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

This Quarterly Report on Form 10-Q, including the following discussion of our
financial condition and results of operations, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
are based on our management's beliefs and assumptions and on information
currently available to our management. All statements other than statements of
historical facts are "forward-looking statements" for purposes of these
provisions, including those relating to future events or our future financial
performance and financial guidance. In some cases, you can identify
forward-looking statements by terminology such as "may," "might," "will,"
"should," "expect," "plan," "anticipate," "project," "believe," "estimate,"
"predict," "potential," "intend" or "continue," the negative of terms like these
or other comparable terminology, and other words or terms of similar meaning in
connection with any discussion of future operating or financial performance.
These statements are only predictions. All forward-looking statements included
in this Quarterly Report on Form 10-Q are based on information available to us
on the date hereof, and we assume no obligation to update any such
forward-looking statements except as required by law. Any or all of our
forward-looking statements in this document may turn out to be wrong. Actual
events or results may differ materially. Our forward-looking statements can be
affected by inaccurate assumptions we might make or by known or unknown risks,
uncertainties and other factors. We discuss many of these risks, uncertainties
and other factors in this Quarterly Report on Form 10-Q in greater detail under
the heading "Part II Item 1A-Risk Factors." We caution investors that our
business and financial performance are subject to substantial risks and
uncertainties.
Overview
Seagen is a biotechnology company that develops and commercializes therapies
targeting cancer. We are commercializing ADCETRIS®, or brentuximab vedotin, for
the treatment of certain CD30-expressing lymphomas, PADCEV®, or enfortumab
vedotin-ejfv, for the treatment of certain metastatic urothelial cancers, and
TUKYSA®, or tucatinib, for treatment of certain metastatic HER2-positive breast
cancers. We are also advancing a pipeline of novel therapies for solid tumors
and blood-related cancers designed to address unmet medical needs and improve
treatment outcomes for patients. Many of our programs, including ADCETRIS and
PADCEV, are based on our antibody-drug conjugate, or ADC, technology that
utilizes the targeting ability of monoclonal antibodies to deliver cell-killing
agents directly to cancer cells. In October 2020, we changed our corporate name
from Seattle Genetics, Inc. to Seagen Inc., reflecting the global expansion of
our operations.
ADCETRIS® (brentuximab vedotin)
ADCETRIS is commercially available in more than 70 countries worldwide. We
commercialize ADCETRIS in the U.S. and its territories and in Canada, and we
collaborate with Takeda Pharmaceutical Company Limited, or Takeda, to develop
and commercialize ADCETRIS on a global basis. Under this collaboration, Takeda
has commercial rights in the rest of the world and pays us a royalty. ADCETRIS
is approved by the U.S. Food and Drug Administration, or FDA, in six
indications. In Hodgkin lymphoma, ADCETRIS is approved as monotherapy for
patients whose disease has relapsed and as consolidation therapy following prior
treatment, and in combination with chemotherapy for the treatment of patients
with previously untreated disease. In T-cell lymphomas, ADCETRIS is approved as
monotherapy for patients with relapsed or refractory systemic anaplastic large
cell lymphoma, or sALCL, or certain types of cutaneous T-cell lymphoma, and in
combination with chemotherapy for patients with previously untreated
CD30-expressing peripheral T-cell lymphoma, or PTCL.
Beyond our current labeled indications, we are evaluating ADCETRIS in several
clinical trials. These include a potentially registration-enabling trial
evaluating treatment with ADCETRIS in Hodgkin lymphoma and PTCL patients who are
unfit for combination chemotherapy, and a potentially registration-enabling
trial evaluating retreatment with ADCETRIS in Hodgkin and T-cell lymphoma
patients who progress after a prior response, including in the frontline
setting. We have also initiated a phase 3 clinical trial evaluating ADCETRIS in
combination with lenalidomide and rituxan in patients with relapsed or
refractory diffuse large B-cell lymphoma. In addition, we are evaluating
ADCETRIS in combination with nivolumab for Hodgkin and non-Hodgkin lymphoma
under a clinical collaboration with Bristol-Myers Squibb Company, or BMS.
Nivolumab is a programmed death-1, or PD-1, immune checkpoint inhibitor. In
April 2020, we and BMS agreed to co-fund an additional cohort in an ongoing
trial that will evaluate the combination of ADCETRIS, nivolumab and chemotherapy
as first-line therapy in stage I and II Hodgkin lymphoma.
PADCEV® (enfortumab vedotin-ejfv)
Our second marketed product, PADCEV, is being co-developed and jointly
commercialized with Astellas Pharma, Inc., or Astellas. In the U.S., we and
Astellas are jointly promoting PADCEV. In the U.S., we record net sales of
PADCEV and are responsible for all distribution activities. We and Astellas each
bear the costs of our own sales organizations in the U.S., equally share certain
other costs associated with commercializing PADCEV in the U.S., and equally
share in any profits realized in the U.S.
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PADCEV was granted accelerated approval by the FDA in December 2019 for the
treatment of adult patients with locally advanced or metastatic urothelial
cancer who have previously received a PD-1 or PD-L1 inhibitor and a
platinum-containing chemotherapy before (neoadjuvant) or after (adjuvant)
surgery or in a locally advanced or metastatic setting. FDA approval of PADCEV
was supported by data from the first cohort of patients in a single-arm pivotal
phase 2 clinical trial called EV-201. The trial enrolled 125 patients with
locally advanced or metastatic urothelial cancer who received prior treatment
with a PD-1 or PD-L1 inhibitor and a platinum-based chemotherapy. It is the
first FDA approved treatment for these patients. Continued approval may be
contingent upon verification and description of clinical benefit in a required
confirmatory trial.
In September 2020, we announced that the global phase 3 clinical trial called
EV-301, which compared PADCEV to chemotherapy in adult patients with locally
advanced or metastatic urothelial cancer who were previously treated with
platinum-based chemotherapy and a PD-1/L1 inhibitor, met its primary endpoint of
overall survival, or OS. We plan to submit the EV-301 results to the FDA as the
confirmatory trial following PADCEV's accelerated approval in December 2019.
EV-301 is also intended to support global registrations. In the trial, PADCEV
significantly improved OS, with a 30 percent reduction in risk of death (Hazard
Ratio [HR]=0.70; [95 percent Confidence Interval (CI): 0.56, 0.89]; p=0.001).
PADCEV also significantly improved progression-free survival, or PFS, a
secondary endpoint, with a 39 percent reduction in risk of disease progression
or death (HR=0.61 [95 percent CI: 0.50, 0.75]; p<0.00001). For patients in the
PADCEV arm of the trial, adverse events were consistent with those listed in the
U.S. Prescribing Information, with rash, hyperglycemia, decreased neutrophil
count, fatigue, anemia and decreased appetite as the most frequent Grade 3 or
greater adverse event(s) occurring in more than 5 percent of patients.
In October 2020, we announced positive topline results from the second cohort of
patients in the pivotal phase 2 EV-201 trial. The cohort is evaluating PADCEV
for patients with locally advanced or metastatic urothelial cancer who have been
previously treated with a PD-1/L1 inhibitor and have not received a
platinum-containing chemotherapy and are ineligible for cisplatin. Results
showed a 52 percent objective response rate, or ORR, [95 percent Confidence
Interval (CI): 40.8, 62.4] per blinded independent central review and a median
duration of response of 10.9 months. The most frequently reported
treatment-related adverse events Grade 3 or greater that occurred in more than 5
percent of patients were: neutropenia, rash, fatigue, increased lipase,
diarrhea, decreased appetite, anemia and hyperglycemia. We expect to discuss the
data from the second cohort with regulatory authorities.
PADCEV is also being investigated in frontline metastatic urothelial cancer and
earlier stages of bladder cancer. We and Astellas are conducting a phase 1b/2
clinical trial, called EV-103, that is a multi-cohort, open-label trial of
PADCEV alone or in combination with the anti-PD-1 therapy pembrolizumab and/or
chemotherapy. The trial is evaluating safety, tolerability and activity in
locally advanced and first- and second-line metastatic urothelial cancer, and
was expanded to include muscle invasive bladder cancer, or MIBC. In February
2020, updated results from the trial in patients with previously untreated
locally advanced or metastatic urothelial cancer who were ineligible for
treatment with cisplatin-based chemotherapy were presented at the 2020
Genitourinary Cancers Symposium.
In February 2020, based on the positive initial results of the EV-103 trial, the
FDA granted Breakthrough Therapy designation for PADCEV in combination with
pembrolizumab for the treatment of patients with unresectable locally advanced
or metastatic urothelial cancer who are unable to receive cisplatin-based
chemotherapy in the first-line setting. In April 2020, we announced that based
on discussions with the FDA, data from the randomized cohort K in the EV-103
trial, along with other data from the EV-103 trial, could potentially support
registration under the FDA's accelerated approval pathway. The primary outcome
measures are objective response rate and duration of response.
In addition to the potential accelerated approval pathway based on the EV-103
trial, we are conducting a global, registrational phase 3 trial, called EV-302,
in frontline metastatic urothelial cancer in collaboration with Astellas and a
subsidiary of Merck & Co., Inc., or Merck. We, Astellas and Merck are jointly
funding EV-302 and the trial is being led by us. EV-302 is an open-label,
randomized phase 3 clinical trial evaluating the combination of PADCEV and
pembrolizumab versus chemotherapy alone in patients with previously untreated
locally advanced or metastatic urothelial cancer. The trial includes metastatic
urothelial cancer patients who are either eligible or ineligible for
cisplatin-based chemotherapy and is expected to enroll 760 patients. The first
patient was dosed in the trial in April 2020. The trial has dual primary
endpoints of progression-free survival and overall survival and is intended to
support global registrations and potentially serve as a confirmatory trial if
accelerated approval is granted based on EV-103.
In April 2020, we and Astellas entered into an agreement with Merck to evaluate
PADCEV in MIBC. Merck has amended its ongoing phase 3 KEYNOTE-905/EV-303
registrational trial in cisplatin-ineligible patients with MIBC to include an
arm evaluating PADCEV in combination with pembrolizumab. In October 2020, we and
Astellas entered into an agreement with Merck to evaluate PADCEV in combination
with pembrolizumab in a phase 3 trial to be conducted by Merck in
cisplatin-eligible patients with MIBC.

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In January 2020, we and Astellas also initiated a phase 2 clinical trial, called
EV-202, to evaluate PADCEV monotherapy in solid tumors that have high-levels of
Nectin-4 expression, including non-small cell lung, head and neck,
gastric/esophageal and breast cancers. In March 2020, the first patient was
dosed in the trial.
TUKYSA® (tucatinib)
In April 2020, TUKYSA received approval from the FDA in combination with
trastuzumab and capecitabine for the treatment of adult patients with advanced
unresectable or metastatic HER2-positive breast cancer, including patients
with brain metastases, who have received one or more prior anti-HER2-based
regimens in the metastatic setting. TUKYSA is an oral, small molecule tyrosine
kinase inhibitor, or TKI, that is highly selective for HER2, a growth factor
receptor overexpressed in many cancers.
The FDA reviewed the application for approval under the Oncology Center of
Excellence's, or OCE's, Real Time Oncology Review, or RTOR, pilot program. We
are also participating in the Project Orbis initiative of the FDA OCE which
provides a framework for concurrent submission and review of oncology products
among international partners. Under this program we have received approval from
the following countries participating in the FDA's Project Orbis initiative:
U.S., Canada, Australia, Singapore, and Switzerland. In January 2020, we
submitted a Marketing Authorization Application, or MAA, to the European
Medicines Agency, or EMA, and the submission was validated, which confirmed it
was sufficiently complete to begin the formal review process.
FDA approval of TUKYSA was supported by data from the HER2CLIMB trial. HER2CLIMB
is a randomized trial evaluating TUKYSA in combination with trastuzumab and
capecitabine versus trastuzumab and capecitabine alone in patients with
HER2-positive unresectable locally advanced or metastatic breast cancer,
including patients with brain metastases. Patients had to have previously
received, either separately or in combination,
trastuzumab, pertuzumab, and ado-trastuzumab emtansine, or T-DM1. In December
2019, positive results from the HER2CLIMB trial were published in the New
England Journal of Medicine and TUKYSA was granted Breakthrough Therapy
designation by the FDA.
We are conducting a broad clinical development program of TUKYSA including
ongoing and planned trials in earlier lines of breast cancer and in other
HER2-positive cancers. In October 2019, we initiated a phase 3 randomized trial,
called HER2CLIMB-02, evaluating TUKYSA versus placebo, each in combination with
T-DM1, for patients with unresectable locally advanced or metastatic
HER2-positive breast cancer, including those with brain metastases, who have had
prior treatment with a taxane and trastuzumab.
We are also conducting a phase 2 trial, called MOUNTAINEER, evaluating TUKYSA in
combination with trastuzumab in patients with HER2-positive, RAS wild-type
metastatic colorectal cancer after treatment with first- and second-line
standard-of-care therapies. Initial results from 23 patients were presented at
the ESMO 2019 Congress that demonstrated encouraging antitumor activity. We
believe the trial could potentially support an application for accelerated
approval in the U.S.
We are conducting a phase 2/3 trial, called MOUNTAINEER-02, in combination with
trastuzumab, ramucirumab and paclitaxel in second-line HER2-positive metastatic
gastroesophageal cancer. We have also initiated a phase 1b trial evaluating
TUKYSA in combination with trastuzumab and oxaliplatin based chemotherapy in
first-line HER2-positive unresectable or metastatic colorectal, gastric,
esophageal and gallbladder cancers.
In September 2020, we entered into a license and collaboration agreement with a
subsidiary of Merck, or the TUKYSA Agreement. that granted exclusive rights to
Merck to commercialize TUKYSA in Asia, the Middle East and Latin America and
other regions outside of the U.S., Canada and Europe. The collaboration is
intended to accelerate global availability of TUKYSA. Please refer to Note 2 of
the Notes to Our Condensed Consolidated Financial Statements included in Part 1
Item 1 of this Quarterly Report on Form 10-Q for additional information.
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Tisotumab Vedotin
In collaboration with Genmab A/S, or Genmab, we are developing tisotumab
vedotin, which is an ADC targeting tissue factor. We and Genmab are conducting a
pivotal phase 2 trial, called innovaTV 204, evaluating single-agent tisotumab
vedotin for patients with recurrent and/or metastatic cervical cancer who have
relapsed or progressed after standard of care treatment. In September 2020, data
from the innovaTV 204 trial were presented at the European Society for Medical
Oncology, or ESMO, Virtual Congress 2020. Results from the trial showed a 24
percent confirmed objective response rate [95 percent Confidence Interval (CI):
15.9 percent-33.3 percent], including 7 patients (7 percent) with a complete
response and 17 patients (17 percent) with a partial response by independent
central review. After a median follow-up of 10 months, the median DOR was 8.3
months (95 percent CI: 4.2, not reached). The most common treatment-related
adverse events (greater than or equal to 20 percent) included alopecia (Grade
1/2 at 38 percent), epistaxis (nose bleeds, Grade 1/2 at 30 percent), nausea
(Grade 1/2 at 27 percent), conjunctivitis (Grade 1/2 at 26 percent), fatigue
(Grade 1/2 at 24 percent, Grade 3 or higher at 2 percent) and dry eye (Grade 1/2
at 23 percent). Most treatment-related adverse events were Grade 1 or 2 and no
new safety signals were reported. One death due to septic shock was considered
by the investigator to be related to tisotumab vedotin. Pre-specified adverse
events of interest with tisotumab vedotin treatment included ocular events,
bleeding and peripheral neuropathy. Ocular adverse events considered to be
related to therapy that occurred in patients were mostly mild to moderate (Grade
1 at 25 percent, Grade 2 at 27 percent, Grade 3 at 2 percent) of which a
majority of the events resolved (86 percent) and were managed with an eye care
plan. Bleeding events considered to be related to therapy that occurred in
patients were mostly mild (Grade 1 at 34 percent, Grade 2 at 3 percent, Grade 3
at 2 percent) of which a majority of the events resolved (90 percent). The most
common bleeding events included Grade 1 epistaxis (28 percent). Peripheral
neuropathy events considered to be related to therapy were mostly mild to
moderate (Grade 1 at 17 percent, Grade 2 at 9 percent, Grade 3 at 7 percent) and
managed with dose modifications. Resolution of peripheral neuropathy was limited
by follow-up period. Based on the positive results, the companies plan to submit
a Biologics License Application, or BLA, to the FDA under the FDA's accelerated
approval pathway.
We are also conducting a phase 2 clinical trial, called innovaTV 205, evaluating
tisotumab vedotin as monotherapy and in combination with certain other
anti-cancer agents for first-line treatment of patients with recurrent or
advanced cervical cancer. Additionally, we are conducting a phase 2 clinical
trial, called innovaTV 207, for patients with relapsed, locally advanced or
metastatic solid tumors and a phase 2 clinical trial, called innovaTV 208, for
patients with platinum-resistant ovarian cancer.
Ladiratuzumab Vedotin
Our pipeline also includes ladiratuzumab vedotin, or LV, an ADC targeting LIV-1,
which is currently being evaluated in phase 1 and phase 2 clinical trials both
as monotherapy and in combination with other agents for patients with metastatic
breast cancer and select solid tumors with high LIV-1 expression. In September
2020, we and a subsidiary of Merck entered into a license and collaboration
agreement, or the LV Agreement, under which the companies will jointly develop
and share future costs and profits worldwide for LV. Merck made an upfront
payment to us of $600.0 million, and in October 2020, Merck made a $1.0 billion
equity investment in 5,000,000 shares of our common stock at $200 per share. In
addition, we are eligible to receive up to $850.0 million in milestone payments
upon the initiation of certain clinical trials and regulatory approval in
certain major markets, and up to an additional $1.75 billion in milestone
payments upon the achievement of specified annual global net sales thresholds of
LV, for an aggregate $2.6 billion. Please refer to Note 2 of the Notes to Our
Condensed Consolidated Financial Statements included in Part 1 Item 1 of this
Quarterly Report on Form 10-Q for additional information.
Other clinical and early-stage product candidates
We are advancing multiple earlier stage programs that employ our proprietary
technologies. In June 2020, the first patient was dosed in a phase 1 clinical
trial of our investigational agent SEA-TGT, also known as SGN-TGT, an anti-TIGIT
antibody for patients with solid tumors and lymphomas. TIGIT (T-cell immune
receptor with Ig and ITIM domains) is an inhibitory immune receptor that is
emerging as a clinically relevant immuno-oncology target. SEA-TGT is a
nonfucosylated human IgG1 antibody that uses our proprietary Sugar Engineered
Antibody, or SEA, technology. We also announced the dosing of the first patient
in a phase 1 clinical trial evaluating our investigational agent SGN-B6A, an ADC
targeting integrin beta-6, which is overexpressed in numerous solid tumors and
has been demonstrated to be a negative prognostic indicator across a diverse
range of cancers.

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Antibody-Drug Conjugate technology license agreements
We have active technology license agreements for our ADC technology with a
number of biotechnology and pharmaceutical companies, including AbbVie
Biotechnology Ltd., or AbbVie; Genentech, Inc., a member of the Roche Group, or
Genentech; GlaxoSmithKline LLC, or GSK; and Progenics Pharmaceuticals Inc, as
well as collaboration agreements with Astellas and Genmab. Genentech and GSK
have ADCs using our technology in late-stage clinical trials. In June 2019,
Genentech received accelerated approval from the FDA and, in January 2020,
received conditional marketing authorization from the European Commission for
Polivy® (polatuzumab vedotin-piic), an ADC that uses our technology, to treat
patients with relapsed or refractory diffuse large B-cell lymphoma. In August
2020, GSK received accelerated approval from the FDA and conditional marketing
authorization from the European Commission for Blenrep™ (belantamab
mafodotin-blmf), an ADC developed by GSK that uses our technology, for treatment
of patients with relapsed or refractory multiple myeloma who have received at
least four prior therapies including an anti-CD38 monoclonal antibody, a
proteasome inhibitor and an immunomodulatory agent. Under our ADC license
agreements with Genentech and GSK, these events triggered milestone payments to
us and we are also entitled receive royalties on net sales of Polivy and Blenrep
worldwide.
COVID-19
We are continuing to closely monitor the impact of the evolving effects of the
COVID-19 pandemic on our business and are taking proactive efforts designed to
protect the health and safety of our workforce, patients and healthcare
professionals, and to continue our business operations and advance our goal of
bringing important medicines to patients as rapidly as possible.
We have implemented measures designed to protect the health and safety of our
workforce, including a mandatory work-from-home policy for employees who can
perform their jobs offsite. We are continuing essential research, manufacturing,
and laboratory activities on site and maintain a number of additional
precautionary measures designed to protect these onsite employees, such as
temperature checks, screening protocols, masks, social distancing, contact
tracing and making testing available. In the conduct of our business activities,
we are also taking actions designed to protect the safety of patients and
healthcare professionals. Among other actions, our field-based personnel have
paused most in-person customer interactions in healthcare settings and have been
using primarily electronic communications to support healthcare professionals
and patients. In addition, following guidance from relevant authorities, our
field-based personnel are engaging in limited in-person interactions where state
and local laws and regulations allow, the institution or office is accepting
in-person interactions and our field-based personnel are comfortable engaging
in-person with healthcare providers. We believe that the measures we have
implemented are appropriate and are helping to reduce transmission of COVID-19,
and we will continue to monitor conditions and related guidance from
governmental authorities and adjust our activities as appropriate.
Outlook
While we anticipate that sales of ADCETRIS will continue to increase, we expect
lower sales growth for ADCETRIS in 2020 as compared to sales growth in 2019. In
addition, impacts associated with the COVID-19 pandemic appear to be reducing
the rate of Hodgkin lymphoma diagnoses, and we are also experiencing an increase
in gross-to-net deductions that we believe is due to a shift in the locations
where ADCETRIS is administered, which has increased the proportion of ADCETRIS
sales through the federal 340B drug discount program. All of these factors
appear to be contributing to the slower growth of ADCETRIS sales in 2020 as
compared to 2019. We expect that, going forward, our ability to maintain or
continue to grow our ADCETRIS sales, if at all, will depend primarily on our
ability to establish or demonstrate to the medical community the value of
ADCETRIS and its potential advantages compared to existing and future
therapeutics in its approved indications, including in the frontline Hodgkin
lymphoma indication, and the extent to which physicians make prescribing
decisions with respect to ADCETRIS. Other important factors affecting our
ADCETRIS sales include the incidence flow of patients eligible for treatment in
ADCETRIS' approved indications, the extent to which coverage and adequate levels
of reimbursement for ADCETRIS are available from governments and other
third-party payors, the impact of any healthcare reform measures that may be
adopted in the future, including measures that could potentially result in more
rigorous coverage criteria and additional downward pressure on the price that we
receive for ADCETRIS, increasing competition from competing therapies including
pembrolizumab in multiple indications, including in the relapsed or refractory
classical Hodgkin lymphoma indication, impacts resulting from the evolving
effects of the COVID-19 pandemic including lower diagnosis rates, and the
potential future approval of ADCETRIS in any additional indications. For these
reasons, we cannot assure you that ADCETRIS sales will continue to grow or that
we can maintain sales of ADCETRIS at or near current levels. In addition, as a
result of these and other factors, our future ADCETRIS product sales can be
difficult to accurately predict from period to period.
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Our ability to realize the anticipated benefits from our investment in PADCEV is
subject to a number of risks and uncertainties, including our and Astellas'
ability to successfully jointly market and commercialize PADCEV in the U.S. in
its approved indication, the extent to which we and Astellas are able to obtain
regulatory approvals of PADCEV in additional indications in the U.S., including
in the frontline metastatic urothelial cancer setting, and in territories
outside the U.S., our ability and Astellas' ability to successfully comply with
rigorous post-marketing requirements, including obtaining the FDA's agreement as
to the confirmation of clinical benefit of PADCEV based on the results of the
EV-301 clinical trial, the acceptance of PADCEV by the medical community and
patients, the extent to which physicians make prescribing decisions with respect
to PADCEV, the incidence flow of patients eligible for treatment in PADCEV's
approved indication, the duration of therapy for patients receiving PADCEV, the
extent to which coverage and adequate levels of reimbursement for PADCEV are
available from governments and other third-party payors, the impact of any
healthcare reform measures that may be adopted in the future, including measures
that could potentially result in more rigorous coverage criteria and additional
downward pressure on the price that we receive for PADCEV, potential competition
from competing therapies, the impact of conducting launch activities virtually
during the COVID-19 pandemic and other impacts resulting from the evolving
effects of the COVID-19 pandemic including potential negative impacts of reduced
cancer diagnosis rates. In addition, due to the lack of significant historical
sales data and these factors, PADCEV sales are currently difficult to predict
from period to period.
Our ability to realize the anticipated benefits of our investment in TUKYSA is
subject to a number of risks and uncertainties, including our and Merck's
ability to successfully launch, market and commercialize TUKYSA in our
respective territories in its approved indication, the extent to which we and
Merck are able to obtain regulatory and other required governmental and pricing
and reimbursement approvals of TUKYSA in additional territories, including in
the European Union, the extent to which we and Merck are able to obtain
regulatory approvals of TUKYSA in additional indications, including earlier
lines of breast cancer and other HER2-positive cancers, the acceptance of TUKYSA
by the medical community and patients, competition from other therapies, our and
Merck's ability to accurately predict and supply product demand, the extent to
which coverage and reimbursement will be available from governments and other
third-party payors, our capacity to effectively commercialize a product outside
of the U.S., the impact of conducting launch activities virtually during the
COVID-19 pandemic and other impacts resulting from the evolving effects of the
COVID-19 pandemic including potential negative impacts of reduced cancer
diagnosis rates. In addition, due to the lack of significant historical sales
data and these factors, TUKYSA sales are currently difficult to predict from
period to period.
The biopharmaceutical industry and the markets in which we operate are intensely
competitive. Many of our competitors are working to develop or have
commercialized products similar to those we market or are developing. Drug
prices are under significant scrutiny and we expect drug pricing and other
healthcare costs to continue to be subject to intense political and societal
pressures on a global basis. For example, in July 2020, President Trump
announced four Executive Orders related to reducing prescription drug prices and
we expect that drug pricing will continue to be subject to close scrutiny by
federal, state and foreign governments. In addition to pricing actions and other
measures being taken worldwide designed to reduce healthcare costs and limit the
overall level of government expenditures, our sales and operations could also be
affected by other risks of doing business internationally.
We expect that amounts earned from our collaboration agreements, including
royalties, will continue to be an important source of our revenues and cash
flows. These revenues will be impacted by future development funding and the
achievement of development, clinical and commercial success by our collaborators
under our existing collaboration and license agreements, including our ADCETRIS
collaboration with Takeda, our PADCEV collaboration with Astellas, and our
TUKYSA and LV collaborations with Merck, as well as by entering into potential
new collaboration and license agreements.
Our ongoing research, development, manufacturing and commercial activities will
require substantial amounts of capital and may not ultimately be successful. We
expect that we will incur substantial expenses, and we will require significant
financial resources and additional personnel in order to advance the development
of, to pursue, obtain and maintain regulatory approvals for, and to
commercialize our products and product candidates, and expand our pipeline. In
addition, we may pursue new operations or continue the expansion of our existing
operations, including with respect to our plans to build a commercial
infrastructure in Europe and to otherwise continue to expand our operations
internationally. As a result, we may need to raise additional capital, and our
operating expenses may fluctuate as a result of such activities. We may also
incur milestone payment obligations to certain of our licensors as our product
candidates progress through clinical trials towards potential commercialization.
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We are closely evaluating the impacts of the evolving effects of the COVID-19
pandemic on our ability and the ability of our collaborators to effectively
market, sell and distribute our products and to develop our products and product
candidates. While our field-based personnel are engaging in limited in-person
interactions, our field-based personnel are primarily using electronic
communication, such as emails, phone calls and video conferences. Many
healthcare professionals that we normally call on are working a greater
proportion of their working schedule from home and are facing additional demands
on their time during the ongoing COVID-19 pandemic. We are experiencing
increased competition for virtual appointments with healthcare professionals and
are experiencing a significant reduction in the number of interactions our sales
personnel are having with physicians. We expect the different quality of
electronic interactions as compared with in-person interactions, as well as the
reduced quantity of interactions during the COVID-19 pandemic, to reduce the
effectiveness of our sales personnel, as well as those of our collaborators,
which could negatively affect our product sales and those of our collaborators,
as well as physician awareness of our products. With respect to PADCEV and
TUKYSA specifically, we have not launched a product using primarily virtual
communication channels in the past and cannot predict the effects that this
approach will ultimately have on demand for TUKYSA or PADCEV. However, we
believe that the need to conduct these activities virtually is negatively
impacting our ability to connect with key customers, including those familiar
with competitive products, and our ability to conduct payor engagements. We face
a number of challenges that will limit our ability to fully resume in-person
interactions for the foreseeable future, including increasing COVID-19 infection
rates in many states, the potential for more severe outbreaks, the need to
navigate varying restrictions for entering healthcare facilities and employee
childcare obligations during virtual school sessions. In addition, the effects
of the COVID-19 pandemic continue to evolve rapidly, and we may subsequently be
forced to, or subsequently determine that we should, resume a more restrictive
remote work model, whether as a result of further spikes or surges in COVID-19
infection, positivity or hospitalization rates or otherwise. Moreover, the
long-term effects of the COVID-19 pandemic are also unknown and it is possible
that following the pandemic, healthcare institutions could alter their policies
with respect to in person visits by pharmaceutical company representatives.
COVID-19 related restrictions could also present product distribution challenges
as we utilize recently initiated distribution channels for TUKYSA. We also
expect that the conversion of medical conferences to a virtual format may reduce
our ability to effectively disseminate scientific information about our
products, which may result in decreased physician awareness of our products,
their approved indications and their efficacy and safety. The evolving effects
of the COVID-19 pandemic may also negatively affect our product sales due to
challenges in patient access to healthcare settings, significant increases in
unemployment and the resulting loss of individual health insurance coverage, and
inability to access government healthcare programs due to backlogs or inability
of government agencies to process additional applications, some or all of which
appear to be affecting diagnosis rates and may affect side effect management and
course of treatment and increase enrollment in our patient support programs.
With respect to ADCETRIS specifically, impacts associated with the COVID-19
pandemic appear to be reducing the rate of Hodgkin lymphoma diagnoses, which
appears to be contributing to the slower growth of ADCETRIS sales in 2020 as
compared to 2019. In addition, we have observed lower than expected levels of
our research and development spending, in part as a result of the COVID-19
pandemic. This includes some delays in clinical trial enrollment as well as
reduced travel due to the conversion of medical and scientific meetings to
virtual format. While we do not at this time anticipate the need to revise our
publicly reported projected clinical milestone dates as a result of the effects
of the COVID-19 pandemic, there may be some impacts to our clinical study
timelines, which, depending upon the duration and severity of the evolving
effects of the COVID-19 pandemic, could ultimately delay data availability. In
addition, many of our non-essential on site research activities are currently
significantly reduced as a result of the COVID-19 pandemic, which may negatively
impact the number of investigational new drug application, or IND, candidates
entering our clinical pipeline in future years. The extent to which the risks
and evolving effects of the COVID-19 pandemic impact our business, our ability
to generate sales of and revenues from our approved products, and our clinical
development and regulatory efforts will depend on future developments that are
highly uncertain and cannot be predicted with confidence, such as the ultimate
duration and severity of the pandemic, government actions, such as travel
restrictions, quarantines and social distancing requirements in the U.S. and in
other countries, business closures or business disruptions and the effectiveness
of actions taken in the U.S. and in other countries to contain and treat the
disease. For more information on the risks and uncertainties associated with the
evolving effects of the COVID-19 pandemic on our business, our ability to
generate sales of and revenues from our approved products, and our clinical
development and regulatory efforts, see "Part II Item 1A-Risk Factors."
Because of the above and other factors, our results of operations may vary
substantially from year to year and from quarter to quarter and, as a result, we
believe that period to period comparisons of our operating results may not be
meaningful and should not be relied upon as being indicative of our future
performance.

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Financial summary
For the nine months ended September 30, 2020, our total revenues increased to
$1.6 billion, compared to $626.9 million for the same period in 2019. This
growth was driven by $725.0 million upfront license revenue recognized in the
third quarter of 2020 related to the LV and TUKYSA agreements with Merck, the
U.S. launches of PADCEV beginning in December 2019 and TUKYSA in April 2020,
respectively, as well as higher ADCETRIS net product sales and royalty revenues.
For the nine months ended September 30, 2020, total costs and expenses increased
to $1.1 billion, compared to $809.0 million for the same period in 2019. This
reflected higher cost of sales, higher selling, general and administrative
expenses, and higher research and development expenses.
As of September 30, 2020, we had $1.7 billion in cash, cash equivalents and
investments and $2.3 billion in total stockholders' equity.

Results of operations
Net product sales
                                                       Three months ended September 30,                             Nine months ended September 30,
(dollars in thousands)                          2020                2019              % Change               2020                2019              % Change
ADCETRIS                                    $  163,263          $ 167,582                    (3) %       $  494,851          $ 461,563                     7  %
PADCEV                                          61,849                  -                       NM          153,485                  -                       NM
TUKYSA                                          42,382                  -                       NM           58,137                  -                       NM
Net product sales                           $  267,494          $ 167,582                    60  %       $  706,473          $ 461,563                    53  %
NM: No amount in comparable period or not a meaningful comparison.


Our net product sales grew 60% and 53% during the three and nine months ended
September 30, 2020, respectively, compared to the prior year periods. We began
commercializing PADCEV and TUKYSA following FDA approvals in December 2019 and
April 2020, respectively. ADCETRIS net product sales declined slightly for the
three months ended September 30, 2020 from the comparable period in 2019.
ADCETRIS net product sales increased for the nine months ended September 30,
2020 from the comparable period in 2019, due to higher sales volumes and the
effect of price increases during the current year period.
While we expect growth in net product sales in 2020 from 2019, primarily driven
by the recent launches of PADCEV and TUKYSA, as well as continued growth in
ADCETRIS net product sales, we also expect lower net product sales growth for
ADCETRIS in 2020 as compared to growth in 2019. Refer to "Overview-Outlook"
above for additional information.
Gross-to-net deductions, net of related payments and credits, were as follows:
                                                                                    Distribution fees,
                                                              Rebates and            product returns
(in thousands)                                                chargebacks               and other                  Total
Balance as of December 31, 2019                             $     38,116          $             7,538          $   45,654
Provision related to current period sales                        256,777                       21,126             277,903
Adjustment for prior period sales                                 (1,244)                           -              (1,244)
Payments/credits for current period sales                       (226,997)                     (12,664)           (239,661)
Payments/credits for prior period sales                          (30,119)                      (1,666)            (31,785)
Balance as of September 30, 2020                            $     36,533          $            14,334          $   50,867


Government-mandated rebates and chargebacks are the most significant component
of our total gross-to-net deductions and the discount percentage has been
increasing. These discount percentages increased during the nine months ended
September 30, 2020 as a result of price increases for ADCETRIS that we
instituted that exceeded the rate of inflation. The most significant portion of
our gross-to-net accrual balances as of September 30, 2020 and 2019 was for
Medicaid rebates. We expect future gross-to-net deductions to fluctuate based on
the volume of purchases eligible for government mandated discounts and rebates,
as well as changes in the discount percentage which is impacted by potential
future price increases, the rate of inflation, and other factors. We expect
gross-to-net deductions to increase in 2020 as compared to 2019, driven by
anticipated growth in our gross product sales.

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Royalty revenues
Royalty revenues primarily reflect royalties earned under the ADCETRIS
collaboration with Takeda. These royalties include commercial sales-based
milestones and sales royalties. Sales royalties are based on a percentage of
Takeda's net sales of ADCETRIS, with rates that range from the mid-teens to the
mid-twenties based on annual net sales tiers. Takeda bears third-party royalty
costs owed on its sales of ADCETRIS. This amount is included in royalty
revenues. Royalty revenues also reflect, to a lesser extent, amounts from
Genentech earned on net sales of Polivy beginning in 2019.
                                                      Three months ended September 30,                           Nine months ended September 30,
(dollars in thousands)                          2020              2019              % Change               2020              2019              % Change
Royalty revenues                            $  35,924          $ 27,261                    32  %       $  87,520          $ 66,218                    32  %


Royalty revenues increased for the three and nine months ended September 30,
2020 from the comparable period in 2019, primarily due to growth in Takeda net
sales of ADCETRIS in its territories, as well as higher Roche net sales of
Polivy, which began in the second quarter of 2019.
We expect that royalty revenues will decrease in 2020 as compared to 2019,
reflecting the recognition in the fourth quarter of 2019 of a $40.0 million
sales-based milestone earned from Takeda based on its achievement of an annual
ADCETRIS net sales milestone. We expect higher anticipated royalties for
ADCETRIS and Polivy in 2020 as compared to 2019.

Collaboration and license agreement revenues
Collaboration and license agreement revenues reflect amounts earned under
certain of our license and collaboration agreements. These revenues reflect the
earned portion of payments received by us for technology access and maintenance
fees, milestone payments and reimbursement payments for research and development
support that we provide to our collaborators.
Collaboration and license agreement revenues by collaborator were as follows:
                                                         Three months ended September 30,                             Nine months ended September 30,
(dollars in thousands)                             2020               2019              % Change               2020               2019              % Change
Merck                                          $  725,000          $      -                       NM       $  725,000          $      -                       NM
Takeda                                              7,013            17,720                   (60) %           22,925            89,859                   (74) %

Other                                              26,300               700                       NM           32,325             9,269                   249  %
Total collaboration and license
agreement revenues                             $  758,313          $ 18,420                       NM       $  780,250          $ 99,128

NM

NM: No amount in comparable period or not a meaningful comparison.

Collaboration and license agreement revenues from Merck included license
revenues of $725.0 million related to the LV Agreement and the TUKYSA Agreement
for the three and nine months ended September 30, 2020. In October 2020, upon
closing of the sale of the shares to Merck under the stock purchase agreement we
entered into with Merck in connection with the LV Agreement, we will record
additional Merck collaboration and license revenues for $250.1 million for the
quarter and year ending December 31, 2020. Refer to Note 2 for additional
information.
Collaboration and license agreement revenues from Takeda fluctuate based on
changes in reimbursement funding under the ADCETRIS collaboration, which are
impacted by the activities each party is performing under the collaboration
agreement at a given time. Additionally, we receive reimbursement for the cost
of drug product supplied to Takeda for its use, the timing of which fluctuates
based on Takeda's product supply needs. Collaboration revenues from Takeda can
also fluctuate based on the achievement of milestones by Takeda. Collaboration
revenues from Takeda for the three and nine months ended September 30, 2020
decreased compared to the comparable periods in 2019, primarily as a result of
regulatory milestones achieved by Takeda in 2019 totaling $37.5 million during
the nine months ended September 30, 2019, respectively, and the completion of
the Takeda performance period in November 2019.
Other collaboration and license agreement revenues increased for the three and
nine months ended September 30, 2020 as compared to the comparable periods in
2019 primarily due to recognition of two regulatory milestones achieved by
GlaxoSmithKline in the third quarter of 2020.
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We expect our collaboration and license agreement revenues in 2020 to increase
substantially compared to 2019, driven by the revenue recognized from the Merck
agreements. Our collaboration and license agreement revenues are impacted by the
term and duration of those agreements and by progress-dependent milestones,
annual maintenance fees, and reimbursement of materials and support services.
Collaboration and license agreement revenues may vary substantially from year to
year and quarter to quarter depending on the progress made by our collaborators
with their product candidates, the level of support we provide to our
collaborators, the timing of milestones achieved and our ability to enter into
potential additional collaboration and license agreements.

Collaboration agreements
Takeda ADCETRIS collaboration
We have an agreement with Takeda for the global co-development of ADCETRIS and
the commercialization of ADCETRIS by Takeda in its territory. We have commercial
rights for ADCETRIS in the U.S. and its territories and in Canada. Takeda has
commercial rights in the rest of the world. Under the collaboration, we and
Takeda can each conduct development activities and equally co-fund the cost of
certain mutually agreed development activities. We recognize payments from
Takeda, including progress-dependent development and regulatory milestone
payments, reimbursement for drug supplied, and net development cost
reimbursement payments, as collaboration and license agreement revenues upon
transfer of control of the goods or services over the development period. When
the performance of development activities under the collaboration results in us
making a reimbursement payment to Takeda, that payment reduces collaboration and
license agreement revenues. We also recognize royalty revenues based on a
percentage of Takeda's net sales of ADCETRIS in its territories, ranging from
the mid-teens to the mid-twenties based on annual net sales tiers, as well as
sales-based milestones. Takeda bears a portion of third-party royalty costs owed
on its sales of ADCETRIS, which is included in royalty revenues. Costs
associated with co-development activities are included in research and
development expense.
As of September 30, 2020, we had achieved milestone payments totaling $157.5
million related to regulatory and commercial progress by Takeda. As of
September 30, 2020, total future potential milestone payments to us under this
collaboration could total $77.0 million. Of that amount, up to approximately
$7.0 million relates to the achievement of development milestones, up to $70.0
million relates to the achievement of regulatory milestones. In addition, we
recognize royalty revenues, where royalties are based on a percentage of
Takeda's net sales of ADCETRIS in its licensed territories, with percentages
ranging from the mid-teens to the mid-twenties based on annual net sales tiers,
and sales-based milestones. Takeda bears a portion of third-party royalty costs
owed on its sales of ADCETRIS, which is included in royalty revenues.
Astellas PADCEV collaboration
We have a collaboration agreement with Agensys, Inc., which subsequently became
an affiliate of Astellas, to jointly research, develop and commercialize ADCs
for the treatment of several types of cancer. The collaboration encompasses
combinations of our ADC technology with fully-human antibodies developed by
Astellas to proprietary cancer targets. Under this collaboration, we and
Astellas are co-funding all development costs for PADCEV. We rely on Astellas to
supply PADCEV for commercial sales and for our clinical trials, and Astellas
oversees the manufacturing supply chain for PADCEV. Costs associated with
co-development activities are included in research and development expense.
In 2018, we and Astellas entered into a joint commercialization agreement to
govern the global commercialization of PADCEV:
•In the U.S., we and Astellas jointly promote PADCEV. We record sales of PADCEV
in the U.S. and are responsible for all U.S. distribution activities. The
companies each bear the costs of their own sales organizations in the U.S.,
equally share certain other costs associated with commercializing PADCEV in the
U.S., and equally share in any profits realized in the U.S.
•Outside the U.S., we have commercialization rights in all countries in North
and South America, and Astellas has commercialization rights in the rest of the
world, including Europe, Asia, Australia and Africa. The agreement is intended
to provide that we and Astellas will effectively equally share in costs incurred
and any profits realized in all of these markets. Cost and profit sharing in
Canada, the United Kingdom, Germany, France, Spain and Italy will be based on
product sales and costs of commercialization. In the remaining markets, the
commercializing party will bear costs and will pay the other party a royalty
rate applied to net sales of the product based on a rate intended to approximate
an equal profit share for both parties.
Astellas or its affiliates are responsible for manufacturing PADCEV for
development and commercial use. However, we are responsible for packaging and
labeling in countries in which we sell PADCEV. In addition, if the parties
determine that a second source is required, we will be responsible for
establishing such second source whether internally or through a third party.
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Genmab tisotumab vedotin collaboration
We have an agreement with Genmab to develop and commercialize ADCs for the
treatment of several types of cancer, under which we previously exercised a
co-development option for tisotumab vedotin. In October 2020, we and Genmab
entered into a joint commercialization agreement to govern the global
commercialization of tisotumab vedotin, if we are successful in obtaining any
regulatory approvals of tisotumab vedotin:
•In the U.S., we and Genmab will co-promote tisotumab vedotin. We will record
sales of tisotumab vedotin in the U.S. and are responsible for leading U.S.
distribution activities. The companies will each hire and maintain 50% of the
sales representatives and medical science liaisons, equally share those and
certain other costs associated with commercializing tisotumab vedotin in the
U.S., individually bear the costs of certain other personnel in the U.S., and
equally share in any profits realized in the U.S.
•Outside the U.S., we have commercialization rights in the rest of the world
except for Japan, where Genmab has commercialization rights. In Europe, China,
and Japan, we and Genmab equally share 50% of the costs associated with
commercializing tisotumab vedotin as well as any profits realized in these
markets. In markets outside the U.S. other than Europe, China, and Japan, aside
from certain costs specified in the agreement, we are solely responsible for all
costs associated with commercializing tisotumab vedotin and will pay Genmab a
royalty based on a percentage of aggregate net sales ranging from the mid-teens
to mid-twenties.
Costs associated with co-development activities are included in research and
development expense.
Merck LV collaboration
In September 2020, we entered into the LV Agreement with a subsidiary of Merck.
We will pursue a broad joint development program evaluating LV as monotherapy
and in combination with Merck's anti-PD-1 therapy KEYTRUDA® (pembrolizumab) in
triple-negative breast cancer, hormone receptor-positive breast cancer and other
LIV-1-expressing solid tumors. Under the terms of the LV Agreement, we granted
Merck a co-exclusive worldwide development and commercialization license for LV,
and agreed to jointly develop and commercialize LV on a worldwide basis. We
received an upfront cash payment of $600.0 million, and we are eligible to
receive up to $850.0 million in milestone payments upon the initiation of
certain clinical trials and regulatory approval in certain major markets, and up
to an additional $1.75 billion in milestone payments upon the achievement of
specified annual global net sales thresholds of LV. Each company is responsible
for 50% of global costs to develop and commercialize LV and will receive 50% of
potential future profits. In connection with the LV Agreement, we entered into a
stock purchase agreement with Merck in September 2020, pursuant to which we
agreed to issue and sell, and Merck agreed to purchase 5,000,000 newly-issued
shares of our common stock, at a purchase price of $200 per share, for an
aggregate purchase price of $1.0 billion, referred to as the Purchase Agreement.
We closed the Purchase Agreement on October 27, 2020 following the expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
We recognized license revenue of $600.0 million during the three and nine months
ended September 30, 2020 associated with the LV Agreement, and we recognize such
cost sharing proportionately with the performance of the underlying activities,
while recording Merck's reimbursement of our expenses as a reduction of research
and development expenses.
Merck TUKYSA collaboration
In September 2020, we entered into the TUKYSA Agreement with a subsidiary of
Merck. We granted exclusive rights to commercialize TUKYSA in Asia, the Middle
East and Latin America and other regions outside of the U.S., Canada and Europe.
Under the terms of the TUKYSA Agreement, Merck is responsible for marketing
applications for approval in its territory, supported by the positive results
from the HER2CLIMB clinical trial. We retained commercial rights in, and will
record sales in, the U.S., Canada and Europe. Merck is also co-funding a portion
of the TUKYSA global development plan, which encompasses several ongoing and
planned trials across HER2-positive cancers. We will continue to lead ongoing
TUKYSA global development operational execution. Merck will solely fund and
conduct country-specific clinical trials necessary to support anticipated
regulatory applications in its territories. We received an upfront cash payment
from Merck of $125.0 million and also received $85.0 million in prepaid research
and development funding to be applied to Merck's global development cost sharing
obligations. We are eligible to receive progress-dependent milestone payments of
up to $65.0 million, and are entitled to receive tiered royalties on sales of
TUKYSA by Merck that begin in the low twenty percent range and escalate based
sales volume by Merck in its territory.
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We recognized license revenue of $125.0 million during the three and nine months
ended September 30, 2020 associated with the TUKYSA Agreement, and we recognize
such cost sharing proportionately with the performance of the underlying
activities, while recording Merck's reimbursement of our expenses as a reduction
of research and development expenses. Sales of TUKYSA drug product supplied is
included in collaboration and license agreement revenues. The prepayment
received for global development cost-sharing was recorded as a co-development
liability in other long-term liabilities on our condensed consolidated balance
sheet as of September 30, 2020. As joint development expenses are incurred, we
recognize the portion of Merck's prepayment as a reduction of our research and
development expenses on our condensed consolidated statements of net income
(loss). As of September 20, 2020, $84.5 million was recorded as the remaining
co-development liability.
Other technology collaboration and license agreements
We have other active collaboration and license agreements for our technology
with a number of biotechnology and pharmaceutical companies entered into prior
to 2015. We typically receive upfront cash payments and progress- and
sales-dependent milestones for the achievement by our licensees of certain
events, and annual maintenance fees and support fees for research and
development services and materials provided under the agreements. These amounts
are recognized as revenue over the performance obligation period if the license
is determined not to be distinct from other goods and services provided, or, if
there is no performance obligation, upon transfer of control of the goods or
services to the customer. Each of these agreements is beyond the initial
performance period, and we have no remaining performance obligations. We may
receive license maintenance fees and potential milestones and royalties based on
collaborator development and regulatory progress, which are recorded in the
period achieved in the case of milestones, and during the period of the related
sales for royalties.

Cost of sales
Cost of sales includes manufacturing and distribution costs of product sold,
gross profit share with Astellas pursuant to our collaboration, amortization of
technology license costs, royalties owed on certain net product sales, as well
as royalties owed to our third-party licensors related to Takeda's sales of
ADCETRIS.
                                                      Three months ended September 30,                            Nine months ended September 30,
(dollars in thousands)                          2020              2019              % Change               2020               2019              % Change
Cost of sales                               $  78,296          $ 10,827                   623  %       $  155,962          $ 32,024                   387  %


Cost of sales increased for the three and nine months ended September 30, 2020
from the comparable periods in 2019, driven by the Astellas gross profit share
related to PADCEV net product sales, a payment owed to a third-party technology
licensor resulting from the TUKSYA Agreement, amortization expense associated
with TUKSYA, and in-licensing royalties owed on PADCEV and TUKYSA net product
sales. We and Astellas launched PADCEV in the U.S. in December 2019. The gross
profit share with Astellas totaled $29.1 million and $72.6 million for the three
and nine months ended September 30, 2020, respectively. We recorded amortization
expense of $5.8 million and $10.5 million for acquired TUKYSA technology costs
during the three and nine months ended September 30, 2020, respectively, which
began following FDA approval of TUKYSA in April 2020.
We expect cost of sales to substantially increase in 2020 as compared to 2019 as
a result of the net product sales growth of our commercial-stage drugs, and the
payment owed to a third-party technology licensor resulting from the TUKYSA
Agreement. This includes cost of product sales for PADCEV and the gross profit
share with Astellas under our collaboration. Growth will also be driven by the
cost of product sales for TUKYSA and the amortization of acquired technology
costs. The increase in cost of sales will also reflect expected growth in
ADCETRIS net product sales. Product costs of sales includes a low-single digit
royalty on ADCETRIS sales, a mid-single digit royalty on PADCEV sales, and a low
double-digit royalty on TUKYSA sales, and royalties on Merck's potential TUKYSA
net sales and development milestones related to licensed technology applicable
to the drug. Cost of sales for PADCEV and TUKYSA in 2020 will be partially
reduced by the use of product inventory that was manufactured prior to FDA
approval, and previously charged to research and development expense.

Research and development
                                                          Three months ended September 30,                             Nine months ended September 30,
(dollars in thousands)                             2020                2019              % Change               2020                2019              % Change
Research and clinical development              $  155,693          $ 136,000                    14  %       $  426,079          $ 352,131                    21  %
Process sciences and manufacturing                 61,977             60,119                     3  %          184,866            166,182                    11  %
Total research and development                 $  217,670          $ 196,119                    11  %       $  610,945          $ 518,313                    18  %

Certain prior year balances have been reclassified within research and development expenses to conform to current year presentation.

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Tabl e o f C o n t e n t s

Research and clinical development expenses include personnel, occupancy and
laboratory expenses, technology access fees, preclinical translational biology
and in vitro and in vivo studies, IND-enabling pharmacology and toxicology
studies, and external clinical trial costs including costs for clinical sites,
clinical research organizations, contractors and regulatory activities
associated with conducting human clinical trials. The increase for the three and
nine months ended September 30, 2020 from the comparable periods in 2019
primarily reflected increases in employee-related costs and external development
costs mainly to support our early- and late-stage pipeline of product
candidates.
Process sciences and manufacturing expenses include personnel and occupancy
expenses, manufacturing costs for the scale-up and pre-approval manufacturing of
drug product used in research and our clinical trials, and costs for drug
product supplied to our collaborators. Process sciences and manufacturing
expenses also include quality control and assurance activities, and storage and
shipment of our product candidates. The increase for the three and nine months
ended September 30, 2020 from the comparable periods in 2019 primarily reflected
increases in employee-related costs and external development costs primarily to
support our early- and late-stage pipeline of product candidates.
We utilize our employee and infrastructure resources across multiple research
and development projects. We track human resource efforts expended on many of
our programs for purposes of billing our collaborators for time incurred at
agreed upon rates and for resource planning. We do not account for actual costs
on a project basis as it relates to our infrastructure, facility, employee and
other indirect costs; however, we do separately track significant third-party
costs including clinical trial costs, manufacturing costs and other contracted
service costs on a project basis. To that end, the following table shows
third-party costs incurred for research, contract manufacturing of our product
candidates and clinical and regulatory services, as well as milestone payments
for in-licensed technology for our products and certain of our clinical-stage
product candidates. The table also presents other costs and overhead consisting
of third-party costs for our preclinical stage programs, as well as personnel,
facilities, manufacturing, and other indirect costs not directly charged to
development programs.
                                              Three months ended September 

30, Nine months ended September 30, Five years ended (dollars in thousands)

                            2020                2019               2020                2019            September 30, 2020
ADCETRIS (brentuximab vedotin)                $   16,669          $  11,539

$ 39,771 $ 33,318 $ 290,409 TUKYSA (tucatinib)

                                18,799             23,441              56,768             67,269                     181,784
PADCEV (enfortumab vedotin-ejfv)                  13,639             10,243              27,450             23,437                     115,968
Tisotumab vedotin                                  8,412              9,746              21,513             24,420                      80,211
Ladiratuzumab vedotin                              4,564              5,260              13,577             15,940                      85,040
Other clinical stage programs                      7,566              7,739              22,892             21,328                     267,746
Total third-party costs for clinical
stage programs                                    69,649             67,968             181,971            185,712                   1,021,158
Other costs and overhead                         148,021            128,151             428,974            332,601                   1,785,079
Total research and development                $  217,670          $ 196,119

$ 610,945 $ 518,313 $ 2,806,237

Third-party costs for ADCETRIS increased for three and nine months ended
September 30, 2020 from the comparable periods in 2019, primarily due to
increased activities associated with our ongoing ADCETRIS clinical trials.
Third-party costs for TUKYSA decreased for the three and nine months ended
September 30, 2020 , as compared to the comparable periods in 2019, primarily
due to lower clinical supply expenses. Following the approval of TUKYSA in April
2020, we began capitalizing inventory costs manufactured for commercial sale.
Third-party costs for PADCEV increased for the three and nine months ended
September 30, 2020 from the comparable periods in 2019, primarily due to
increased activities associated with our ongoing PADCEV clinical trials.
Third-party costs for tisotumab vedotin decreased for the three and nine months
ended September 30, 2020, from the comparable periods in 2019, due to the timing
of our and Genmab's ongoing clinical trials.
Third-party costs for ladiratuzumab vedotin decreased for the three and nine
months ended September 30, 2020, as compared to the comparable periods in 2019,
primarily due to lower research and clinical development expenses.
Other costs and overhead include third-party costs of our preclinical programs
and costs associated with personnel and facilities. These costs increased for
the three and nine months ended September 30, 2020 from the comparable periods
in 2019, due to the addition of new preclinical programs and higher
employee-related expenses from headcount growth.
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In order to advance our product candidates toward commercialization, the product
candidates are tested in numerous preclinical safety, toxicology and efficacy
studies. We then conduct clinical trials for those product candidates that take
several years or more to complete. The length of time varies substantially based
upon the type, complexity, novelty and intended use of a product candidate. We
will also need to conduct additional clinical trials in order to expand labeled
indications of use for our commercial products. The outcome of our clinical
trials is uncertain. The cost of clinical trials may vary significantly as a
result of a variety of factors, including the number of patients enrolled,
patient site costs, quantity and source of drug supply required, safety and
efficacy of the product candidate, and extent of regulatory efforts, among
others.
We anticipate that our total research and development expenses in 2020 will
increase compared to 2019, primarily due to higher costs for the continued
development of our approved products and product candidates.
The risks and uncertainties associated with our research and development
projects are discussed more fully in "Part II Item 1A-Risk Factors." As a result
of these risk and uncertainties, we are unable to determine with any degree of
certainty the duration and completion costs of our research and development
projects, anticipated completion dates, or when and to what extent we will
receive cash inflows from the commercialization and sale of our products in any
additional approved indications or of any of our product candidates.

Selling, general and administrative

                                                          Three months ended September 30,                             Nine months ended September 30,
(dollars in thousands)                              2020               2019              % Change               2020                2019              % Change
Selling, general and administrative             $  127,579          $ 96,101                    33  %       $  375,470          $ 258,703                    45  %


Selling, general and administrative expenses increased for the three and nine
months ended September 30, 2020 from the comparable periods in 2019 primarily
due to increased field sales personnel for our recently commercialized products,
and higher infrastructure costs to support our continued growth.
We anticipate that selling, general and administrative expenses will increase in
2020 as compared to 2019 as we support the launches of PADCEV and TUKYSA, and
invest in infrastructure to support our continued growth.

Investment and other income (loss), net

                                                     Three months ended September 30,                            Nine months ended September 30,
(dollars in thousands)                         2020              2019              % Change               2020               2019              % Change
Gain (loss) on equity securities            $      -          $ (5,690)                 (100) %       $  11,604          $ (10,258)

(213) %

Investment and other income, net               1,223             3,561                   (66) %           6,347              7,909                   (20) %
Total investment and other income
(loss), net                                 $  1,223          $ (2,129)                 (157) %       $  17,951          $  (2,349)                 (864) %


Investment and other income (loss), net includes other non-operating income and
loss, such as unrealized holding gains and losses on equity securities (which
primarily included common stock holdings in Immunomedics prior to the sale of
these securities in April 2020), realized gains and losses on equity and debt
securities, and amounts earned on our investments in U.S. Treasury securities.
The gain on equity securities in the nine months ended September 30, 2020 was
primarily driven by a realized gain in April 2020 from the sale of our equity
securities, offset in part by an unrealized loss on equity securities during the
three months ended March 31, 2020. In April 2020, we sold our Immunomedics
common stock holdings for $174.7 million, and, accordingly, recognized the
associated realized gain in our condensed consolidated statements of
comprehensive income (loss) for the nine months ended September 30, 2020.
Investment and other income, net reflects amounts earned on our investments in
U.S. Treasury securities. Investment and other income, net decreased for the
three and nine months ended September 30, 2020 compared to the comparable
periods in 2019, due to lower average yields on our investment portfolio during
the 2020 periods.

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Provision for income taxes
We recorded a provision for income taxes of $3.2 million for the three and nine
months ended September 30, 2020. We utilized deferred tax assets to offset a
Federal tax liability, however, we incurred certain state tax liabilities due to
the apportionment of income to some states in which there were limitations of
the utilization of net operating losses to offset the respective tax liability.

Liquidity and capital resources
(in thousands)                                September 30, 2020       December 31, 2019
Cash, cash equivalents, and investments      $         1,718,375      $          868,338
Working capital                                        1,572,901                 917,284
Stockholders' equity                                   2,258,030               1,876,287


                                     Nine months ended September 30,
(in thousands)                             2020                     2019
Cash provided (used) by:
Operating activities          $        667,424                  $ (151,886)
Investing activities                   (95,440)                   (342,883)
Financing activities                    72,773                     610,049


The change in net cash from operating activities was primarily due to the change
in our net income (loss), working capital fluctuations and changes in our
non-cash expenses, all of which are highly variable. The change in net cash from
investing activities reflected differences between the proceeds received from
sale and maturity of our investments, proceeds from sales of securities, and
amounts reinvested. The change in net cash from financing activities was driven
by differences in proceeds from stock option exercises and our employee stock
purchase plan.
We primarily have financed our operations through the issuance of our common
stock, collections from commercial sales of our products, amounts received
pursuant to product collaborations and our ADC collaborations, and royalty
revenues. To a lesser degree, we also have financed our operations through
investment income. These financing and revenue sources have allowed us to
maintain adequate levels of cash and investments.
Our cash, cash equivalents, and investments are held in a variety of
non-interest bearing bank accounts and interest-bearing instruments subject to
investment guidelines allowing for holdings in U.S. government and agency
securities, corporate securities, taxable municipal bonds, commercial paper and
money market accounts. Our investment portfolio is structured to provide for
investment maturities and access to cash to fund our anticipated working capital
needs. However, if our liquidity needs should be accelerated for any reason in
the near term, or investments do not pay at maturity, we may be required to sell
investment securities in our portfolio prior to their scheduled maturities,
which may result in a loss. As of September 30, 2020, we had $1.7 billion held
in cash, cash equivalents and investments scheduled to mature within the next
twelve months.
At our currently planned spending rates, we believe that our existing financial
resources together with product sales, royalty revenues, and the milestone
payments and reimbursements we expect to receive under our existing
collaboration and license agreements, will be sufficient to fund our operations
for at least the next twelve months.
We expect to make additional capital outlays and to increase operating
expenditures over the next several years as we hire additional employees, and
support our development, commercialization, and planned global expansion, which
may require us to raise additional capital. Further, we actively evaluate
various strategic transactions on an ongoing basis, including licensing or
otherwise acquiring complementary products, technologies or businesses, and we
may require significant additional capital in order to complete or otherwise
provide funding for such transactions. We may seek additional capital through
some or all of the following methods: corporate collaborations, licensing
arrangements, and public or private debt or equity financings. In this regard,
our ability to raise additional funds may be adversely impacted by deteriorating
global economic conditions and the disruptions to and volatility in the credit
and financial markets in the United States and worldwide resulting from the
evolving effects of the COVID-19 pandemic. We do not know whether additional
capital will be available when needed, or that, if available, we will obtain
financing on terms favorable to us or our stockholders. If we are unable to
raise additional funds when we need them, our business and operations may be
adversely affected.
Commitments
Our future minimum contractual commitments were reported in our Annual Report on
Form 10-K for the year ended December 31, 2019. Our future minimum contractual
commitments have not changed materially from the amounts previously reported.
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Critical accounting policies
The preparation of financial statements in accordance with generally accepted
accounting principles requires us to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. We evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from those estimates. Our
critical accounting policies, those with the more significant judgments and
estimates, used in the preparation of our financial statements for the nine
months ended September 30, 2020 were consistent with those in Part II Item 7 of
our Annual Report on Form 10-K for the year ended December 31, 2019, except for
the following updates:
Revenue recognition
Net product sales: We sell ADCETRIS, PADCEV, and TUKYSA through a limited number
of specialty distributors and specialty pharmacies. We and our collaboration
partner Astellas Pharma, Inc. or Astellas jointly promote PADCEV in the U.S.
Under the joint promotion in the U.S., we record net sales of PADCEV and are
responsible for all distribution through a limited number of specialty
distributors. The delivery of our products represents a single performance
obligation for these transactions and we record net product sales at the point
in time when title and risk of loss pass. The transaction price for net product
sales represents the amount we expect to receive, which is net of estimated
government-mandated rebates and chargebacks, distribution fees, estimated
product returns and other deductions. Accruals are established for these
deductions, and actual amounts incurred are offset against applicable accruals.
We reflect these accruals as either a reduction in the related account
receivable from the distributor or as an accrued liability, depending on the
nature of the sales deduction. Sales deductions are based on management's
estimates that consider payor mix in target markets and experience to-date.
These estimates involve a substantial degree of judgment. We have applied a
portfolio approach as a practical expedient for estimating net product sales.
Government-mandated rebates and chargebacks: We have entered into a Medicaid
Drug Rebate Agreement, or MDRA, with the Centers for Medicare & Medicaid
Services. This agreement provides for a rebate based on covered purchases of our
products. Medicaid rebates are invoiced to us by the various state Medicaid
programs. We estimate Medicaid rebates using the expected value approach, based
on a variety of factors, including payor mix and our experience to-date.
We have a Federal Supply Schedule, or FSS, agreement under which certain U.S.
government purchasers receive a discount on eligible purchases of our products.
In addition, we have entered into a Pharmaceutical Pricing Agreement with the
Secretary of Health and Human Services, which enables certain entities that
qualify for government pricing under the Public Health Services Act, or PHS, to
receive discounts on their qualified purchases of our products. Under these
agreements, distributors process a chargeback to us for the difference between
wholesale acquisition cost and the applicable discounted price. We estimate
expected chargebacks for FSS and PHS purchases based on the expected value of
each entity's eligibility for the FSS and PHS programs. We also review
historical rebate and chargeback information to further refine these estimates.
Distribution fees, product returns and other deductions: Our distributors charge
a volume-based fee for distribution services that they perform for us. We allow
for the return of product that is within a specified number of days prior to or
past expiration date or that is damaged. We estimate product returns based on
our experience to-date using the expected value approach. We provide financial
assistance to qualifying patients that are underinsured or cannot cover the cost
of commercial coinsurance through our patient support programs. Estimated
contributions for commercial coinsurance under Seagen Secure are deducted from
gross sales and are based on an analysis of expected plan utilization. These
estimates are adjusted as necessary to reflect our actual experience.
Business combinations, including acquired in-process research and development
and goodwill. We account for business combinations using the acquisition method,
recording the acquisition-date fair value of total consideration over the
acquisition-date fair value of net assets acquired as goodwill.
Fair value is typically estimated using an income approach based on the present
value of future discounted cash flows. The significant estimates in the
discounted cash flow model primarily include the discount rate, and rates of
future revenue and expense growth and/or profitability of the acquired business.
The discount rate considers the relevant risk associated with business-specific
characteristics and the uncertainty related to the ability to achieve the
projected cash flows. We may record adjustments to the fair values of assets
acquired and liabilities assumed within the measurement period (up to one year
from the acquisition date).
In-process research and development assets are accounted for as indefinite-lived
intangible assets and maintained on the balance sheet until either the
underlying project is completed or the asset becomes impaired. If the project is
completed, which generally occurs when FDA approval is obtained, the carrying
value of the related intangible asset is amortized to cost of sales on a
straight-line basis over the estimated useful life of the asset beginning in the
period in which the project is completed. We periodically evaluate when facts or
circumstances indicate that the carrying value of these assets may not be
recoverable. If the asset becomes impaired or is abandoned, the carrying value
of the related intangible asset is written down to its fair value and an
impairment charge is recorded in the period in which the impairment occurs.
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We evaluate indefinite-lived intangible assets and goodwill for impairment
annually, as of October 1, or more frequently when events or circumstances
indicate that impairment may have occurred. As part of the impairment
evaluation, we may elect to perform an assessment of qualitative factors. If
this qualitative assessment indicates that it is more likely than not that the
fair value of the indefinite-lived intangible asset or the reporting unit (for
goodwill) is less than its carrying value, we then would proceed with the
quantitative impairment test to compare the fair value to the carrying value and
record an impairment charge if the carrying value exceeds the fair value.
Acquisition-related costs, including banking, legal, accounting, valuation, and
other similar costs, are expensed in the period in which the costs are incurred.
The results of operations of the acquired business are included in the
consolidated financial statements from the acquisition date.
Recent accounting pronouncements
Refer to "Part I Item 1 Note 1--Summary of significant accounting policies" for
a discussion on recent accounting pronouncements.

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