Agreement and Revenues, to the condensed consolidated financial statements for details.
Collaboration Partnerships for Roxadustat
Our current and future research, development, manufacturing and commercialization efforts with respect to roxadustat and our other product candidates currently in development depend on funds from our collaboration agreements with Astellas and AstraZeneca. See Note 2, Collaboration Agreements, License Agreement and Revenues, to the condensed consolidated financial statements for details.
Astellas
InJune 2005 , we entered into a collaboration agreement with Astellas for the development and commercialization (but not manufacture) of roxadustat for the treatment of anemia inJapan ("Japan Agreement"). InApril 2006 , we entered into the Europe Agreement with Astellas for roxadustat for the treatment of anemia inEurope , the Commonwealth of Independent States, theMiddle East , andSouth Africa ("Europe Agreement"). Under these agreements, the aggregate amount of such consideration received throughSeptember 30, 2021 totals$765.1 million . During the third quarter of 2021, theEuropean Commission approved EVRENZO® (roxadustat) for the treatment of adult patients with symptomatic anemia associated with CKD, which triggered a total of$120.0 million milestone payable to us by Astellas under the Europe Agreement. Accordingly, the consideration of$120.0 million associated with these milestones was included in the transaction price and allocated to performance obligations under the Europe Agreement, all of which was recognized as revenue during the third quarter of 2021 from performance obligations satisfied. In 2018,FibroGen and Astellas entered into an amendment to the Japan Agreement that allows Astellas to manufacture roxadustat drug product for commercialization inJapan (the "Japan Amendment"). Under this amendment, the related drug product revenue was$2.1 million for the nine months endedSeptember 30, 2021 . During the first quarter of 2021, we entered into an EU Supply Agreement under the Europe Agreement with Astellas to define general forecast, order, supply and payment terms for Astellas to purchase roxadustat bulk drug product fromFibroGen in support of commercial supplies. We shipped bulk drug product to Astellas as pre-commercial supply for process validation purposes during the first quarter of 2021. We continued to record the consideration of$11.8 million from this shipment as deferred revenue as ofSeptember 30, 2021 , due to a high degree of uncertainty associated with the final consideration. The deferred revenue will be recognized as and when the uncertainty is resolved.
AstraZeneca
InJuly 2013 , we entered into theU.S. /RoW Agreement a collaboration agreement with AstraZeneca for roxadustat for the treatment of anemia in theU.S. and all territories not previously licensed to Astellas, exceptChina . InJuly 2013 , through ourChina subsidiary and related affiliates, we entered into a collaboration agreement with AstraZeneca for roxadustat for the treatment of anemia inChina ("China Agreement"). Under the AstraZeneca agreements, aggregate amount of such consideration received throughSeptember 30, 2021 totals$516.2 million . 35
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Under the China Agreement, which is conducted throughFibroGen China Anemia Holdings, Ltd. , FibroGen Beijing, andFibroGen International (Hong Kong ) Limited (collectively, ("FibroGen China"), the commercial collaboration was structured as a 50/50 profit share, which was amended by the China Amendment in the third quarter of 2020, as discussed and defined below inChina Amendment. In 2020, we entered into Master Supply Agreement under theU.S. /RoW Agreement with AstraZeneca ("Master Supply Agreement") to define general forecast, order, supply and payment terms for AstraZeneca to purchase roxadustat bulk drug product fromFibroGen in support of commercial supplies. We shipped bulk drug product to AstraZeneca as commercial supply during 2020 and the first and second quarter of 2021. Based on the CRL issued by the FDA inAugust 2021 , we evaluated the impact of these developments in revising our estimates of variable consideration associated with drug product revenue. As a result, we updated the estimated transaction price, and continued to record$11.2 million as deferred revenue as ofSeptember 30, 2021 .
China Amendment
InJuly 2020 , FibroGen China and AstraZeneca (together with FibroGen China, the "Parties") entered into an amendment, effectiveJuly 1, 2020 , to theChina Agreement, relating to the development and commercialization of roxadustat inChina (the "China Amendment"). Under the China Amendment, inSeptember 2020 , FibroGen Beijing and AstraZeneca completed the establishment of a jointly owned entity, Falikang, which performs roxadustat distribution, as well as conduct sales and marketing through AstraZeneca. FibroGen Beijing manufactures and supplies commercial product to Falikang based on an agreed upon transfer price, which includes gross transfer price, net of calculated profit share. Revenue is recognized upon the transfer of control of commercial products to Falikang in an amount that reflects the allocation of transaction price of theChina manufacturing and supply obligation ("China performance obligation") to the performance obligation satisfied during the reporting period. During the three and nine months endedSeptember 30, 2021 , we recognized net product revenue of$10.3 million and$32.5 million , respectively.
Additional Information Related to Collaboration Agreements
Total cash consideration received through
Cash Received for Total Upfront Payments and Additional Potential Milestone Payments Potential Cash Payments for Through Cash Payment for Upfront Payments and September 30, 2021 Milestones Milestones (in thousands) Astellas--related-party: Japan Agreement $ 105,093 $ 67,500 $ 172,593 Europe Agreement 660,000 85,000 745,000 Total Astellas 765,093 152,500 917,593 AstraZeneca: U.S. / RoW Agreement 439,000 810,000 1,249,000 China Agreement 77,200 299,500 376,700 Total AstraZeneca 516,200 1,109,500 1,625,700 Total $ 1,281,293$ 1,262,000 $ 2,543,293 The above table does not include development cost reimbursement, transfer price payments, and royalties and profit share under our existing collaboration agreements. These collaboration agreements also provide for reimbursement of certain fully burdened research and development costs as well as direct out of pocket expenses. 36
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Table of Contents RESULTS OF OPERATIONS Revenue Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Revenue: License revenue$ 116,434 $ -$ 116,434
100 %
26,097 20,663 5,434 26 % 60,325 59,065 1,260 2 %
Product revenue, net 13,442 22,683 (9,241 ) (41 ) % 42,175
43,331 (1,156 ) (3 ) % Drug product revenue - 686 (686 )
(100 ) % (168 ) 8,924 (9,092 ) (102 ) % Total revenue
$ 155,973 $ 44,032 $ 111,941
254 %
Our revenue to date has been generated substantially from our collaboration
agreements with Astellas and AstraZeneca. In addition, we started roxadustat
commercial sales in
Under our revenue recognition policy, license revenue includes amounts from upfront, non-refundable license payments and amounts allocated pursuant to the standalone selling price method from other consideration received during the periods. This revenue is generally recognized as deliverables are met and services are performed. Development revenue includes co-development and other development related services. Co-development services are recognized as revenue in the period in which they are billed to our partners, excludingChina . ForChina co-development services, revenue is deferred until we begin to transfer control of the manufactured commercial product to AstraZeneca, which commenced in the first quarter of 2021 and is expected to continue through 2028. Other development related services are recognized as revenue over the non-contingent development period based on a proportional performance method. As ofSeptember 30, 2021 , the estimated future non-contingent development periods range from three to 45 months. Other revenues consist of sales of research and development material and have not been material for any of the periods presented.
Product revenue is recognized when our customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services.
Drug product revenue includes commercial-grade API or bulk drug product sales to AstraZeneca and Astellas in support of pre-commercial preparation prior to the NDA or Marketing Authorization Application approval, and to Astellas for ongoing commercial launch inJapan . Drug product revenue is recognized when we fulfill the delivery obligations. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the drug product revenue 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 when the uncertainty associated with the variable consideration is subsequently resolved. Actual amounts of consideration ultimately received in the future may differ from our estimates, for which we will adjust these estimates and affect the drug product revenue in the period such variances become known. In the future, we will continue generating revenue from collaboration agreements in the form of license fees, milestone payments, reimbursements for collaboration services and royalties on drug product sales, and from product sales. We expect that any revenues we generate will fluctuate from quarter to quarter due to the uncertain timing and amount of such payments and sales.
Total revenue increased
37
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Table of Contents License Revenue Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) License revenue: Astellas$ 108,434 $ -$ 108,434 100 %$ 108,434 $ -$ 108,434 100 % AstraZeneca - - - - % - - - 100 % Eluminex 8,000 - 8,000 100 % 8,000 - 8,000 100 %
Total license revenue
License revenue recognized under our collaboration agreements with Astellas for the three and nine months endedSeptember 30, 2021 represented the allocated revenue of related to a total of$120.0 million regulatory milestones associated with the approval byEuropean Commission of EVRENZO® (roxadustat) for the treatment of adult patients with symptomatic anemia associated with CKD during the third quarter of 2021.
License revenue recognized under our license agreement with Eluminex for the
three and nine months ended
We did not have any license revenue for the three and nine months ended
Development and Other Revenue Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in
thousands)
Development revenue: Astellas$ 14,127 $ 4,737 $ 9,390 198 %$ 20,383 $ 14,240 $ 6,143 43 % AstraZeneca 11,970 15,926 (3,956 ) (25 ) % 39,939 44,825 (4,886 ) (11 ) % Total development revenue 26,097 20,663 5,434 26 % 60,322 59,065 1,257 2 % Other revenue - - - - % 3 - 3 100 % Total development and other revenue$ 26,097 $ 20,663 $ 5,434 26
%
Development and other revenue increased
Development revenue recognized under our collaboration agreements with Astellas included the allocated revenue of$11.6 million related to the above-mentioned$120.0 million associated with the approvals in EU achieved during the third quarter of 2021. The increases were partially offset by the decreased in co-development billings related to the development of roxadustat under our collaboration agreements with Astellas for the three and nine months endedSeptember 30, 2021 as a result of the substantial completion of Phase 3 trials for roxadustat. Development revenue recognized under our collaboration agreements with AstraZeneca for the three and nine months endedSeptember 30, 2021 was impacted by the increase in CKD related co-development billings in theU.S. , offset by the extension of the estimated future non-contingent development period when we were notified of the FDA CRDAC meeting to review the NDA for roxadustat. 38
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Table of Contents Product Revenue, Net Three Months Ended September 30, Change Nine Months Ended September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Direct Sales: Gross revenue$ 3,249 $ 27,900 $ (24,651 ) (88
) %
(9,721 ) 8,407 (86 ) % Sales returns (2 ) (8 ) 6 (75 ) % 86 (53 ) 139 (262 ) % Direct sales revenue, net 3,114 22,683 (19,569 ) (86 ) % 9,680 43,331 (33,651 ) (78 ) % Sales to Falikang: Gross transfer price 31,179 - 31,179 100 % 82,294 - 82,294 100 % Profit share (12,090 ) - (12,090 ) 100 % (31,726 ) - (31,726 ) 100 % Net transfer price 19,089 - 19,089 100 % 50,568 - 50,568 100 % Increase in deferred revenue (8,761 ) - (8,761 ) 100 % (18,073 ) - (18,073 ) 100 % Sales to Falikang revenue, net 10,328 - 10,328 100 % 32,495 - 32,495 100 % Total product revenue, net$ 13,442 $ 22,683 $ (9,241 ) (41 ) %$ 42,175 $ 43,331 $ (1,156 ) (3 ) % InJanuary 2021 , Falikang became fully operational and substantially all direct product sales to distributors inChina were made by Falikang, whileFibroGen Beijing continued to sell product directly in a few provinces inChina . Product revenue from direct sales to distributors is recognized in an amount that reflects the consideration that we expect to be entitled to in exchange for those products, net of various sales rebates and discounts. The gross product revenue from direct sales to distributors was$3.2 million and$27.9 million for the three months endedSeptember 30, 2021 and 2020, and$10.9 million and$53.1 million for nine months endedSeptember 30, 2021 and 2020, respectively. The total discounts and rebates were$0.1 million and$5.2 million for the three months endedSeptember 30, 2021 and 2020, and$1.3 million and$9.7 million for nine months endedSeptember 30, 2021 and 2020, respectively. The discounts and rebates primarily consisted of the contractual sales rebate that were calculated based on the stated percentage of gross sales by each distributor in the distribution agreement, and non-key account hospital listing award that was calculated based on eligible non-key account hospital listing to date achieved by each distributor with certain requirements met during the period. During the three and nine months endedSeptember 30, 2020 , non-key account hospital listing award was$2.9 million and$5.5 million , respectively, recorded as a reduction to the revenue, related to accounting modifications of non-key account hospital listing award, as a result of the amendment to the agreement with our pharmaceutical distributors in the second quarter of 2020. FibroGen Beijing manufactures and supplies commercial product to Falikang based on an agreed upon transfer price, which includes gross transfer price, net of calculated profit share. Revenue is recognized upon the transfer of control of commercial products to Falikang in an amount that reflects the allocation of theChina performance obligation transaction price to the performance obligation satisfied during the reporting period. The variable consideration components that are included in the transaction price may be constrained, and are included in the product revenue 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 when the uncertainty associated with the variable consideration is subsequently resolved. During the three and nine months endedSeptember 30, 2021 , the gross transfer price was$31.2 million and$82.3 million respectively, net of the calculated profit share of$12.1 million and$31.7 million respectively. Following updates to our estimates, we deferred$8.8 million and$18.1 million from the sales to Falikang for the three and nine months endedSeptember 30, 2021 respectively, which was included in the related deferred revenue of theChina performance obligation. 39
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Table of Contents Drug Product Revenue Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Drug product revenue: Astellas $ -$ (3,957 ) $ 3,957 (100 ) %$ 2,056 $ 4,281 $ (2,225 ) (52 ) % AstraZeneca - 4,643 (4,643 ) 100 % (2,224 ) 4,643 (6,867 ) 148 % Total drug product revenue: $ -$ 686 $ (686 ) (100 ) %$ (168 ) $ 8,924 $ (9,092 ) (102 ) %
We did not have any drug product revenue for the three months ended
During the nine months endedSeptember 30, 2021 , we recorded$2.1 million in the drug product revenue related to the API shipments fulfilled under the terms of the Japan Amendment with Astellas in 2018, due to a change in estimated variable consideration. Specifically, the change in estimated variable consideration was based on the API held by Astellas, adjusted to reflect the changes in the estimated bulk product strength mix intended to be manufactured by Astellas, estimated cost to convert the API to bulk product tablets, and estimated yield from the manufacture of bulk product tablets, among others. During the three months endedSeptember 30, 2020 , we recorded a reduction of$4.0 million to the drug product revenue related to the same API shipments for the change in estimated variable consideration based on the API held by Astellas under the same methodology. During the first quarter of 2021, we shipped bulk drug product from process validation supplies for commercial purposes under the terms of theEurope Agreement with Astellas. We continued to record the consideration of$11.8 million from this shipment as deferred revenue as ofSeptember 30, 2021 , due to a high degree of uncertainty associated with the final consideration, which will be recognized as and when the uncertainty is resolved. During the second quarter of 2021, we shipped bulk drug product to AstraZeneca as commercial supply under the terms of the Master Supply Agreement. Based on the above-mentioned FDA CRL inAugust 2021 , we evaluated the impact of these developments in revising our estimates of variable consideration associated with drug product revenue. As a result, we updated the estimated transaction price, and continued to record$11.2 million as deferred revenue as ofSeptember 30, 2021 .
During the second quarter of 2020, we fulfilled the delivery obligations under
the terms of the Japan Amendment, and recognized the related drug product
revenue of
During the first three quarters of 2020, we delivered process validation product to AstraZeneca as pre-commercial supply under theU.S. /RoW Agreement and recorded the related drug product revenue of$4.6 million during the three and nine months endedSeptember 30, 2020 .
Operating Costs and Expenses
Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Operating costs and expenses Cost of goods sold$ 3,266 $ 2,207 $ 1,059 48 %$ 9,746 $ 6,253 $ 3,493 56 % Research and development 75,880 58,476 17,404
30 % 273,123 174,792 98,331 56 % Selling, general and administrative
25,853 (48,981 ) 74,834 153 % 89,186 64,157 25,029 39 % Total operating costs and expenses$ 104,999 $ 11,702 $ 93,297
797 %
Total operating costs and expenses increased$93.3 million , or 797% for the three months endedSeptember 30, 2021 , and$126.9 million , or 52% for the nine months endedSeptember 30, 2021 , compared to the same periods a year ago, for the reason discussed in the sections below. 40
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Table of Contents Cost of Goods Sold Cost of goods sold was$3.3 million and 2.2 million for the three months endedSeptember 30, 2021 and 2020, respectively. Cost of goods sold was$9.7 million and$6.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Cost of goods sold, associated with the roxadustat commercial sales inChina , consists of direct costs to manufacture commercial product, as well as indirect costs including factory overhead, storage, shipping, quality assurance, idle capacity charges, and inventory valuation adjustments. Cost of goods sold, associated with the roxadustat commercial sales inChina , was$2.8 million and$2.2 million for the three months endedSeptember 30, 2021 and 2020, and$7.4 million and$5.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively, due to the sales to Falikang that started inJanuary 2021 , offset by the overall increase in the gross sales. Cost of goods sold associated with the roxadustat drug product revenue in theU.S. was$0.5 million and immaterial for the three months endedSeptember 30, 2021 and 2020, and$2.3 million and$0.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. We expect costs of goods sold to increase in relation to drug product revenue as we deplete inventories that we had expensed prior to receiving regulatory approvals.
Research and Development Expenses
Research and development expenses consist of third-party research and development costs and the fully-burdened amount of costs associated with work performed under collaboration agreements. Research and development expenses include employee-related expenses for research and development functions, expenses incurred under agreements with clinical research organizations ("CROs"), other clinical and preclinical costs and allocated direct and indirect overhead costs, such as facilities costs, information technology costs and other overhead. Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites. Research and development expenses also include in-process research and development assets that have no alternative future use other than in a particular research and development project. Following the CRL for roxadustat in theU.S. , we are implementing a cost reduction effort, and as a result, research and development expenses may decrease in certain areas in the near future.
The following table summarizes our research and development expenses incurred
during the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30, Product Candidate Phase of Development 2021 2020 2021 2020 (in thousands) Roxadustat Phase 3$ 19,822 $ 31,222 $ 72,989 $ 91,586 Pamrevlumab Phase 2/3 43,780 24,959 137,334 70,374 Other research and development expenses 12,278 2,295 62,800 12,832 Total research and development expenses$ 75,880 $ 58,476 $ 273,123 $ 174,792
The program-specific expenses summarized in the table above include costs we directly attribute to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and other indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses. We expect our research and development expenses to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio.
Research and development expenses increased$17.4 million , or 30% for the three months endedSeptember 30, 2021 , compared to the same period a year ago, as a result of the net effect of the following:
• Increase of
trials for pamrevlumab and roxadustat post-approval safety studies in
• Increase of
substance and drug product manufacturing activities primarily related to
pamrevlumab;
• Increase of
expenses and higher scientific contract activities related to pamrevlumab
Phase 3; and
• Decrease of
to cancellation related to departure of certain senior level employees and
lower stock price, partially offset by the cumulative impact of stock option
grant activities expensed in the normal course. 41
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Research and development expenses increased$98.3 million , or 56% for the nine months endedSeptember 30, 2021 , compared to the same period a year ago, as a result of the net effect of the following:
• Increase of
trials for pamrevlumab and roxadustat post-approval safety studies in
• Expense of
asset from HiFiBiO;
• Increase of
substance and drug product manufacturing activities primarily related to
pamrevlumab;
• Increase of
headcount in the research and development functions and generally higher
compensation levels; and
• Increase of
expenses related to roxadustat in
activities related to pamrevlumab Phase 3.
Selling, General and Administrative Expenses
We started to incur sales and marketing expenses in 2019 inChina to prepare for commercial operations. Selling, general and administrative ("SG&A") expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance, and human resource functions. SG&A expenses also include facility-related costs, professional fees, accounting and legal services, other outside services including co-promotional expenses associated with our commercialization efforts inChina , recruiting fees and expenses associated with obtaining and maintaining patents. Following the CRL for roxadustat in theU.S. , we are implementing a cost reduction effort, and as a result, SG&A expenses may decrease in certain areas in the near future.
SG&A expenses increased
• Increase of
the prior year period, as discussed under Financial Highlight section, based
on a change in the calculation of co-promotion expenses with AstraZeneca in
the third quarter of 2020, offset by the fact that AstraZeneca now bills the
co-promotion expenses to Falikang and to FibroGen Beijing, respectively, for
its services provided to the respective entity in 2021;
• Increase of
and general maintenance expenses and higher lease expenses resulting from the
lease modification of our
to operating lease during the second quarter of 2021; and
• Decrease of
patent-related activities in the
SG&A expenses increased
• Increase of
above-mentioned reversal in the prior year period in the third quarter of
2020, offset by the fact that AstraZeneca now bills the co-promotion expenses
to Falikang and to FibroGen Beijing, respectively, for its services provided
to the respective entity in 2021;
• Increase of
and general maintenance expenses and higher lease expenses resulting from the
lease modification of our
to operating lease during the second quarter of 2021;
• Increase of
headcount in the general and administrative functions and higher compensation
levels;
• Increase of
to the cumulative impact of stock option grant activities expensed in the
normal course;
• Increase of
• Decrease of
patent-related activities in theUnited Kingdom . 42
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Table of Contents Interest and Other, Net Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Interest and other, net: Interest expense$ (109 ) $ (580 ) $ 471 (81 ) %$ (965 ) $ (1,864 ) $ 899 (48 ) % Interest income and other income (expenses), net (1,303 ) 1,482 (2,785 ) (188 ) % (2,120 ) 5,292 (7,412 ) (140 ) % Total interest and other, net$ (1,412 ) $ 902 $ (2,314 ) (257 ) %$ (3,085 ) $ 3,428 $ (6,513 ) (190 ) % Interest Expense Interest expense relates to our finance lease liabilities accretion primarily for our leased facilities inSan Francisco andChina . Interest expense also includes interest related to theTechnology Development Center of theRepublic of Finland product development obligations. Interest expense decreased$0.5 million , or 81% for the three months endedSeptember 30, 2021 , and$0.9 million , or 48% for the nine months endedSeptember 30, 2021 compared to the same periods a year ago. The decrease was primarily due to the lease amendment effectiveJune 1, 2021 , related to our long-term property lease inSan Francisco , was determined as a lease modification and classified as an operating lease, as compared to a finance lease before the lease modification. In addition, the new lease agreement effective inFebruary 2021 for our long-term property lease inChina was classified as an operating lease, as compared to a finance lease for the expired lease. The classification for both leases no longer trigger recognition of interest on the lease liabilities separately in the condensed statement of operations. See Note 5, Leases, to the condensed consolidated financial statements for details.
Interest Income and Other Income (Expenses), Net
Interest income and other income (expenses), net primarily include interest income earned on our cash, cash equivalents and investments, foreign currency transaction gains (losses), remeasurement of certain monetary assets and liabilities in non-functional currency of our subsidiaries into the functional currency, realized gains (losses) on sales of investments, and other non-operating income and expenses. Interest income and other income (expenses), net decreased$2.8 million , or 188% for the three months endedSeptember 30, 2021 , and$7.4 million , or 140% for the nine months endedSeptember 30, 2021 compared to the same periods a year ago, primarily due to lower interest earned on our cash, cash equivalents and investments associated with the lower interest rates, as well as unfavorable foreign exchange impacts. Income Taxes Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020
(dollars in thousands)
Income (loss) before income taxes
106 215 235 190 Effective tax rate 0.2 % 0.6 % (0.2 ) % (0.1 ) %
Provision for income taxes for the three and nine months ended
Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception, we have established and continue to maintain a full valuation allowance against our net deferred tax assets as we do not currently believe that realization of those assets is more likely than not.
Investment Income (Loss) in Unconsolidated Variable Interest Entity
Investment income (loss) in unconsolidated variable interest entity ("VIE") represented our proportionate share of the reported profits or losses of Falikang, an unconsolidated VIE accounted for under the equity method, and was immaterial for the three and nine months endedSeptember 30, 2021 and 2020. See Note 3, Variable Interest Entity, to the condensed consolidated financial statements for details. 43
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LIQUIDITY AND CAPITAL RESOURCES
Financial Conditions
We have historically funded our operations principally from the sale of common stock (including our public offering proceeds) and from the execution of collaboration agreements involving license payments, milestones and reimbursement for development services.
As ofSeptember 30, 2021 , we had cash and cash equivalents of$274.5 million . Cash is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Investments, consisting of available-for-sale debt investments and marketable equity investments, and stated at fair value, are also available as a source of liquidity. As ofSeptember 30, 2021 , we had short-term and long-term investments of$211.9 million and$142.6 million , respectively. As ofSeptember 30, 2021 , a total of$77.4 million of our cash and cash equivalents was held outside of theU.S. in our foreign subsidiaries, including$56.0 million of our cash and cash equivalents is held inChina , to be used primarily for ourChina operations.
Operating Capital Requirements
In the third quarter of 2019, we started generating revenue from commercial sales of roxadustat product inChina . Even with the expectation of increases in revenue from product sales, we anticipate that we will continue to generate losses for the foreseeable future. Following the CRL for roxadustat in theU.S. , we are implementing a cost reduction effort, and as a result, operating expenses may decrease in certain areas in the near future. To date, we have funded certain portions of our research and development and manufacturing efforts globally through collaboration partners, government support, and capital investment. There is no guarantee that sufficient funds will be available to continue to fund these development efforts through commercialization or otherwise. Although AstraZeneca is funding all non-China collaboration expenses not reimbursed by Astellas, we expect our research and development expenses to continue to increase as we invest in our other programs. We are subject to all the risks related to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, such as from the COVID-19 pandemic or other factors outlined under Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. We anticipate that we will need substantial additional funding in connection with our continuing operations. We believe that our existing cash and cash equivalents, short-term and long-term investments and accounts receivable will be sufficient to meet our anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. However, our liquidity assumptions may change over time, and we could utilize our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain needed additional funds, we will have to reduce our operating costs and expenses, which would impair our growth prospects and could otherwise negatively impact our business.
Cash Sources and Uses
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods set forth below (in thousands):
Nine Months Ended
2021
2020
Net cash provided by (used in): Operating activities $ (27,272 )$ 88,830 Investing activities (376,405 ) 308,719 Financing activities (532 ) 7,684 Effect of exchange rate changes on cash and cash equivalents 343 969 Net increase (decrease) in cash and cash equivalents$ (403,866 ) $ 406,202 44
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Table of Contents Operating Activities Net cash used in operating activities was$27.3 million for the nine months endedSeptember 30, 2021 and consisted primarily of net loss of$155.9 million adjusted for non-operating cash items of$92.4 million , offset by a net increase in operating assets and liabilities of$36.3 million . The significant non-operating cash items included stock-based compensation expense of$54.1 million , expense for acquired in-process research and development asset from HiFiBiO of$25.0 million , depreciation expense of$7.7 million and amortization of finance lease right-of-use assets of$4.5 million . The significant items in the changes in operating assets and liabilities included the increases resulting from the following:
• Deferred revenue of
drug product shipped to Astellas and AstraZeneca, respectively, due to a high
degree of uncertainty associated with the final consideration, and
million of the deferred revenue from the sales to Falikang associated with
the
driven by the extension of the estimated future non-contingent development
period and recognition of revenues under our collaboration agreements with
Astellas and AstraZeneca. See Note 2, Collaboration Agreements, License
Agreement and Revenues, to the condensed consolidated financial statements
for details;
• Accrued and other liabilities of
timing of invoicing and payment; and
• Accounts receivable of
receipt of upfront payments and the recognition of revenues under our collaboration agreements with Astellas and AstraZeneca, as well as the collection from our distributors and Falikang.
The increases were partially offset by the decreases resulting from the following:
• Other long-term liabilities of
in the co-promotional expenses with AstraZeneca for its sales and marketing
efforts related to the commercial launch of roxadustat in
expected to be paid in the next year;
• Inventories of
primarily related to FibroGen Beijing's productions of roxadustat for
commercial sales purposes and pre-launch inventory cost capitalized in the
• Prepaid expenses and other current assets of
the unbilled upfront license payment from Eluminex of
prepayments made for roxadustat API manufacturing activities; and
• Other assets of
licenses.
Net cash provided by operating activities was$88.8 million for the nine months endedSeptember 30, 2020 and consisted primarily of net loss of$130.7 million adjusted for non-cash items of$69.4 million , offset by a net increase in operating assets and liabilities of$150.1 million . The significant non-cash items included stock-based compensation expense of$52.5 million , depreciation expense of$8.7 million and amortization of finance lease ROU of$7.9 million . The significant items in the changes in operating assets and liabilities included the increases resulting from the following:
• Prepaid expenses and other current assets of
revenue of
Astellas associated with the Marketing Authorization Application submission
in
under the
submission for review in the
million and
also driven by the recognition of revenues under our collaboration agreements
with Astellas and AstraZeneca;
• Other assets of
of input value added tax by FibroGen Beijing;
• Accrued and other liabilities of
million of the accrued co-promotion expenses at
anticipated to be paid within the next 12 months resulting from the
Amendment in the third quarter of 2020, as well as driven by the timing of
invoicing and payment; offset by the payment of
accrued at
consideration associated with the API delivery; and
• Accounts receivable of
receipt of upfront payments and the recognition of revenues under our
collaboration agreements with Astellas and AstraZeneca; offset by the
increase in accounts receivable from customers in
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The increases were partially offset by the decreases resulting from the following:
• Other long-term liabilities of
in long-term co-promotion expenses payable to AstraZeneca for its sales and
marketing efforts related to the commercial sales of roxadustat in
resulting from the China Amendment in the third quarter of 2020; and
• Inventories of
primarily related to FibroGen Beijing's productions of roxadustat for
commercial sales purposes.
Investing Activities
Investing activities primarily consist of purchases of property and equipment, purchases of investments, and proceeds from the maturity and sale of investments.
Net cash used in investing activities was$376.4 million for the nine months endedSeptember 30, 2021 and consisted primarily of$397.9 million of cash used in purchases of available-for-sale securities,$25.0 million of cash paid for the acquired in-process research and development asset and$3.8 million of cash used in purchases of property and equipment, partially offset by$46.3 million of proceeds from maturities of investments and$4.0 million of proceeds from sales of available-for-sale securities. Net cash provided by investing activities was$308.7 million for the nine months endedSeptember 30, 2020 and consisted primarily of$301.9 million of proceeds from maturities of investments, and$10.6 million of proceeds from sales of available-for-sale securities, partially offset by$2.1 million of purchases of property and equipment and$1.6 million of payment made for investment in Falikang, our unconsolidated VIE.
Financing Activities
Financing activities primarily reflect proceeds from the issuance of our common stock, cash paid for payroll taxes on restricted stock unit releases, repayments of our lease liabilities and obligations. Net cash used in financing activities was$0.5 million for the nine months endedSeptember 30, 2021 and consisted primarily of$11.9 million of proceeds from the issuance of common stock upon exercise of stock options and purchases under our Employee Share Purchase Plan ("ESPP"), partially offset by$6.7 million of cash paid for payroll taxes on restricted stock unit releases, and$5.4 million of repayments of finance lease liabilities. Net cash provided by financing activities was$7.7 million for the nine months endedSeptember 30, 2020 and consisted primarily of$26.2 million of proceeds from the issuance of common stock upon exercise of stock options and purchases under our ESPP, partially offset by$9.0 million of cash paid for payroll taxes on restricted stock unit releases, and$9.3 million of repayments of finance lease liabilities.
Off-Balance Sheet Arrangements
During the three and nine months endedSeptember 30, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations and Commitments
As of
As ofSeptember 30, 2021 , we had outstanding total non-cancelable purchase obligations of$77.4 million , including$22.0 million for manufacture and supply of roxadustat,$46.5 million for manufacture and supply of pamrevlumab, and$8.9 million for other purchases. We expect to fulfill our commitments under these agreements in the normal course of business, and as such, no liability has been recorded. 46
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Table of Contents Some of our license agreements provide for periodic maintenance fees over specified time periods, as well as payments by us upon the achievement of development, regulatory and commercial milestones. As ofSeptember 30, 2021 , future milestone payments for research and pre-clinical stage development programs consisted of up to approximately$359.1 million in total potential future milestone payments under our license agreements with HiFiBiO (for Galectin-9),Medarex, Inc. and others. These milestone payments generally become due and payable only upon the achievement of certain developmental, clinical, regulatory and/or commercial milestones. The event triggering such payment or obligation has not yet occurred.
Recently Issued Accounting Guidance
For recently issued accounting guidance, see Note 1, Significant Accounting Policies, to the condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes in our critical accounting policies, estimates and judgments during the three and nine months endedSeptember 30, 2021 compared with the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , except for the updates to the following: Product revenue, net Product revenue, net consists of revenues from sales of roxadustat commercial product to Falikang, and directly to pharmaceutical distributors located in a few provinces inChina that are not covered by Falikang. Falikang is jointly owned by AstraZeneca and FibroGen Beijing. We are not the primary beneficiary of Falikang for accounting purposes, as AstraZeneca is the final decision maker for all the roxadustat commercialization activities, and we lack the power criterion to direct the activities of Falikang (see Note 3, Variable Interest Entity, to the condensed consolidated financial statements).
Sales to Falikang
Falikang became fully operational inJanuary 2021 , at which timeFibroGen Beijing began selling roxadustat commercial product to Falikang. Falikang is FibroGen Beijing's primary customer inChina and substantially all roxadustat product sales to distributors inChina are made by Falikang. Falikang bears inventory risk once it receives and accepts the product from FibroGen Beijing, and is responsible for delivering product to its distributors. The promises identified under the AstraZeneca China Agreement, including the license, co-development services and manufacturing of commercial supplies have been bundled into theChina performance obligation. Amounts of the transaction price allocable to this performance obligation under our agreements with AstraZeneca are deferred until control of the manufactured commercial product is transferred to AstraZeneca. The initiation of roxadustat sales to Falikang marked the beginning of theChina performance obligation. Revenue is recognized at a point in time when control of roxadustat commercial product is transferred to Falikang. Revenue is recognized based on the estimated transaction price per unit and actual quantity of product delivered during the reporting period. Specifically, the transaction price per unit is determined based on the overall transaction price over the total estimated sales quantity for the estimated performance period in which we believe those sales would occur. The price per unit is subject to reassessment on a quarterly basis, which may result in cumulative catch up adjustments due to changes in estimates. 47
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The overall transaction price for FibroGen Beijing's product sales to Falikang includes the following elements of consideration:
? Non-refundable upfront license fees; development, regulatory, and commercial
milestone payments based on the China Agreement allocated to theChina performance obligation;
? Co-development billings resulting from our research and development efforts,
which are reimbursable under the China Agreement;
? Interim profit/loss share between FibroGen Beijing and AstraZeneca from April
1, 2020 throughDecember 31, 2020 ; and ? Net transfer price from product sales to Falikang fromJanuary 1, 2021 onwards. The net transfer price includes the following elements:
o Gross transfer price: The gross transfer price is based on a percentage of
Falikang's net sales to its distributors, which takes into account
Falikang's operating expenses and its payments to AstraZeneca for roxadustat
sales and marketing efforts, capped at a percentage of Falikang's net roxadustat sales.
o Profit share: The gross transfer price is then adjusted for an estimated
amount to achieve the 50/50 profit share from current period roxadustat net
sales in
transfer price and the related accounts receivable from Falikang.
The non-refundable upfront license fees constitute a fixed consideration. The remainder of the above are variable consideration components, which may be constrained, and included in the transaction 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 when the uncertainty associated with the variable consideration is subsequently resolved. The calculation of the above variable consideration includes key estimates such as total sales quantity, performance period, gross transfer price and profit share, which require a substantial degree of judgment.
Any net transfer price in excess of the revenue recognized is deferred, and will be recognized over future periods as the performance obligations are satisfied.
Direct Sales to Distributors
We sell roxadustat inChina directly to a number of pharmaceutical distributors located in a few provinces inChina that are not covered by Falikang. These pharmaceutical distributors are our customers. Hospitals order roxadustat through a distributor and we ship the product directly to the distributors. The delivery of roxadustat to a distributor represents a single performance obligation. Distributors are responsible for delivering product to end users, primarily hospitals. Distributors bear inventory risk once they receive and accept the product. Product revenue is recognized when control of the promised good is transferred to the customer in an amount that reflects the consideration that we expect to be entitled to in exchange for the product. The period between the transfer of control of the promised goods and when we receive payment is based on 60-day payment terms. As such, product revenue is not adjusted for the effects of a significant financing component.
Product revenue is recorded at the net sales prices that includes the following estimates of variable consideration:
? Price adjustment: When China's
releases price guidance for roxadustat under the National Reimbursement Drug
List, any channel inventories that have not been sold through by
distributors, or to patients by hospitals and retailers, would be eligible
for a price adjustment under the price protection. The price adjustment is
calculated based on estimated channel inventory levels;
? Contractual sales rebate: The contractual sales rebate is calculated based
on the stated percentage of gross sales by each distributor in the
distribution agreement entered between
contractual sales rebate is recorded as a reduction to revenue at the point
of sale to the distributor;
? Non-key account hospital listing award: A one-time fixed-amount award is
offered to a distributor who successfully lists the product with an eligible
hospital, and who meets certain requirements. We consider this particular
award to be an upfront payment to a customer within the definitions of the
ASC 606. The non-key account hospital listing award is capitalized when the
distributor meets eligibility requirements, and amortized as reduction to
product revenue over future sales orders made by the distributor until
exhausted;
? Other discounts and rebates, including key account hospital sales rebate and
transfer fee discount, are generally based on a percentage of eligible gross
sales made by the distributor and recorded as a reduction to revenue at the
point of sale to the distributor; and
? Sales returns: Distributors can request to return product to us only due to
quality issues or for product purchased within one year prior to the product's expiration date. 48
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The calculation of the above variable consideration is based on gross sales to the distributor, or estimated utilizing best available information from the distributor, maximum known exposures and other available information including estimated channel inventory levels and estimated sales made by the distributor to hospitals, which involve a substantial degree of judgment. The above rebates and discounts all together are eligible to be applied against the distributor's future sales order, limited to certain maximums until such rebates and discounts are exhausted. These rebates and discounts are recorded as contract liabilities at the time they become eligible and in the same period that the related revenue is recorded. Due to the distributor's legal right to offset, at each balance sheet date, the liability for rebates and discounts are presented as reductions of gross accounts receivable from the distributor, or as a current liability to the distributor to the extent that the total amount exceeds the gross accounts receivable or when we expect to settle the discount in cash. The distributor's legal right of offset is calculated at the individual distributor level.
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