tsro_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

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 001-35587

 

TESARO, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

27-2249687

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

1000 Winter Street

 

 

Waltham, Massachusetts

 

02451

(Address of Principal Executive Offices)

 

(Zip Code)

 

(339) 970-0900

(Registrant’s Telephone Number, Including Area Code)

 

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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a 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 ☒

 

As of April 30, 2018, there were 54,823,563 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

 

 

 

 


 

Table of Contents

TESARO, INC.

FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2018

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I. 

FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (unaudited)

3

 

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

3

 

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

4

 

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

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

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

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4. 

Controls and Procedures

31

 

 

 

PART II. 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

32

Item 1A. 

Risk Factors

32

Item 6. 

Exhibits

35

 

 

 

SIGNATURES 

36

 

 

CERTIFICATIONS

 

 

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PART IFINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

TESARO, INC.

Condensed Consolidated Balance Sheets

(all amounts in 000’s, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

December 31,

    

March 31,

    

 

 

2017

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

643,095

 

$

498,980

 

Accounts receivable

 

 

53,416

 

 

44,182

 

Inventories

 

 

57,939

 

 

74,444

 

Other current assets

 

 

33,511

 

 

38,184

 

Total current assets

 

 

787,961

 

 

655,790

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

56,384

 

 

54,947

 

Property and equipment, net

 

 

9,652

 

 

10,272

 

Restricted cash

 

 

2,552

 

 

2,556

 

Other assets

 

 

5,636

 

 

6,127

 

Total assets

 

$

862,185

 

$

729,692

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,172

 

$

5,079

 

Accrued expenses

 

 

154,808

 

 

150,589

 

Deferred revenue, current

 

 

324

 

 

117

 

Other current liabilities

 

 

6,902

 

 

7,451

 

Total current liabilities

 

 

166,206

 

 

163,236

 

 

 

 

 

 

 

 

 

Convertible notes, net

 

 

143,446

 

 

146,529

 

Long-term debt, net

 

 

293,659

 

 

293,888

 

Deferred revenue, non-current

 

 

211

 

 

188

 

Other non-current liabilities

 

 

9,577

 

 

8,123

 

Total liabilities

 

 

613,099

 

 

611,964

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized at both December 31, 2017 and March 31, 2018; no shares issued or outstanding at both December 31, 2017 and March 31, 2018

 

 

 

 

 —

 

Common stock, $0.0001 par value; 100,000,000 shares authorized at both December 31, 2017 and March 31, 2018; 54,464,039 and 54,801,636 shares issued and outstanding at December 31, 2017 and March 31, 2018, respectively

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

1,724,850

 

 

1,755,783

 

Accumulated other comprehensive loss

 

 

(5,882)

 

 

(5,357)

 

Accumulated deficit

 

 

(1,469,887)

 

 

(1,632,703)

 

Total stockholders’ equity

 

 

249,086

 

 

117,728

 

Total liabilities and stockholders’ equity

 

$

862,185

 

$

729,692

 

 

See accompanying notes to condensed consolidated financial statements.

 

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TESARO, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(all amounts in 000’s, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2018

    

Revenues:

 

 

 

 

 

 

 

Product revenue, net

 

$

2,139

 

$

50,172

 

License, collaboration and other revenues

 

 

934

 

 

(430)

 

Total revenues

 

 

3,073

 

 

49,742

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Cost of sales – product

 

 

444

 

 

9,997

 

Cost of sales – intangible asset amortization

 

 

490

 

 

1,437

 

Research and development

 

 

66,122

 

 

96,755

 

Selling, general and administrative

 

 

69,262

 

 

93,607

 

Acquired in-process research and development

 

 

 —

 

 

 —

 

Total expenses

 

 

136,318

 

 

201,796

 

Loss from operations

 

 

(133,245)

 

 

(152,054)

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,267)

 

 

(12,092)

 

Interest income

 

 

841

 

 

1,665

 

Other income

 

 

 —

 

 

81

 

Loss before income taxes

 

 

(136,671)

 

 

(162,400)

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

54

 

 

416

 

 

 

 

 

 

 

 

 

Net loss

 

$

(136,725)

 

$

(162,816)

 

 

 

 

 

 

 

 

 

Net loss per share applicable to common stockholders - basic and diluted

 

$

(2.55)

 

$

(2.98)

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted

 

 

53,685

 

 

54,615

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

Net loss

 

$

(136,725)

 

$

(162,816)

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized gain on pension obligation

 

 

45

 

 

63

 

Foreign currency translation adjustments

 

 

35

 

 

462

 

Other comprehensive income

 

 

80

 

 

525

 

Comprehensive loss

 

$

(136,645)

 

$

(162,291)

 

 

See accompanying notes to condensed consolidated financial statements.

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TESARO, INC.

Condensed Consolidated Statements of Cash Flows

(all amounts in 000’s)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2018

    

 

 

(as revised)

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(136,725)

 

$

(162,816)

 

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

954

 

 

2,455

 

Stock-based compensation expense

 

 

18,401

 

 

26,128

 

Non-cash interest expense

 

 

2,757

 

 

3,312

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

134

 

 

9,287

 

Inventories

 

 

(179)

 

 

(16,200)

 

Other assets

 

 

(3,345)

 

 

(4,731)

 

Accounts payable

 

 

5,119

 

 

895

 

Accrued expenses

 

 

(1,847)

 

 

(4,834)

 

Deferred revenues

 

 

(22)

 

 

(230)

 

Other liabilities

 

 

172

 

 

(898)

 

Net cash used in operating activities

 

 

(114,581)

 

 

(147,632)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,790)

 

 

(1,619)

 

Net cash used in investing activities

 

 

(1,790)

 

 

(1,619)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from sale of common stock, net of issuance costs

 

 

(8)

 

 

 —

 

Proceeds from exercise of stock options and Employee Stock Purchase Plan

 

 

3,323

 

 

4,497

 

Net cash provided by financing activities

 

 

3,315

 

 

4,497

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

45

 

 

651

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(113,011)

 

 

(144,103)

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

787,866

 

 

645,954

 

Cash, cash equivalents, and restricted cash at end of period

 

$

674,855

 

$

501,851

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Stock option exercise proceeds receivable as of period end

 

$

103

 

$

 —

 

Leasehold improvement assets funded by lessor

 

$

585

 

$

 —

 

Purchase of property and equipment - cash not paid as of period end

 

$

301

 

$

56

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,019

 

$

12,274

 

Milestone obligation not paid as of period end

 

$

24,790

 

$

 —

 

Income taxes paid

 

$

176

 

$

80

 

 

The following table presents the line items and amounts of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

2017

    

2018

Cash and cash equivalents

 

$

643,095

 

$

498,980

Restricted cash included in other current assets

 

 

307

 

 

315

Restricted cash, noncurrent

 

 

2,552

 

 

2,556

Total cash, cash equivalents and restricted cash

 

$

645,954

 

$

501,851

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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TESARO, INC.

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Description of Business

 

TESARO, Inc., or the Company or TESARO, was incorporated in Delaware and commenced operations in 2010. Headquartered in Waltham, Massachusetts, TESARO is a commercial-stage biopharmaceutical company devoted to providing transformative therapies to people bravely facing cancer.  TESARO’s primary focus is to develop treatments for solid tumors using various approaches, including small molecules and immuno-oncology antibodies, as monotherapies and in combinations.  The Company has in-licensed and is developing several oncology-related product candidates, and has entered into several research collaborations with third parties for the discovery of new candidates.    The Company operates in one segment.    The Company is subject to a number of risks, including dependence on key individuals, regulatory and manufacturing risks, the need to develop additional commercially viable products, risks associated with competitors, many of which are larger and better capitalized, risks related to intellectual property, and the need to obtain adequate additional financing to fund the development and potential commercialization of its product candidates and further its in-licensing and acquisition activities.

 

The Company’s two currently marketed products, ZEJULA® and VARUBI®/VARUBY®, are approved in both the U.S. and the European Union, or EU.  ZEJULA is approved as a maintenance treatment of adults with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy.  VARUBI/VARUBY is approved for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  The Company has determined that it will cease marketing and distribution of the intravenous, or IV, formulation of VARUBI and intends to pursue strategic alternatives for the VARUBI brand.

 

The Company has incurred significant operating losses since inception and has relied on its ability to fund its operations through private and public equity and debt financings and to a lesser extent through product sales and license and collaboration arrangements.  Management expects operating losses and negative operating cash flows to continue for the foreseeable future.  As the Company continues to incur losses, the transition to profitability is dependent upon the successful development, approval, and commercialization of its products and product candidates and the achievement of a level of revenues adequate to support its cost structure.  The Company believes that its currently available funds, including an additional draw under the Company’s term loan agreement, in addition to cash generated from sales of its products will be sufficient to fund the Company’s operations through at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q.  Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties.  If actual results are different from management’s estimates, the Company may need to seek additional funding.

 

2.  Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited and have been prepared by TESARO in conformity with accounting principles generally accepted in the United States of America, or GAAP. 

 

The Company’s condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.  The Company currently operates in one business segment, which is the identification, acquisition, development and commercialization of oncology-related therapeutics, and has a single reporting and operating unit structure.

 

Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted.  These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended March 31, 2017 and 2018.

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The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.  These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2017 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2018 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2017 Annual Report on Form 10-K and are updated below as necessary.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, other comprehensive income (loss) and the related disclosures.  Significant estimates in these condensed consolidated financial statements include estimates made in connection with accrued research and development expenses, stock-based compensation expense, revenue, valuation of convertible notes, inventory, intangible assets and related amortization.  The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances.  Actual results may differ from those estimates or assumptions.

 

Fair Value of Financial Instruments

 

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values.  The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs.  The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of investment credit quality.  The hierarchy defines three levels of valuation inputs:

 

Level 1 inputs      Quoted prices in active markets for identical assets or liabilities

 

Level 2 inputs      Observable inputs other than Level 1 inputs, including quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active

 

Level 3 inputs     Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

 

The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of December 31, 2017 and March 31, 2018 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Description

    

Balance Sheet Classification

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Cash and cash equivalents

 

$

593,955

 

$

593,955

 

$

 —

 

$

 —

 

Total assets

 

 

 

$

593,955

 

$

593,955

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

Description

    

Balance Sheet Classification

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Cash and cash equivalents

 

$

403,121

 

$

403,121

 

$

 

$

 

Total assets

 

 

 

$

403,121

 

$

403,121

 

$

 —

 

$

 —

 

 

The carrying amounts of accounts payable and accrued expenses approximate their fair values due to their short-term maturities.

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In September 2014, the Company issued $201.3 million aggregate principal amount of 3.00% convertible senior notes due October 1, 2021, or the Convertible Notes.  Interest is payable semi-annually in arrears on April 1 and October 1 of each year.  As of March 31, 2018, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $146.5 million and the estimated fair value of the principal amount was $369.0 million.  As of March 31, 2018, the carrying value of the Company’s borrowing under its term loan agreement approximated its fair value.  The Convertible Notes and the term loan agreement are discussed in more detail in Note 5, “Debt”.

 

Revenue Recognition

 

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.  To determine revenue recognition, the Company 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 Company satisfies a performance obligation.  The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  For a further discussion of accounting for net product revenue and license, collaboration and other revenues, see Note 11, “Revenue Recognition”.

 

Intangible Assets

 

The Company maintains definite-lived intangible assets related to milestone payments made to third parties subsequent to regulatory approval for acquired and in-licensed product candidates.  These assets are amortized over their remaining useful lives, which are generally estimated to be the remaining patent life.  If the Company’s estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used.  Intangible assets are amortized using the economic consumption method if anticipated future revenues can be reasonably estimated.  The straight-line method is used when future revenues cannot be reasonably estimated, with a cumulative catch-up of amortization expense for milestone payments that do not result in additional intellectual property rights and/or incremental cash flows.  Amortization expense is recorded as a component of cost of sales in the condensed consolidated statements of operations and comprehensive loss.

 

The Company assesses its intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist.  Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate or new information regarding potential sales for the drug.  If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the condensed consolidated balance sheet.  If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value.

 

Comprehensive Loss

 

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss includes foreign currency translation adjustments and unrealized gains

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and losses on pension obligations.  The following table presents changes in the components of accumulated other comprehensive loss (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

Unrealized loss on pension liability

 

 

Total

Balance at December 31, 2016

$

(142)

 

$

(2,782)

 

$

(2,924)

Other comprehensive (loss) income

 

35

 

 

45

 

 

80

Balance at March 31, 2017

$

(107)

 

$

(2,737)

 

$

(2,844)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

259

 

$

(6,141)

 

$

(5,882)

Other comprehensive (loss) income

 

462

 

 

63

 

 

525

Balance at March 31, 2018

$

721

 

$

(6,078)

 

$

(5,357)

 

New Accounting Pronouncements - Recently Adopted

 

In August 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-15, which is intended to simplify and clarify how certain transactions are classified in the statement of cash flows, and to reduce diversity in practice for such transactions.  This ASU addresses eight specific issues regarding classification of cash flows.  The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company adopted this ASU effective January 1, 2018.  The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements and related disclosures. 

 

In October 2016, the FASB issued ASU No. 2016-16, which removes the prohibition in ASC Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory.  As a result, the income tax consequences from the intra-entity transfer of an asset, other than inventory, and associated changes to deferred taxes will be recognized when the transfer occurs.  The Company adopted this new standard effective January 1, 2018 using the modified retrospective method.  Upon adoption, the Company recorded a deferred tax asset and corresponding valuation allowance of $52.7 million.  There was no cumulative effect adjustment to accumulated deficit as of the beginning of the period of adoption.

 

In November 2016, the FASB issued ASU No. 2016-18, which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows.  ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method to each period presented.  The Company adopted this ASU effective January 1, 2018.  The adoption of this guidance required the following changes and disclosures to the presentation of the condensed consolidated financial statements:

 

·

Cash, cash equivalents and restricted cash and cash equivalents reported on the condensed consolidated statements of cash flows now includes restricted cash and cash equivalents and totals $646.0 million and $501.9 million as of December 31, 2017 and March 31, 2018, respectively.

 

·

Restricted cash generally consists of cash balances held as collateral for the Company’s employee credit card programs.

 

In May 2017, the FASB issued ASU No. 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification.  The new guidance requires modification accounting if the fair value, vesting condition or classification of the award is not the same immediately before and after a change to the terms and conditions of the award.  This ASU is effective on a prospective basis beginning on January 1, 2018, with early adoption permitted.  The Company adopted this ASU effective January 1, 2018, and the adoption did not have an impact on the Company’s condensed consolidated financial statements and related disclosures.

 

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New Accounting Pronouncements – Recently Issued

 

In February 2016, the FASB issued ASU No. 2016-02, a comprehensive new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees and requires lessees to recognize a lease liability and a right-of-use asset for most leases.  This ASU also requires additional disclosures.  The new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.  The new standard must be applied using a modified retrospective transition approach that requires application of the new guidance for all periods presented.  Although its assessment is not complete, the Company currently expects the adoption of this guidance to result in the addition of material balances of leased assets and corresponding lease liabilities to its consolidated balance sheets, primarily relating to leases of office space.

 

 

 

3.  Net Loss per Share

 

Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents.  The Company’s potentially dilutive shares, which include outstanding stock options, Employee Stock Purchase Plan awards, unvested restricted stock units, or RSUs, and shares issuable upon conversion of the Convertible Notes, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

 

The following table presents amounts that were excluded from the calculation of diluted net loss per share, due to their anti-dilutive effect (in thousands):

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2017

    

2018

Outstanding stock options and Employee Stock Purchase Plan

 

7,366

 

8,067

Unvested restricted stock units

 

1,093

 

2,197

Shares issuable upon conversion of Convertible Notes

 

4,186

 

1,441

 

 

12,645

 

11,705

 

In September 2014, the Company issued Convertible Notes, which provide in certain situations for the conversion of the outstanding principal amount of the Convertible Notes into shares of the Company’s common stock at a predefined conversion rate.  See Note 5, “Debt”, for additional information.  In conjunction with the issuance of the Convertible Notes, the Company entered into capped call option transactions, or Capped Calls, with certain counterparties.  The Capped Calls are expected generally to reduce the potential dilution, and/or offset, to an extent, the cash payments the Company may choose to make in excess of the principal amount, upon conversion of the Convertible Notes.

 

As provided by the terms of the indenture underlying the Convertible Notes, the Company has a choice to settle the conversion obligation for the Convertible Notes in cash, shares or any combination of the two.  The Company currently intends to settle the par value of the Convertible Notes in cash and any excess conversion premium in shares.  Accordingly, the par value of the Convertible Notes will not be included in the calculation of diluted net income per share, but the dilutive effect of the conversion premium will be considered in the calculation of diluted net income per share using the treasury stock method.  The share figures in the table above represent the estimated incremental shares that would be issued, after consideration of the Capped Calls, assuming conversion of all of the outstanding Convertible Notes as of March 31, 2017 and 2018.

 

4. Inventories

 

The following table presents inventories as of December 31, 2017 and March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

    

2017

    

2018

Raw materials

 

$

17,876

 

$

22,428

Work in process

 

 

38,629

 

 

50,231

Finished goods

 

 

1,434

 

 

1,785

   Total inventories

 

$

57,939

 

$

74,444

 

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Inventories are related to the Company’s approved products, primarily ZEJULA.  If future sales of ZEJULA or VARUBI are less than expected, the Company may be required to write down the value of such inventories.

 

 

 

5.  Debt

 

Our outstanding debt obligations consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

2017

    

2018

Convertible notes, net

 

$

143,446

 

$

146,529

Term Loan (Tranche A), net

 

 

293,659

 

 

293,888

Total long-term debt

 

$

437,105

 

$

440,417

 

Convertible Notes

 

On September 29, 2014, in a registered underwritten public offering, the Company completed the issuance of $201.3 million aggregate principal amount of Convertible Notes.  In conjunction with the sale of the Convertible Notes, the Company used $20.8 million of the net proceeds to enter into separate Capped Calls.

 

The Convertible Notes bear interest at a rate of 3.00% per annum, payable semi-annually on April 1 and October 1, and will be convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.  The Convertible Notes will mature on October 1, 2021, unless earlier converted or repurchased in accordance with their terms.  Prior to the close of business on the business day immediately preceding April 1, 2021, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods as discussed below, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.  The initial conversion price of the Convertible Notes is approximately $35.13 per share of common stock at an initial conversion rate of 28.4627 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes.

 

The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends.  At any time prior to the close of business on the business day immediately preceding April 1, 2021, holders may convert their Convertible Notes at their option only under the following circumstances:

 

(1)

during any calendar quarter commencing after the calendar quarter ending on December 31, 2014 (and only during such calendar quarter), if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter in which the conversion occurs is greater than 130% of the conversion price on each applicable trading day;

 

(2)

during the five business day period after any ten consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Company’s common stock and the conversion rate on each such trading day; or

 

(3)

upon the occurrence of specified corporate events.

 

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As of March 31, 2018, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $146.5 million and the estimated fair value of the principal amount was $369.0 million.  As provided by the terms of the indenture underlying the Convertible Notes, the Company has a choice to settle the conversion obligation for the Convertible Notes in cash, shares or any combination of the two.  The Company currently intends to settle the par value of the Convertible Notes in cash and any excess conversion premium in shares. 

 

The following table presents total interest expense recognized related to the Convertible Notes during the three months ended March 31, 2017 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2017

    

2018

Contractual interest expense

 

$

1,509

 

$

1,509

Amortization of debt discount

 

 

2,615

 

 

2,953

Amortization of debt issuance costs

 

 

143

 

 

130

Total interest expense

 

$

4,267

 

$

4,592

 

2017 Term Loan Agreement

 

In November 2017, the Company entered into a loan agreement, or the Loan Agreement, with BioPharma Credit PLC and affiliates, or the Lenders.  The Lenders agreed to provide up to an aggregate principal amount of $500.0 million in two tranches, with the first tranche equal to $300.0 million, or Tranche A, and the second in an amount between $50.0 million and $200.0 million at the Company’s discretion, or Tranche B.  The Company drew Tranche A on December 6, 2017 with a maturity date of December 6, 2024.  Tranche B is available for draw at the Company’s option, on 90 days’ notice, from June 30, 2018 until December 20, 2018 and if drawn by the Company, will also have a maturity date of December 6, 2024.  Borrowings under the Tranche A and Tranche B loans bear interest at rates equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of 8% per annum and 7.5% per annum, respectively (with the LIBOR rate subject to a floor of 1% and cap equal to the LIBOR rate as of the Tranche A closing date plus 1.5%).  The loans have an up-front fee of 2% on the funded amount of each tranche, payable at the applicable closing date.

 

The Tranche A loan was recorded on the condensed consolidated balance sheets, net of a debt discount of $6.0 million in upfront fees assessed by the Lenders at the time of borrowing.  The debt discount and deferred financing costs of $0.4 million are being amortized to interest expense using the effective interest method over the same term.  The effective annual interest rate of the outstanding debt under Tranche A loan is approximately 10.0%.  For the three months ended March 31, 2018, the Company recognized $7.5 million of interest expense related to the Tranche A loan, including $0.2 million related to the accretion of debt discount and amortization of deferred financing costs.

 

6.  Accrued Expenses

 

The following table presents the components of accrued expenses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

    

2017

    

2018

 

Research and development

 

$

55,949

 

$

57,285

 

Salaries, bonuses and other compensation

 

 

33,717

 

 

23,625

 

Product revenue allowances

 

 

22,847

 

 

18,590

 

Inventory

 

 

16,469

 

 

28,633

 

Sales and marketing

 

 

6,701

 

 

7,347

 

Royalties

 

 

6,552

 

 

4,982

 

Professional services

 

 

3,944

 

 

3,101

 

Other

 

 

8,629

 

 

7,026

 

Total accrued expenses

 

$

154,808

 

$

150,589

 

 

7.  Stock-Based Compensation

 

The Company maintains several equity compensation plans, including the TESARO, Inc. 2012 Omnibus Incentive Plan, or the 2012 Incentive Plan, the TESARO, Inc. 2010 Stock Incentive Plan, or the 2010 Incentive Plan, the TESARO, Inc. 2015 Non-Employee Director Stock Incentive Plan, or the 2015 Director Plan, and the TESARO, Inc. 2012 Employee Stock Purchase Plan, or the 2012 ESPP.

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On April 27, 2012, the stockholders of the Company approved the 2012 Incentive Plan, which had been previously adopted by the board of directors.  Upon effectiveness of the 2012 Incentive Plan, the Company ceased making awards under the 2010 Incentive Plan.  The 2012 Incentive Plan initially allowed the Company to grant awards for up to 1,428,571 shares of common stock plus the number of shares of common stock available for grant under the 2010 Incentive Plan as of the effectiveness of the 2012 Incentive Plan (an additional 6,857 shares) plus the number of shares of common stock related to awards outstanding under the 2010 Incentive Plan that terminate by expiration, forfeiture, cancellation, cash settlement or otherwise.  The number of shares available for grants of awards under the 2012 Incentive Plan is increased automatically each January 1 by a number of shares of common stock equal to the lesser of 4% of the shares of common stock then outstanding or the number of shares determined by the Company’s board of directors.  Most recently, on January 1, 2017 and 2018, the number of shares authorized for issuance under the 2012 Incentive Plan was increased by 2,144,867 shares and 2,178,561 shares, respectively.  Awards under the 2012 Incentive Plan may include the following award types: stock options, which may be either incentive stock options or nonqualified stock options; stock appreciation rights; restricted stock; RSUs; dividend equivalent rights; performance shares; performance units; cash-based awards; other stock-based awards, including unrestricted shares; or any combination of the foregoing.  The exercise price of stock options granted under the 2012 Incentive Plan is equal to the closing price of a share of the Company’s common stock on the grant date.

 

The 2015 Director Plan allows the Company to grant awards for up to 500,000 shares of common stock.  Awards under the 2015 Director Plan may include the following award types: stock options; stock appreciation rights; restricted stock; RSUs; unrestricted stock; or any combination of the foregoing.  The exercise price of stock options granted under the 2015 Director Plan is equal to the closing price of a share of the Company’s common stock on the grant date. 

 

The following table presents stock-based compensation expense as reflected in the Company’s condensed consolidated statements of operations and comprehensive loss (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2017

    

2018

Research and development

 

$

7,125

 

$

7,940

Selling, general and administrative

 

 

11,276

 

 

18,493

Subtotal

 

 

18,401

 

 

26,433

Capitalized stock-based compensation costs

 

 

 —

 

 

(305)

Stock-based compensation expense included in total expenses

 

$

18,401

 

$

26,128

 

Stock Options

 

The following table presents a summary of the Company’s stock option activity and related information:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average

 

 

 

 

 

exercise price per

 

 

 

Shares

 

share

 

Outstanding at December 31, 2017

 

6,908,313

 

$

52.00

 

Granted

 

1,366,909

 

 

56.12

 

Exercised

 

(121,278)

 

 

37.08

 

Cancelled

 

(141,904)

 

 

90.70

 

Outstanding at March 31, 2018

 

8,012,040

 

$

52.24

 

 

 

 

 

 

 

 

Vested at March 31, 2018

 

4,558,825

 

$

36.97

 

 

At March 31, 2018, there was approximately $132.6 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize over a remaining weighted-average period of 2.67 years.

 

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Restricted Stock Units

 

The following table presents a summary of the Company’s RSU activity and related information:

 

 

 

 

 

 

 

 

    

    

    

Weighted-average

 

 

 

 

grant date fair

 

 

Shares

 

value per share

Unvested restricted stock units at December 31, 2017

 

1,159,118

 

$

115.01

Granted

 

1,315,916

 

 

59.07

Vested

 

(216,319)

 

 

108.51

Forfeited

 

(62,001)

 

 

114.08

Unvested restricted stock units at March 31, 2018

 

2,196,714

 

$

82.17

 

At March 31, 2018, there was approximately $166.8 million of unrecognized compensation cost related to unvested RSUs, which the Company expects to recognize over a remaining weighted-average period of 3.19 years. 

 

ESPP

 

Under the Company’s 2012 ESPP, an aggregate of 275,000 shares of common stock have been reserved for issuance pursuant to purchase rights granted to the Company’s employees or to employees of the Company’s designated subsidiaries.  As of March 31, 2018, 151,859 shares remained available for issuance.  During the three months ended March 31, 2017 and 2018, the Company did not issue any shares under the 2012 ESPP, and recognized approximately $0.5 million and $0.4 million in related stock-based compensation expense, respectively.

 

8.  Income Taxes

 

Deferred tax assets and deferred tax liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A valuation allowance is recorded against deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The Company does not recognize a tax benefit for uncertain tax positions unless it is more likely than not that the position will be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The tax benefit that is recorded for these positions is measured at the largest amount of cumulative benefit that has greater than a 50 percent likelihood of being realized upon ultimate settlement.  Deferred tax assets that do not meet these recognition criteria are not recorded and the Company recognizes a liability for uncertain tax positions that may result in tax payments.  If such unrecognized tax benefits were realized and not subject to valuation allowances, the entire amount would impact the tax provision.  As of March 31, 2018, the Company’s uncertain tax positions were subject to valuation allowances.

 

As of March 31, 2018, the Company continues to consider interpretations of the application of SEC Staff Accounting Bulletin No. 118, and has not finalized incremental accounting adjustments related to the Tax Cuts and Jobs Act of 2017.

 

The Company recorded provisions for income taxes for the three months ended March 31, 2017 and 2018 of $0.1 million and $0.4 million, respectively.  The provision for income taxes consists of current tax expense, which relates primarily to the Company’s subsidiary operations in non-U.S. tax jurisdictions.

 

 

9. Intangible Assets

 

The following table presents intangible assets as of December 31, 2017 and March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

 

 

    

2017

    

2018

    

Estimated useful life

Acquired and in-licensed rights

 

$

64,665

 

$

64,665

 

8-15

Years

Less accumulated amortization

 

 

(8,281)

 

 

(9,718)

 

 

 

   Total intangible assets, net

 

$

56,384

 

$

54,947

 

 

 

 

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The Company recorded $0.5 million and $1.4 million in amortization expense related to intangible assets during the three months ended March 31, 2017 and 2018, respectively.  Estimated future amortization expense for intangible assets as of March 31, 2018 is $4.5 million for the remainder of 2018, $6.0 million per year for 2019, 2020,  2021, and 2022, and $26.5 million thereafter.

 

10.  Commitments and Contingencies

 

The Company leases approximately 275,000 square feet of office space in Waltham, Massachusetts under a non-cancelable operating lease agreement.  The Company also leases office space in several locations throughout Europe.  The Company recognizes rental expense on a straight-line basis over the respective lease term including any free rent periods and tenant allowances. 

 

Future minimum rental commitments under the Company’s leased properties as of March 31, 2018 were $8.4 million for the remainder of the year ending December 31, 2018 and $12.1 million, $8.0 million, $3.8 million, $3.6 million and $2.3 million for the years ending December 31, 2019, 2020, 2021, 2022 and thereafter, respectively.  

 

The Company has entered into agreements with certain vendors for the provision of services, including services related to commercial manufacturing, data management and clinical operation support, that the Company is not able to terminate for convenience under its contracts, and thus avoid any and all future obligations to the vendors.  Under such agreements, the Company is contractually obligated to make certain minimum payments to the vendors, with the exact amounts in the event of termination to be based on the timing of the termination and the exact terms of the agreement.

 

The Company has certain obligations under licensing agreements with third parties that are contingent upon achieving various development, regulatory and commercial milestones.  Pursuant to these license agreements, the Company is required to make milestone payments if certain development, regulatory and commercial sales milestones are achieved, and may have certain additional research funding obligations.  Also, pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, the Company will pay royalties to its licensors on net sales of the respective products.

 

Litigation and Other Proceedings

 

The Company may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which the Company is focused. 


A putative class action complaint was filed on January 17, 2018 in the United States District Court for the District of Massachusetts, entitled Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086.  The complaint alleges that the Company and its Chief Executive Officer and its Chief Financial Officer violated certain federal securities laws, specifically under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder.  The plaintiff seeks unspecified damages on behalf of a purported class of purchasers of the Company’s common stock between March 14, 2016 and January 12, 2018.    On March 19, 2018, six separate applicants filed motions seeking appointment as lead plaintiff.  Four of these applicants subsequently withdrew their motions or indicated that they did not oppose a competing motion filed by another applicant.  The Court has not yet ruled on the remaining motions or selected a lead plaintiff.    The Court has also not set a trial date for this matter.  The Company believes that the allegations contained in the complaint are without merit and intends to defend the case vigorously.  The Company has not recorded an estimated liability associated with this legal proceeding as it does not believe that such a liability is probable.

 

11. Revenue Recognition

 

Product Revenue, Net

 

The Company sells its products principally to a limited number of specialty distributors and specialty pharmacy providers in the U.S., and directly to hospitals and clinics as well as to certain wholesale distributors in Europe, or collectively, its Customers.  These Customers subsequently resell the Company’s products to health care providers and patients.  In addition to distribution agreements with Customers, the Company enters into arrangements with health care

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providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of the Company’s products.

 

Revenues from product sales are recognized when the Customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the Customer.  When the Company performs shipping and handling activities after the transfer of control to the Customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.  Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues. 

 

Product Revenue.  Net product revenue relates to sales of ZEJULA and VARUBI/VARUBY.  The Company commenced sales of ZEJULA in the U.S. in April 2017 and in Europe in December 2017.  The following table presents net product revenues by product for the three months ended March 31, 2017 and 2018, respectively (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

Change

 

 

2017

 

2018

 

 

Amount

 

Percentage

ZEJULA

 

$

––

 

$

48,869

 

$

48,869

 

n/m

VARUBI/VARUBY

 

 

2,139

 

 

1,303

 

 

(836)

 

(39)%

Product revenue, net

 

$

2,139

 

$

50,172

 

$

48,033

 

2,246%

 

n/m = not meaningful

 

The following table summarizes activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2017 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Chargebacks,
discounts and
fees

    

Government
and other
rebates

    

Returns

    

Total

Balance at December 31, 2016

 

$

177

 

$

1,312

 

$

18

 

$

1,507

Provision related to current period sales

 

 

736

 

 

562

 

 

 8

 

 

1,306

Adjustment related to prior period sales

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Credit or payments made during the period

 

 

(756)

 

 

(1,157)

 

 

 —

 

 

(1,913)

Balance at March 31, 2017

 

$

157

 

$

717

 

$

26

 

$

900

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

2,088

 

$

6,450

 

$

16,350

 

$

24,888

Provision related to current period sales

 

 

3,310

 

 

3,115

 

 

194

 

 

6,619

Adjustment related to prior period sales

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Credit or payments made during the period

 

 

(4,208)

 

 

(3,801)

 

 

(3,697)

 

 

(11,706)

Balance at March 31, 2018

 

$

1,190

 

$

5,764

 

$

12,847

 

$

19,801

 

License, Collaboration and Other Revenues

 

The Company enters into out-licensing agreements which are within the scope of Topic 606, under which it licenses certain rights to its product candidates to third parties.  The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products.  Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

 

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. 

 

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The following table presents changes in the Company’s contract assets and liabilities during the three months ended March 31, 2017 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at
Beginning
of Period

    

Additions

    

Deductions

    

Balance at
End of Period

Three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

 

$

1,000

 

$

 —

 

$

 —

 

$

1,000

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

399

 

$

 —

 

$

(23)

 

$

376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

  

$

1,000

  

$

 —

  

$

(1,000)

  

$

 —

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

306

 

$

 —

 

$

(24)

 

$

282

 

During the three months ended March 31, 2017 and 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended
March 31,

 

 

2017

 

 

2018

    

Revenue recognized in the period from:

 

 

 

 

 

Amounts included in the contract liability or contract assets at the beginning of the period

$

23

 

$

24

 

Performance obligations satisfied in previous periods

$

 —

 

$

(1,000)

 

 

The $(1.0) million noted above for the three months ended March 31, 2018 was a reversal of license revenue based on a re-evaluation of the probability of a milestone being achieved, as more fully described in Note 12, “Collaboration Arrangements”, under “Jiangsu Hengrui Medicine Co., Ltd.”    

 

 

12. Collaboration Arrangements

 

Merck Collaboration

 

In May 2015, the Company entered into a research agreement with Merck Sharp & Dohme B.V., a subsidiary of Merck, to perform a trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® in patients with triple negative breast cancer and patients with ovarian cancer.  Under the terms of this agreement, the Company is responsible for providing niraparib study materials and for carrying out clinical research activities.  The Company and Merck share in the external costs of the study equally, with certain exceptions.  The Company records cost-sharing payments due from Merck as reductions of research and development expense.  During the three months ended March 31, 2017 and 2018, the Company incurred $2.1 million and $1.8 million in external costs related to this study, of which $1.0 million and $0.9 million is reimbursable by Merck, respectively.  At March 31, 2018, $2.2 million of cost-sharing receivable from Merck has been recorded in other current assets on the condensed consolidated balance sheets.

 

Out-Licenses

 

Takeda Pharmaceutical Co., Ltd.

 

On July 27, 2017, the Company entered into an exclusive license agreement, or the Takeda Agreement, with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda.  Pursuant to the Takeda Agreement, the Company granted Takeda licenses under certain patent rights and know-how relating to niraparib to develop and commercialize niraparib for the treatment of all tumor types in Japan, and all tumor types excluding prostate cancer in South Korea, Taiwan, Russia and Australia.

 

In connection with the Takeda Agreement, the Company received a $100.0 million up-front payment and is eligible to receive additional payments of up to $140.0 million related to the achievement of certain clinical development and regulatory milestones as well as up to $100.0 million related to the achievement of additional sales milestones.  The Company will also be eligible to receive tiered royalties from Takeda based on percentages of net product sales ranging from the high teens to low thirties.  Takeda is responsible for conducting and funding all development and

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commercialization of niraparib in the licensed territories, including research, development, regulatory and commercialization activities. Unless earlier terminated, the Takeda Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.

 

The Company identified the following performance obligations at the inception of the Takeda Agreement: (1) exclusive license with rights to develop and commercialize niraparib to Takeda in the licensed territories for the associated tumor types, and (2) initial supply to Takeda of certain materials for the manufacture of niraparib.  In addition, the Company may also become responsible for manufacturing certain niraparib products for clinical and commercial supply and providing technical assistance related to the transfer of know-how, at Takeda’s option, for the manufacture of niraparib for which the Company will receive reimbursement that approximates stand-alone selling prices.

 

Revenue associated with the transfer of the license was fully recognized during the third quarter of 2017, the performance obligation is fully satisfied, and no changes have occurred in the transaction price during the three months ended March 31, 2018.

 

Revenue associated with the initial supply of niraparib materials will be recognized when delivered to Takeda.  During the three months ended March 31, 2018, the Company recognized $0.1 million as other revenues within license, collaboration and other revenues in the Company’s condensed consolidated statements of operations and comprehensive loss related to materials delivered to Takeda.  No revenue was recognized during the three months ended March 31, 2017.  No changes have occurred in the transaction price of previously delivered goods during the three months ended March 31, 2018. 

 

Janssen Biotech, Inc.

 

Under the terms of the Company’s collaboration agreement with Janssen Biotech, Inc., or Janssen, the Company granted Janssen licenses under certain patent rights and know-how relating to niraparib for prostate cancer worldwide, except for Japan.  Janssen will conduct all development and commercialization of niraparib in the field of prostate cancer worldwide (excluding Japan). 

 

Pursuant to the collaboration agreement, within 30 days after the date of the collaboration agreement, the Company provided Janssen with electronic copies of certain know-how relating to development of niraparib.  In addition, at Janssen’s request and in return for certain reimbursement, the Company is also responsible for manufacturing and supplying to Janssen all of Janssen’s requirements of active pharmaceutical ingredient, or API, and finished drug product, for niraparib and niraparib products to be used by Janssen for its development activities in prostate cancer indications.  Also at Janssen’s request, the Company is responsible for manufacturing of certain niraparib products and API for commercial sale in the field of prostate cancer.  In both cases, if Janssen exercises its right to receive the manufacturing services, the Company will receive reimbursement that will at least cover its cost of providing such services.

 

The Company received a $35.0 million up-front, non-refundable license fee from Janssen.  Assuming successful development and commercialization of niraparib products for prostate cancer, the Company could receive up to an additional $43.0 million in clinical milestones and $372.0 million in regulatory and sales milestones as well as tiered, double-digit royalties on aggregate net sales of products in the field of prostate cancer.  Janssen is responsible for funding all development and commercialization of niraparib in prostate cancer worldwide (excluding Japan), including research, development, manufacturing, regulatory and commercialization activities.  Janssen may terminate the collaboration agreement at any time upon 90 days’ written notice, upon termination of the Company’s license agreement with Merck or in the event of certain safety concerns.  Either party may terminate the collaboration agreement for uncured material breach or bankruptcy.  Unless earlier terminated, the collaboration agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.

 

The Company assessed this arrangement in accordance with Topic 606 and concluded that the contract counterparty, Janssen, is a customer.  The Company identified the following material promises under the contract: (1) the licenses under certain patent rights relating to niraparib for prostate cancer worldwide, except for Japan, and transfer of certain development and regulatory information; and (2) the obligation to participate in Joint Committees. In addition, the Company identified the following customer options that will create manufacturing obligations for the Company upon

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exercise by Janssen: (1) the supply of API and niraparib products for Janssen’s development and commercial needs; and (2) the supply of niraparib for Janssen’s clinical trial needs.  The Company considered the manufacturing capabilities of Janssen, Janssen’s right to sublicense and manufacture API, and the fact that the manufacturing services are not proprietary and can be provided by other vendors, to conclude that the license has stand-alone functionality and is distinct.  The Company’s obligation to participate in the Joint Committees and provide development, regulatory and commercialization information to Janssen does not significantly impact or modify the licenses’ granted functionality.  Further, the customer options for manufacturing services were evaluated as a material right, but were concluded to be immaterial to the Company’s financial statements.  Based on these assessments, the Company identified the license and the participation in Joint Committees as the only performance obligations at the inception the arrangement, which were both deemed to be distinct.

 

Revenue associated with the transfer of the license was fully recognized during the second quarter of 2016, the performance obligation is fully satisfied, and no changes have occurred in the transaction price during the three months ended March 31, 2018.

 

Revenue associated with the Joint Committees performance obligation, $0.5 million, is being recognized on a straight-line basis over a period of five years, which, in management’s judgment, is the best measure of progress toward satisfying the performance obligation and represents the Company’s best estimate of the period of the obligation to participate in the Joint Committees.  The remaining transaction price of $0.3 million is recorded in deferred revenue as of March 31, 2018 on the condensed consolidated balance sheets and will be recognized as revenue over the remaining period of 36 months.

 

Revenue associated with the materials supply service is recognized when the material is delivered to Janssen.  During the three months ended March 31, 2017 and 2018, the Company recognized $0.9 million and $0.5 million, respectively, as other revenues within license, collaboration and other revenues in the Company’s condensed consolidated statements of operations and comprehensive loss related to materials delivered to Janssen.  No changes have occurred in the transaction price of previously delivered goods during the three months ended March 31, 2018.

 

Zai Lab (Shanghai) Co., Ltd.

 

On September 28, 2016, the Company entered into a Collaboration, Development and License Agreement, or the Zai Agreement, with Zai Lab.  Under the terms of the Zai Agreement, the Company exclusively licensed the rights to develop and commercialize niraparib to Zai Lab for China, Hong Kong and Macao, or the China Territories.  Zai Lab will conduct all development, manufacturing and commercialization of niraparib in the China Territories, except for prostate cancer. 

 

Under the terms of the Zai Agreement, the Company received a $15.0 million up-front, non-refundable license fee from Zai Lab in the fourth quarter of 2016.  Assuming successful development and commercialization of niraparib products in the China Territories, the Company could receive additional regulatory and sales milestones as well as tiered, double-digit royalties on aggregate net sales of products in the China Territories.  Zai Lab is responsible for funding all development and commercialization of niraparib in the China Territories, including research, development, manufacturing, regulatory and commercialization activities.  The term of the Zai Agreement continues, on a country-by-country basis, until the later of expiration of the last patent in the China Territories covering the niraparib product, or ten years from the first commercial sale in such country.  The Zai Agreement may also be terminated by Zai Lab at any time upon prior written notice, or by either party for material breach or insolvency.

 

 The Company identified three performance obligations under the contract.  Revenue associated with all three performance obligations was fully recognized during 2016, the performance obligations are fully satisfied, and no changes have occurred in the transaction price during the three months ended March 31, 2018.  No revenue was recognized during the three months ended March 31, 2017 and 2018. 

 

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Jiangsu Hengrui Medicine Co., Ltd.

 

In July 2015, the Company entered into a license agreement with Jiangsu Hengrui Medicine Co., Ltd., or Hengrui, pursuant to which Hengrui has licensed the rights to develop, manufacture and commercialize rolapitant in the China Territories.  The Company received a $1.0 million up-front, non-refundable license fee from Hengrui in the fourth quarter of 2015.  The Company has evaluated the terms of this arrangement under Topic 606 and has determined that there are two performance obligations: (1) exclusive license with rights to develop, manufacture and commercialize rolapitant in the China Territories; and (2) provision of technical assistance related to the know-how transfer for the development of the rolapitant formulations.  The Company further determined that the transaction price for this arrangement included the $1.0 million up-front consideration received and a future regulatory development milestone of $1.0 million.  This future milestone payment relates to the submission of the clinical trial application with the China Food and Drug Administration.  The Company re-evaluates the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

 

During the first quarter of 2018, Hengrui ceased development activities related to the licensed product.  All performance obligations were recognized in 2015 and 2016, including a $1.0 million future regulatory development milestone that the Company assessed as probable.  The Company re-evaluated the probability of the milestone, including its impact on the transaction price, and recognized a $1.0 million reversal of license revenue during the three months ended March 31, 2018.  No revenue was recognized during the three months ended March 31, 2017.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  In this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

 

Examples of forward-looking statements contained in this report include statements regarding the following: our commercialization plans for niraparib and rolapitant, including the progress of the commercial launches of ZEJULA® (niraparib) in the U.S. and Europe and VARUBI®/VARUBY® (rolapitant) in the U.S. and Europe; our intent to in-license or acquire additional product candidates; our expectations regarding product revenues and license, collaboration and other revenues; our expectation that research and development and selling, general and administrative expenses will increase in the future; our expectations regarding the timing and design of our development plans, the timing of regulatory filings, and the timing of data from clinical trials, including with respect to each of our niraparib, TSR-042, TSR-022 and TSR-033 programs; our expectations regarding new clinical trials of our product candidates, including the commencement and timing thereof; our expectations regarding our discovery and development plans for immunotherapy antibodies, including the timing thereof; our anticipated milestone and royalty payment obligations; our expectations that our operating losses and negative operating cash flows will continue, and possibly increase, for the foreseeable future; efforts to pursue strategic alternatives for the VARUBI/VARUBY brand, including potentially out-licensing the product line;  our intent to settle the par value of the Convertible Notes in cash and any excess conversion premium in shares of common stock; and our needs for additional capital and the forecast of the period of time through which our financial resources will be adequate to support our operations.

 

Forward-looking statements are not guarantees of future performance.  Actual future results, performance, achievements or the timing of certain events may differ significantly from those expressed or implied by the forward-looking statements.  Risks and uncertainties involved in the forward-looking statements include, among others: uncertainties inherent in the development or commercialization of any new pharmaceutical product and the execution and completion of clinical trials; risks related to competition; the timing and availability of data from clinical trials; uncertainties regarding ongoing discussions with and actions by regulatory authorities; patient accrual rates for clinical trials; manufacturing and supply risks; risks related to intellectual property; and other matters that could affect the timing of data or the potential regulatory approval or commercial availability or success of our products.  Forward-looking statements contained in this Quarterly Report on Form 10-Q should be considered in light of these factors and the factors discussed elsewhere in this Quarterly Report on Form 10-Q, and in light of factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, including under the heading “Risk Factors”.  You should read carefully the factors described in the “Risk Factors” section to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.  You are also advised to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and our website.

 

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.  We disclaim any obligation, except as specifically required by law and the rules of the U.S. Securities and Exchange Commission, or the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

TESARO, the TESARO logo, VARUBI, VARUBY and ZEJULA are trademarks of TESARO, Inc. in the United States and in other selected countries.  All other brand names or trademarks appearing in this report are the property of their respective holders.  Unless the context requires otherwise, references in this report to “TESARO”, the “Company,” “we,” “us,” and “our” refer to TESARO, Inc.