clvs_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2018.

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from            to           .

 

Commission file number: 001-35347

 


Clovis Oncology, Inc.

(Exact name of Registrant as specified in its charter)


 

 

 

Delaware

90-0475355

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

5500 Flatiron Parkway, Suite 100

 

Boulder, Colorado

80301

(Address of principal executive offices)

(Zip Code)

 

(303) 625-5000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of May 4, 2018 was 52,548,995.

 


 

Table of Contents

CLOVIS ONCOLOGY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

PART I. Financial Information 

3

 

 

 

 

ITEM 1. 

 

Financial Statements (unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss — for the three months ended March 31, 2018 and 2017

3

 

 

 

 

 

 

Consolidated Balance Sheets — as of March 31, 2018 and December 31, 2017

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows — for the three months ended March 31, 2018 and 2017

5

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

 

ITEM 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

ITEM 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

 

ITEM 4. 

 

Controls and Procedures

32

 

 

PART II. Other Information 

33

 

 

 

 

ITEM 1. 

 

Legal Proceedings

33

 

 

 

 

ITEM 1A. 

 

Risk Factors

35

 

 

 

 

ITEM 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

 

ITEM 3. 

 

Defaults Upon Senior Securities

37

 

 

 

 

ITEM 4. 

 

Mine Safety Disclosures

37

 

 

 

 

ITEM 5. 

 

Other Information

37

 

 

 

 

ITEM 6.

 

Exhibits

38

 

 

SIGNATURES 

41

 

 

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2018

    

2017

 

 

(in thousands, except per share amounts)

Revenues:

 

 

 

 

 

 

Product revenue

 

$

18,523

 

$

7,045

Operating expenses:

 

 

  

 

 

  

Cost of sales - product

 

 

4,006

 

 

1,163

Cost of sales - intangible asset amortization

 

 

372

 

 

372

Research and development

 

 

43,543

 

 

32,447

Selling, general and administrative

 

 

39,274

 

 

29,224

Total expenses

 

 

87,195

 

 

63,206

Operating loss

 

 

(68,672)

 

 

(56,161)

Other income (expense):

 

 

  

 

 

  

Interest expense

 

 

(2,635)

 

 

(2,581)

Foreign currency loss

 

 

(81)

 

 

(159)

Legal settlement loss

 

 

(7,975)

 

 

 —

Other  income

 

 

1,409

 

 

354

Other expense, net

 

 

(9,282)

 

 

(2,386)

Loss before income taxes

 

 

(77,954)

 

 

(58,547)

Income tax benefit

 

 

260

 

 

83

Net loss

 

$

(77,694)

 

$

(58,464)

Other comprehensive income (loss):

 

 

  

  

 

  

Foreign currency translation adjustments, net of tax

 

 

1,517

  

 

467

Net unrealized loss on available-for-sale securities, net of tax

 

 

(5)

  

 

(5)

Other comprehensive income:

 

 

1,512

  

 

462

Comprehensive loss

 

$

(76,182)

 

$

(58,002)

 

 

 

 

 

 

 

Loss per basic and diluted common share:

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(1.54)

 

$

(1.33)

Basic and diluted weighted average common shares outstanding

 

 

50,602

 

 

44,039

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CLOVIS ONCOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

374,114

 

$

464,198

 

Accounts receivable, net

 

 

12,936

 

 

6,181

 

Inventories

 

 

69,192

 

 

27,508

 

Available-for-sale securities

 

 

89,697

 

 

99,533

 

Prepaid research and development expenses

 

 

4,619

 

 

1,559

 

Deposit on inventory

 

 

 —

 

 

20,461

 

Other current assets

 

 

9,115

 

 

7,500

 

Total current assets

 

 

559,673

 

 

626,940

 

Deposit on inventory

 

 

9,303

 

 

 —

 

Property and equipment, net

 

 

3,938

 

 

4,007

 

Intangible assets, net

 

 

19,189

 

 

19,561

 

Goodwill

 

 

66,960

 

 

65,217

 

Other assets

 

 

19,861

 

 

19,505

 

Total assets

 

$

678,924

 

$

735,230

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

13,378

 

$

15,147

 

Accrued research and development expenses

 

 

22,224

 

 

18,465

 

Milestone liability

 

 

22,534

 

 

22,022

 

Other accrued expenses

 

 

27,306

 

 

25,883

 

Total current liabilities

 

 

85,442

 

 

81,517

 

Deferred income taxes

 

 

371

 

 

 —

 

Convertible senior notes

 

 

282,732

 

 

282,406

 

Deferred rent, long-term

 

 

4,143

 

 

3,671

 

Total liabilities

 

 

372,688

 

 

367,594

 

Commitments and contingencies (Note 14)

 

 

  

 

 

  

 

Stockholders' equity:

 

 

  

 

 

  

 

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized, no shares issued and outstanding at March 31, 2018 and December 31, 2017

 

 

 —

 

 

 —

 

Common stock, $0.001 par value per share, 100,000,000 shares authorized at March 31, 2018 and December 31, 2017; 50,697,471 and 50,565,119 shares issued and outstanding at March 31, 2018 and December 31, 2017 respectively

 

 

51

 

 

51

 

Additional paid-in capital

 

 

1,899,624

 

 

1,887,198

 

Accumulated other comprehensive loss

 

 

(40,661)

 

 

(42,173)

 

Accumulated deficit

 

 

(1,552,778)

 

 

(1,477,440)

 

Total stockholders' equity

 

 

306,236

 

 

367,636

 

Total liabilities and stockholders' equity

 

$

678,924

 

$

735,230

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CLOVIS ONCOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

  

 

 

  

 

 

Net loss

 

$

(77,694)

 

$

(58,464)

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

  

 

 

Share-based compensation expense

 

 

11,913

 

 

8,947

 

 

Depreciation and amortization

 

 

586

 

 

639

 

 

Amortization of premiums and discounts on available-for-sale securities

 

 

(171)

 

 

214

 

 

Amortization of debt issuance costs

 

 

326

 

 

317

 

 

Deferred income taxes

 

 

(101)

 

 

(60)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

 

Accounts receivable

 

 

(3,418)

 

 

(2,257)

 

 

Inventory

 

 

(41,716)

 

 

(6,504)

 

 

Prepaid and accrued research and development expenses

 

 

637

 

 

(10,047)

 

 

Deposit on inventory

 

 

11,157

 

 

(18,237)

 

 

Other operating assets

 

 

(1,890)

 

 

1,223

 

 

Accounts payable

 

 

(1,730)

 

 

13,780

 

 

Other accrued expenses

 

 

1,466

 

 

(9,990)

 

 

Net cash used in operating activities

 

 

(100,635)

 

 

(80,439)

 

 

Investing activities

 

 

  

 

 

  

 

 

Purchases of property and equipment

 

 

(217)

 

 

(53)

 

 

Deposits for purchases of property and equipment

 

 

 —

 

 

(2,515)

 

 

Purchases of available-for-sale securities

 

 

 —

 

 

(133,000)

 

 

Sales of available-for-sale securities

 

 

10,000

 

 

50,000

 

 

Acquired in-process research and development - milestone payment

 

 

 —

 

 

(1,100)

 

 

Net cash provided by (used in) investing activities

 

 

9,783

 

 

(86,668)

 

 

Financing activities

 

 

  

 

 

  

 

 

Proceeds from the sale of common stock, net of issuance costs

 

 

 —

 

 

221,224

 

 

Proceeds from the exercise of stock options and employee stock purchases

 

 

514

 

 

5,674

 

 

Net cash provided by financing activities

 

 

514

 

 

226,898

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

254

 

 

72

 

 

Increase (decrease) in cash and cash equivalents

 

 

(90,084)

 

 

59,863

 

 

Cash and cash equivalents at beginning of period

 

 

464,198

 

 

216,186

 

 

Cash and cash equivalents at end of period

 

$

374,114

 

$

276,049

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

 

 

Cash paid for interest

 

$

3,594

 

$

3,594

 

 

Non-cash investing and financing activities:

 

 

  

 

 

  

 

 

Vesting of restricted stock units

 

$

6,409

 

$

2,534

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CLOVIS ONCOLOGY, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of Business and Basis of Presentation

 

Clovis Oncology, Inc. (together with its consolidated subsidiaries, the “Company”, “Clovis”, “we”, “our”, “us”) is a biopharmaceutical company focused on acquiring, developing and commercializing innovative anti-cancer agents in the United States, Europe and additional international markets. We target our development programs for the treatment of specific subsets of cancer populations, and simultaneously develop, with partners, diagnostic tools intended to direct a compound in development to the population that is most likely to benefit from its use. We have and intend to continue to license or acquire rights to oncology compounds in all stages of clinical development. In exchange for the right to develop and commercialize these compounds, we generally expect to provide the licensor with a combination of upfront payments, milestone payments and royalties on future sales. In addition, we generally expect to assume the responsibility for future drug development and commercialization costs. We currently operate in one segment. Since inception, our operations have consisted primarily of developing in-licensed compounds, evaluating new product acquisition candidates and general corporate activities.

 

Our marketed product Rubraca® (rucaparib) is approved in the United States by the Food and Drug Administration (“FDA”) for the treatment of adult patients with deleterious BRCA (human genes associated with the repair of damaged DNA) mutation (germline and/or somatic) epithelial ovarian, fallopian tube, or primary peritoneal cancer who have been treated with two or more chemotherapies, and selected for therapy based on an FDA-approved companion diagnostic for Rubraca. We launched Rubraca in the United States in December 2016.

 

On April 6, 2018, the FDA approved Rubraca for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy. The FDA granted regular approval for Rubraca in this second, broader and earlier-line indication on a priority review timeline based on positive data from the phase 3 ARIEL3 clinical trial. Diagnostic testing is not required for patients to be prescribed Rubraca in this maintenance treatment indication.

 

In March 2018, the Committee for Medicinal Products for Human Use (“CHMP”) of the European Union’s European Medicines Agency (“EMA”) adopted a positive opinion recommending the granting of a conditional marketing authorization for Rubraca as monotherapy treatment of adult patients with platinum sensitive, relapsed or progressive, BRCA mutated (germline and/or somatic), high-grade epithelial ovarian, fallopian tube, or primary peritoneal cancer, who have been treated with two or more prior lines of platinum based chemotherapy, and who are unable to tolerate further platinum based chemotherapy. We anticipate receiving a formal marketing authorization from the European Commission for Rubraca for this indication in the second quarter of 2018. As this is a conditional approval, it will be necessary to complete confirmatory post marketing commitments, including ensuring that sufficient partially platinum sensitive patients are enrolled in our ARIEL4 confirmatory trial to support the indication. This may require enrollment of additional patients into the study, increasing its overall size and extending the time for enrollment. In the event of such an approval from the European Commission for this treatment indication, we intend to submit to the EMA a variation to the marketing authorization for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy, for which we anticipate a CHMP opinion may come during the fourth quarter of 2018. 

 

In addition to Rubraca, we have two other product candidates: lucitanib, an oral, potent inhibitor of the tyrosine kinase activity of vascular endothelial growth factor receptors 1 through 3 (VEGFR1-3), platelet-derived growth factor receptors alpha and beta (PDGFR α/β) and fibroblast growth factor receptors 1 through 3 (FGFR1-3), and rociletinib, an oral mutant-selective inhibitor of epidermal growth factor receptor (“EGFR”). While we have stopped enrollment in ongoing trials for each of these candidates, we continue to provide drug to patients whose clinicians recommend continuing therapy. We maintain certain development and commercialization rights for lucitanib and global development and commercialization rights for rociletinib.

 

Lucitanib was originally developed by Clovis and Servier with the hypothesis of activity in FGFR driven tumors; however, data in breast and lung cancer were insufficient to move the program forward. We have received notice from Servier of termination of their rights to lucitanib, resulting in the return of global rights (excluding China) for lucitanib to us later in 2018. We believe that recent data for a drug similar to lucitanib that inhibits these same pathways – when

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combined with a PD-1 inhibitor – provide support for development of lucitanib in combination with a PD(L)-1 inhibitor, and we are exploring a study of the combination. We also intend to initiate a study of lucitanib in combination with Rubraca, based on encouraging data of VEGF and PARP inhibitors in combination.  Each of these studies is expected to initiate by the end of 2018 or in the first quarter of 2019.

 

Basis of Presentation

 

All financial information presented includes the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The unaudited financial statements of Clovis Oncology, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the periods presented herein. Interim results may not be indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”) for a broader discussion of our business and the opportunities and risks inherent in such business.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and revenue and related disclosures. On an ongoing basis, we evaluate our estimates, including estimates related to revenue deductions, intangible asset impairment, clinical trial accruals and share-based compensation expense. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

 

Liquidity

 

We have incurred significant net losses since inception and have relied on our ability to fund our operations through debt and equity financings. We expect operating losses and negative cash flows to continue for the foreseeable future. As we continue to incur losses, transition to profitability is dependent upon achieving a level of revenues from Rubraca adequate to support our cost structure. We may never achieve profitability, and unless or until we do, we will continue to need to raise additional cash.

 

In April 2018, we sold 1,837,898 shares of our common stock in a public offering at $54.41 per share. The net proceeds from the offering were approximately $94 million, after deducting underwriting discounts and commissions and offering expenses. Concurrently, we completed the public offering of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025. The net proceeds from this offering were approximately $292 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds of the offerings for general corporate purposes, including sales and marketing expenses associated with Rubraca in the United States and, if approved by the European Commission, in Europe, funding of our development programs, general and administrative expenses, acquisition or licensing of additional product candidates or businesses and working capital. Based on current estimates, we believe that our existing cash, cash equivalents and available-for-sale securities will allow us to fund our operating plan through at least the next 12 months.

 

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2. Summary of Significant Accounting Policies

 

Recently Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers”, and has subsequently issued several supplemental and/or clarifying ASUs (collectively, “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. ASC 606 is intended to provide a more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability.  Adoption of ASC 606 is required for annual and interim periods beginning after December 15, 2017. Upon adoption, we must elect to adopt either retrospectively to each prior reporting period presented or use the modified retrospective transition method with the cumulative effect of initial adoption recognized at the date of initial application. We adopted the new standard using the modified retrospective method on January 1, 2018 for contracts that are not completed as of the adoption date.

 

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

   

We have examined our revenue recognition policy specific to revenue streams from representative contracts governing product sales from Rubraca and have come to conclusions on the impact of the new standard using the 5-step process prescribed by ASC 606. We have reviewed a representative sample of contracts, including our collaboration agreements with Servier and Bristol-Myers Squibb, and determined the potential impact to our accounting policies, financial controls and operations. Our conclusions include recognizing revenue on product sales once the product is sold to the specialty distributor and specialty pharmacy providers.

 

As noted above, we used the modified retrospective method to adopt the new standard. This means that we did not restate previously issued financial statements, but we recorded a one-time adjustment to retained earnings of $2.4 million. This adjustment represents the sales of our product to our customers prior to January 1, 2018, that have not been sold to patients or healthcare providers, offset by related gross-to-net adjustments and other direct costs, including royalties and sales incentive compensation.

 

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at

    

Adjustments due to

    

Balance at

 

 

December 31, 2017

 

Adoption of ASC 606

 

January 1, 2018

ASSETS

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

6,181

 

$

3,336

 

$

9,517

Inventories

 

$

27,508

 

 

(62)

 

$

27,446

    Total assets

 

$

735,230

 

$

3,274

 

$

738,504

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Other accrued expenses

 

$

25,883

 

$

918

 

$

26,801

Accumulated deficit

 

$

(1,477,440)

 

 

2,356

 

$

(1,475,084)

    Total liabilities and stockholders' equity

 

$

735,230

 

$

3,274

 

$

738,504

 

Previously, we recognized revenue on product sales once the product was sold to the patient or healthcare provider by the specialty distributor or specialty pharmacy provider, i.e. when product is sold through the channel. Effective January 1, 2018, we began recognizing revenue when our customers, the specialty distributors and specialty pharmacy providers, take control of our product or when product is sold into the channel. This will have the impact of us recognizing revenue approximately two to four weeks earlier than before adopting the new standard and will also increase the significance of estimating variable consideration. The impact of adoption on our consolidated statement of

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operations and comprehensive loss and consolidated balance sheet for the quarter ended March 31, 2018 was as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Balances without

    

Effect of Change

 

 

As reported

 

Adoption of ASC 606

 

Higher/(Lower)

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

Product revenue

 

$

18,523

 

$

17,956

 

$

567

Cost of sales - product

 

$

4,006

 

$

3,541

 

$

465

Selling, general and administrative

 

$

39,274

 

$

39,234

 

$

40

Net loss

 

$

(77,694)

 

$

(77,756)

 

$

(62)

 

 

 

 

 

 

 

 

 

 

Loss per basic and diluted common share:

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(1.54)

 

$

(1.54)

 

$

(0.00)

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED BALANCE SHEET

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

12,936

 

$

12,322

 

$

614

Inventories

 

$

69,192

 

$

69,559

 

$

(367)

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Other accrued expenses

 

$

27,306

 

$

27,120

 

$

186

Accumulated deficit

 

$

(1,552,778)

 

$

(1,552,840)

 

$

(62)

 

ASC 606 did not have an aggregate impact on our net cash provided by operating activities, but resulted in offsetting changes in certain assets and liabilities presented within net cash used in operating activities in our consolidated statement of cash flows, as reflected in the above tables.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which we would be required to apply modification accounting under ASC 718. Specifically, we would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective for us on January 1, 2018 and the adoption resulted in no change to our consolidated financial statements and related disclosures.

 

Recently Issued Accounting Standards

 

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an ASU.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

 

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Revenue Recognition

 

We are currently approved to sell Rubraca in the United States market. We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers.  Our customers subsequently sell our products to patients and health care providers.  Separately, we have arrangements with certain payors and other third-parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. 

 

Product Revenue

 

We are currently approved to sell Rubraca in the United States market.  We distribute our product principally through a limited number of specialty distributor and specialty pharmacy providers, collectively, our customers.  Our customers subsequently sell our products to patients and health care providers.  Separately, we have arrangements with certain payors and other third-parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. 

 

Revenue from product sales are recognized when the performance obligation is satisfied, which is when customers obtain control of our product at a point in time, typically upon delivery. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.

 

Reserves for Variable Consideration

   

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from rebates, chargebacks, discounts, co-pay assistance, estimated product returns and other allowances that are offered within contracts between us and our customers, health care providers, payors and other indirect customers relating to the sales of our product.  These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customers) or a current liability (if the amount is payable to a party other than a customer).  Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.  Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract.  The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  Actual amounts of consideration ultimately received may differ from our estimates.  If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known.

 

Rebates. Rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare coverage gap program. Rebates are amounts owed after the final dispensing of products to a benefit plan participant and are based upon contractual agreements or legal requirements with the public-sector benefit providers. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. The accrual for rebates is based on statutory discount rates and known sales to specialty pharmacy patients, or expected utilization for specialty distributor sales to healthcare providers. As we gain more historical experience, the accrual will be based solely on the expected utilization from historical data we have accumulated since the Rubraca product launch. Rebates are generally invoiced and paid quarterly in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known or estimated prior quarters’ unpaid rebates.

 

Chargebacks. Chargebacks are discounts that occur when contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service organizations and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty distributors at a discounted price. The specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the healthcare provider. These reserves are established in the same

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period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for specialty distributor chargebacks is estimated based on known chargeback rates and known sales to specialty distributors adjusted for the estimated utilization by healthcare providers.

 

Discounts and Fees. Our payment terms are approximately 30 days. Specialty distributors and specialty pharmacies are offered various forms of consideration, including service fees and prompt pay discounts for payment within a specified period. We expect these customers will earn prompt pay discounts and therefore, we deduct the full amount of these discounts and service fees from product sales when revenue is recognized.

 

Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. The intent of this program is to reduce the patient’s out of pocket costs. Liabilities for co-pay assistance are based on actual program participation provided by third-party administrators at month end.

     

Returns. Consistent with industry practice, we generally offer customers a right of return limited only to product that will expire in six months or product that is six months beyond the expiration date. To date, we have had minimal product returns and we currently do not have an accrual for product returns. We will continue to assess our estimate for product returns as we gain additional historical experience.

 

Cost of Sales – Product

 

Product cost of sales consists primarily of materials, third-party manufacturing costs as well as freight and royalties owed to our licensing partners for Rubraca sales.

 

Cost of Sales – Intangible Asset Amortization

 

Cost of sales for intangible asset amortization consists of the amortization of capitalized milestone payments made to our licensing partners upon FDA approval of Rubraca. Milestone payments are amortized on a straight-line basis over the estimated remaining patent life of Rubraca.

 

Inventory

 

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out (“FIFO”) basis. We began capitalizing incurred inventory related costs upon the regulatory approval of Rubraca. Prior to the regulatory approval of Rubraca, we incurred costs for the manufacture of the drug that could potentially be available to support the commercial launch of Rubraca and all such costs were recognized as research and development expense. We periodically analyze our inventory levels, and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and/or inventory in excess of expected sales requirements as cost of product revenues. Expired inventory would be disposed of and the related costs would be written off as cost of product revenues. 

 

The active pharmaceutical ingredient (“API”) in Rubraca is currently produced by a single supplier. As the API has undergone significant manufacturing specific to its intended purpose at the point it is purchased by us, we classify the API as work-in-process inventory.     

 

Our other significant accounting policies are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in our 2017 Form 10-K.

 

3. Financial Instruments and Fair Value Measurements

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

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The three levels of inputs that may be used to measure fair value include:

 

Level 1:

Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets consist of money market investments. We do not have Level 1 liabilities.

 

 

Level 2:

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets consist of U.S. treasury securities. We do not have Level 2 liabilities.

 

 

Level 3:

Unobservable inputs that are supported by little or no market activity. We do not have Level 3 assets or liabilities that are measured at fair value on a recurring basis.

 

The following table identifies our assets and liabilities that were measured at fair value on a recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

Level 1

    

Level 2

    

Level 3

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

294,559

 

$

294,559

 

$

 —

 

$

 —

 

U.S. treasury securities

 

 

89,697

 

 

 —

 

 

89,697

 

 

 —

 

Total assets at fair value

 

$

384,256

 

$

294,559

 

$

89,697

 

$

 —

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

433,136

 

$

433,136

 

$

 —

 

$

 —

 

U.S. treasury securities

 

 

99,533

 

 

 —

 

 

99,533

 

 

 —

 

Total assets at fair value

 

$

532,669

 

$

433,136

 

$

99,533

 

$

 —

 

 

There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the three months ended March 31, 2018.

 

Financial instruments not recorded at fair value include our convertible senior notes. At March 31, 2018, the carrying amount of the convertible senior notes was $282.7 million, which represents the aggregate principal amount net of remaining debt issuance costs, and the fair value was $335.5 million. The fair value was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of these notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. See Note 9, Convertible Senior Notes for discussion of the convertible senior notes.

 

4. Available-for-Sale Securities

 

As of March 31, 2018, available-for-sale securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

Aggregate

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. treasury securities

 

$

89,821

 

$

 —

 

$

(124)

 

$

89,697

 

 

As of December 31, 2017, available-for-sale securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

Aggregate

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. treasury securities

 

$

99,650

 

$

 —

 

$

(117)

 

$

99,533

 

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As of March 31, 2018, there were no available-for-sale securities that have been in a continuous unrealized loss position for less than 12 months.

 

As of March 31, 2018, the amortized cost and fair value of available-for-sale securities by contractual maturity were (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

Due in one year or less

 

$

89,821

 

$

89,697

 

Due in one year to two years

 

 

 —

 

 

 —

 

Total

 

$

89,821

 

$

89,697

 

 

 

 

5. Inventories

 

The following table presents inventories as of March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

    

2018

    

2017

Work-in-process

 

$

67,437

 

$

24,721

Finished goods

 

 

1,755

 

 

2,787

Total inventories

 

$

69,192

 

$

27,508

 

Some of the costs related to our finished goods on-hand as of March 31, 2018 were expensed as incurred prior to the commercialization of Rubraca on December 19, 2016.

 

At March 31, 2018, deposit on inventory on the Consolidated Balance Sheets is a cash deposit of $9.3 million made to a manufacturer for the purchase of work-in-process inventory which we expect to be converted to finished goods beyond the next twelve months.

 

6. Other Current Assets

 

Other current assets were comprised of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Prepaid insurance

 

$

1,427

 

$

1,926

 

Prepaid expenses - other

 

 

5,684

 

 

3,355

 

Receivable - other

 

 

1,780

 

 

2,023

 

Other

 

 

224

 

 

196

 

Total

 

$

9,115

 

$

7,500

 

 

 

 

 

 

 

7. Intangible Assets and Goodwill

 

Intangible assets related to capitalized milestones under license agreements consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2018

    

2017

Intangible asset - milestones

 

$

21,100

 

$

21,100

Accumulated amortization

 

 

(1,911)

 

 

(1,539)

Total intangible asset, net

 

$

19,189

 

$

19,561

  

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The estimated useful lives of these intangible assets are based on the estimated remaining patent life of Rubraca and extend through 2031.

 

We recorded amortization expense of $0.4 million and $0.4 million related to capitalized milestone payments during the three months ended March 31, 2018 and March 31, 2017, respectively, included in cost of sales – intangible asset amortization on the Consolidated Statements of Operations and Comprehensive Loss.

 

Estimated future amortization expense associated with intangibles is expected to be as follows (in thousands):

 

 

 

 

 

 

 

 

2018

 

 

 

 

$

1,114

2019

 

 

 

 

 

1,486

2020

 

 

 

 

 

1,486

2021

 

 

 

 

 

1,486

2022

 

 

 

 

 

1,486

Thereafter

 

 

 

 

 

12,131

 

 

 

 

 

$

19,189

 

The change in goodwill established as part of the purchase accounting of EOS in November 2013 consisted of the following (in thousands):

 

 

 

 

 

 

Balance at December 31, 2017

 

$

65,217

 

Change in foreign currency gains and losses

 

 

1,743

 

Balance at March 31, 2018

 

$

66,960

 

 

 

8. Other Accrued Expenses

 

Other accrued expenses were comprised of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Accrued personnel costs

 

$

7,381

 

$

13,889

 

Accrued interest payable

 

 

299

 

 

2,096

 

Income tax payable

 

 

45

 

 

 —

 

Accrued corporate legal fees and professional services

 

 

137

 

 

415

 

Accrued royalties

 

 

4,025

 

 

2,984

 

Accrued variable considerations

 

 

1,391

 

 

1,008

 

Payable to third party logistics provider

 

 

2,661

 

 

2,661

 

Accrued legal settlement cost

 

 

7,975

 

 

 —

 

Accrued expenses - other

 

 

3,392

 

 

2,830

 

Total

 

$

27,306

 

$

25,883

 

 

 

9. Convertible Senior Notes

 

On September 9, 2014, we completed a private placement of $287.5 million aggregate principal amount of 2.5% convertible senior notes due 2021 (the “2021 Notes”) resulting in net proceeds of $278.3 million after deducting offering expenses. In accordance with the accounting guidance, the conversion feature did not meet the criteria for bifurcation, and the entire principal amount was recorded as a long-term liability on the Consolidated Balance Sheets.

 

The 2021 Notes are governed by the terms of the indenture between the Company, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2021 Notes are senior unsecured obligations and bear interest at a rate of 2.5% per year, payable semi-annually in arrears on March 15 and September 15 of each year. The 2021 Notes will mature on September 15, 2021, unless earlier converted, redeemed or repurchased.

 

Holders may convert all or any portion of the 2021 Notes at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the holders will receive shares of our common stock at an initial conversion rate of 16.1616 shares per $1,000 in principal amount of 2021 Notes, equivalent to a conversion

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price of approximately $61.88 per share. The conversion rate is subject to adjustment upon the occurrence of certain events described in the indenture, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or upon our issuance of a notice of redemption, we will increase the conversion rate for holders who elect to convert the 2021 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

 

On or after September 15, 2018, we may redeem the 2021 Notes, at our option, in whole or in part, if the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending not more than two trading days preceding the date on which we provide written notice of redemption at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2021 Notes.

 

If we undergo a fundamental change, as defined in the indenture, prior to the maturity date of the 2021 Notes, holders may require us to repurchase for cash all or any portion of the 2021 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

 

The 2021 Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2021 Notes; equal in right of payment to all of our liabilities that are not so subordinated; effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

 

In connection with the issuance of the 2021 Notes, we incurred $9.2 million of debt issuance costs. The debt issuance costs are presented as a deduction from the convertible senior notes on the Consolidated Balance Sheets and are amortized as interest expense over the expected life of the 2021 Notes using the effective interest method. We determined the expected life of the debt was equal to the seven-year term of the 2021 Notes. As of March 31, 2018 and December 31, 2017, the balance of unamortized debt issuance costs was $4.8 million and $5.1 million, respectively.

 

The following table sets forth total interest expense recognized during the three months ended March 31, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2018

    

2017

 

Contractual interest expense

 

$

1,797

 

$

1,797

 

Accretion of interest on milestone liability

 

 

512

 

 

467

 

Amortization of debt issuance costs

 

 

326

 

 

317

 

Total interest expense

 

$

2,635

 

$

2,581

 

 

In April 2018, we completed the public offering of $300.0 million aggregate principal amount of 1.25% convertible senior notes due 2025. The net proceeds from this offering were approximately $292 million, after deducting underwriting discounts and commissions and offering expenses.

 

10. Stockholders’ Equity

 

Common Stock

 

In April 2018, we sold 1,837,898 shares of our common stock in a public offering at $54.41 per share. The net proceeds from the offering were approximately $94 million, after deducting underwriting discounts and commissions and offering expenses.

 

The holders of common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors.

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Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss consists of changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency, and unrealized gains and losses on available-for-sale securities.

 

The changes in accumulated balances related to each component of other comprehensive income (loss) are summarized for the three months ended March 31, 2018 and 2017, as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized

 

Total Accumulated

 

 

 

Translation Adjustments

 

(Losses) Gains

 

Other Comprehensive Loss

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Balance at December 31,

 

$

(41,917)

 

$

(47,434)

 

$

(256)

 

$

(146)

 

$

(42,173)

 

$

(47,580)

 

Other comprehensive income (loss)

 

 

1,991

 

 

735

 

 

(7)

 

 

(5)

 

 

1,984

 

 

730

 

Total before tax

 

 

(39,926)

 

 

(46,699)

 

 

(263)

 

 

(151)

 

 

(40,189)

 

 

(46,850)

 

Tax effect

 

 

(474)

 

 

(268)

 

 

 2

 

 

 —

 

 

(472)

 

 

(268)

 

Balance at March 31, 

 

$

(40,400)

 

$

(46,967)

 

$

(261)

 

$

(151)

 

$

(40,661)

 

$

(47,118)

 

 

The period change between December 31, 2017 and March 31, 2018 was primarily due to the currency translation of the goodwill and deferred income taxes associated with the acquisition of EOS in November 2013. There were no reclassifications out of accumulated other comprehensive loss in each of the three months ended March 31, 2018 and 2017.

 

11. Share-Based Compensation

 

Share-based compensation expense for all equity based programs, including stock options, restricted stock units and the employee stock purchase plan, for the three months ended March 31, 2018 and 2017 was recognized in the accompanying Consolidated Statements of Operations as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

    

2018

    

2017

 

 

Research and development

 

$

5,376

 

$

4,167

 

 

Selling, general and administrative

 

 

6,537

 

 

4,780

 

 

Total share-based compensation expense

 

$

11,913

 

$

8,947

 

 

 

We did not recognize a tax benefit related to share-based compensation expense during the three months ended March 31, 2018 and 2017, respectively, as we maintain net operating loss carryforwards and have established a valuation allowance against the entire net deferred tax asset as of March 31, 2018.

 

Stock Options

 

The following table summarizes the activity relating to our options to purchase common stock for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted