SPECTRUM PHARMACEUTICALS, INC.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of various
factors including the risks we discuss in Item 1A. Risk Factors and elsewhere in
this Annual Report on Form 10-K.
Overview
Our Business
We are a biopharmaceutical company, with a primary strategy comprised of
acquiring, developing, and commercializing novel and targeted oncology
therapies. Our in-house development organization includes clinical development,
regulatory, quality and data management. We continue to build out our commercial
and marketing capabilities to prepare for the launch of ROLONTIS.
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We have three drugs in development: •ROLONTIS, a novel long-acting G-CSF for chemotherapy-induced neutropenia which is under review by the FDA. OnOctober 26, 2020 , the Company announced that the FDA had deferred action on the BLA for ROLONTIS due to the inability to conduct an inspection of our third-party manufacturing facility inSouth Korea as a result of COVID-19 related travel restrictions. InMarch 2021 , the FDA scheduled the pre-approval inspection of the Hanmi manufacturing facility forMay 2021 ; •Poziotinib, a novel irreversible tyrosine kinase inhibitor under investigation for NSCLC tumors with various mutations. A New Drug Application ("NDA") based on data from Cohort 2 of ZENITH20, which evaluated previously treated patients with NSCLC with HER2 exon 20 insertion mutation is expected to be filed with the FDA in 2021; and •Anti-CD20-IFN?, an antibody-interferon fusion molecule directed against CD20 that is in Phase 1 development for treating relapsed or refractory NHL patients. Our business strategy is the development of our late-stage assets through commercialization and the sourcing of additional assets that are synergistic with our existing portfolio (through purchase acquisitions, in-licensing transactions, or co-development and marketing arrangements). See Item 1. Business, for our discussion of: •Company Overview •Cancer Background and Market Size •Product Portfolio •Manufacturing •Competition •Research and Development Recent Highlights of Our Business, Product Development Initiatives, and Regulatory Approvals During the year endedDecember 31, 2020 , we continued our strategic shift in our business following the completion of the sale of our legacy Commercial Product Portfolio inMarch 2019 . We also continued to make meaningful progress in the advancement of our product pipeline, as summarized below: ROLONTIS, a novel long-acting G-CSF: We submitted our updated BLA for ROLONTIS to the FDA onOctober 24, 2019 , which was accepted for review by the FDA onDecember 20, 2019 . Our BLA is supported by data from two similarly designed Phase 3 clinical trials, ADVANCE and RECOVER, which evaluated the safety and efficacy of ROLONTIS in 643 early-stage breast cancer patients for the treatment of neutropenia due to myelosuppressive chemotherapy. OnOctober 26, 2020 , we announced that the FDA PDUFA target action date set forOctober 24, 2020 was deferred pending inspection of the Hanmi manufacturing facility inKorea due to COVID-19 related travel restrictions. InMarch 2021 , the FDA scheduled the pre-approval inspection of the Hanmi manufacturing facility forMay 2021 . A company sponsored clinical trial has been initiated to evaluate the administration of ROLONTIS on the same day as chemotherapy. This Phase 1 clinical trial is a randomized, open label, actively controlled study to evaluate the same-day dosing of eflapegrastim on duration of neutropenia when administered at varying intervals following docetaxel and cyclophosphamide (TC) chemotherapy in patients with early-stage breast cancer. OnMarch 4, 2021 , at the virtual 38th Annual Miami Breast Cancer Conference®, the company presented positive early data showing rapid absolute neutrophil count (ANC) recovery in the first three patients dosed in the 30-minute arm of the same-day dosing. This arm met the prespecified interim safety evaluation criteria and therefore supports the expansion of this arm to 15 patients. The study design included an interim safety evaluation that was conducted once the first three patients in each arm (30 minutes, 3 hours, or 5 hours) completed Cycle 1. Based on this review, the 30-minute arm will expand to a total of 15 patients, while the 3- and 5-hour dosing arms have been discontinued. In the 30-minute dosing arm, ANC recovery was more rapid compared to the 3- and 5-hour arms. The overall safety profile for the 30-minute arm was similar to what has been seen previously in large randomized studies with GCSF given 24 hours after chemotherapy. 44
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Poziotinib, an irreversible tyrosine kinase inhibitor targeting EGFR and HER2 mutations: InOctober 2017 , we announced the start of our pivotal ZENITH20 Phase 2 global clinical trial with active sites in theU.S. ,Canada andEurope . The ZENITH20 trial consists of seven cohorts of NSCLC patients. Cohorts 1 (EGFR) and 2 (HER2) have completed enrollment of previously treated NSCLC patients with exon 20 mutations. Cohort 3 (EGFR) and 4 (HER2) are currently enrolling first-line NSCLC patients with exon 20 mutations. Cohorts 1- 4 are each independently powered for a pre-specified statistical hypothesis and the primary endpoint is ORR. Cohort 5 includes previously treated or treatment-naïve NSCLC patients with EGFR or HER2 exon 20 insertion mutations. Cohort 6 includes NSCLC patients with classical EGFR mutations who progressed while on treatment with first-line osimertinib and developed an additional EGFR mutation. Cohort 7 includes NSCLC patients with a variety of less common mutations in EGFR or HER2 exons 18-21 or the extracellular or transmembrane domains. OnDecember 26, 2019 , we announced that the pre-specified primary endpoint was not met in Cohort 1 of the ZENITH20 trial evaluating poziotinib in previously treated NSCLC patients with EGFR exon 20 insertion mutations. Cohort 1 enrolled a total of 115 patients who received 16 mg/day of poziotinib. The intent-to-treat analysis showed that 17 patients had a response (by RECIST) and 62 patients had stable disease for a 68.7% DCR. The confirmed ORR was 14.8% (95% CI 8.9%-22.6%). The median duration of response was 7.4 months and the progression free survival was 4.2 months. The safety profile was in-line with other second-generation EGFR tyrosine kinase inhibitors. OnJuly 27, 2020 , we announced that we met the pre-specified primary endpoint for Cohort 2 in the ZENITH20 trial evaluating previously treated NSCLC patients with HER2 exon 20 insertion mutations. Cohort 2 enrolled a total of 90 patients who received an oral, once daily dose of 16 mg of poziotinib. All the patients had failed at least one line of prior systemic therapy with 60 patients (67%) having failed two or more prior therapies, including chemotherapy and immunotherapy. All responses were read independently and confirmed by a central imaging laboratory using RECIST criteria. The intent-to-treat analysis demonstrated a confirmed ORR of 27.8% (95% CI of 18.9%-38.2%). Based on the pre-specified statistical hypothesis for the primary endpoint, the observed lower bound of 18.9% exceeded the pre-specified lower bound of 17% in this heavily pre-treated population. The safety profile was in-line with the type of adverse events seen with other second-generation EGFR tyrosine kinase inhibitors. These results were presented at theESMO Virtual Congress 2020 Science Weekend held inSeptember 2020 . InMarch 2021 , we announced that the FDA granted Fast Track designation for Poziotinib based on data from Cohort 2 of ZENITH20, which evaluated previously treated patients with NSCLC with HER2 exon 20 insertion mutations. InDecember 2020 , we reported that its pre-specified primary endpoint in Cohort 3 evaluating poziotinib in first-line NSCLC patients with EGFR exon 20 insertion mutations was not met. We additionally reported that preliminary data from patients receiving 8 mg of poziotinib twice daily demonstrated meaningful improvement in tolerability as measured by adverse events and dosing interruptions. Cohort 3 of the ZENITH20 clinical trial enrolled a total of 79 patients who received an oral once daily dose of 16 mg of poziotinib. The median time of follow up of all patients was 9.2 months with 12 ongoing patients still on treatment. The intent-to-treat analysis showed that 22 patients had a partial response (by RECIST) and 68 patients had stable disease for an 86.1% DCR. 91% of patients experienced tumor reduction with a median reduction of 25.5%. The confirmed ORR was 27.8% (95% CI 18.4-39.1%). Based on the pre-specified statistical hypothesis for the primary endpoint, the observed lower bound of 18.4% did not meet the pre-specified lower bound of >20%. The median duration of response was 6.5 months and the median progression free survival was 7.2 months. The safety profile was similar with the type of adverse events observed with other second-generation EGFR tyrosine kinase inhibitors. Grade 3 treatment related rash was 33% and diarrhea was 23%. 94% of patients had drug interruptions with 6 patients (8%) permanently discontinuing due to adverse events. Additionally, preliminary data from ZENITH20 Cohort 5 for patients with exon 20 insertion mutations receiving 8 mg twice daily dosing shows improved tolerability versus patients who received the 16 mg once daily dose. The data from this cohort includes patients with both EGFR and HER2 mutations. In Cycle 1, the incidence of Grade 3 or higher treatment related adverse events (rash, diarrhea and stomatitis) decreased by 32% for patients receiving the 8 mg twice daily dose. In addition, dose interruptions were reduced by 38% for the 8 mg twice daily dose versus the 16 mg once daily dose. No new types of adverse events were observed with the twice daily dosing regimen. The preliminary findings of BID dosing could benefit the entire poziotinib program including both EGFR and HER2 exon 20 insertion mutations, and Cohorts 4-7 of the ZENITH20 trial continue to enroll. Anti-CD20-IFN?: 45
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InApril 2019 , we executed a license agreement withImmunGene for an antibody-interferon fusion molecule directed against CD20 (Anti-CD20-IFN?) that is in Phase 1 development for treating relapsed or refractory NHL, This technology is designed to selectively target NHL with therapeutic doses of IFNa, while minimizing systemic toxicity. Under the terms of this agreement, we received the exclusive worldwide rights to commercialize this drug for any indication, and are financially responsible for the clinical and regulatory development programs. Components of Operating Results The below summarizes the nature of our revenue and operating expense line items within our Consolidated Statements of Operations: Revenue InMarch 2019 , we completed the Commercial Product Portfolio Transaction. In accordance with applicable GAAP, the revenue-deriving activities of our sold commercial operation are separately classified as "discontinued" for all periods presented within the accompanying Consolidated Statements of Operations. The majority of our revenue was derived from sales of our drug products to large pharmaceutical wholesalers and distributors, which we recognized upon title transfer (which is typically at time of delivery), provided our other revenue recognition criteria have been met. We expect that this revenue source and recognition will persist upon the potential FDA approval of ROLONTIS and poziotinib. To a lesser extent we also derived revenue from (i) upfront license fees, (ii) milestone receipts from our licensees' sales or regulatory achievements, and royalties from out-licensing our licensees' sales in applicable territories, and (iii) service revenue from third-parties under certain arrangements for our research and development activities, sales and marketing activities, clinical trial management, and supply chain services conducted for the benefit of third parties. We expect that this revenue source and recognition will persist from our current and future out-license arrangements. Cost of Sales (excluding amortization of intangible assets) Cost of sales includes production and packaging materials, contract manufacturer fees, allocated personnel costs (including stock-based compensation expense), shipping expenses, and royalty fees. Operating Expenses Selling, General and Administrative Selling, general and administrative expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force and personnel that support our sales and marketing operations, and our general operations such as information technology, executive management, financial accounting, and human resources. It also includes costs attributable to marketing our products to our customers and prospective customers, patent and legal fees, financial statement audit fees, insurance coverage fees, bad debt expense, personnel recruiting fees, and other professional services. Research and Development Our research and development activities primarily relate to the clinical development of new drugs and costs associated with at-risk manufacture of drug products prior to FDA approval . These clinical development expenses specifically consist of (i) compensation (including stock-based compensation) and benefits for research and development and clinical and regulatory personnel, (ii) materials and supplies for each project, (iii) consultants, and (iv) associated regulatory and clinical site expenses. Our research and development manufacture expenses are recognized in the period which the activity occurs and includes (i) our technology transfer costs for production, (ii) FDA qualification costs of our contract manufacturers' sites, and (iii) material and service costs associated with our inventory build in anticipation of FDA approval and subsequent commercial launch. Results of Operations 46
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Comparison of the Years Ended
Year Ended December 31,
2020 2019 $ Change
($ in thousands)
Revenues $ - $ - $ -
Operating costs and expenses:
Selling, general and administrative 60,357 61,373 (1,016)
Research and development 109,377 79,325 30,052
Total operating costs and expenses 169,734 140,698 29,036
Loss from continuing operations before other income
(expense) and income taxes (169,734) (140,698) (29,036)
Other income (expense): -
Interest income, net 1,342 4,996 (3,654)
Other expense, net (2,940) (8,892) 5,952
Total other expense (1,598) (3,896) 2,298
Loss from continuing operations before income taxes (171,332) (144,594) (26,738)
Benefit for income taxes from continuing operations 60 9,208 (9,148)
Loss from continuing operations (171,272) (135,386) (35,886)
Income from discontinued operations, net of income taxes 10,404 22,697 (12,293)
Net loss $ (160,868) $ (112,689) $ (48,179)
Operating Expenses
Year Ended December 31,
2020 2019 $ Change % Change
($ in millions)
Operating expenses:
Selling, general and administrative 60.4 61.4 (1.0) (1.6) %
Research and development 109.4 79.3 30.1 38.0 %
Total operating costs and expenses $ 169.7 $ 140.7 $ 29.0 20.6 %
Selling, general and administrative expenses decreased by $1.0 million in the
current period, primarily related to (i) $1.5 million of non-recurring employee
severance expense related to the Commercial Product Portfolio Transaction and
(ii) a decrease in overall travel of $2 million as a result of COVID-19, which
has been ongoing since the first quarter of 2020. These decreases were partially
offset by $1.6 million of increased information technology, infrastructure and
systems-related expenses in preparation for our planned commercial launch of
ROLONTIS, and $0.8 million of increased legal and other general expenses.
Research and development expenses increased by $30.1 million in the current
period primarily related to (i) impairment and write-offs of $28.2 million
related to our ROLONTIS second source manufacturer, (ii) ROLONTIS manufacturing
and other development activities of $3.9 million , (iii) personnel-related
expenses of $3.6 million , and (iv) upfront payments of $0.8 million for other
research and development milestones. These increases are partially offset by (i)
poziotinib expenses of $3.9 million related to manufacturing activities and drug
substance purchases, (ii) $2.0 million of ROLONTIS expenses related to the
preparation and submission of our updated BLA in the prior year period, and
(iii) $0.6 million of expenses related to our in-license for Anti-CD20-IFN?,
given upfront payments made in the prior year that did not reoccur.
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Total Other Expense
Year Ended December 31,
2020 2019 $ Change % Change
($ in millions)
Total other expense $ (1.6) $ (3.9) $ 2.3 59.0 %
Total other expense decreased by $2.3 million primarily due to $8.2 million of
increased market value of our equity holding in the current period versus the
prior period, offset by (i) $3.5 million of decreased interest income and
changes in value on certain investments, (ii) $1.3 million of lower realized
gains in the current period compared to the prior period from the sale of our
equity holdings, (iii) $0.7 million decrease of billable services rendered to
Acrotech as part of a transition services agreement that expired in May 2019 ,
and (iv) $0.4 million increase in loss on foreign currency exchange.
Income Taxes
Year Ended December 31,
2020 2019 $ Change % Change
($ in millions)
Benefit for income taxes from continuing
operations $ 0.1 $ 9.2 $ (9.1) (98.9) %
In 2020 the Company early adopted ASU 2019-12, "Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes". Prior to the early adoption of ASU
2019-12, the intraperiod tax allocation guidance required that we allocate
income taxes between continuing operations and other categories of earnings. Due
to the required allocation in 2019, we recorded an income tax benefit of $9.2
million from continuing operations, income tax expense of $7.5 million within
income from discontinued operations, and income tax expense of $0.2 million
within other comprehensive income (loss) on the Consolidated Statements of
Comprehensive Loss for the year ended December 31, 2019 .
Our net tax benefit for the year ended December 31, 2019 prior to the
application of the intraperiod allocation guidance was $1.5 million . This tax
benefit arose from the reversal of deferred tax liabilities recorded on our
Consolidated Balance Sheets as of December 31, 2018 that were associated with
indefinite-lived intangible assets that were sold as part of the Commercial
Product Portfolio Transaction. The intraperiod allocation is not applicable for
the year ended December 31, 2020 as a result of the early adoption of ASU
2019-12. Our $0.1 million tax benefit for the year ended December 31, 2020 is
primarily related to state income taxes.
Liquidity and Capital Resources
We believe that our $180.0 million in aggregate cash, cash equivalents, and
marketable securities as of December 31, 2020 is sufficient to fund our current
and planned operations for at least the next twelve months. We may, however,
require additional liquidity as we continue to execute our business strategy,
and in connection with opportunistic acquisitions or licensing arrangements. We
anticipate that to the extent that we require additional liquidity, it will be
funded through additional equity or debt financings, or out-licensing
arrangements. However, we cannot provide assurance that we will be able to
obtain this additional liquidity on terms favorable to us or our current
stockholders, if at all. Additionally, our liquidity and our ability to fund our
capital requirements are also dependent on our future financial performance
which is subject to various market and economic factors that are beyond our
control.
We have no off-balance sheet arrangements that provide financing, liquidity,
market or credit risk support, or involve derivatives. In addition, we have no
arrangements that may expose us to liability that are not expressly reflected in
the accompanying Consolidated Financial Statements and/or notes thereto.
Net Cash Used In Operating Activities
Net cash used in operating activities was $121.6 million for the year ended
December 31, 2020 , as compared to $134.6 million for the year ended December 31,
2019 . This decrease in net cash used in operating activities was primarily
related to
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improvements in working capital during the year endedDecember 31, 2020 as a result of no longer being a commercial stage entity after the Commercial Product Portfolio Transaction. Net Cash Provided By Investing Activities Net cash provided by investing activities was$18.1 million for the year endedDecember 31, 2020 , as compared to$32.0 million for the year endedDecember 31, 2019 . Cash provided by investing activities primarily relates to proceeds of$109.0 million from our investments and proceeds of$4.0 million from the sale of our equity holdings. These cash receipts were partially offset by$89.4 million of purchased investments and$5.5 million of equipment purchases. Net Cash Provided By Financing Activities Net cash provided by financing activities was$85.2 million for the year endedDecember 31, 2020 , as compared to$9.6 million for the year endedDecember 31, 2019 . Cash provided by financing activities during the year endedDecember 31, 2020 relates to$69.7 million of proceeds from our public offering, net of offering expenses,$14.9 million of proceeds received from common shares sold pursuant to an at-the-market-issuance sales agreement, and$0.7 million of proceeds from employee shares purchased under our employee stock purchase plan. Sale of Common Stock Under ATM Agreements OnApril 5, 2019 , we entered into a new collective at-market-issuance ("ATM") sales agreement withCantor Fitzgerald & Co. ,H.C. Wainwright & Co., LLC andB. Riley FBR, Inc. (the "April 2019 ATM Agreement"), pursuant to which we may offer and sell shares of our common stock by any method deemed to be an "at the market" offering (the "ATM Offering"). FromApril 5, 2019 toMarch 2, 2020 , the ATM Offering was conducted pursuant to a sales agreement prospectus filed with our automatic shelf registration statement on Form S-3ASR, filed with theSEC onApril 5, 2019 , which registered an aggregate offering price of$150 million under theApril 2019 ATM Agreement. FromMay 8, 2020 toJune 30, 2020 , the ATM Offering was conducted pursuant to a sales agreement prospectus (the "Initial Sales Agreement Prospectus") filed with our shelf registration statement on Form S-3, filed with theSEC onMarch 20, 2020 , as amended by Pre-Effective Amendment No. 1 thereto, and declared effective by theSEC onMay 8, 2020 (the "Registration Statement"), which registered an aggregate offering price of up to$75 million under theApril 2019 ATM Agreement. OnJuly 29, 2020 , we terminated the Initial Sales Agreement Prospectus, but left theApril 2019 ATM Agreement in full force and effect. OnNovember 6, 2020 , we filed a new sales agreement prospectus to the Registration Statement, which registered an aggregate offering price of up to$60 million under theApril 2019 ATM Agreement. We sold and issued common shares under theApril 2019 ATM Agreement as follows: Proceeds Received (Net of Broker No. of Common Shares Commissions and Fees Description of Financing Transaction Issued )
Common shares issued pursuant to the
221,529 $ 1,814
Common shares issued pursuant to the
3,950,398 $ 14,902 Impact of COVID-19 Pandemic OnMarch 11, 2020 , COVID-19 was declared a pandemic by theWorld Health Organization . Concerns related to the spread of COVID-19 began to create global business disruptions as well as disruptions in our operations. OnOctober 26, 2020 , we announced that the FDA had deferred action on the BLA for ROLONTIS due to the inability to conduct an inspection of our third-party manufacturing facility inSouth Korea as a result of COVID-19 related travel restrictions. InMarch 2021 , the FDA scheduled the pre-approval inspection of the Hanmi manufacturing facility forMay 2021 (See Item 1A: "Risk Factors" for additional details). 49
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Proceeds From the Commercial Product Portfolio Transaction InMarch 2019 , we completed the sale of our Commercial Product Portfolio to Acrotech. Upon the closing of the Commercial Product Portfolio Transaction, we received$158.8 million in an upfront cash payment. We are also entitled to receive up to an aggregate of$140 million upon Acrotech's achievement of certain regulatory and sales-based milestones relating to the Commercial Product Portfolio. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires our management to make informed estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses. These amounts may materially differ from the amounts ultimately realized and reported due to the inherent uncertainty of any estimate or assumption. On an on-going basis, our management evaluates (as applicable) its most critical estimates and assumptions, including those related to: (i) gross-to-net revenue adjustments; (ii) the timing of revenue recognition; (iii) the collectability of customer accounts; (iv) whether the cost of our inventories can be recovered; (v) the realization of our tax assets and estimates of our tax liabilities; (vi) the fair value of our investments; (vii) the valuation of our stock options and the periodic expense recognition of stock-based compensation; and (viii) the potential outcome of our ongoing or threatened litigation. Our accounting policies and estimates that most significantly impact the presented amounts within these Consolidated Financial Statements are further described below: Revenue Recognition OnMarch 1, 2019 , we completed the Commercial Product Portfolio Transaction. In accordance with applicable GAAP (ASC 205-20, Presentation of Financial Statements), the revenue-deriving activities of our sold commercial operation are separately classified as "discontinued" for all periods presented within the accompanying Consolidated Statements of Operations. Required Elements of Our Revenue Recognition: Revenue from our (a) product sales, (b) out-license arrangements, and (c) service arrangements is recognized under Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("Topic 606") in a manner that reasonably reflects the delivery of our goods and/or services to customers in return for expected consideration and includes the following elements: (1)we ensure that we have an executed contract(s) with our customer that we believe is legally enforceable; (2)we identify the "performance obligations" in the respective contract; (3)we determine the "transaction price" for each performance obligation in the respective contract; (4)we allocate the transaction price to each performance obligation; and (5)we recognize revenue only when we satisfy each performance obligation. These five elements, as applied to each of our revenue categories, are summarized below: (a) Product Sales: We sell our products to pharmaceutical wholesalers/distributors or to our product licensees (i.e., our customers). Our wholesalers/distributors in turn sell our products directly to clinics, hospitals, and private oncology-based practices. Revenue from our product sales is recognized as physical delivery of product occurs (when our customer obtains control of the product), in return for agreed-upon consideration. Our gross product sales (i.e., delivered units multiplied by the contractual price per unit) are reduced by our corresponding gross-to-net ("GTN") estimates using the "expected value" method, resulting in reported "product sales, net" that reflects the amount we ultimately expect to realize in net cash proceeds, taking into account our current period gross sales and related cash receipts, and the subsequent cash disbursements on these sales that we estimate for the various GTN categories discussed below. These estimates are based upon information received from external sources (such as written or oral information obtained from our customers with respect to their period-end inventory levels and sales to end-users during the period), in combination with management's informed judgments. Due to the inherent uncertainty of these estimates, the actual amount incurred (of some, or all) of product returns, government chargebacks, prompt pay discounts, commercial rebates, Medicaid rebates, and distribution, data, and group purchasing organization ("GPO") administrative fees may be materially above or below the amount estimated, then requiring prospective adjustments to our reported net product sales. These GTN estimate categories (that comprise our GTN liabilities) are each discussed below: 50
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Product Returns Allowances: Our customers are contractually permitted to return certain purchased products within the contractual allowable time before/after its applicable expiration date. Returns outside of this aforementioned criteria are not customarily allowed. We estimate expected product returns using our historical return rates. Returned product is typically destroyed since substantially all are due to its imminent expiry and cannot be resold. Government Chargebacks: Our products are subject to pricing limits under certain federal government programs (e.g., Medicare and 340B Drug Pricing Program). Qualifying entities (i.e., end-users) purchase products from our customers at their qualifying discounted price. The chargeback amount we incur represents the difference between our contractual sales price to our customer, and the end-user's applicable discounted purchase price under the government program. There may be significant lag time between our reported net product sales and our receipt of the corresponding government chargeback claims from our customers. Prompt Pay Discounts: Discounts for prompt payment are estimated at the time of sale, based on our eligible customers' prompt payment history and the contractual discount percentage. Commercial Rebates: Commercial rebates are based on (i) our estimates of end-user purchases through a group GPO, (ii) the corresponding contractual rebate percentage tier we expect each GPO to achieve, and (iii) our estimates of the impact of any prospective rebate program changes made by us. Medicaid Rebates: Our products are subject to state government-managed Medicaid programs, whereby rebates are issued to participating state governments. These rebates arise when a patient treated with our product is covered under Medicaid, resulting in a discounted price for our product under the applicable Medicaid program. Our Medicaid rebate accrual calculations require us to project the magnitude of our sales, by state, that will be subject to these rebates. There is a significant time lag in our receiving rebate notices from each state (generally several months or longer after our sale is recognized). Our estimates are based on our historical claim levels by state, as supplemented by management's judgment. Distribution, Data, and GPO Administrative Fees: Distribution, data, and GPO administrative fees are paid to authorized wholesalers/distributors of our products for various commercial services including: contract administration, inventory management, delivery of end-user sales data, and product returns processing. These fees are based on a contractually-determined percentage of our applicable sales. (b) License Fees: Our out-license arrangements allow licensees to market our product(s) in certain territories for a specific term (representing the out-license of "functional intellectual property"). These arrangements may include one or more of the following forms of consideration: (i) upfront license fees, (ii) sales royalties, (iii) sales milestone-achievement fees, and (iv) regulatory milestone-achievement fees. We recognize revenue for each based on the contractual terms that establish our right to collect payment once the performance obligation is achieved, as follows: (1) Upfront License Fees: We determine whether upfront license fees are earned at the time of contract execution (i.e., when rights transfer to the customer) or over the actual (or implied) contractual period of the out-license. As part of this determination, we evaluate whether we have any other requirements to provide substantive services that are inseparable from the performance obligation of the license transfer. Our customers' "distinct" rights to licensed "functional intellectual property" at the time of contract execution results in concurrent revenue recognition of all upfront license fees (assuming that there are no other performance obligations at contract execution that are inseparable from this license transfer). (2) Royalties: Under the "sales-or-usage-based royalty exception" we recognize revenue in the same period that our licensees complete product sales in their territory for which we are contractually entitled to a percentage-based royalty receipt.
(3) Sales Milestones: Under the "sales-or-usage-based royalty exception" we recognize revenue in full within the period that our licensees achieve annual or aggregate product sales levels in their territories for which we are contractually entitled to a specified lump-sum receipt.
(4) Regulatory Milestones: Under the terms of the respective out-license, regulatory achievements may either be our responsibility, or that of our licensee.
•When our licensee is responsible for the achievement of the regulatory
milestone, we recognize revenue in full (for the contractual amount due from our
licensee) in the period that the approval occurs (i.e., when the "performance
obligation" is satisfied by our customer) under the "most likely amount" method.
This revenue
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recognition remains "constrained" (i.e., not recognized) until regulatory approval occurs, given its inherent uncertainty and the requirement of a significant revenue reversal not being probable if achievement does not occur. At each reporting period, we re-evaluate the probability of milestone achievement and the associated revenue constraint; any resulting adjustments would be recorded on a cumulative catch-up basis, thus reflected in our financial statements in the period of adjustment. •When we are responsible for the achievement of a regulatory milestone, the "relative selling price method" is applied for purposes of allocating the transaction price to our performance obligations. In such case, we consider (i) the extent of our effort to achieve the milestone and/or the enhancement of the value of the delivered item(s) as a result of milestone achievement and (ii) if the milestone payment is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. We have historically assessed the contractual value of these milestones upon their achievement to be identical to the allocation of value of our performance obligations and thus representing the "transaction price" for each milestone at contract inception. We recognize this revenue in the period that the regulatory approval occurs (i.e., when we complete the "performance obligation") under the "most likely amount" method, and revenue recognition is otherwise "constrained" until regulatory approval occurs, given its inherent uncertainty and the requirement of a significant revenue reversal not being probable if achievement does not occur. At each reporting period, we re-evaluate the probability of milestone achievement and the associated revenue constraint; any resulting adjustments would be recorded on a cumulative catch-up basis, thus reflected in our financial statements in the period of adjustment. (c) Service Revenue: We receive fees under certain arrangements for (i) sales and marketing services, (ii) supply chain services, (iii) research and development services, and (iv) clinical trial management services. Our rights to receive payment for these services may be established by (1) a fixed-fee schedule that covers the term of the arrangement, so long as we meet ongoing performance obligations, (2) our completion of product delivery in our capacity as a procurement agent, (3) the successful completion of a phase of drug development, (4) favorable results from a clinical trial, and/or (5) regulatory approval events. We consider whether revenue associated with these service arrangements is reportable each period, based on our completed services or deliverables (i.e., satisfied "performance obligations") during the reporting period, and the terms of the arrangement that contractually result in fixed payments due to us. The promised service(s) within these arrangements are distinct and explicitly stated within each contract, and our customer benefits from the separable service(s) delivery/completion. Further, the nature of the promise to our customer as stated within the respective contract is to deliver each named service individually (not a transfer of combined items to which the promised goods or services are inputs), and thus are separable for revenue recognition. Property and Equipment, Net Our property and equipment, net is stated at historical cost, and is depreciated on a straight-line basis over an estimated useful life that corresponds with its designated asset category. We evaluate the recoverability of "long-lived assets" (which includes property and equipment) whenever events or changes in circumstances in our business indicate that the asset's carrying amount may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset group. An impairment loss would be recorded for the excess of net carrying value over the fair value of the asset impaired. The fair value is estimated based on expected discounted future cash flows or other methods such as orderly liquidation value based on assumptions of asset class and observed market data. An orderly liquidation value is the amount that could be realized upon liquidation, given a sufficient amount of time to find a purchaser for a sale of assets in their existing condition and location, as of a specific date, and assuming the sale is to market participants who can utilize such assets in their highest and best use. The orderly liquidation values are applied against the carrying values of the assets and the impairment loss is measured as the difference between the liquidation value and the carrying value of the assets. During the fourth quarter of 2020, we determined that we would no longer proceed with the technology transfer and validation of a second manufacturing source for ROLONTIS and communicated this decision to the second source manufacturer. We had invested significant capital to prepare this facility for production. Given the decision to discontinue this work, we determined that the value of certain ROLONTIS production equipment had a carrying amount in excess of the anticipated recoverable value as there would be no future cash flows from these assets other than through the sale of this equipment. We determined the fair value of these assets under an orderly liquidation value method and recorded an impairment of$19.7 million to our carrying value for this equipment, which was recorded as research and development expense. In connection with this decision, we additionally wrote off$8.5 million in prepaid costs related to future manufacturing activities that would no longer be taking place as research and development expense. 52
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InAugust 2018 , the FASB issued Accounting Standards Update No. 2018-15, Intangibles -Goodwill and other -Internal-Use Software (Subtopic 350-40), which amended its guidance for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and to expense such capitalized implementation costs over the term of the hosting arrangement. The guidance is effective for fiscal years beginning afterDecember 15, 2019 , with early adoption permitted. OnJanuary 1, 2021 , we adopted this standard on a prospective basis for applicable implementation costs, which did not have a material impact on our consolidated financial statements. Stock-Based Compensation Stock-based compensation expense for equity awards granted to our employees and members of our Board of Directors is recognized on a straight-line basis over each award's vesting period. Recognized compensation expense is net of an estimated forfeiture rate, representing the percentage of awards that are expected to be forfeited prior to vesting, though is ultimately adjusted for actual forfeitures. We use the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights (as of the date of grant) that have service conditions for vesting. We use theMonte Carlo valuation model to value equity awards (as of the date of grant) that have combined market conditions and service conditions for vesting. The recognition of stock-based compensation expense and the initial calculation of stock option fair value requires uncertain assumptions, including (a) the pre-vesting forfeiture rate of the award, (b) the expected term that the stock option will remain outstanding, (c) our stock price volatility over the expected term (and that of our designated peer group with respect to certain market-based awards), and (d) the prevailing risk-free interest rate for the period matching the expected term. With regard to (a)-(d) above: we estimate forfeiture rates based on our employees' overall forfeiture history, which we believe will be representative of future results. We estimate the expected term of stock options granted based on our employees' historical exercise patterns, which we believe will be representative of their future behavior. We estimate the volatility of our common stock on the date of grant based on the historical volatility of our common stock for a look-back period that corresponds with the expected term. We estimate the risk-free interest rate based upon theU.S. Department of the Treasury yields in effect at award grant, for a period equaling the expected term of the stock option. Research and Development Costs Our research and development costs are expensed as incurred. Research and development costs consist primarily of salaries, benefits, and other staff-related costs including associated stock-based compensation, laboratory supplies, clinical trial and related clinical manufacturing costs, costs related to manufacturing preparations, fees paid to other entities that conduct certain research and development activities on our behalf and payments made pursuant to license agreements. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed. We accrue for costs incurred as the services are being provided by monitoring the status of activities and the invoices received from its external service providers. We adjust our accruals as actual costs become known. Where contingent milestone payments are due to third parties under research and development or license agreements, the milestone payment obligations are expensed when the clinical or regulatory milestone results are achieved.
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