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 September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐

 

 

 

 

 

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 October 29, 2018, there were 55,046,956 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 NINE MONTHS ENDED SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I. 

FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December  31, 2017

3

 

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

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

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

23

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 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)

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

    

 

 

2018

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

476,812

 

$

643,095

 

Accounts receivable

 

 

31,362

 

 

53,416

 

Inventories

 

 

108,822

 

 

57,939

 

Other current assets

 

 

31,382

 

 

33,511

 

Total current assets

 

 

648,378

 

 

787,961

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

 

35,897

 

 

56,384

 

Property and equipment, net

 

 

9,923

 

 

9,652

 

Restricted cash

 

 

8,610

 

 

2,552

 

Other assets

 

 

8,032

 

 

5,636

 

Total assets

 

$

710,840

 

$

862,185

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

28,160

 

$

4,172

 

Accrued expenses

 

 

150,933

 

 

154,808

 

Deferred revenue, current

 

 

530

 

 

324

 

Other current liabilities

 

 

10,819

 

 

6,902

 

Total current liabilities

 

 

190,442

 

 

166,206

 

 

 

 

 

 

 

 

 

Convertible notes, net

 

 

153,057

 

 

143,446

 

Long-term debt, net

 

 

490,525

 

 

293,659

 

Deferred revenue, non-current

 

 

141

 

 

211

 

Other non-current liabilities

 

 

7,467

 

 

9,577

 

Total liabilities

 

 

841,632

 

 

613,099

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

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

 

 

 —

 

 

 

Common stock, $0.0001 par value; 100,000,000 shares authorized at both September 30, 2018 and December 31, 2017; 55,034,990 and 54,464,039 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

1,813,884

 

 

1,724,850

 

Accumulated other comprehensive loss

 

 

(8,239)

 

 

(5,882)

 

Accumulated deficit

 

 

(1,936,442)

 

 

(1,469,887)

 

Total stockholders’ equity (deficit)

 

 

(130,792)

 

 

249,086

 

Total liabilities and stockholders’ equity (deficit)

 

$

710,840

 

$

862,185

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

63,612

 

$

41,755

 

$

170,312

 

$

72,723

 

License, collaboration and other revenues

 

 

787

 

 

101,011

 

 

1,037

 

 

102,580

 

Total revenues

 

 

64,399

 

 

142,766

 

 

171,349

 

 

175,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales – product

 

 

14,225

 

 

6,216

 

 

37,735

 

 

10,280

 

Cost of sales – intangible asset amortization

 

 

728

 

 

1,254

 

 

3,663

 

 

4,723

 

Research and development

 

 

94,188

 

 

73,388

 

 

288,551

 

 

210,910

 

Selling, general and administrative

 

 

93,497

 

 

83,998

 

 

287,137

 

 

246,239

 

Acquired in-process research and development

 

 

 —

 

 

 —

 

 

 —

 

 

7,000

 

Total expenses

 

 

202,638

 

 

164,856

 

 

617,086

 

 

479,152

 

Loss from operations

 

 

(138,239)

 

 

(22,090)

 

 

(445,737)

 

 

(303,849)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(18,179)

 

 

(4,424)

 

 

(43,101)

 

 

(13,117)

 

Interest income

 

 

1,944

 

 

1,133

 

 

5,143

 

 

2,933

 

Gain on sale of business

 

 

17,627

 

 

 —

 

 

17,627

 

 

 —

 

Other income

 

 

81

 

 

243

 

 

243

 

 

243

 

Loss before income taxes

 

 

(136,766)

 

 

(25,138)

 

 

(465,825)

 

 

(313,790)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

322

 

 

139

 

 

730

 

 

271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(137,088)

 

$

(25,277)

 

$

(466,555)

 

$

(314,061)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(2.49)

 

$

(0.47)

 

$

(8.51)

 

$

(5.82)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

54,957

 

 

54,241

 

 

54,807

 

 

53,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(137,088)

 

$

(25,277)

 

$

(466,555)

 

$

(314,061)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on pension obligation

 

 

62

 

 

46

 

 

186

 

 

137

 

Foreign currency translation adjustments

 

 

(406)

 

 

131

 

 

(2,543)

 

 

421

 

Other comprehensive income (loss)

 

 

(344)

 

 

177

 

 

(2,357)

 

 

558

 

Comprehensive income (loss)

 

$

(137,432)

 

$

(25,100)

 

$

(468,912)

 

$

(313,503)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2018

    

2017

    

 

 

 

 

 

(as revised)

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(466,555)

 

$

(314,061)

 

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

 

 

 

 

 

 

 

Acquired in-process research and development

 

 

 —

 

 

7,000

 

Depreciation and amortization expense

 

 

7,139

 

 

7,092

 

Stock-based compensation expense

 

 

79,295

 

 

66,925

 

Non-cash interest expense

 

 

10,477

 

 

8,588

 

Gain on sale of business

 

 

(17,627)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

6,063

 

 

(21,484)

 

Inventories

 

 

(54,647)

 

 

(35,827)

 

Other assets

 

 

3,629

 

 

(12,415)

 

Accounts payable

 

 

23,921

 

 

692

 

Accrued expenses

 

 

12,178

 

 

49,375

 

Deferred revenues

 

 

146

 

 

(70)

 

Other liabilities

 

 

2,187

 

 

1,000

 

Net cash used in operating activities

 

 

(393,794)

 

 

(243,185)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Acquisition of product candidates, technology licenses and milestone payments

 

 

 —

 

 

(42,000)

 

Proceeds from sale of business

 

 

35,000

 

 

 —

 

Purchase of property and equipment

 

 

(3,757)

 

 

(4,926)

 

Net cash provided by (used in) investing activities

 

 

31,243

 

 

(46,926)

 

 

 

 

 

 

 

 

 

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

 

 

8,734

 

 

25,849

 

Net cash provided by financing activities

 

 

204,734

 

 

25,841

 

 

 

 

 

 

 

 

 

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

 

 

(2,409)

 

 

498

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(160,226)

 

 

(263,772)

 

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

 

 

645,954

 

 

787,866

 

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

 

$

485,728

 

$

524,094

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Stock option exercise proceeds receivable as of period end

 

$

 —

 

$

71

 

Leasehold improvement assets funded by lessor

 

$

 —

 

$

585

 

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

 

$

 —

 

$

328

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

33,099

 

$

6,038

 

Income taxes paid

 

$

921

 

$

468

 

 

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

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

    

2017

Cash and cash equivalents

 

$

476,812

 

$

643,095

Restricted cash included in other current assets

 

 

306

 

 

307

Restricted cash, noncurrent

 

 

8,610

 

 

2,552

Total cash, cash equivalents and restricted cash

 

$

485,728

 

$

645,954

 

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 and commercialize 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”, for additional details. The Company is continuing to market and sell 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 sooner than expected, or reduce or defer spending on future research and development.

 

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 September 30, 2018 and 2017.

 

The results of operations for the interim periods are not necessarily indicative of the results of operations to be

6


 

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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 nine months ended September 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 September 30, 2018 and December  31, 2017 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Description

    

Balance Sheet Classification

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Cash and cash equivalents

 

$

345,237

 

$

345,237

 

$

 

$

 

Total assets

 

 

 

$

345,237

 

$

345,237

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

 

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 September 30, 2018, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $153.1 million and the estimated fair value of the principal amount was $266.9 million.  As of

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September 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 6, “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 3, “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 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 obligation

 

Total

Balance at December 31, 2017

$

259

 

$

(6,141)

 

$

(5,882)

Other comprehensive (loss) income

 

(2,543)

 

 

186

 

 

(2,357)

Balance at September 30, 2018

$

(2,284)

 

$

(5,955)

 

$

(8,239)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

(142)

 

$

(2,782)

 

$

(2,924)

Other comprehensive (loss) income

 

421

 

 

137

 

 

558

Balance at September 30, 2017

$

279

 

$

(2,645)

 

$

(2,366)

 

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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 $485.7 million and $646.0 million as of September 30, 2018 and December 31, 2017, respectively.

 

·

Restricted cash primarily 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, with certain practical expedients available pursuant to ASU No. 2018-10, issued in July 2018.  In July 2018, the FASB issued ASU No. 2018-11, which provides an additional transition method to adopt the new leasing standard.  Under this new transition method, an entity initially applies the new leasing standard using a cumulative-effect adjustment to the opening balance of retained earnings but will continue to report comparative periods under existing guidance.  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.  As part of its assessment, the Company is considering whether to utilize the practical expedients.  The Company is also in the process of implementing appropriate changes to its controls to support lease accounting and related disclosures under the new standard.

 

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.

 

 

 

 

3. 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 nine months ended September 30, 2018, sales of ZEJULA in Europe accounted for over 25% of total net ZEJULA product revenues.  The following tables present net product revenues by product for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2018

 

2017

 

2018

    

2017

ZEJULA

 

$

63,226

 

$

39,375

 

$

165,989

 

$

65,321

VARUBI/VARUBY

 

 

386

 

 

2,380

 

 

4,323

 

 

7,402

Product revenue, net

 

$

63,612

 

$

41,755

 

$

170,312

 

$

72,723

 

 

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The following tables summarize activity in each of the product revenue allowance and reserve categories for the nine months ended September 30, 2018 and 2017 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Chargebacks,
discounts and
fees

    

Government
and other
rebates

    

Returns

    

Total

Balance at December 31, 2017

 

$

2,088

 

$

6,450

 

$

16,350

 

$

24,888

Provision related to current period sales

 

 

13,052

 

 

14,778

 

 

428

 

 

28,258

Adjustment related to prior period sales

 

 

(268)

 

 

(53)

 

 

(49)

 

 

(370)

Credit or payments made during the period

 

 

(13,639)

 

 

(12,667)

 

 

(15,671)

 

 

(41,977)

Balance at September 30, 2018

 

$

1,233

 

$

8,508

 

$

1,058

 

$

10,799

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

177

 

$

1,312

 

$

18

 

$

1,507

Provision related to current period sales

 

 

6,567

 

 

6,924

 

 

155

 

 

13,646

Adjustment related to prior period sales

 

 

 —

 

 

62

 

 

 —

 

 

62

Credit or payments made during the period

 

 

(5,906)

 

 

(4,311)

 

 

 —

 

 

(10,217)

Balance at September 30, 2017

 

$

838

 

$

3,987

 

$

173

 

$

4,998

 

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. 

 

The following tables present changes in the Company’s contract assets and liabilities during the nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at
Beginning
of Period

    

Additions

    

Deductions

    

Balance at
End of Period

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

  

$

1,000

  

$

 —

  

$

(1,000)

  

$

 —

Contract liabilities

 

$

306

 

$

 —

 

$

(71)

 

$

235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

 

$

1,000

 

$

 —

 

$

 —

 

$

1,000

Contract liabilities

 

$

400

 

$

 —

 

$

(70)

 

$

330

 

During the three and nine months ended September 30, 2018 and 2017, 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 September 30,

 

 

2018

 

 

2017

    

Revenue recognized in the period from:

 

 

 

 

 

Amounts included in contract liabilities at the beginning of the period

$

23

 

$

23

 

Performance obligations satisfied in previous periods

$

 —

 

$

 —

 

 

 

 

 

 

 

 

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Nine Months Ended September 30,

 

 

2018

 

 

2017

    

Revenue recognized in the period from:

 

 

 

 

 

Amounts included in contract liabilities at the beginning of the period

$

71

 

$

70

 

Performance obligations satisfied in previous periods

$

(1,000)

 

$

 —

 

 

The $(1.0) million noted above for the nine months ended September 30, 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”.

 

4.  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 Nine Months Ended September 30,

 

    

2018

    

2017

Outstanding stock options and Employee Stock Purchase Plan

 

7,797

 

7,033

Unvested restricted stock units

 

2,121

 

1,174

Shares issuable upon conversion of Convertible Notes

 

 —

 

3,559

 

 

9,918

 

11,766

 

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 6, “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.  The share figures in the table above represent the estimated shares that would be issued, assuming settlement in shares of all of the outstanding Convertible Notes.  The Convertible Notes were not eligible for conversion as of September 30, 2018, as per the terms noted below in Note 6, “Debt”.

 

5. Inventories

 

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

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

Raw materials

 

$

14,809

 

$

17,876

Work in process

 

 

88,838

 

 

38,629

Finished goods

 

 

5,175

 

 

1,434

Total inventories

 

$

108,822

 

$

57,939

 

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

 

 

 

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6.  Debt

 

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

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

    

2017

Convertible notes, net

 

$

153,057

 

$

143,446

Term loan, net

 

 

490,525

 

 

293,659

Total long-term debt

 

$

643,582

 

$

437,105

 

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 September 30, 2018, the carrying value of the Convertible Notes, net of unamortized discount and debt issuance costs, was $153.1 million and the estimated fair value of the principal amount was $266.9 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 nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2018

    

2017

    

2018

    

2017

Contractual interest expense

 

$

1,509

 

$

1,509

 

$

4,528

 

$

4,528

Amortization of debt discount

 

 

3,139

 

 

2,779

 

 

9,231

 

 

8,172

Amortization of debt issuance costs

 

 

125

 

 

136

 

 

380

 

 

416

Total interest expense

 

$

4,773

 

$

4,424

 

$

14,139

 

$

13,116

 

2017 Term Loan Agreement

 

In November 2017, the Company entered into a loan agreement, or the Loan Agreement, with BioPharma Credit PLC and affiliates and certain assignees, 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 three-month 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, which was 1.69%, 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 nine months ended September 30, 2018, respectively, the Company recognized $13.4 million and $29.0 million of interest expense related to the Loan Agreement, including $0.4 million and $0.9 million related to the accretion of debt discounts and deferred financing costs.

 

7.  Accrued Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2018

    

2017

 

Research and development

 

$

46,449

 

$

55,949

 

Salaries, bonuses and other compensation

 

 

32,787

 

 

33,717

 

Product revenue allowances

 

 

9,567

 

 

22,847

 

Inventory

 

 

35,468

 

 

16,469

 

Sales and marketing

 

 

7,098

 

 

6,701

 

Royalties

 

 

7,675

 

 

6,552

 

Professional services

 

 

4,655

 

 

3,944

 

Other

 

 

7,234

 

 

8,629

 

Total accrued expenses

 

$

150,933

 

$

154,808

 

 

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8.  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, 2018 and 2017, the number of shares authorized for issuance under the 2012 Incentive Plan was increased by 2,178,561 shares and 2,144,867 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 September 30,

 

Nine Months Ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Research and development

 

$

7,392

 

$

8,545

 

$

23,635

 

$

23,532

 

Selling, general and administrative

 

 

17,740

 

 

16,471