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 June 30, 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 July 30, 2018, there were 54,910,079 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 AND SIX MONTHS ENDED JUNE 30, 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 June 30, 2018

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2017 and 2018

4

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

22

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4. 

Controls and Procedures

34

 

 

 

PART II. 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

35

Item 1A. 

Risk Factors

35

Item 5. 

Other Information

38

Item 6. 

Exhibits

39

 

 

 

SIGNATURES 

40

 

 

CERTIFICATIONS

 

 

2


 

Table of Contents

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,

    

June 30,

    

 

 

2017

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

643,095

 

$

575,104

 

Accounts receivable

 

 

53,416

 

 

35,679

 

Inventories

 

 

57,939

 

 

87,406

 

Other current assets

 

 

33,511

 

 

36,924

 

Assets held for sale

 

 

 —

 

 

22,299

 

Total current assets

 

 

787,961

 

 

757,412

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

56,384

 

 

36,624

 

Property and equipment, net

 

 

9,652

 

 

10,657

 

Restricted cash

 

 

2,552

 

 

2,556

 

Other assets

 

 

5,636

 

 

3,204

 

Total assets

 

$

862,185

 

$

810,453

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,172

 

$

12,925

 

Accrued expenses

 

 

154,808

 

 

159,447

 

Deferred revenue, current

 

 

324

 

 

437

 

Other current liabilities

 

 

6,902

 

 

11,371

 

Total current liabilities

 

 

166,206

 

 

184,180

 

 

 

 

 

 

 

 

 

Convertible notes, net

 

 

143,446

 

 

149,793

 

Long-term debt, net

 

 

293,659

 

 

490,125

 

Deferred revenue, non-current

 

 

211

 

 

164

 

Other non-current liabilities

 

 

9,577

 

 

7,739

 

Total liabilities

 

 

613,099

 

 

832,001

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized at both December 31, 2017 and June 30, 2018; no shares issued or outstanding at both December 31, 2017 and June 30, 2018

 

 

 

 

 —

 

Common stock, $0.0001 par value; 100,000,000 shares authorized at both December 31, 2017 and June 30, 2018; 54,464,039 and 54,897,095 shares issued and outstanding at December 31, 2017 and June 30, 2018, respectively

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

1,724,850

 

 

1,785,696

 

Accumulated other comprehensive loss

 

 

(5,882)

 

 

(7,895)

 

Accumulated deficit

 

 

(1,469,887)

 

 

(1,799,354)

 

Total stockholders’ equity (deficit)

 

 

249,086

 

 

(21,548)

 

Total liabilities and stockholders’ equity (deficit)

 

$

862,185

 

$

810,453

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

Table of Contents

TESARO, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2018

    

2017

    

2018

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

28,829

 

$

56,528

 

$

30,968

 

$

106,700

 

License, collaboration and other revenues

 

 

635

 

 

680

 

 

1,569

 

 

250

 

Total revenues

 

 

29,464

 

 

57,208

 

 

32,537

 

 

106,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales – product

 

 

3,620

 

 

13,513

 

 

4,064

 

 

23,510

 

Cost of sales – intangible asset amortization

 

 

2,979

 

 

1,498

 

 

3,469

 

 

2,935

 

Research and development

 

 

71,400

 

 

97,608

 

 

137,522

 

 

194,363

 

Selling, general and administrative

 

 

92,979

 

 

100,033

 

 

162,241

 

 

193,640

 

Acquired in-process research and development

 

 

7,000

 

 

 —

 

 

7,000

 

 

 —

 

Total expenses

 

 

177,978

 

 

212,652

 

 

314,296

 

 

414,448

 

Loss from operations

 

 

(148,514)

 

 

(155,444)

 

 

(281,759)

 

 

(307,498)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,426)

 

 

(12,830)

 

 

(8,693)

 

 

(24,922)

 

Interest income

 

 

959

 

 

1,534

 

 

1,800

 

 

3,199

 

Other income

 

 

 —

 

 

81

 

 

 —

 

 

162

 

Loss before income taxes

 

 

(151,981)

 

 

(166,659)

 

 

(288,652)

 

 

(329,059)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for (benefit from) for income taxes

 

 

78

 

 

(8)

 

 

132

 

 

408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(152,059)

 

$

(166,651)

 

$

(288,784)

 

$

(329,467)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(2.82)

 

$

(3.04)

 

$

(5.36)

 

$

(6.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

53,982

 

 

54,845

 

 

53,834

 

 

54,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(152,059)

 

$

(166,651)

 

$

(288,784)

 

$

(329,467)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on pension obligation

 

 

46

 

 

61

 

 

91

 

 

124

 

Foreign currency translation adjustments

 

 

255

 

 

(2,598)

 

 

290

 

 

(2,137)

 

Other comprehensive income (loss)

 

 

301

 

 

(2,537)

 

 

381

 

 

(2,013)

 

Comprehensive income (loss)

 

$

(151,758)

 

$

(169,188)

 

$

(288,403)

 

$

(331,480)

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Table of Contents

TESARO, INC.

Condensed Consolidated Statements of Cash Flows

(all amounts in 000’s)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2017

    

2018

    

 

 

(as revised)

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(288,784)

 

$

(329,467)

 

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

 

 

 

 

 

 

 

Acquired in-process research and development

 

 

7,000

 

 

 —

 

Depreciation and amortization expense

 

 

4,931

 

 

5,097

 

Stock-based compensation expense

 

 

41,909

 

 

54,537

 

Non-cash interest expense

 

 

5,672

 

 

6,813

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(16,954)

 

 

17,477

 

Inventories

 

 

(6,959)

 

 

(34,314)

 

Other assets

 

 

(10,950)

 

 

2,743

 

Accounts payable

 

 

(5,146)

 

 

8,778

 

Accrued expenses

 

 

19,746

 

 

1,158

 

Deferred revenues

 

 

(46)

 

 

76

 

Other liabilities

 

 

94

 

 

2,915

 

Net cash used in operating activities

 

 

(249,487)

 

 

(264,187)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Acquisition of product candidates, technology licenses and milestone payments

 

 

(42,000)

 

 

 —

 

Purchase of property and equipment

 

 

(4,309)

 

 

(3,172)

 

Net cash used in investing activities

 

 

(46,309)

 

 

(3,172)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from term loan, net of issuance costs

 

 

 —

 

 

196,000

 

Proceeds from sale of common stock, net of issuance costs

 

 

(8)

 

 

 —

 

Proceeds from exercise of stock options and Employee Stock Purchase Plan

 

 

18,348

 

 

5,367

 

Net cash provided by financing activities

 

 

18,340

 

 

201,367

 

 

 

 

 

 

 

 

 

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

 

 

366

 

 

(1,999)

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(277,090)

 

 

(67,991)

 

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

 

 

787,866

 

 

645,954

 

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

 

$

510,776

 

$

577,963

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Stock option exercise proceeds receivable as of period end

 

$

35

 

$

312

 

Leasehold improvement assets funded by lessor

 

$

585

 

$

 —

 

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

 

$

118

 

$

 —

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,019

 

$

20,093

 

Income taxes paid

 

$

315

 

$

268

 

 

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,

 

June 30,

 

 

2017

    

2018

Cash and cash equivalents

 

$

643,095

 

$

575,104

Restricted cash included in other current assets

 

 

307

 

 

303

Restricted cash, noncurrent

 

 

2,552

 

 

2,556

Total cash, cash equivalents and restricted cash

 

$

645,954

 

$

577,963

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

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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 product ZEJULA® is approved in both the U.S. and the European Union, or EU, as a maintenance treatment for adults with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy.  In June 2018, the Company entered into an agreement with TerSera Therapeutics LLC, or TerSera, pursuant to which the Company sold to TerSera its rights to VARUBI® (rolapitant) in the United States and Canada, and the transaction closed in July 2018.  See Note 13, “VARUBI Transaction and Assets Held for Sale”, for additional details. We are continuing to market VARUBY in Europe. 

 

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, 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 June 30, 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 and six months ended June 30, 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 discloses 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 June 30, 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

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

Description

    

Balance Sheet Classification

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Cash and cash equivalents

 

$

492,858

 

$

492,858

 

$

 

$

 

Total assets

 

 

 

$

492,858

 

$

492,858

 

$

 —

 

$

 —

 

 

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 June 30, 2018, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $149.8 million and the estimated fair value of the principal amount was $300.9 million.  As of June 30, 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 represents 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

 

91

 

 

290

 

 

381

Balance at June 30, 2017

$

(51)

 

$

(2,492)

 

$

(2,543)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

259

 

$

(6,141)

 

$

(5,882)

Other comprehensive (loss) income

 

(2,137)

 

 

124

 

 

(2,013)

Balance at June 30, 2018

$

(1,878)

 

$

(6,017)

 

$

(7,895)

 

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, and the adoption 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 $578.0 million as of December 31, 2017 and June 30, 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.

 

New Accounting Pronouncements – Recently Issued

 

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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, with certain practical expedients available pursuant to ASU No. 2018-10, issued in July 2018.  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.

 

In June 2018, the FASB issued ASU No. 2018-07, which simplifies the accounting for share-based payments granted to nonemployees by aligning the accounting with the requirements for employee share-based compensation.  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 Company is assessing the impact of the adoption of this guidance on its condensed consolidated financial statements, and whether or not to adopt early.

 

 

 

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 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 and Six Months Ended June 30,

 

    

2017

    

2018

Outstanding stock options and Employee Stock Purchase Plan

 

7,204

 

7,915

Unvested restricted stock units

 

1,158

 

2,158

Shares issuable upon conversion of Convertible Notes

 

3,932

 

5,728

 

 

12,294

 

15,801

 

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 generally expected to reduce the potential dilution 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.  As of June 30, 2018, the share figure in the table above represents the estimated shares that would be issued, assuming settlement in shares of all of the outstanding Convertible Notes.

 

4. Inventories

 

The following table presents inventories as of December 31, 2017 and June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

June 30,

 

    

2017

    

2018

Raw materials

 

$

17,876

 

$

15,840

Work in process

 

 

38,629

 

 

70,080

Finished goods

 

 

1,434

 

 

1,486

   Total inventories

 

$

57,939

 

$

87,406

 

Inventories are related to the Company’s approved products, primarily ZEJULA.  If future sales of its approved

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products are less than expected, the Company may be required to write down the value of such inventories.  As of June 30, 2018, $5.5 million of VARUBI inventories were reclassified as assets held for sale on the condensed consolidated balance sheet in connection with the VARUBI divestiture transaction further described in Note 13, “VARUBI Transaction and Assets Held for Sale”.

 

 

 

5.  Debt

 

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

 

 

 

 

 

 

 

 

 

 

December 31,

 

June 30,

 

 

2017

    

2018

Convertible notes, net

 

$

143,446

 

$

149,793

Term loan, net

 

 

293,659

 

 

490,125

Total long-term debt

 

$

437,105

 

$

639,918

 

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 June 30, 2018, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $149.8 million and the estimated fair value of the principal amount was $300.9 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 following table presents total interest expense recognized related to the Convertible Notes during the three and six months ended June 30, 2017 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2017

    

2018

    

2017

    

2018

Contractual interest expense

 

$

1,509

 

$

1,509

 

$

3,019

 

$

3,019

Amortization of debt discount

 

 

2,779

 

 

3,139

 

 

5,394

 

 

6,092

Amortization of debt issuance costs

 

 

136

 

 

125

 

 

279

 

 

255

Total interest expense

 

$

4,424

 

$

4,773

 

$

8,692

 

$

9,366

 

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 and $200.0 million in principal on Tranche B on June 29, 2018.  Both tranches have a maturity date of December 6, 2024, with payments of principal commencing in the fourth quarter of 2019 for Tranche A and the second quarter of 2020 for Tranche B.  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.

 

Both Tranche A and Tranche B of the Loan Agreement were recorded on the condensed consolidated balance sheets, net of debt discounts of $6.0 million and $4.0 million, respectively, in up-front fees assessed by the Lenders at the time of the borrowings.  The debt discounts 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 both Tranche A and Tranche B is approximately 10%.

 

 For the three and six months ended June 30, 2018, respectively, the Company recognized $8.1 million and $15.6 million of interest expense related to the Loan Agreement, including $0.2 million and $0.5 million related to the accretion of debt discounts and deferred financing costs.

 

6.  Accrued Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

June 30,

 

 

    

2017

    

2018

 

Research and development

 

$

55,949

 

$

67,261

 

Salaries, bonuses and other compensation

 

 

33,717

 

 

26,882

 

Product revenue allowances

 

 

22,847

 

 

18,781

 

Inventory

 

 

16,469

 

 

22,326

 

Sales and marketing

 

 

6,701

 

 

6,107

 

Royalties

 

 

6,552

 

 

6,500

 

Professional services

 

 

3,944

 

 

2,630

 

Other

 

 

8,629

 

 

8,960

 

Total accrued expenses

 

$

154,808

 

$

159,447

 

 

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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.

 

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 June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2018

    

2017

    

2018

 

Research and development

 

$

7,862

 

$

8,303

 

$

14,987

 

$

16,243

 

Selling, general and administrative

 

 

15,646

 

 

20,429

 

 

26,922

 

 

38,922

 

Subtotal

 

 

23,508

 

 

28,732

 

 

41,909

 

 

55,165

 

Capitalized stock-based compensation costs

 

 

 —

 

 

(323)

 

 

 —

 

 

(628)

 

Stock-based compensation expense included in total expenses

 

$

23,508

 

$

28,409

 

$

41,909

 

$

54,537

 

 

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

 

1,490,885

 

 

55.39

Exercised

 

(157,402)

 

 

36.07

Cancelled

 

(376,325)

 

 

81.60

Outstanding at June 30, 2018

 

7,865,471

 

$

51.54

 

 

 

 

 

 

Vested at June 30, 2018

 

4,940,628

 

$

40.93

 

At June 30, 2018, there was approximately $112.8 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize over a remaining weighted-average period of 2.59 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

 

1,444,268

 

 

58.36

Vested

 

(268,608)

 

 

106.44

Forfeited

 

(176,731)

 

 

98.43

Unvested restricted stock units at June 30, 2018

 

2,158,047

 

$

79.52

 

At June 30, 2018, there was approximately $149.0 million of unrecognized compensation cost related to unvested RSUs, which the Company expects to recognize over a remaining weighted-average period of 2.98 years. 

 

ESPP

 

Under the Company’s 2012 ESPP, as amended, an aggregate of 550,000 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 June 30, 2018, 426,859 shares remained available for issuance.  During the six months ended June 30, 2017 and 2018, the Company issued 17,684 and no shares under the 2012 ESPP, and recognized approximately $1.0 million and $0.9 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 June 30, 2018, the Company’s uncertain tax positions were subject to valuation allowances.

 

As of June 30, 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, or the Tax Act.  However, the Company currently does not expect any material incremental accounting adjustments related to the Tax Act.

 

The Company recorded $0.1 million in provision for income taxes for the three months ended June 30, 2017, a negligible benefit for income taxes for the three months ended June 30, 2018, and $0.1 million and $0.4 million provisions for the six months ended June 30, 2017 and 2018, 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.

 

 

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9. Intangible Assets

 

The following table presents intangible assets as of December 31, 2017 and June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

June 30,

 

 

 

 

    

2017

    

2018

    

Estimated useful life

Acquired and in-licensed rights

 

$

64,665

 

$

39,665

 

13-15

Years

Less accumulated amortization

 

 

(8,281)

 

 

(3,041)

 

 

 

   Total intangible assets, net

 

$

56,384

 

$

36,624

 

 

 

 

The Company recorded $3.0 million and $1.5 million in amortization expense related to intangible assets during the three months ended June 30, 2017 and 2018, respectively, and $3.5 million and $2.9 million during the six months ended June 30, 2017 and 2018, respectively.  Estimated future amortization expense for intangible assets as of June 30, 2018 is $1.5 million for the remainder of 2018, $2.9 million per year for 2019, 2020, 2021, and 2022, and $23.5 million thereafter.  As of June 30, 2018, $16.8 million of intangible assets (net book value) were reclassified as assets held for sale on the condensed consolidated balance sheet in connection with the VARUBI divestiture transaction further described in Note 13, “VARUBI Transaction and Assets Held for Sale”.

 

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 June 30, 2018 were $6.1 million for the remainder of 2018 and $12.1 million, $7.9 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 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, captioned Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086.  The complaint alleges that the Company and its Chief Executive Officer and 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.  On May 4, 2018, the Court entered an order appointing one of the two remaining applicants – Zev Crawley – as the lead plaintiff and approving his selection of

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lead counsel for the class.  On June 8, 2018, the lead plaintiff moved the Court for an order prohibiting the Company from enforcing the terms of its confidentiality agreements against former Company employees who provide information to the lead plaintiff in the course of his investigation.  The Company opposed the motion and, on July 13, 2018, the Court entered an order denying the lead plaintiff’s motion and instructing the parties to meet and confer regarding either a joint proposed order or competing proposals regarding interviews with former Company employees.  The Court has not set a trial date.  The Company believes that the allegations contained in the complaint are without merit and intends to defend the case vigorously.  

 

On May 19, 2018, a putative stockholder derivative action was filed, purportedly for the Company’s benefit, in the United States District Court for the District of Delaware against eleven of the Company’s directors and/or officers.  The action is styled Dai v. Moulder, et, al., Case no.: 1:18-cv-00773 (D. Del.) and contains substantive disclosure allegations similar to those alleged in the Bowers action.  Additionally, the complaint in the Dai action alleges that the defendants breached their fiduciary duties by failing to maintain proper internal controls, wasting corporate assets through a write-down, awarding themselves excessive compensation, and by engaging in insider trading.  The Complaint contains counts for: (1) alleged violations of Section 14(a) of the Securities Exchange Act of 1934; (2) breach of fiduciary duty for failure to maintain proper internal controls, making false and misleading statements and corporate waste; (3) breach of fiduciary for excessive compensation; (4) unjust enrichment; and (5) waste of corporate assets.  The Complaint seeks, among other things, an award of an unspecified amount of damages to the Company, a series of supposed governance reforms, restitution and costs and expenses (including attorneys’ fees).  On June 25, 2018, the Court entered a joint stipulation by the parties staying the Dai action until and through disposition of a motion to dismiss that is anticipated to be filed in the Bowers action.  The Company intends to vigorously defend the Dai action.  

On June 29, 2018, a putative stockholder derivative action was filed, purportedly for the Company’s benefit, in the United States District Court for the District of Massachusetts against eleven of the Company’s directors and/or officers.  The action is styled Friedt v. Moulder, et al., Case No. 1-18-cv-11374 (D. Mass.) and contains substantive disclosure allegations similar to those alleged in the Bowers action and substantive derivative allegations similar to those alleged in the Dai action.  The complaint in the Friedt action contains counts for: (1) alleged violations of Section 14(a) of the Securities Exchange Act of 1934; (2) breach of fiduciary duty for failure to maintain proper internal controls, making false and misleading statements and corporate waste; (3) waste of corporate assets; and (4) unjust enrichment.  The Complaint seeks, among other things, an award of an unspecified amount of damages to the Company, a series of supposed governance reforms, restitution and costs and expenses (including attorneys’ fees).  No defendant has yet responded to the Complaint.  The Company intends to vigorously defend the Friedt action.  

 

The Company has not recorded any estimated liabilities associated with these legal proceedings as it does not believe that such liabilities are 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 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.  For the six months ended June 30, 2018, sales of ZEJULA in Europe accounted for over 20% of total net ZEJULA product revenues.  The

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following tables present net product revenues by product for the three and six months ended June 30, 2017 and 2018, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

2017

 

2018

ZEJULA

 

$

25,945

 

$

53,894

VARUBI/VARUBY

 

 

2,884

 

 

2,634

Product revenue, net

 

$

28,829

 

$

56,528

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

    

2017

    

2018

ZEJULA

 

$

25,945

 

$

102,763

VARUBI/VARUBY

 

 

5,023

 

 

3,937

Product revenue, net

 

$

30,968

 

$

106,700

 

The following tables summarize activity in each of the product revenue allowance and reserve categories for the six months ended June 30, 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

 

 

3,251

 

 

3,264

 

 

73

 

 

6,588

Adjustment related to prior period sales

 

 

 —

 

 

62

 

 

 —

 

 

62

Credit or payments made during the period

 

 

(2,730)

 

 

(2,343)

 

 

 —

 

 

(5,073)

Balance at June 30, 2017

 

$

698

 

$

2,295

 

$

91

 

$

3,084

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$